<PAGE>
As filed with the Securities and Exchange Commission on October 18, 1999
Registration No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Quicksilver Resources Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 1311 75-2756163
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
(817) 877-3151
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Bill Lamkin
Executive Vice President, Chief Financial Officer
Quicksilver Resources Inc.
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
(817) 877-3151
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<CAPTION>
Dean A. Tetirick, Esq. L. Steven Leshin, Esq.
<S> <C>
Cantey & Hanger, L.L.P. Jenkens & Gilchrist, P.C.
801 Cherry Street, Suite 2100 1445 Ross Avenue, Suite 3200
Fort Worth, Texas 76102 Dallas, Texas 75202
(817) 877-2800 (214) 855-4500
</TABLE>
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities offered only in connection with dividend or interest
reinvestment plans, 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, 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Each Class of Securities Amount to be Price Per Offering Registration
to be Registered Registered (1) Share (2) Price (2) Fee
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share.... 8,050,000 $6.3125 $50,815,625 $14,126.74
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,050,000 shares which the underwriters have an option to purchase
to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) on the basis of the high and low prices of common stock
reported on the American Stock Exchange on October 13, 1999.
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 Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 18, 1999
PROSPECTUS
7,000,000 Shares
[Logo]
Quicksilver Resources Inc.
Common Stock
------------
We are offering for sale 7,000,000 shares of common stock of Quicksilver
Resources Inc. All of the shares are being sold by us.
Our common stock is traded on the American Stock Exchange under the symbol
"KWK". On October 13, 1999, the last reported sales price of our common stock
on the American Stock Exchange was $6.375 per share.
We are an independent energy company engaged in the acquisition, development,
exploration, production and sale of natural gas and crude oil and the
gathering, processing and transmission of natural gas. Our producing properties
are principally in the states of Michigan, Wyoming and Montana.
See "Risk Factors" beginning on page 9 to read about some of the risks that you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds, before expenses, to us................................ $ $
</TABLE>
------------
The underwriters may also purchase up to an additional 1,050,000 shares of our
common stock from us at the public offering price less the underwriting
discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares to purchasers on ,
1999.
------------
Bear, Stearns & Co. Inc.
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Morgan Keegan & Company, Inc.
The date of this prospectus is October , 1999.
<PAGE>
[Maps of Michigan, Wyoming and Montana will be shown here, in each case
depicting our reserves, present value of cash flows from estimated proved
reserves, acreage and well data.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Price Range of Common Stock.............................................. 19
Capitalization........................................................... 20
Selected Historical and Pro Forma Consolidated Financial Data............ 21
Selected Historical Financial Data of Predecessors....................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business and Properties.................................................. 32
Management............................................................... 42
Certain Transactions..................................................... 46
Security Ownership of Management and Certain Beneficial Holders.......... 49
Description of Capital Stock............................................. 51
Underwriting............................................................. 55
Legal Matters............................................................ 57
Experts.................................................................. 57
Where You Can Find More Information...................................... 57
Glossary of Oil and Gas Terms............................................ 59
Index to Financial Statements............................................ F-1
Report of Independent Petroleum Engineers................................ A-1
</TABLE>
----------------
In this prospectus, the terms "Quicksilver," "we," "our," and "us" refer to
Quicksilver Resources Inc. and, where appropriate, to our predecessors: Mercury
Exploration Company; Quicksilver Energy, L.C.; Michigan Gas Partners Limited
Partnership; and MSR Exploration Ltd. The term "you" refers to a prospective
investor. We have included definitions of technical terms important to an
understanding of our business under "Glossary of Oil and Gas Terms" on page 59.
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in the common stock offered through this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing in the common stock discussed under "Risk Factors".
Quicksilver Resources Inc.
We are an independent energy company engaged in the acquisition,
development, exploration, production and sale of natural gas and crude oil and
the gathering, processing and transmission of natural gas. Our producing
properties are located principally in the states of Michigan, where we are the
largest independent natural gas producer, Wyoming and Montana. We acquired our
first properties in Canada in August 1999. Over the past four years, we have
significantly increased our proved reserves and production. We have
accomplished this growth primarily through the acquisition of reserves in well-
established producing areas followed by aggressive exploitation and development
drilling and the purchase of additional interests in those or nearby similar
properties. Our properties are located in well-established producing areas that
have long productive histories and typically exhibit low annual decline rates.
We have established a high quality reserve base that is primarily located in
Michigan and the Rocky Mountain states of Montana and Wyoming. As of September
1, 1999, we had proved reserves of 364 Bcfe, of which approximately 58% were
natural gas and 42% were crude oil and condensate, with an estimated PV-10
value of $348.6 million. The average prices used in this calculation were $2.75
per Mcf of gas and $19.32 per barrel of oil, which takes into account all
applicable hedging arrangements and basis and quality differentials.
Approximately 66% of our proved reserve volumes are classified as proved
developed and we are the operator of the proved reserves that constitute
approximately 92% of our PV-10 value. Our production for the twelve months
ended June 30, 1999, on a pro forma basis, was 19.8 Bcfe, assuming the
acquisition of producing properties from Unocal on May 17, 1999 had occurred as
of January 1, 1999. Approximately 84% of this production was natural gas. Based
on our proved reserves as of September 1, 1999, we had a reserve life of 18.4
years. As of September 1, 1999, we had interests in 1,623 gross (769 net)
producing wells and were the operator of approximately 69% of the gross wells.
No individual well accounts for a significant amount of our production.
Since 1995, we have experienced significant growth in reserves and
production and achieved high drilling success rates. We have increased our
reserves by 139% from 152 Bcfe on December 31, 1995 to 364 Bcfe as of September
1, 1999, and we have done this at an average acquisition, development and
finding cost of $0.62 per Mcfe. In 1998, we have replaced 154% of our
production through extensions and discoveries at an average cost of $0.32 per
Mcfe. Average daily production has increased by 202% from 17.5 Mmcfe in 1996 to
52.9 Mmcfe in 1999. Our average daily production for August 1999 was
approximately 60.0 Mmcfe. Since 1996, we have participated in the drilling of
132 gross (61 net) wells and have achieved a success rate of 98%. Since 1996,
86% of our drilling has been classified as development and 14% has been
classified as exploratory.
The following table sets forth the total amount we spent to acquire and
develop our proved reserves and the amount of such reserves on an Mcfe basis,
from October 1995 to September 1, 1999:
<TABLE>
<CAPTION>
Average Cost
Costs Mmcfe Per Mcfe
-------------- -------------- ------------
(in thousands) (in thousands)
<S> <C> <C> <C>
Acquisition of producing
properties................... $146,730 353,114 $0.42
Exploration and development of
properties................... 16,160 49,799 0.32
-------- -------
Total....................... $162,890 402,913 $0.40
======== ======= =====
</TABLE>
1
<PAGE>
We were formed in December 1997 for the purpose of combining natural gas and
crude oil properties owned by Mercury Exploration Company, Quicksilver Energy,
L.C., referred to in this prospectus as QELC, and Michigan Gas Partners Limited
Partnership. Effective January 1, 1998, Michigan Gas Partners was merged into
us and assets and liabilities of Mercury and QELC were transferred to and
assumed by us. Later, in March 1999, we became the surviving company in a
merger with MSR, a publicly-traded company. Although we are a new company, we,
through our principal predecessor, Mercury, have operated in the oil and gas
industry since 1963.
Our Strengths
We believe that our historical success and future prospects are directly
related to our unique combination of strengths, including the following:
High Quality Property Base. Approximately 80% of our production revenue
results from the sale of natural gas, and our properties are characterized by
long reserve lives and predictable well production profiles. Based on current
production from 769 net producing wells, the average reserve-to-production
index, determined by dividing our proved reserves by our annual production, for
our proved reserves at September 1, 1999 was 18.4 years. In general, these
properties have extensive production histories and still contain significant
reserves and production enhancement opportunities. We are principally engaged
in activities in two core areas and the producing fields within these areas are
in close proximity to each other, allowing for substantial economies of scale
in production and cost-effective application of advanced reservoir management
techniques. Our natural gas is primarily produced and sold in Michigan, which
imports approximately 75% of its gas supply and has prices slightly higher than
standard industry benchmarks.
Significant Inventory of Exploitation and Development Opportunities. We have
generated an inventory of approximately 1,035 potential drilling locations
within our existing properties, of which 590 have been classified as proved
undeveloped locations. In addition, we have over 260 recompletion and workover
opportunities within our existing property base. This inventory should continue
to support future net reserve additions and production growth over the next
several years.
Experience and Success with Acquisition and Exploitation. We employ a
disciplined acquisition program to augment our core properties and expand our
reserve base. Our engineering and geoscience professionals use their expertise
and experience, gained through the management of existing core properties, to
target acquisition opportunities in the same geographic area or in areas with
similar geological and reservoir characteristics. Following an acquisition,
these professionals implement development programs to enhance production,
increase revenues and reduce costs.
Experienced Technical Team. We have greater technical expertise than most
independent companies our size. Our technical team has a significant number of
engineering and geo-science professionals who have held very senior positions
with major oil and gas exploration and production companies. Among others, our
team includes: the former Chief Petrophysical Engineer in Shell's corporate
headquarters, who was formerly the president of the Society of Professional
Engineers; one of Shell's former senior engineers, who was responsible for most
of Shell's western U.S. thermal recovery projects and also designed and
implemented the world's largest enhanced oil recovery project; and one of
Shell's former senior geologists, who was responsible for much of Shell's
technical reservoir and geological engineering training provided to Shell's
technical professionals. Others on our team are senior geologists and senior
engineers from larger independent oil and gas companies, and they have spent
years working the areas on which we focus. We have achieved success in the
areas in which we operate because of the depth of our technical team and their
high levels of experience.
2
<PAGE>
Operational Control. We believe that controlling the operations of our
properties, including facilities related to gathering, transportation,
processing and marketing, is critical to our success in acquiring and
exploiting producing properties. As of September 1, 1999, we were the operator
of properties representing approximately 92% of the PV-10 value from our
estimated proved reserves. Control over operations provides several advantages
that enhance our ability to increase the value of our property base.
Operational control allows us to have greater control over the timing, scope
and level of expenditures associated with exploitation and development drilling
activities and other field operations. Given the level of expertise our
technical team has with our property base, we believe we are able to conduct
these activities in a cost-effective manner, lowering our overall finding,
development and operating costs. In particular, our significant operational
control over gathering, transportation, processing and marketing facilities
associated with our Michigan properties allows us to lower operating costs and
increase the net price received for our production.
Our Strategy
Our business strategy focuses on growth in value per share through
development of our existing property base, the selective acquisition of high-
quality, long-lived producing properties, managing our exposure to commodity
price volatility, reducing operating costs, improving efficiency and increasing
production and reserves.
Exploit Existing Property Base. A principal component of our strategy is the
increase of production and reserves through aggressive management of operations
and low-risk development drilling. Our principal properties possess geological
and reservoir characteristics that make them well-suited for production
increases through exploitation activity and development drilling. We regularly
review operations and mechanical data on operated properties to determine if
actions can be taken to reduce operating costs or increase production. These
actions include installing, repairing and upgrading lifting equipment,
redesigning equipment to improve production from different zones, modifying
gathering and other surface facilities and conducting restimulations and
recompletions.
Pursue Complementary Acquisitions. We seek to acquire operated, long-lived
producing properties that present opportunities to profitably increase reserves
and production levels through the implementation of technically advanced
reservoir management techniques and the reduction of expenses through more
efficient field operations. While we are continually evaluating opportunities
to acquire properties in or near our existing core areas in Michigan, Wyoming
and Montana, we also evaluate acquisitions outside our existing core areas that
possess the characteristics to become a new core area. We target acreage that
would expose us to high potential prospects located in areas that are
geologically similar to neighboring areas with large developed fields. While we
believe that many of the well-established North American producing basins
possess such opportunities, we seek properties in areas that provide the
potential to establish meaningful reserves and production. In addition, we
believe that larger oil and gas companies will continue to sell domestic
onshore properties and that this will present opportunities for us to grow our
reserves and production on a cost-effective basis.
Manage Commodity Price Risk. To help ensure a level of predictability in the
prices received for our product and, therefore, the resulting cash flow, we
have natural gas sales contracts, of up to 10 years in length, and financial
hedges in place for approximately 70% of our production volumes of natural gas
and crude oil. Our strategy is to seek arrangements that provide a guaranteed
minimum price that assures acceptable rates of return on that portion of our
production committed under those contracts. As incremental production is added
or contracts or financial instruments expire, we will continue to enter into
similar contracts for up to 70% of our production, when favorable terms are
available. We believe our commodity risk management strategy helps to ensure a
base level of cash flow to execute our drilling and exploitation program, meet
our debt service requirements, and pursue acquisition opportunities, even in
times of weakness in the prices of natural gas and crude oil.
3
<PAGE>
Participate in Exploration Activities. We will continue to focus the bulk of
our activities on lower risk exploitation activity and development drilling.
However, we may allocate up to 10% of our future capital budgets to exploration
projects. We have a significant inventory of exploration projects and over
100,000 net undeveloped acres. Some of this acreage overlays coal deposits that
we believe are possible prospects for coal bed methane gas development, which
is extensive in surrounding areas with similar coal deposits. We are
particularly interested in exploration activity that has the ability to create
a sizable amount of follow-on development drilling and exploitation activity,
such as the development of coal bed methane reserves, to which our technical
and operational expertise is well suited. Since we have already established the
acreage position, we intend to involve industry partners in the initial capital
intensive higher risk phases of the exploration activity, while maintaining our
ability to participate in any subsequent lower risk development and
exploitation activities.
Recent Developments
MSR Merger. In early 1999, our stockholders approved our merger with MSR.
The merger was completed on March 4, 1999. As a result of the merger, we
acquired all of MSR's interests in oil and gas mineral leases, gas gathering
pipeline systems and producing wells located principally in the states of
Montana and Texas. MSR's Montana properties acquired in the merger fit
strategically with some of our adjoining properties.
Reliant Energy Agreement. In May 1999, Reliant Energy Services, Inc., the
wholesale trading and marketing organization of the Reliant Energy Wholesale
Group, entered into a long-term agreement to purchase natural gas from us.
Reliant is a large, investment grade transporter and marketer of energy
products. Terms of the agreement call for us to supply 25,000 Mmbtu of natural
gas per day at $2.49 per Mmbtu, or 91 billion Btu of gas over a 10-year period.
Approximately two-thirds of these volumes will be our production with the
balance supplied by third parties. This contract provides a predictable revenue
stream for a portion of our natural gas production and access to additional
markets for our natural gas.
Unocal Acquisition. On May 17, 1999, we completed a purchase from Unocal
Corporation's Spirit Energy 76 unit of substantially all of Unocal's natural
gas and crude oil assets in Michigan. The assets purchased, consisting of
ownership interests in the Garfield Unit and the Beaver Creek Unit, include
approximately 20,000 net leasehold acres and about 13.0 Mmcfe per day of
production. As a result of the acquisition, we increased our ownership in
fields we already controlled, obtained assets which complemented existing
assets and increased our total production substantially. Our ownership in the
Garfield Unit increased from 54% to 99%. The purchase price for the Unocal
acquisition was $30 million, consisting of $27 million in cash, adjusted to
$25.8 million cash at closing, and 404,381 unregistered shares of our common
stock. The stock portion of the purchase price was placed in escrow and may be
distributed to Unocal over a three-year period, subject to downward adjustment
in correlation to costs, expenses, and liabilities which may be incurred during
this period.
Beaver Creek Pipeline, L.L.C. In June 1999, we and Mercury Michigan, Inc.,
an affiliate of our largest stockholder, formed Beaver Creek Pipeline, L.L.C.
We and Mercury Michigan, Inc. each acquired a 50% interest in Beaver Creek.
Beaver Creek purchased from Dow Chemical a 125-mile natural gas pipeline
extending from our Beaver Creek field in northern Michigan to the Midland,
Michigan industrial corridor. A number of large end-use customers, including
Dow Chemical, are located in the area of the pipeline and we expect demand for
natural gas to significantly increase due to increasing industrial activity and
power generation in the area. We expect this pipeline acquisition to decrease
our transportation expenses and, as a result, increase the net prices we
receive for our natural gas.
4
<PAGE>
MGV Energy Acquisition. On August 26, 1999, we purchased a 89.5% interest in
MGV Energy, Inc., which is a Calgary-based natural gas production company, for
$1.6 million. MGV is involved in a joint venture relationship with Pan
Canadian, one of the largest independent oil and gas companies in Canada. Under
the arrangement, MGV identifies acquisition and development prospects for Pan
Canadian within a 36,000 square mile area of mutual interest primarily in
southern Alberta. Should Pan Canadian decide to acquire a submitted prospect,
MGV has a right to participate in the acquisition at up to a 20% level. MGV is
free to pursue on its own any prospects outside of the area of mutual interest
and also may take 100% of any prospect within the area of mutual interest which
Pan Canadian rejects. MGV recently made its first acquisition of an interest in
375 existing gas wells in southern Alberta, Canada, incurring approximately
$2.3 million of debt to finance its purchase. MGV acquired current daily net
production of 1.2 Mmcf and 10.1 Bcf of proved reserves.
Our Executive Offices
Our principal executive offices are located at 1619 Pennsylvania Avenue in
Fort Worth, Texas 76104, and our telephone number is (817) 877-3151.
The Offering
<TABLE>
<S> <C>
Common stock offered.................. 7,000,000 shares(1)
Common stock to be outstanding after
the offering......................... 19,888,500 shares(1)(2)
Use of proceeds....................... We intend to use all of the net proceeds from this offering
to repay a portion of our existing debt.
American Stock Exchange symbol........ KWK
</TABLE>
- --------
(1) Excludes a 30-day option granted to the underwriters to purchase up to
1,050,000 additional shares of common stock to cover over-allotments, if
any.
(2) Excludes 1,152,857 shares of common stock issuable upon exercise of
outstanding warrants and vested stock options, 6,400 shares to be issued to
four of our non-employee directors as compensation for services in 1998 and
404,381 contingently issuable shares held in trust in connection with the
Unocal property acquisition.
Risk Factors
For a description of some of the risks that you should consider before
buying shares of our common stock, see "Risk Factors" beginning on page 9.
5
<PAGE>
Summary Historical and Pro Forma Consolidated Financial Data
The following table gives a summary of our historical and pro forma
consolidated financial data. You should read the data with our consolidated
financial statements and pro forma and unaudited financial statements included
elsewhere in this prospectus. The pro forma adjustments give effect to the
purchase of properties from Unocal on May 17, 1999 and the purchase of the
remaining minority interest in MSR on March 4, 1999 as if those purchases had
occurred at the beginning of each period presented. The pro forma adjustments
include revenues and operating expenses attributed to those properties, as well
as depletion charges based on our purchase price, and interest on the debt
incurred to acquire the properties. The net losses of MSR attributed to
minority interest owners are reversed in the pro forma amounts.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
-------------------------- -----------------
(unaudited)
Pro Pro
Forma(1) Forma(1)
1999 1999 1998 1998 1998
-------- ------- ------- --------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Natural gas and oil revenues... $22,947 $19,747 $21,709 $51,798 $42,080
Other income................... 2,150 2,150 1,376 3,607 3,607
------- ------- ------- ------- -------
Total revenues............... 25,097 21,897 23,085 55,405 45,687
Expenses:
Lease operating expenses....... 10,273 9,381 9,057 20,451 17,781
Depreciation, depletion and
amortization.................. 7,392 6,129 6,043 16,231 12,365
General and administrative..... 1,836 1,836 548 1,430 1,430
Provision for doubtful
accounts...................... 1,350 1,350 - - -
Interest expense............... 4,453 3,738 3,660 8,844 6,698
------- ------- ------- ------- -------
Total expenses............... 25,304 22,434 19,308 46,956 38,274
Income (loss) before income
taxes and minority interest.... (207) (537) 3,777 8,449 7,413
------- ------- ------- ------- -------
Minority interest............... - 141 268 - 758
------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... (207) (396) 4,045 8,449 8,171
Income tax provision (benefit).. (69) (135) 1,459 3,383 3,286
------- ------- ------- ------- -------
Net income (loss)............... (138) (261) 2,586 5,066 4,885
======= ======= ======= ======= =======
Basic and diluted earnings
(loss) per share............... $ (0.01) $ (0.02) $ 0.22 $ 0.44 $ 0.42
======= ======= ======= ======= =======
Weighted average number of
shares outstanding--basic and
diluted........................ 12,417 12,417 11,511 11,511 11,511
======= ======= ======= ======= =======
Other Data:
EBITDA(2)...................... $11,638 $ 9,330 $13,480 $33,524 $26,476
Net cash provided by operating
activities.................... 2,191 11,148 16,335
Net cash used in investing
activities.................... (31,097) (7,638) (16,097)
Net cash provided by (used in)
financing activities.......... 28,769 (3,576) (607)
Capital expenditures........... 31,097 7,638 16,097
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------
(unaudited)
Actual As Adjusted(3)
-------- --------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 157 $
Total assets.......................................... 177,684
Long-term debt and other long-term liabilities........ 115,837
Total equity.......................................... 42,723
</TABLE>
- --------
(1) See "Selected Historical and Pro Forma Consolidated Financial Data".
(2) EBITDA means earnings before interest, income taxes, depreciation,
depletion and amortization, and impairment of natural gas and oil
properties. EBITDA is not a calculation based upon generally accepted
accounting principles. EBITDA should not be considered as an alternative to
net income as an indicator of our operating performance, or as an
alternative to cash flow as a better measure of liquidity. EBITDA measures
presented in this prospectus may not be comparable to other similarly
titled measures reported by other companies. We believe EBITDA is a widely
accepted financial indicator of a company's ability to incur and service
debt and to fund capital expenditures. In evaluating EBITDA, we believe
that investors should consider, among other things, the amount by which
EBITDA exceeds interest costs, how EBITDA compares to principal repayments
on debt and how EBITDA compares to capital expenditures for each period.
(3) The "as adjusted" balance sheet data:
. gives effect to the application of the $ million of estimated
net proceeds from the sale of common stock in this offering to repay a
portion of our debt; and
. assumes an offering price for our common stock equal to the last
reported sales price appearing on the cover page of this prospectus.
Please read "Use of Proceeds".
7
<PAGE>
Summary Reserve Information
The table below presents our summary reserve information as of September 1,
1999. Estimates of proved reserves are based on the September 1, 1999 reserve
report prepared by Holditch-Reservoir Technologies Consulting Services, a
Schlumberger company, our independent petroleum engineering consultants.
Appendix A to this prospectus contains a letter prepared by Holditch
summarizing the reserve report. For additional information relating to our
natural gas and oil reserves, please read "Business and Properties--Natural Gas
and Crude Oil Reserves" and note 11 of the notes to our December 31, 1998
consolidated financial statements.
As of September 1, 1999, our PV-10 value was $348.6 million. For purposes of
this calculation, the August 31, 1999 New York Mercantile Exchange prices on
this date of $2.83 per Mmbtu of natural gas and $22.86 per barrel of crude oil
were used. These NYMEX prices were then adjusted for volumes subject to long-
term contracts and financial hedges and all applicable basis and quality
differentials. After taking into account such adjustments, the average actual
prices used to calculate our PV-10 value were $2.75 per Mmbtu for natural gas
and $19.32 per barrel for crude oil and condensate. Please read note 11 of the
notes to our December 31, 1998 consolidated financial statements.
<TABLE>
<CAPTION>
As of
September 1,
1999
------------
<S> <C>
Estimated proved reserves:
Natural gas (Mmcf)............................................... 217,124
Oil and condensate (Mbbls)....................................... 24,483
Total (Mmcfe).................................................... 364,022
Proved developed reserves as a percentage of proved reserve
volumes......................................................... 66%
PV-10 value (in thousands)....................................... $348,567
</TABLE>
Summary Operating Data
The following table presents information regarding the production volumes
of, average sales prices received for and average production costs associated
with our sales of natural gas and crude oil for the periods indicated. The pro
forma adjustments give effect to the purchase of properties from Unocal on May
17, 1999 as if the purchases had occurred at the beginning of the period
presented.
<TABLE>
<CAPTION>
Six Months Ended June
30,
--------------------- Year Ended
Pro Forma December 31,
1999 1999 1998 1998
--------- ----- ----- ------------
<S> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)......................... 8,460 7,381 7,741 15,315
Crude oil and condensate (Mbbls)........... 347 288 370 667
Total (Mmcfe).............................. 10,542 9,109 9,961 19,317
Average sales price per unit:
Natural gas (per Mcf)...................... $ 2.19 $2.20 $2.31 $ 2.33
Crude oil and condensate (per Bbl)......... 12.80 12.09 10.39 9.55
Total (per Mcfe)........................... 2.17 2.17 2.18 2.17
Expenses (per Mcfe):
Lease operating............................ $ 0.97 $1.03 $0.91 $ 0.92
General and administrative................. 0.17 0.20 0.06 0.07
Depreciation, depletion and amortization... 0.70 0.67 0.61 0.64
</TABLE>
8
<PAGE>
RISK FACTORS
Investing in our common stock will provide you with an equity ownership in
our company. Your investment will be subject to risks inherent in our business.
The trading price of your shares will be affected by the performance of our
business relative to, among other things, competition, market conditions and
general economic and industry conditions. The value of your investment may
decrease, resulting in a loss. You should carefully consider the following
factors as well as other information contained in this prospectus before
deciding to invest in shares of our common stock. This prospectus contains
forward-looking statements. See "Forward-Looking Statements." Our actual
results may differ materially from those projected in the forward-looking
statements as a result of any number of factors, including the risk factors set
forth below.
Because we have a limited operating history, our future operating results are
difficult to forecast, and our failure to sustain profitability in the future
could adversely affect the market price of our common stock.
Although our predecessors operated for years in the oil and gas industry
prior to our formation, we began operations in 1998, and have a limited
operating history in our current form upon which you may base your evaluation
of our performance. As a result of our recent formation and our brief operating
history, the operating results from the properties contributed by Mercury
Exploration Company and others to us when we were formed may not indicate what
our future results will be. We cannot assure you that we will maintain the
current level of revenues, natural gas and crude oil reserves or production we
now attribute to the properties contributed to us when we were formed. Any
future growth of our natural gas and crude oil reserves, production and
operations could place significant demands on our financial, operational and
administrative resources. Our failure to sustain profitability in the future
could adversely affect the market price of our common stock.
Natural gas and crude oil prices fluctuate widely, and low prices could have a
material adverse impact on our business.
Our revenues, profitability and future growth depend on prevailing natural
gas and crude oil prices. Prices also affect the amount of cash flow available
for capital expenditures and our ability to borrow and raise additional
capital. The amount we can borrow under our credit facility is subject to
periodic redetermination based in part on changing expectations of future
prices. Lower prices may also reduce the amount of natural gas and crude oil
that we can economically produce.
Prices for natural gas and crude oil fluctuate widely. For example, natural
gas and crude oil prices declined significantly in 1998 and, for an extended
period of time, remained substantially below prices obtained in previous years.
Among the factors that can cause this fluctuation are:
. the level of consumer product demand;
. weather conditions;
. domestic and foreign governmental regulations;
. the price and availability of alternative fuels;
. political conditions in oil and gas producing regions;
. the domestic and foreign supply of oil and gas;
. the price of foreign imports; and
. overall economic conditions.
9
<PAGE>
Reserve estimates depend on many assumptions that may turn out to be inaccurate
and any material inaccuracies in these reserve estimates or underlying
assumptions will materially affect the quantities and present value of our
reserves.
The process of estimating oil and gas reserves is complex. It requires
interpretations of available technical data and various assumptions, including
assumptions relating to economic factors. Any significant inaccuracies in these
interpretations or assumptions could materially affect the estimated quantities
and present value of reserves shown in this prospectus. Please read "Business
and Properties--Natural Gas and Crude Oil Reserves".
In order to prepare these estimates we must project production rates and
timing of development expenditures. We must also analyze available geological,
geophysical, production and engineering data, and the extent, quality and
reliability of this data can vary. The process also requires economic
assumptions such as natural gas and crude oil prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. Therefore,
estimates of natural gas and crude oil reserves are inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable natural gas and
crude oil reserves most likely will vary from our estimates. Any significant
variance could materially affect the estimated quantities and present value of
reserves shown in this prospectus. In addition, we may adjust estimates of
proved reserves to reflect production history, results of exploration and
development, prevailing natural gas and crude oil prices and other factors,
many of which are beyond our control.
At September 1, 1999, approximately 34% of our estimated proved reserves
were undeveloped. Undeveloped reserves, by their nature, are less certain.
Recovery of undeveloped reserves requires significant capital expenditures and
successful drilling operations. The reserve data assumes that we will make
significant capital expenditures to develop our reserves. Although we have
prepared estimates of our natural gas and crude oil reserves and the costs
associated with these reserves in accordance with industry standards, we cannot
assure you that the estimated costs are accurate, that development will occur
as scheduled or that the actual results will be as estimated.
You should not assume that the present value of future net revenues referred
to in this prospectus and the information incorporated by reference is the
current market value of our estimated oil and gas reserves. In accordance with
Securities and Exchange Commission requirements, the estimated discounted
future net cash flows from proved reserves are generally based on prices and
costs as of the date of the estimate. Actual future prices and costs may be
materially higher or lower than the prices and costs as of the date of the
estimate. Any changes in consumption by gas purchasers or in governmental
regulations or taxation will also affect actual future net cash flows. The
timing of both the production and the expenses from the development and
production of oil and gas properties will affect the timing of actual future
net cash flows from proved reserves and their present value. In addition, the
10% discount factor, which is required by the Securities and Exchange
Commission to be used in calculating discounted future net cash flows for
reporting purposes, is not necessarily the most accurate discount factor. The
effective interest rate at various times and the risks associated with us or
the oil and gas industry in general will affect the accuracy of the 10%
discount factor.
We may have difficulty financing our planned growth.
We have experienced and expect to continue to experience substantial capital
expenditure and working capital needs, particularly as a result of our property
acquisition and development drilling activities. In the future, we will require
additional financing, in addition to cash generated from our operations, to
fund our planned growth. If revenues decrease as a result of lower natural gas
or crude oil prices or otherwise, we may have limited ability to expend the
capital necessary to replace our reserves or to maintain production at current
levels, resulting in a decrease in production over time. If our cash flow from
operations is not sufficient to satisfy our capital expenditure requirements,
we cannot be certain that additional financing will be available to us on
10
<PAGE>
acceptable terms or at all. In the event additional capital resources are
unavailable, we may curtail our acquisition, development drilling and other
activities or be forced to sell some of our assets on an untimely or
unfavorable basis.
We are vulnerable to operational hazards, transportation dependencies,
regulatory risks, and other uninsured risks associated with our activities.
The oil and gas business involves operating hazards such as well blowouts,
craterings, explosions, uncontrollable flows of crude oil, natural gas or well
fluids, fires, formations with abnormal pressures, pipeline ruptures or spills,
pollution, releases of toxic gas and other environmental hazards and risks, any
of which could cause us to experience substantial losses. Also, the
availability of a ready market for our natural gas and crude oil production
depends on the proximity of reserves to, and the capacity of, natural gas and
crude oil gathering systems, pipelines and trucking or terminal facilities.
Federal and state regulation of oil and gas production and transportation,
tax and energy policies, changes in supply and demand and general economic
conditions all could adversely affect our ability to produce and market our
natural gas and crude oil. In addition, we may be liable for environmental
damage caused by previous owners of property purchased and leased by us.
As a result of operating hazards, regulatory risks and other uninsured
risks, we could incur substantial liabilities to third parties or governmental
entities, the payment of which could reduce or eliminate funds available for
exploration, development or acquisitions. According to customary industry
practices, we maintain insurance against some, but not all, of such risks and
losses. The occurrence of an event that is not covered, or not fully covered,
by insurance could have a material adverse effect on our business, financial
condition and results of operations. In addition, pollution and environmental
risks generally are not fully insurable.
We may be unable to make additional acquisitions of producing properties or
successfully integrate them into our operations.
Our growth in recent years has been due in significant part to acquisitions
of producing properties. We expect to continue to evaluate and, where
appropriate, pursue acquisition opportunities on terms our management considers
to be favorable to us. We cannot assure you that we will be able to identify
suitable acquisitions in the future, or that we will be able to finance these
acquisitions on favorable terms or at all. In addition, we compete against
other companies for acquisitions, and we cannot assure you that we will be
successful in the acquisition of any material property interests. Further, we
cannot assure you that any future acquisitions that we make will be integrated
successfully into our operations or will achieve desired profitability
objectives.
The successful acquisition of producing properties requires an assessment of
recoverable reserves, exploration potential, future oil and gas prices,
operating costs, potential environmental and other liabilities and other
factors beyond our control. These assessments are necessarily inexact and their
accuracy inherently uncertain, and such a review may not reveal all existing or
potential problems, nor will it necessarily permit us to become sufficiently
familiar with the properties to fully assess their merits and deficiencies.
Inspections may not always be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection
is undertaken.
In addition, significant acquisitions can change the nature of our
operations and business depending upon the character of the acquired
properties, which may be substantially different in operating and geological
characteristics or geographic location than existing properties. While our
current operations are located primarily in Michigan, Montana, Wyoming and
Canada, we cannot assure you that we will not pursue acquisitions or properties
located in other locations.
11
<PAGE>
The failure to replace our reserves could adversely affect our production and
cash flows.
Our future success depends upon our ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Our proved
reserves will generally decline as reserves are depleted, except to the extent
that we conduct successful exploration or development activities or acquire
properties containing proved reserves, or both. In order to increase reserves
and production, we must continue our development drilling and recompletion
programs or undertake other replacement activities. Our current strategy is to
maintain our focus on low-cost operations while increasing our reserve base,
production and cash flow through acquisitions of producing properties where we
can utilize our experience as a low-cost operator and use available cash flows
to continue to exploit our existing properties. We cannot assure you, however,
that our planned development projects and acquisition activities will result in
significant additional reserves or that we will have continuing success
drilling productive wells at low finding and development costs. Furthermore,
while our revenues may increase if prevailing oil and gas prices increase
significantly, our finding costs for additional reserves could also increase.
For a discussion of our reserves, see "Business and Properties--Natural Gas and
Crude Oil Reserves".
We cannot control the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest.
As a result, we have a limited ability to exercise influence over operations
for these properties or their associated costs. Our dependence on the operator
and other working interest owners for these projects and our limited ability to
influence operations and associated costs could materially adversely affect the
realization of our targeted returns on capital in drilling or acquisition
activities. As a result, the success and timing of our drilling and development
activities on properties operated by others depend upon a number of factors
that are outside of our control, including:
. timing and amount of capital expenditures;
. the operator's expertise and financial resources;
. approval of other participants in drilling wells; and
. selection of technology.
The loss of key personnel could adversely affect our ability to operate.
Our operations are dependent on a relatively small group of key management
and technical personnel. We cannot assure you that these individuals will
remain with us for the immediate or foreseeable future. The unexpected loss of
the services of one or more of these individuals could have a detrimental
effect on us.
Competition in our industry is intense, and we are smaller and have a more
limited operating history than most of our competitors.
We compete with major and independent oil and gas companies for property
acquisitions. We also compete for the equipment and labor required to operate
and develop these properties. Most of our competitors have substantially
greater financial and other resources than we do. In addition, larger
competitors may be able to absorb the burden of any changes in federal, state
and local laws and regulations more easily than we can, which would adversely
affect our competitive position. These competitors may be able to pay more for
exploratory prospects and productive natural gas and oil properties and may be
able to define, evaluate, bid for and purchase a greater number of properties
and prospects than we can. Our ability to explore for oil and gas prospects and
to acquire additional properties in the future will depend on our ability to
conduct operations, to evaluate and select suitable properties and to complete
transactions in this highly competitive environment. In addition, many of our
competitors have been operating for a much longer time than we have and have
demonstrated the ability to operate through industry cycles. Furthermore, the
oil and gas industry competes with other industries in supplying the energy and
fuel needs of industrial, commercial, and other consumers.
12
<PAGE>
Leverage materially affects our operations.
As of September 30, 1999, our long-term debt was $117,074,000, including
$114,850,000 outstanding under our bank credit facility and $2,224,000 of
subsidiary and other debt. We had no additional available borrowing capacity
under our bank credit facility. The borrowing base limitation on our credit
facility is periodically redetermined. Upon a redetermination, we could be
forced to repay a portion of our bank debt. We may not have sufficient funds to
make such repayments. On December 1, 1999, the borrowing base will be reviewed
and we could be required to repay up to $20,000,000 of the outstanding balance
if the borrowing base is reduced. As of September 30, 1999, $114,850,000 was
outstanding under the credit facility.
Our level of debt affects our operations in several important ways,
including the following:
. a large portion of our cash flow from operations is used to pay interest
on borrowings;
. the covenants contained in the agreements governing our debt limit our
ability to borrow additional funds or to dispose of assets;
. the covenants contained in the agreements governing our debt may affect
our flexibility in planning for, and reacting to, changes in business
conditions;
. a high level of debt may impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes;
. our leveraged financial position may make us more vulnerable to economic
downturns and may limit our ability to withstand competitive pressures;
. any debt that we incur under our credit facility will be at variable
rates, making us vulnerable to increases in interest rates; and
. a high level of debt will affect our flexibility in planning for or
reacting to changes in market conditions.
In addition, we may significantly alter our capitalization in order to make
future acquisitions or develop our properties. These changes in capitalization
may significantly increase our level of debt. A higher level of debt increases
the risk that we may default on our debt obligations. Our ability to meet debt
obligations and to reduce our level of debt depends on our future performance.
General economic conditions and financial, business and other factors affect
our operations and our future performance. Many of these factors are beyond our
control.
If we are unable to repay our debt at maturity out of cash on hand, we could
attempt to refinance the debt or repay the debt with the proceeds of an equity
offering. We cannot assure you that we will be able to generate sufficient cash
flow to pay the interest on our debt or that future borrowing or equity
financing will be available to pay or refinance the debt. The terms of our debt
may also prohibit us from taking these actions. Factors that will affect our
ability to raise cash through an offering or our capital stock or a refinancing
of our debt include financial market conditions and our market value and
operations performance at the time of the offering or other financing. We
cannot assure you that any offering or refinancing can be successfully
completed.
Several companies have entered into purchase contracts with us for a
significant part of our production and if they default on these contracts, we
could be materially and adversely affected.
Several long-term contracts for the sale of a significant portion of our
natural gas production are currently in place and account for a significant
portion of our total revenues. We cannot assure you that the other parties to
these contracts will continue to perform under the contracts. If the other
parties were to default, it could have a material adverse effect on our cash
flows for the period in which the default occurred.
13
<PAGE>
Our activities are regulated by complex laws and regulations, including
environmental regulations, that can adversely affect the cost, manner or
feasibility of doing business.
Oil and gas operations are subject to various federal, state, and local
government laws and regulations which may be changed from time to time in
response to economic or political conditions. Matters that are typically
regulated include:
. discharge permits for drilling operations;
. drilling bonds;
. reports concerning operations;
. spacing of wells;
. unitization and pooling of properties;
. environmental protection; and
. taxation.
From time to time, regulatory agencies have imposed price controls and
limitations on production by restricting the rate of flow of oil and gas wells
below actual production capacity to conserve supplies of natural gas and crude
oil. We also are subject to changing and extensive tax laws, the effects of
which cannot be predicted.
The development, production, handling, storage, transportation and disposal
of natural gas and crude oil, by-products, and other substances and materials
produced or used in connection with oil and gas operations are subject to laws
and regulations primarily relating to protection of human health and the
environment. The discharge of natural gas, crude oil or pollutants into the
air, soil or water may give rise to significant liabilities on our part to the
government and third parties and may result in the assessment of civil or
criminal penalties or require us to incur substantial costs of remediation.
Legal requirements frequently are changed and subject to interpretation, and
we are unable to predict the ultimate cost of compliance with these
requirements or their effect on our operations. We cannot assure you that
existing laws or regulation, as currently interpreted or reinterpreted in the
future, or future laws or regulations, will not materially adversely affect our
business, results of operations and financial condition.
Hedging our production may result in losses.
To reduce our exposure to fluctuations in the prices of natural gas and
crude oil, we have entered into long-term gas contracts and hedging
arrangements. These hedging arrangements expose us to risk of financial loss in
some circumstances including the following:
. our production is less than expected;
. there is a change in the expected difference between the underlying
price in the hedging agreement and actual prices received;
. the other parties to the hedging contracts fail to perform their
contract obligations; or
. a sudden unexpected event materially impacts natural gas or crude oil
prices.
In addition, these hedging arrangements may limit the benefit we would
receive from increases in the prices for natural gas and crude oil.
Furthermore, if we choose not to engage in hedging arrangements in the future,
we may be more adversely affected by changes in natural gas and crude oil
prices than our competitors who engage in hedging arrangements.
14
<PAGE>
A small number of existing stockholders control our company, which could limit
your ability to influence the outcome of stockholder votes.
Members of the Darden family, together with Mercury and QELC, companies
primarily owned by the members of the Darden family, beneficially own on the
date of this prospectus approximately 77.1% of our common stock, and will own
approximately 51.4% after the offering, assuming that the over-allotment option
is not exercised by the underwriters. As a result, these entities and
individuals will be able to control the outcome of stockholder votes, including
votes concerning the election of directors, the adoption or amendment of
provisions in our charter or bylaws and the approval of mergers and other
significant corporate transactions.
A large number of our outstanding shares may be sold into the market in the
near future which could cause the market price of our common stock to drop
significantly, even if our business is doing well.
Our shares that are eligible for future sale may have an adverse affect on
the price of our stock. After this offering, approximately 19,888,500 shares of
common stock will be outstanding, assuming the underwriters' over-allotment
option is not exercised. In addition, options and warrants to purchase
1,152,857 shares are outstanding, all of which are exercisable. These options
and warrants are exercisable at prices ranging from $8.75 to $33.75 per share.
Approximately 8,400,000 shares, assuming that the over-allotment option is not
exercised by the underwriters, will be freely tradeable without substantial
restriction or the requirement of future registration under the Securities Act.
Our officers and directors who are stockholders and a number of other
stockholders have entered into lock-up agreements under which they have agreed
not to offer or sell any shares of common stock or similar securities for a
period of 180 days from the date of this prospectus without the prior written
consent of Bear Stearns, on behalf of the underwriters; however, Bear Stearns
may at any time waive the terms of these lock-up agreements as specified in the
underwriting agreement. Sales of substantial amounts of common stock, or a
perception that such sales could occur, and the existence of options or
warrants to purchase shares of common stock at prices that may be below the
then current market price of the common stock could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of our equity securities.
Our certificate of incorporation contains provisions that could discourage an
acquisition or change of control.
Our certificate of incorporation authorizes our board of directors to issue
preferred stock without stockholder approval. If our board of directors elects
to issue preferred stock, it could be more difficult for a third party to
acquire control of us, even if that change of control might be beneficial to
stockholders. Please read "Description of Capital Stock".
Our computer systems and the computer systems of our business partners may not
be Year 2000 compliant, which may cause system failures and disruptions
adversely affecting our operations.
The "Year 2000" issue is a general term used to refer to the business
implications of the arrival of the new millennium. In simple terms, on January
1, 2000, all computer hardware and software systems that use the two-digit year
convention could fail completely or create erroneous data as a result of the
system failing to recognize the two-digit internal date "00" as representing
the Year 2000. Our computer systems and the computer systems of our business
partners may not be Year 2000 compliant, which may cause system failures and
disruptions adversely affecting our operations. Please read "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance".
We cannot assure you that our internal operations do not have any material
issues with respect to Year 2000 compliance. In addition, we may not properly
identify all potential problems or all potentially affected systems or remedy
all problems in our systems. Furthermore, the Year 2000 issue also affects our
customers, our suppliers and other third parties with whom we do business. The
failure of any of these entities to become
15
<PAGE>
Year 2000 compliant could adversely affect our operations. The most reasonably
likely "worst case" impacts would be:
. impairment of our ability to deliver our production to, or receive
payment from, third parties gathering and/or purchasing our production
from affected facilities;
. impairment of the ability of third-party suppliers or service companies
to provide needed materials or services to our planned or ongoing
operations, necessitating deferral or shut-in of exploration,
development or production operations;
. impairment of our ability to receive and process data, which would
hinder our ability to conduct development drilling and exploitation
activities; and
. our inability to execute financial transactions with our banks or other
third parties whose systems fail or malfunction.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus under "Prospectus
Summary," "Risk Factors," "Managements' Discussion and Analysis of Financial
Condition and Results of Operations" and "Business and Properties" that relate
to our business and the industry in which we operate are forward-looking.
Statements or assumptions related to or underlying such forward-looking
statements include, without limitation, statements regarding:
. the quality of our properties with regard to, among other things, the
existence of reserves in economic quantities;
. our ability to increase our reserves through exploration and
development;
. the number of locations to be drilled and the time frame within which
they will be drilled;
. future prices of natural gas and crude oil;
. anticipated domestic demand for natural gas; and
. the adequacy of our capital resources and liquidity.
Actual results may differ materially from those suggested by the forward-
looking statements for various reasons, including those discussed under "Risk
Factors".
17
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 7,000,000
shares of common stock in this offering will be approximately $
million ($ million if the underwriters' over-allotment option is
exercised in full), at an assumed public offering price of $ per
share, after deducting underwriting discounts and commissions and estimated
offering expenses of $ .
We intend to use all of the net proceeds to repay a portion of our
outstanding debt under our credit facility.
At September 30, 1999, we had $114,850,000 outstanding under our credit
facility. The weighted average interest rate for outstanding borrowings under
our credit facility as of September 30, 1999 was 7.5%. The credit facility has
a maturity of March 4, 2004. We have used borrowings under our current credit
facility to refinance prior debt, fund a portion of our acquisitions and for
other corporate purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, for the operation and
development of our business and do not anticipate paying any cash dividends on
our common stock in the foreseeable future. In addition, our current credit
facility prohibits us from paying cash dividends on our common stock. Any
future dividends may also be restricted by any loan agreements which we may
enter into from time to time.
18
<PAGE>
PRICE RANGE OF COMMON STOCK
Since March 4, 1999, our common stock has been traded on the American Stock
Exchange under the symbol "KWK." The following table sets forth the high and
low closing prices for our common stock as reported on the American Stock
Exchange for the period from March 4, 1999 through October 13, 1999.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
First quarter 1999 (beginning March 4, 1999)............. $ 7 5/8 $ 7 1/4
Second quarter 1999...................................... 7 3/8 6 1/8
Third quarter 1999....................................... 7 3/8 6 1/2
Fourth quarter 1999 (through October 13, 1999)........... 6 1/2 5 7/8
</TABLE>
On October 13, 1999, the last reported sales price of our common stock on
the American Stock Exchange was $6.375 per share. As of September 1, 1999,
there were approximately 400 stockholders of record of our common stock.
19
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of June 30, 1999 on two
bases:
. on a historical basis; and
. on a pro forma basis as adjusted to reflect our anticipated use of the
estimated net proceeds of this offering at an assumed offering price of
$ per share.
You should read the table together with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Total debt.............................................. $114,975(1) $
Stockholders' equity.................................... 42,723(2) (2)
--------
Total capitalization.................................. 157,698
========
</TABLE>
- --------
(1) In addition, on August 26, 1999, our subsidiary, MGV Energy, incurred an
additional $2,125,000 of long-term debt.
(2) Does not reflect the 404,381 contingently issuable shares of unregistered
common stock currently held in escrow to be released over a three year
period in connection with the acquisition of properties from Unocal (see
note 2 of the condensed notes to our consolidated financial statements for
the six months ended June 30, 1999) or 6,400 shares to be issued to four of
our non-employee directors as compensation for services in 1998.
20
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table gives a summary of our selected historical and pro forma
consolidated financial data for the six months ended June 30, 1999 and 1998 and
for the year ended December 31, 1998. Balance sheet data only is also presented
for the year ended December 31, 1997. You should read the data with our
consolidated financial statements and unaudited financial statements included
elsewhere in this prospectus. The pro forma adjustments give effect to the
purchase of properties from Unocal on May 17, 1999 and the purchase of the
remaining minority interest in MSR on March 4, 1999 as if those purchases had
occurred at the beginning of each period presented. The pro forma adjustments
include revenues and operating expenses attributed to those properties, as well
as depletion charges based on our purchase price, and interest on the debt
incurred to acquire the properties. The net losses of MSR attributed to
minority interest owners are reversed in the pro forma amounts.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
--------------------------- -------------------------
(unaudited)
Pro Pro
Forma(1) Forma(1)
1999 1999 1998 1998 1998
-------- -------- ------- -------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Natural gas and oil
revenues.............. $22,947 $ 19,747 $21,709 $ 51,798 $ 42,080
Other income........... 2,150 2,150 1,376 3,607 3,607
------- -------- ------- ----------- ------------
Total revenues....... 25,097 21,897 23,085 55,405 45,687
Expenses:
Lease operating
expenses.............. 10,273 9,381 9,057 20,451 17,781
Depreciation, depletion
and amortization...... 7,392 6,129 6,043 16,231 12,365
General and
administrative........ 1,836 1,836 548 1,430 1,430
Provision for doubtful
accounts.............. 1,350 1,350 - - -
Interest expense....... 4,453 3,738 3,660 8,844 6,698
------- -------- ------- ----------- ------------
Total expenses....... 25,304 22,434 19,308 46,956 38,274
Income (loss) before
income taxes and
minority interest...... (207) (537) 3,777 8,449 7,413
------- -------- ------- ----------- ------------
Minority interest....... - 141 268 - 758
------- -------- ------- ----------- ------------
Income (loss) before
income taxes........... (207) (396) 4,045 8,449 8,171
Income tax provision
(benefit).............. (69) (135) 1,459 3,383 3,286
------- -------- ------- ----------- ------------
Net income (loss)....... $ (138) $ (261) $ 2,586 $ 5,066 $ 4,885
======= ======== ======= =========== ============
Basic and diluted
earnings (loss) per
share.................. $ (0.01) $ (0.02) $ 0.22 $ 0.44 $ 0.42
======= ======== ======= =========== ============
Weighted average number
of shares outstanding--
basic and diluted...... 12,417 12,417 11,511 11,511 11,511
======= ======== ======= =========== ============
Other Data:
EBITDA(2).............. $11,638 $ 9,330 $13,480 $ 33,524 $ 26,476
Net cash provided by
operating activities.. 2,191 11,148 16,335
Net cash used in
investing activities.. (31,097) (7,638) (16,097)
Net cash provided by
(used in) financing
activities............ 28,769 (3,576) (607)
Capital expenditures... 31,097 7,638 16,097
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -----------------
1999 1998 1998 1997
-------- -------- -------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................ $ 157 $ 577 $ 294 $ 643
Current assets........................... 8,517 6,940 8,821 2,497
Total assets............................. 177,684 145,763 144,600 133,912
Short-term debt.......................... 30 70,480 67 161
Other current liabilities................ 4,141 8,513 7,463 1,954
Long-term debt and other long-term
liabilities............................. 115,837 12,962 86,310 87,336
Total equity............................. 42,723 36,254 32,588 27,852
</TABLE>
- --------
(1) Pro forma adjustments give effect to the purchase of properties from Unocal
on May 17, 1999 and the purchase of the remaining minority interest in MSR
on March 4, 1999 as if those acquisitions had occurred at the beginning of
each period presented, as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
Revenues......................................... $3,200 $9,718
Operating expenses............................... 892 2,670
Depletion and depreciation....................... 1,263 3,866
Interest on acquisition debt..................... 715 2,146
Reversal of minority interest in MSR............. (141) (758)
Tax effect of pro forma adjustments.............. (66) (97)
------ ------
Net income effect of pro forma adjustments....... $ 123 $ 181
====== ======
</TABLE>
(2) EBITDA means earnings before interest, income taxes, depreciation,
depletion and amortization, and impairment of natural gas and crude oil
properties. EBITDA is not a calculation based upon generally accepted
accounting principles. EBITDA should not be considered as an alternative to
net income as an indicator of our operating performance, or as an
alternative to cash flow as a better measure of liquidity. EBITDA measures
presented in this prospectus may not be comparable to other similarly
titled measures reported by other companies. We believe EBITDA is a widely
accepted financial indicator of a company's ability to incur and service
debt and to fund capital expenditures. In evaluating EBITDA, we believe
that investors should consider, among other things, the amount by which
EBITDA exceeds interest costs, how EBITDA compares to principal repayments
on debt and how EBITDA compares to capital expenditures for each period.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF PREDECESSORS
Set forth below, in separate tables, is summary selected historical
financial data of our predecessors: Mercury, QELC, Michigan Gas Partners and
MSR. The financial data of our predecessors is for fiscal periods ended in
1997, 1996 and 1995 and is derived from the predecessors' audited consolidated
financial statements and related notes presented elsewhere in this prospectus.
We do not believe that presentation of this financial data of our predecessors
in combined form provides useful comparative data because of the differing
fiscal periods of the predecessors and because only a portion of Mercury's
assets were contributed to us as part of our formation in 1998. Further, we do
not consider separate financial data for fiscal periods ended in 1994 to be
material to us or useful for comparative purposes.
MERCURY EXPLORATION COMPANY
(includes Quicksilver Energy, L.C.)
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended
Three Months Ended September 30,
December 31, --------------------------
1997 1997 1996 1995
------------------ -------- ------- -------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenues...................... $ 11,049 $ 41,328 $17,388 $ 6,703
Net income.................... 2,354 5,115 2,248 1,463
Net income per common share... 9.38 20.38 8.96 5.83
Weighted average shares
outstanding.................. 251 251 251 251
Cash dividends................ - - - -
Other Information:
Capital expenditures.......... $ 27,750 $ 54,231 $19,779 $ 2,227
<CAPTION>
September 30,
December 31, --------------------------
1997 1997 1996 1995
------------ -------- ------- -------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)..... $ (9,324) $(13,133) $(5,813) $(5,068)
Total assets.................. 126,506 102,880 50,186 28,743
Long-term debt................ 65,275 47,174 19,560 2,150
Stockholders' equity.......... 17,670 15,316 10,427 6,988
</TABLE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
(in thousands)
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Statements of Operations Data:
Revenues............................................. $3,021 $ 3,368 $ 1,930
Net income (loss).................................... 19 (617) (613)
Other Information:
Capital expenditures................................. $ 13 $ 132 $ 4,837
Balance Sheet Data:
Working capital...................................... $ 343 $ 261 $ 324
Total assets......................................... 9,835 10,551 13,160
Long-term debt....................................... - - -
Partners' capital ................................... 9,453 10,313 13,025
</TABLE>
23
<PAGE>
MSR EXPLORATION LTD.
For the Period from Inception on March 7, 1997, to December 31, 1997
(in thousands)
Statements of Operations Data:
<TABLE>
<S> <C>
Revenues......................................................... $ 854
Net income ...................................................... 30
Other Information:
Capital expenditures............................................. $ 592
Balance Sheet Data:
Working capital.................................................. $ 42
Total assets .................................................... 25,963
Long-term debt................................................... 10,560
Stockholders' equity............................................. 13,070
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We engage in the acquisition, exploration, production and sale of natural
gas, crude oil and condensate and the gathering, processing and transmission of
natural gas. We pursue our business through the acquisition of oil and gas
mineral leases, gas gathering systems and producing natural gas and crude oil
properties. Based upon the specifics of each lease, as well as geological and
engineering interpretations, we develop our inventory of leases by drilling
wells, redrilling wells or recompleting existing wells located on those leases
for the recovery of the reserves located there. We currently have an interest
in natural gas and crude oil mineral leases, gas gathering pipeline systems and
wells producing natural gas and crude oil that are located principally in the
states of Michigan, Wyoming and Montana. We evaluate other opportunities for
the development of reserves and related assets as they become available and, in
some circumstances, may explore opportunities in regions other than those in
which we are currently involved.
We are not a user or refiner of the natural gas or crude oil produced,
except as needed in the operation of wells that produce natural gas. Once
extracted from the ground, we connect the natural gas production to a pipeline
gathering system and store the crude oil in storage tanks located close to the
producing field for collection by crude oil purchasers.
We own or hold working interests in 1,623 gross producing wells (769 net
wells). We also hold interests in properties that contain proved undeveloped
natural gas and crude oil reserves that require additional drilling, workovers,
waterflooding or other forms of enhancement in order to become productive.
We were formed as a Delaware corporation in December 1997 to combine oil and
gas properties in a reorganization and merger. On January 1, 1998, we, Mercury,
QELC, Michigan Gas Partners, Trust Company of the West and Joint Energy
Development Investments Limited Partnership, an affiliate of Enron Corp.
referred to below as JEDI, entered into an agreement and plan of reorganization
and merger to combine some of the oil and gas properties owned by Mercury, QELC
and Michigan Gas Partners by causing Michigan Gas Partners to be merged into us
and by causing some of the assets and liabilities of Mercury and QELC to be
transferred to and assumed by us. We were the surviving corporation of the
merger.
In early 1999, our stockholders approved the merger of MSR into us. In the
merger, stockholders of MSR received approximately 2,577,700 shares of our
common stock. As a result of the merger, MSR ceased to exist, and all of its
assets and liabilities were transferred to us. The merger was accounted for, in
part, as a pooling of interest. As a result, our financial statements have been
combined with those of MSR. The merged net assets attributable to minority
interest stockholders were reported as a minority interest at December 31,
1998. This minority interest was acquired in March 1999 and was accounted for
under the purchase method of accounting.
On May 17, 1999, we completed the purchase from Unocal of substantially all
of Unocal's natural gas and crude oil assets in Michigan. The assets purchased,
consisting of ownership interests in the Garfield Unit and the Beaver Creek
Unit, included approximately 20,000 net leasehold acres and about 13,000 Mcfe
production per day. Our ownership in the Garfield Unit increased from 54% to
99%. Revenues attributable to the purchased assets were $9,718,000 in 1998 and
operating expenses totaled $2,670,000, resulting in operating income and cash
flow of $7,048,000, before depreciation, depletion, administrative and interest
expense. The sales price for gas realized by Unocal of $1.98 per Mcf was $0.35
per Mcf lower than the average price we received in 1998. For the four months
ended April 30, 1999, we estimate that Unocal reported $3,200,000 total
revenues comprised of $2,240,000 in natural gas sales and $960,000 in crude oil
sales. Direct operating expenses were an estimated $892,000. For further
information on the Unocal acquisition, see condensed notes to consolidated
financial statements (unaudited) for the six months ended June 30, 1999 and
1998.
25
<PAGE>
We use the full-cost method of accounting for our investments in properties.
Under this method, all costs of exploration, development and acquisition of oil
and gas reserves are capitalized into separate country-by-country "full-cost
pools" as incurred. Properties in each pool are depleted and charged to
operations using the unit-of-production method, based on a ratio of current
production to total proved reserves. To the extent that the capitalized costs,
net of accumulated depreciation, depletion and amortization, less deferred
taxes, exceed the PV-10 value of proved natural gas and crude oil reserves and
the lower of cost or fair value of unproved properties, the excess costs are
charged to operations. If a write-down were required, it would result in a non-
cash charge to earnings but would not have an impact on cash flows.
Liquidity and Capital Resources
Cash Flow. We believe that our cash flows from operations are adequate to
meet the requirements of our business. However, future cash flows are subject
to a number of variables, including our level of production and prices, and we
cannot assure you that operations and other capital resources will provide cash
in sufficient amounts to maintain planned levels of capital expenditures. Our
principal operating sources of cash include sales of natural gas and crude oil,
as well as revenues from transportation and processing of natural gas.
Our net cash provided by operations for the six months ended June 30, 1999
was $2,191,000, compared to $11,148,000 for the same period last year. The
reduction resulted from lower earnings, a $2,500,000 account receivable we did
not collect and the repayment of $3,107,000 of current liabilities owed to
Mercury.
Our net cash used in investing for the six months ended June 30, 1999 was
$31,097,000, including $25,800,000 for the Unocal property acquisition.
Investing activities were comprised primarily of additions to oil and gas
properties through acquisitions and development and additions of field service
assets. For the six months ended June 30, 1999, we spent $31,097,000 for
capital investments. For the rest of 1999, we expect to spend approximately
$12,700,000. We have budgeted approximately $30,000,000 in 2000 for capital
investments. Our activities have been financed through a combination of
operating cash flow and bank borrowings. Our primary source of financing has
been borrowing the under our credit facility. We believe we will have
sufficient cash flow from operations, borrowings under our credit facility and
proceeds from this stock offering to meet our obligations and operating needs.
Credit Facilities. As part of the merger with MSR on March 4, 1999, we
entered into a new five-year credit facility agreement. Our then existing debt
of $73,993,000 and $10,848,000 from MSR was transferred into the new credit
facility. The credit facility permits us to obtain revolving credit loans and
to issue letters of credit for our own account from time to time in a total
amount not to exceed the lesser of $200,000,000 or the borrowing base. Under an
amendment to the credit facility dated May 17, 1999, the borrowing base is
$115,000,000 and is subject to semi-annual determination and other
redeterminations based upon a variety of factors, including the PV-10 value of
our reserves. On December 1, 1999, the borrowing base will be reviewed and we
could be required to repay up to $20,000,000 of the outstanding balance if the
borrowing base is reduced. As of September 30, 1999, $114,850,000 was
outstanding under the credit facility. At our option, loans may be prepaid, and
revolving credit commitments may be reduced, in whole or in part at any time in
specified minimum amounts. We can designate the interest rate on amounts
outstanding at either the London Interbank Offered Rate (LIBOR) + 2.375% or at
bank prime. The collateral for this loan agreement consists of substantially
all of our existing assets and any future reserves acquired. The loan agreement
contains a number of dividend restrictions and restrictive covenants which,
among other things, require the maintenance of a minimum current ratio.
Market Risk. We sell approximately 70% of our natural gas under long-term,
fixed price contracts and swap agreements and, therefore, benefit from
significant predictability of our natural gas revenues. Commodity market price
fluctuations affect those natural gas volumes that are not sold under contract
and also affect our crude oil sales that are not hedged. In April 1999, we
entered into a contract to swap 7,500 Mmbtu per day at $2.40 per Mmbtu. The
contract, which expires in April 2004, increased our revenues by an
insignificant amount in the second quarter of 1999.
26
<PAGE>
In addition, we have entered into interest rate swap agreements covering
$50,000,000 of our debt. These agreements convert floating rate debt to 5.7%
fixed rate debt. Interest expense increased $61,000 over the six months ended
June 30, 1999 as a result of these rate swaps.
Inflation and Changes in Prices. Our revenues and the value of our oil and
gas properties have been and will be affected by changes in natural gas and
crude oil prices. Our ability to maintain current borrowing capacity and to
obtain additional capital on attractive terms is also substantially dependent
on natural gas and crude oil prices. These prices are subject to significant
seasonal and other fluctuations that are beyond our ability to control or
predict. During 1999, we have received an average of $12.09 per barrel of crude
oil and $2.20 per Mcf of gas. Although some costs and expenses are affected by
the level of inflation, inflation has not had a significant effect in 1999.
Should conditions in the industry improve, causing an increase in competition
resulting in a relative shortage of oilfield supplies and/or services,
inflationary cost pressures may resume.
Results of Operations
Our revenue, profitability, and future rate of growth are dependent upon
prevailing prices for oil and gas, which, in turn, depend upon numerous factors
such as economic, political, and regulatory developments as well as competition
from other sources of energy. The energy markets historically have been highly
volatile, and future decreases in prices could have an adverse effect on our
financial position, results of operations, quantities of reserves that may be
economically produced, and access to capital.
Due to our limited existence, comparisons of our and our predecessors'
results of operations may not be meaningful. Results of operations for the six
months ended June 30, 1999 and the twelve months ended December 31, 1998
include MSR's results. The 1997 results of operations are from our predecessors
and include MSR's from its inception March 7, 1997 through December 31, 1997;
Mercury's for the fiscal year ended September 30, 1997; and Michigan Gas
Partners' for the year ended December 31, 1997. A significant portion of
Mercury's assets and associated revenue and expenses, which result primarily
from contract operating and maintenance, were not conveyed to us at the time of
our formation.
You should read the following discussion and analysis together with our
consolidated financial statements and the related notes and with our audited
combined consolidated financial statements and the related notes for the fiscal
year ended December 31, 1998 and the audited financial statements of our
predecessors for the years ended in 1997 and 1996.
Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998
Revenues. Total revenues for the six months ended June 30, 1999 were
$21,897,000, a 5% decrease from the $23,085,000 of total revenues for the same
period in 1998.
Natural gas sales for the 1999 period were $16,264,000, a 9% decrease from
1998 revenues of $17,865,000. Sales volumes decreased from 7,741,000 Mcf to
7,381,000 Mcf as the result of over-allocation of natural gas to us in 1998 and
the lack of production during workover projects at the Garfield Unit. During
the first six months of 1999, we sold our natural gas at an average price of
$2.20 per Mcf compared to $2.31 in the 1998 period.
Crude oil sales during the first half of 1999 of $3,483,000 were down 9%
from the 1998 period. A 16% increase in average prices was more than offset by
a 22% decrease in volumes. Shutting-in of wells in Wyoming during the period of
historically low oil prices caused the drop in crude oil production volumes.
Other income increased from higher processing and transportation fees.
Expenses. Total expenses for the first half of 1999 were $22,434,000, a 16%
increase over 1998. Operating expenses of $9,381,000 increased 4% over 1998 as
the result of an increase in workovers and the settlement of a joint interest
billing dispute. Depletion and depreciation expense of $6,129,000 was slightly
27
<PAGE>
higher than in 1998 as the decrease in sales volumes was more than offset by a
higher depletion cost per unit. A $1,350,000 provision for doubtful accounts
was established in the first quarter of 1999 to provide for amounts due from a
natural gas purchaser that declared bankruptcy. General and administrative
expenses of $1,836,000 increased significantly over the 1998 period, reflecting
the higher costs associated with being a larger, public company. Interest
expense rose to $3,738,000 from higher debt levels in 1999, primarily as a
result of the Unocal acquisition.
Net Income (Loss). We reported a net loss of $261,000 during the first half
of 1999 compared to net income of $2,586,000 in 1998. Lower revenues and higher
expenses, including the provision for doubtful accounts and the general and
administrative expense increase, resulted in the loss.
Year Ended December 31, 1998 Compared With Predecessors' 12 Month Periods Ended
September 30, 1997 and December 31, 1997
Revenue. Total oil and gas revenues for the 12 months ended December 31,
1998 were $45,687,000, an increase of 25% over $36,588,000 of combined
predecessor revenue for 1997. Natural gas revenues for the 1998 period were
$35,713,000, approximately 31% higher than 1997 predecessor natural gas
revenues of $27,264,000. Natural gas sales volumes for the 1998 period were
15,315,000 Mcf, a 29% increase over 11,854,000 Mcf in 1997. Average natural gas
sale prices declined from $2.30 per Mcf in the 1997 period to $2.13 in 1998.
For 1998, approximately 84% of our product sales were natural gas. A majority
of our natural gas production was sold under long-term contracts with
approximately 35% under one- to three-year contracts and 60% under 10-year
contracts. Crude oil revenues for 1998 were $6,367,000, a 31% decrease from
$9,171,000 of predecessor revenues for the same period in 1997. Crude oil
production in the 1998 period was 667,000 barrels compared to 619,000
predecessor barrels, an increase of 8%. The average crude oil sales price for
1998 was $9.55 per barrel, compared to an average price of $14.62 per barrel in
1997, a decrease of 35%.
Interest and Other Income. Interest and other income for the year ended
December 31, 1998 was $3,607,000 and primarily consisted of $1,632,000 from the
sale of tax credits and $1,879,000 from transportation and processing of
natural gas.
Minority Interest. The minority interest in net loss of MSR for 1998 was
$758,000. This was the minority interest's 53.5% share of MSR's before tax net
loss of approximately $1,416,000. As described in the footnotes to the
financial statements, this minority interest relates to the portion of the
merger with MSR that was accounted for under the purchase method of accounting.
Expenses. Operating expenses for the year ended December 31, 1998 were
$17,781,000, or $0.92 per Mcfe, a 5% decrease compared to $18,786,000 or $1.20
per Mcfe of predecessor operating expenses for the same period in 1997.
Depreciation and depletion expense was $12,365,000, or approximately $0.64 per
Mcfe, compared to $7,093,000 for 1997. General and administrative expense was
$1,430,000, or approximately $0.07 per Mcfe, compared to $1,941,000 for 1997.
Interest expense was $6,698,000, compared to $5,561,000 for 1997. Our interest
rate averaged approximately 7.4%.
Income Tax Expense. Income taxes for the year ended December 31, 1998
consisted of $950,000 due currently and deferred taxes of $2,336,000. The
effective tax rate was 40%.
Net Income. Net income for the year ended December 31, 1998 was $4,885,000
or $0.42 per share, which was approximately 10% of total revenues.
28
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Mercury Exploration Company
Results of Operations
The following discussion and analysis should be read in conjunction with
Mercury's statement of income contained elsewhere in this prospectus.
Year Ended September 30, 1997 Compared With Year Ended September 30, 1996
Mercury acquired the Shell Michigan properties on November 14, 1996. The
results of operations of these properties have been included in Mercury's
results since November 1, 1996. Unless otherwise indicated, the changes in
operating results were primarily the result of the acquisition of these
properties.
Revenues. Total oil and gas revenues for the 1997 period were $41,328,000,
an increase of 138% compared to $17,388,000 for the 1996 period. In 1997,
$32,714,000 of the revenues were related to the sale of natural gas and crude
oil, compared to $11,771,000 for the 1996 period. Sales volumes for 1997 were
12,864,000 Mcfe, sold at an average price of $2.54 per Mcfe, compared to
4,332,000 Mcfe sold in the 1996 period at an average price of $2.72 per Mcfe.
This increase in sales was principally due to the purchase of the Shell
Michigan properties. The remainder of the revenues for 1997, of approximately
$8,614,000, as well as $5,617,000 in 1996, resulted from contract field
services and gas marketing.
Costs and Expenses. Total costs and expenses for the 1997 period were
$24,156,000, a 69% increase compared to $14,265,000 for the 1996 period.
Production expenses for the 1997 period were $16,454,000, or $1.28 per Mcfe,
and a 38% increase compared to $11,907,000, or $2.75 per Mcfe. General and
administrative expenses for 1997 were $1,784,000, a 30% increase compared to
$1,372,000 for 1996. Depreciation and depletion for the 1997 period was
$5,918,000, or $0.45 per Mcfe, compared to $986,000, or $0.23 per Mcfe, for
1996.
Interest Expense. Interest expense for the nine months ended September 30,
1997 was $5,414,000 compared to $1,620,000 for the 1996 period. Almost all of
the increase in interest expense relates to the approximately $57,000,000
borrowed to purchase the Shell Michigan properties.
Other Income and Expenses. Excluding interest expense noted above, the
remainder of other income totals $1,738,000 for the 1997 period, a decrease of
$254,000, or 13%, from $1,992,000 for 1996. Most of the change is attributable
to the $279,000 decrease in equity in partnership income. The decrease in net
income from the partnerships was primarily due to higher operating costs.
Income. Income before minority interest and income taxes was $13,496,000 for
the 1997 period compared to $3,495,000 for 1996. These amounts include 100% of
the results of operations of QELC, of which 52% is owned by Mercury. The
minority interest in income of subsidiaries principally applies to QELC.
Earnings. Net income was $5,115,000, or $20.38 per share, for the 1997
period compared to $2,248,000, or $8.96 per share, for 1996. Most of the
increase relates to the acquisition of the Shell Michigan properties.
Liquidity and Capital Resources
Cash Flow from Operating Activities. Mercury's net cash flow from operations
for the year ended September 30, 1997 was $15,356,000, compared to $3,951,000
for the same period in 1996. The increase was principally attributable to the
Shell Michigan properties.
Cash Flow from Investing Activities. Mercury's net cash used for investing
activities during the twelve months ended September 30, 1997 totaled
$53,578,000. Of this amount, $54,231,000 was for capital expenditures, which
were principally used for the acquisition of the Shell Michigan properties.
29
<PAGE>
Cash Flow from Financing Activities. For the year ended September 30, 1997,
cash provided by financing activities totaled $39,794,000. Mercury borrowed
$94,323,000 and repaid $54,529,000 of debt.
On October 9, 1997, Mercury completed the acquisition of the Destec
properties in Michigan from ECT Enocene Enterprises II, Inc. The properties
consist of 143 wells with combined proved reserves of approximately 30.8 Bcfe.
The purchase price was approximately $23,500,000, which was paid in cash
provided primarily by bank debt.
Effective January 1, 1998, Mercury exchanged most of its natural gas and
crude oil producing properties and most of its long-term debt for our common
stock.
Three Months Ended December 31, 1997 Compared With Three Months Ended
December 31, 1996
Revenues. Total oil and gas revenues for the three months ended December 31,
1997 were $11,049,000, an increase of 10% compared to $10,016,000 for the 1996
period. In 1997, $9,456,000 of the revenues related to the sale of natural gas
and crude oil, compared to $8,178,000 for the 1996 period. Sales volumes for
the 1997 period were 4,342,800 Mcfe sold at an average price of $2.18 per Mcfe,
compared to 3,177,000 Mcfe sold in the 1996 period at an average price of $2.58
per Mcfe. The increase in natural gas and crude oil sales was primarily due to
the purchase of the Shell Michigan and the Destec properties. The remainder of
the revenues, approximately $1,593,000 for the 1997 period and $1,838,000 in
1996, was from natural gas and crude oil contract operations, providing
services such as field operations, well supervision, well maintenance, and gas
marketing.
Costs and Expenses. Total costs and expenses for the 1997 period were
$7,734,000, an increase of 28% over $6,039,000 for the 1996 period. Generally,
the increase in expense is the result of the acquisition of the Destec and
Shell Michigan properties. The Destec results have been included since October
1, 1997, and Shell Michigan since November 1, 1996. Operating expenses for the
three months ended December 31, 1997, were $4,736,000 or $1.09 per Mcfe,
compared to $4,114,000, or $1.30 per Mcfe for the 1996 period. A portion of the
improvement in cost per unit of sales was due to economies of scale. The recent
acquisitions included mostly producing natural gas properties. Natural gas
properties generally cost less to operate on a per unit of sales basis than do
oil properties.
Depletion and depreciation expense for the 1997 period was $2,466,000, or
$0.57 per Mcfe, compared to $1,479,000 or $0.47 per Mcfe, for 1996. The
increase in 1997 was due to Mercury's property acquisitions.
General and administrative expenses for the 1997 period were $532,000, a 19%
increase over $446,000 for the 1996 period, largely attributable to the
increased size of Mercury's asset base.
Other Income and Expense. Interest expense for the three months ended
December 31, 1997 was $1,879,000, an increase of 39% over $1,353,000 for the
1996 period. The increase in interest expense primarily was due to the increase
in debt related to Mercury's property acquisitions. During the 1997 period,
Mercury received a settlement on a lawsuit in the amount of $2,781,000, which
was included in other income. The other income items for the 1997 period
totaled $652,000, down slightly compared to $750,000 for 1996.
Income. Income before income taxes and minority interest was $4,869,000 for
the 1997 period compared to $3,374,000 in 1996. These amounts include 100% of
the results of operations of QELC.
The minority interest in income of subsidiary of $1,277,000 for the 1997
period and $1,422,000 for 1996 primarily applies to QELC.
Income taxes were calculated using a statutory rate of 34%.
Earnings. Net income was $2,354,000, or $9.38 per share, for the 1997
period, compared to $1,279,000, or $5.10 per share, for 1996. Most of the
increase in earnings relates to the recent property acquisitions.
30
<PAGE>
Year 2000 Compliance
We have developed a Year 2000 Plan to address the Year 2000 issue created by
computer programs and applications that use two digit rather than four digit
date fields to designate a year. As a result, computer equipment, software, and
devices with embedded technology that are date-sensitive may be unable to
recognize or may misinterpret the actual date. This could result in a system
failure or miscalculations causing disruptions of operations.
We have assessed our information technology, referred to as "IT," and our
non-IT systems. We believe that all of our computer equipment and software as
well as our operational and control systems are currently Year 2000 compliant.
We are also monitoring the compliance efforts of the significant suppliers,
customers, and service providers with whom we do business and whose IT and non-
IT systems interface with ours to ensure that they will be Year 2000 compliant.
Management believes that ongoing communications with and assessment of the
compliance efforts of these third parties will minimize any noncompliance
risks.
Although we do not expect to experience significant operational problems due
to the Year 2000 issue, we cannot assure you that this issue will not
materially impact our results of operations or adversely affect our
relationship with customers or vendors.
The inability of third parties to complete their Year 2000 resolution in a
timely fashion could materially impact our results of operations and cash
flows. The effect of non-compliance by third parties is not determinable. The
most reasonably likely "worst case" impacts would be:
. impairment of our ability to deliver our production to, or receive
payment from, third parties gathering and/or purchasing our production
from affected facilities;
. impairment of the ability of third-party suppliers or service companies
to provide needed materials or services to our planned or ongoing
operations, necessitating deferral or shut-in of exploration,
development or production operations;
. impairment of our ability to receive and process data, which would
hinder our ability to generate development drilling and exploitation
activities; and
. our inability to execute financial transactions with our banks or other
third parties whose systems fail or malfunction.
We do not anticipate significant operational or financial problems due to
the Year 2000 issue. However, there are currently no commercially reasonable
alternatives to our current IT and non-IT systems. As a result, contingency
plans would include working with vendors, suppliers and various third parties
to remedy any Year 2000-related problems as quickly as possible. Costs incurred
to date for Year 2000 compliance have been insignificant and we expect the
remaining costs to be minimal.
31
<PAGE>
BUSINESS AND PROPERTIES
General
We are an independent energy company engaged in the acquisition,
development, exploration, production and sale of natural gas and crude oil and
the gathering, processing and transmission of natural gas. Our producing
properties are located principally in the states of Michigan, where we are the
largest independent natural gas producer, Wyoming and Montana. We acquired our
first properties in Canada in August 1999. Over the past four years, we have
significantly increased our proved reserves and production. We have
accomplished this growth primarily through the acquisition of reserves in well-
established producing areas followed by aggressive exploitation and development
drilling and the purchase of additional interests in those or nearby similar
properties. Our properties are located in well-established producing areas that
have long productive histories and typically exhibit low annual decline rates.
We have established a high quality reserve base that is primarily located in
Michigan and the Rocky Mountain states of Montana and Wyoming. As of September
1, 1999, we had proved reserves of 364 Bcfe, of which approximately 58% were
natural gas and 42% were crude oil and condensate, with an estimated PV-10
value of $348.6 million. The average prices used in this calculation were $2.75
per Mcf of gas and $19.32 per barrel of oil, which takes into account all
applicable hedging arrangements and basis and quality differentials.
Approximately 66% of our proved reserve volumes are classified as proved
developed and we are the operator of the proved reserves that constitute
approximately 92% of our PV-10 value. Our production for the twelve months
ended June 30, 1999, on a pro forma basis, was 19.8 Bcfe, assuming the
acquisition of producing properties from Unocal on May 17, 1999 had occurred as
of January 1, 1999. Approximately 84% of this production was natural gas. Based
on our proved reserves as of September 1, 1999, we had a reserve life of 18.4
years. As of September 1, 1999, we had interests in 1,623 gross (769 net)
producing wells and were the operator of approximately 69% of the gross wells.
No individual well accounts for a significant amount of our production.
Since 1995, we have experienced significant growth in reserves and
production and achieved high drilling success rates. We have increased our
reserves by 139% from 152 Bcfe on December 31, 1995 to 364 Bcfe as of September
1, 1999, and we have done this at an average acquisition, development and
finding cost of $0.62 per Mcfe. In 1998, we have replaced 154% of our
production through extensions and discoveries at an average cost of $0.32 per
Mcfe. Average daily production has increased by 202% from 17.5 Mmcfe in 1996 to
52.9 Mmcfe in 1999. Our average daily production for August 1999 was
approximately 60.0 Mmcfe. Since 1996, we have participated in the drilling of
132 gross (61 net) wells and have achieved a success rate of 98%. Since 1996,
86% of our drilling has been classified as development and 14% has been
classified as exploratory.
We were formed in December 1997 for the purpose of combining natural gas and
crude oil properties owned by Mercury, QELC and Michigan Gas Partners.
Effective January 1, 1998, Michigan Gas Partners was merged into us and assets
and liabilities of Mercury and QELC were transferred to and assumed by us.
Later, in March 1999, we became the surviving company in a merger with MSR.
Although we are a new company, we, through our principal predecessor, Mercury,
have operated in the oil and gas industry since 1963.
Our Strengths
We believe that our historical success and future prospects are directly
related to our unique combination of strengths, including the following:
. our high quality property base;
. our significant inventory of exploitation and development opportunities;
. our experience and success with acquisition and exploitation;
32
<PAGE>
. our experienced technical team; and
. our high degree of operational control.
Our Strategy
Our business strategy focuses on growth in value per share through
development of our existing property base, the selective acquisition of high-
quality, long-lived producing properties, managing our exposure to commodity
price volatility, reducing operating costs, improving efficiency and increasing
production and reserves. The key elements of our strategy are to:
. exploit our existing property base;
. pursue complementary acquisitions;
. manage commodity price risk; and
. participate in exploration activities.
Antrim Shale Versus Conventional Natural Gas
The majority of our natural gas reserves are in the Antrim Shale formation.
The Antrim Shale is a thick blanket formation, generally found from 500 feet to
2,200 feet in depth, which underlies much of northern and western Michigan.
Natural gas reserves in the Antrim are developed and produced using methodology
which is very similar to that used in developing and producing coal bed methane
reserves. Typically, commercial natural gas and crude oil are found in a
porous, permeable layer of rock, to which hydrocarbons have migrated, which is
surrounded by a non-permeable layer or barrier of rock which then traps the
hydrocarbons until extracted. The Antrim Shale is fairly porous with naturally
occurring fracturing. As in coal bed methane production, when wells are drilled
and placed on production, they initially produce significant quantities of
water; as water is taken out of the reservoir, the reservoir pressure decreases
and the natural gas leaves (desorbs from) the shale and can flow to the
wellbore. The ability of the Antrim Shale to produce commercial quantities of
natural gas depends on the amount of gas originally in the shale, the level of
natural fracturing (permeability) through which the natural gas released can
flow to the wellbore and the amount that the reservoir pressure can be reduced
to promote the release of gas from the shale.
Description of Our Properties
We own significant interests in the following properties:
Michigan
Reserve and Production Data
<TABLE>
<CAPTION>
Reserve Data Estimated Daily
as of Production Data
September 1, 1999 for August 1999
-------------------- --------------------
Gas Oil Total Gas Oil Total
(Bcf) (Mmbbls) (Bcfe) (Mmcf) (Bbls) (Mmcfe)
----- ------- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Producing Formation:
Antrim Shale...................... 108.2 - 108.2 15.9 - 15.9
Prairie du Chien.................. 80.9 0.6 84.5 28.6 227 29.9
Other............................. 9.4 2.8 26.2 0.5 563 3.9
----- ----- ----- ----- ---- -----
Total........................... 198.5 3.4 218.9 45.0 790 49.7
===== ===== ===== ===== ==== =====
</TABLE>
33
<PAGE>
The Antrim Shale. The Antrim Shale underlies a large percentage of our
Michigan acreage and is fairly homogeneous in terms of reservoir quality; wells
tend to produce relatively predictable amounts of natural gas. While subsurface
fracturing can increase reserves and production attributable to any particular
well, the over 6,300 wells drilled in the trend and the approximately 500 wells
we have drilled suggest typical per well reserves of 600 Mmcf to 800 Mmcf and a
total productive life of more than 20 years, with an average reserve life of 15
years. As new wells produce and the de-watering process takes place, they tend
to reach a production level of 150 Mcf to 200 Mcf per day in six to 12 months.
They remain at these levels for one to two years and then decline at 8% to 10%
per year thereafter. The total cost to drill and complete an Antrim well is
approximately $225,000, including all acreage, production facilities and
flowlines, and wells tend to produce the best economic results when drilled in
large numbers in a fairly concentrated area. This well concentration provides
for a more rapid de-watering of a specific area, which decreases the time to
natural gas production and increases the amount of natural gas production. It
also enables us to maximize the use of existing production infrastructure,
which decreases per unit operating costs. Since reserve quantities and
production levels over a large number of wells are fairly predictable,
maximizing per well recoveries and minimizing per unit production costs through
a sizeable well-engineered drilling program are the keys to profitable Antrim
development. In addition, Michigan has very favorable natural gas supply/demand
characteristics in that Michigan has been importing an increasing percentage of
its natural gas, and currently imports approximately 75%. This supply/demand
situation generally allows Michigan producers to sell their natural gas at a
slight premium to typical industry benchmark prices. It also provides
opportunities for long-term contracts at favorable terms with end users who
value such supply arrangements.
As of September 1, 1999, we own interests in 781 Antrim wells and operate
404 of these wells, or 52% of our total Antrim wells. Our average net
production during August 1999 was 15.9 Mmcf per day. Since 1996 we have drilled
115 Antrim wells and successfully completed 114 for a success rate of 99%. We
have 120 identified Antrim drilling locations of which 81 are currently
classified as proved undeveloped locations. In 1998 we drilled 49 gross (37.7
net) Antrim wells, successfully completing all of them, and as of September 1,
1999 we have drilled four gross (four net) Antrim wells, all of which were
successfully completed. In the remainder of 1999 we expect to drill 28 gross
(28 net) wells for a cost of approximately $4.9 million, and in 2000 we have
budgeted for the drilling of 53 gross (33.5 net) Antrim wells at a cost of
approximately $7.4 million.
The Prairie du Chien. Our Prairie du Chien wells produce from several
Ordovician age reservoirs with the majority being in the 1,000 feet to 1,200
feet thick Prairie du Chien Group that has three major sands: the Lower PdC,
Middle PdC and Upper PdC. Many of these wells also can produce from the St.
Peter sandstone and the Glenwood formations, both of which lie directly above
the PdC. Some of the wells are producing from two or more of these zones.
Depending upon the area and the particular zone, the PdC will produce dry gas,
gas and condensate or oil with associated gas. The average depths of these
wells range from 7,000 feet to 12,000 feet.
As a result of the Unocal acquisition in May 1999, we own an average working
interest of 92%, on a Bcfe basis, in the wells comprising our PdC reserves. We
operate over 90% of these reserves. Our PdC production is well established.
Three development wells have been drilled in recent years to increase
production from existing fields. As a result of some of this work and the
Unocal acquisition, we have identified 14 additional proved undeveloped
locations. In addition, there are numerous proved non-producing zones in
existing wellbores that provide recompletion opportunities, allowing us to
maintain or, in some cases, increase production from our PdC wells as currently
producing reservoirs deplete. As of September 1, 1999, we had 53 gross (32.6
net) PdC wells producing 29.9 Mmcfe per day. For the rest of 1999 and 2000 we
have budgeted $50,000 and $690,000, respectively, for various workovers and
recompletions on our PdC wells, and we plan to spend $5.2 million in 2000 to
drill four new wells.
Richfield/Detroit River. The Unocal acquisition included 1,123 producing oil
wells in the Beaver Creek field, which is being waterflooded in the Devonian
Richfield formation. Additional interests were also acquired
34
<PAGE>
in the nearby Garfield Richfield field, which has seven producing oil wells.
Our average daily production from the Richfield formation is approximately 3.5
Mmcfe. We have budgeted $2.4 million to drill ten new Richfield wells and $5.1
million to drill and recomplete 36 Detroit River wells in 2000.
Rocky Mountain Region
Our Rocky Mountain properties are located in Montana and Wyoming, and our
production, which is primarily crude oil, is from well-established producing
formations at depths ranging from 1,000 feet to 11,000 feet. These properties
typically have multiple producing zones, some of which include the Phosphoria
at 750 feet to 1,000 feet, the Tensleep at 1,000 feet to 3,000 feet and the
Muddy/Morrow at 8,400 feet to 9,000 feet. Our Rocky Mountain producing
properties possess significant development drilling, secondary recovery and
other exploitation opportunities. As of September 1, 1999, our Rocky Mountain
proved reserves were 21 Mmbbls of crude oil and 5.9 Bcf of natural gas, for
total equivalent reserves of 131.7 Bcfe. In 1998, our daily production averaged
9.5 Mmcfe, and during the month of August 1999 our daily production averaged
8.7 Mmcfe. In 1998 we drilled no wells in the area; however, we spent $160,000
on various exploitation projects. In 1999, we have spent $400,000 on the
drilling of five gross (4.7 net) wells, four of which were successful. We have
also spent approximately $200,000 on various exploitation activities. We are
currently conducting an active exploitation program on several of our Rocky
Mountain fields that involves recompletions in existing wells. For the rest of
1999, we expect to spend approximately $2.2 million on various exploitation
projects. In 2000 we have budgeted $4.9 million for the drilling of 40 gross
(40 net) wells and $3.7 million for exploitation activities.
South Casper Creek Steamflood Project
In October 1995, we acquired the South Casper Creek steamflood project in
Natrona County, Wyoming as part of a larger acquisition from Unocal. In the
1970s and 1980s, Unocal had conducted several steamflood evaluations of the
Tensleep formation, a producing horizon that contains 14 degree gravity crude
oil which is relatively heavy and is more effectively recovered when heated
with steam, allowing the oil to flow toward the wellbore at a faster rate. In
the late 1980s, Unocal attempted several additional redesigned pilot
steamfloods and had encouraging results. Based on these results, Unocal
undertook full development of the project, drilling additional steam injection
wells and installing four 50 Mmbtu per hour generators providing 13,000 barrels
of steam per day through eleven injection wells. The post-steamflood production
peaked in 1992 at 1,500 barrels per day, an 88% increase from the pre-
steamflood production of 800 barrels per day, exceeding Unocal's original
expectations. Despite this success, Unocal decided to cut the project's budget,
resulting in a decrease in steam injection, a decrease in production and the
eventual discontinuation of the project. Our acquisition of this project
included all of the associated steam generating equipment in place that had
been installed by Unocal. This equipment is in good condition and could be
restarted at minimal cost. While the project is economically viable at current
crude oil prices, we have excluded this project from our reserve report and are
studying our options in light of the project's sensitivity to long-term oil
prices.
Canada
We believe that a number of producing areas in Canada offer excellent
opportunities for acquisition and exploitation oriented companies such as
ourselves. Our purchase of MGV, a Calgary-based independent energy company,
provides a vehicle for us to evaluate and selectively participate in such
opportunities. MGV's main strength lies in conducting detailed reservoir
engineering studies over producing fields to identify remaining reserves not
currently being exploited by the current operator. MGV's technical staff has
developed proprietary reservoir analysis software designed to integrate large
amounts of engineering and geologic data to identify such opportunities.
Additionally, MGV has an arrangement with Pan Canadian where MGV identifies
opportunities in a 36,000 square mile area of mutual interest. This area of
mutual interest is primarily in southern Alberta, which has historically and
continues to produce significant amounts of hydrocarbons. When MGV identifies a
prospect, it has the right to acquire up to a 20% interest if Pan Canadian
participates, and a 100% interest if Pan Canadian declines. MGV recently made
its first acquisition of 375 existing gas wells in southern Alberta with net
daily production of 1.2 Mmcf and 10.1 Bcf of proved reserves. We believe MGV
will allow us to methodically build a reserve and production base in Canada in
a fashion similar to the development of our Michigan reserves.
35
<PAGE>
Exploration Activities
We have interests in 19 exploratory prospects located in Montana and
Wyoming. Eleven are crude oil prospects and the remaining eight are natural gas
prospects. These prospects are located in the Crazy Mountain Basin, the Big
Horn Basin, and the Montana Thrust Belt. Our interest in these prospects ranges
from 25% to 50%, with 50% being our most common interest. The target depths of
these prospects range from 3,000 feet to 19,500 feet, with 7,000 feet being the
average depth. We believe that several of these prospects have significant
reserve potential and that we can test many of them at a relatively low cost.
Big Horn Basin. The Big Horn Basin is located in northern Wyoming and
southern Montana. Several of the prospects in the Big Horn are known to contain
oil, however, the oil is a low gravity, heavy crude. Due to the low gravity of
the oil, pressures at the wellbore required to produce the oil are high,
resulting in high levels of water production. We believe that drilling
horizontal wells would reduce the pressure required to produce the oil and
decrease associated water production. A producing horizontal well on one of
these prospects is currently being evaluated, and the other prospects will be
developed based on the results of this well.
Crazy Mountain Basin. The Crazy Mountain Basin is located in south central
Montana and is an extension of the Big Horn Basin. Our prospects are
approximately 30 miles from existing production and consist of two Fort Union
coal bed methane prospects and a deep Frontier prospect. The two Fort Union
prospects are less than 4,000 feet deep and were identified by a well drilled
on our acreage in 1996, which encountered numerous thin gassy coal beds between
500 feet and 4,500 feet. The Frontier prospect, which is at a depth of 14,600
feet, is designed to test the Big Elk member of the Frontier formation. We have
3-D seismic data over this prospect and have identified several large geologic
structures.
Montana Thrust Belt. The Montana Thrust Belt is located in western Montana.
These prospects target fractured rocks of the Mississippian Madison formation,
which has been over-thrust from the west by older Pre-Cambrian rocks. We
believe the geologic environment is similar to the Alberta Foothills area that
has significant reserves and production. We have five prospects in the Thrust
Belt area.
Natural Gas and Crude Oil Reserves
The following table presents our estimated net proved natural gas and crude
oil reserves and the present value of our reserves at September 1, 1999 and
December 31, 1998, in each case based on a reserve report prepared by Holditch.
Appendix A to this prospectus contains a letter prepared by Holditch
summarizing the reserve report. The PV-10 values shown in the table are not
intended to represent the current market value of the estimated natural gas and
crude oil reserves we own. For further information concerning the PV-10 values
of these proved reserves, please read note 11 of the notes to our December 31,
1998 consolidated financial statements.
<TABLE>
<CAPTION>
September 1, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Proved reserves:
Oil (Mbbl).................................. 24,483 17,983
Natural gas (Mmcf).......................... 217,124 153,202
Total (Mmcfe)............................... 364,022 261,100
Proved developed reserves:
Oil (Mbbl).................................. 15,180 9,829
Natural gas (Mmcf).......................... 149,130 123,743
Total (Mmcfe)............................... 240,210 182,717
Estimated future net cash flows before income
taxes........................................ $620,881 $275,737
PV-10 value................................... $348,567 $160,495
</TABLE>
The process of estimating natural gas and crude oil reserves is complex. It
requires various assumptions, including assumptions relating to natural gas and
crude oil prices, drilling and operating expenses, capital
36
<PAGE>
expenditures, production taxes and availability of funds. Production rates and
timing of development expenditures must be projected. Reserve estimates require
an analysis of available geological, geophysical, production and engineering
data, and the extent, quality and reliability of this data can vary. Therefore,
estimates of natural gas and crude oil reserves are inherently imprecise.
Actual future production, natural gas and crude oil prices, revenues,
production taxes, development expenditures, operating expenses and quantities
of recoverable natural gas and crude oil reserves most likely will vary from
our estimates. Any significant variance could materially affect the estimated
quantities and present value of reserves shown in this prospectus. In addition,
estimates of proved reserves may be adjusted to reflect production history,
results of exploration and development, prevailing natural gas and crude oil
prices and other factors that are beyond our control.
Recovery of undeveloped reserves generally requires significant capital
expenditures and successful drilling operations. The reserve data assumes that
we will make these expenditures. Although reserve estimates and the associated
development costs are prepared in accordance with industry standards, the
estimated costs may be inaccurate, development may not occur as scheduled and
results may not be as predicted.
You should not assume that the PV-10 value of our reserves referred to in
this prospectus is the current market value of our estimated natural gas and
crude oil reserves. In accordance with Securities and Exchange Commission
requirements, we generally base the PV-10 value on prices and costs on the date
of the estimate. Actual future prices and costs may differ materially from
those used in the estimate.
Volumes, Prices and Operating Expenses
The following table presents information regarding the production volumes
of, average sales prices received for, and average production costs associated
with, our sales of natural gas and crude oil for the periods indicated. Pro
forma adjustments give effect to the purchase of properties from Unocal on May
17, 1999 as if the purchase had occurred at the beginning of 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------- Year Ended
Pro Forma December 31,
1999 1999 1998 1998
------------------- -------- ------------
<S> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)................. 8,460 7,381 7,741 15,315
Oil and condensate (Mbbls)......... 347 288 370 667
Total (Mmcfe) ..................... 10,542 9,109 9,961 19,317
Average sales price unit:
Natural gas (per Mcf).............. $ 2.19 $ 2.20 $ 2.31 $ 2.33
Oil and condensate (per Bbl)....... 12.80 12.09 10.39 9.55
Total (per Mcfe)................... 2.17 2.17 2.18 2.17
Expenses (per Mcfe):
Lease operating.................... $ 0.97 $ 1.03 $ 0.91 $ 0.92
General and administrative......... 0.17 0.20 0.06 0.07
Depreciation, depletion and
amortization...................... 0.70 0.67 0.61 0.64
</TABLE>
37
<PAGE>
Development, Exploration and Acquisition Capital Expenditures
The following table presents information regarding our net costs incurred in
the purchase of proved and unproved properties and in exploration and
development activities.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Year Ended December 31,
-------------- -----------------------
1999 1998 1998
------- ------ -----------------------
(in thousands)
<S> <C> <C> <C>
Acquisition costs........................ $25,807 $1,670 $ 1,715
Exploration.............................. - 370 1,095
Development.............................. 3,048 4,864 8,283
------- ------ -------
Total costs incurred................... $28,855 $6,904 $11,093
======= ====== =======
</TABLE>
Drilling Activity
The following table shows our drilling activity for the six months ended
June 30, 1999 and for the year ended December 31, 1998. In the table, "gross"
refers to the total wells in which we have a working interest and "net" refers
to gross wells multiplied by our working interest in such wells.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
------------------- --------------
1999 1998 1998
--------- --------- --------------
Gross Net Gross Net Gross Net
----- --- ----- --- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Exploration Wells:
Productive.................................. - - 6.0 6.0 9.0 9.0
Non-productive.............................. - - - - 1.0 0.5
--- --- ---- --- ------ ------
Total..................................... - - 6.0 6.0 10.0 9.5
=== === ==== === ====== ======
Development Wells:
Productive.................................. 8.0 7.2 15.0 7.4 41.0 29.7
Non-productive.............................. 1.0 0.9 - - - -
--- --- ---- --- ------ ------
Total..................................... 9.0 8.1 15.0 7.4 41.0 29.7
=== === ==== === ====== ======
</TABLE>
Productive Wells
The following table sets forth the number of productive natural gas and
crude oil wells in which we owned an interest as of September 1, 1999:
<TABLE>
<CAPTION>
Total Productive Wells
-----------------------
Gross Net
------------ ----------
<S> <C> <C>
Natural gas....................................... 1,120 297
Crude oil......................................... 503 472
------------ ----------
Total........................................... 1,623 769
============ ==========
</TABLE>
Productive wells consist of producing wells and wells capable of production,
including natural gas wells awaiting pipeline connections to commence
deliveries and crude oil wells awaiting connection to production facilities.
38
<PAGE>
Acreage Data
The following table presents information regarding our developed and
undeveloped lease acreage as of September 1, 1999. Developed acreage refers to
acreage within producing units and undeveloped acreage refers to acreage that
has not been placed in producing units.
<TABLE>
<CAPTION>
Developed Undeveloped
Acreage Acreage Total
--------------- --------------- ---------------
Gross Net Gross Net Gross Net
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Michigan........................ 120,370 37,949 25,932 19,608 146,302 57,557
Montana......................... 77,328 76,488 274,105 143,447 351,433 219,935
Canada.......................... 59,494 4,743 9,648 197 69,142 4,940
Wyoming......................... 7,285 6,702 56,608 38,632 63,893 45,334
------- ------- ------- ------- ------- -------
Total......................... 264,477 125,882 366,293 201,884 630,770 327,766
======= ======= ======= ======= ======= =======
</TABLE>
Marketing
We have typically marketed the natural gas and crude oil produced from our
properties through normal channels for these products. We generally sell our
crude oil at local field prices paid by the principal purchasers of crude oil.
The majority of our natural gas production is sold under long-term contracts of
up to 10 years in length and is transported in intrastate pipelines.
Both natural gas and crude oil are purchased by refineries, major oil
companies, public utilities, industrial customers and other users and
processors of petroleum products. We are not confined to, or dependent upon,
any one purchaser or small group of purchasers. Accordingly, the loss of a
single purchaser, or a few purchasers, would not have a long-term material
effect on our business because there are numerous purchasers in the areas in
which we sell our production. In September 1999, purchases by the following
companies exceeded 10% of our total oil and gas revenues: CMS Energy, Coenergy
Trading Company, Reliant Energy Resources Corp. and Unocal Energy Trading Inc.
Competition
We face competition from other oil and gas companies in all aspects of our
business, including acquisition of producing properties and oil and gas leases,
marketing of oil and gas, and obtaining goods, services and labor. Many of our
competitors have substantially larger financial and other resources. Factors
that affect our ability to acquire producing properties include available
funds, available information about the property and our standards established
for minimum projected return on investment. Because gathering systems are the
only practical method for the intermediate transportation of natural gas,
competition for natural gas delivery is presented by other pipelines and gas
gathering systems. Competition is also presented by alternative fuel sources,
including heating oil and other fossil fuels. Because of the long-lived nature
of our natural gas and crude oil reserves, our ownership interest in Beaver
Creek Pipeline, L.L.C., and our expertise in developing our reserves, we
believe that we are competing effectively in the market.
Regulation
Federal Regulation of Transportation of Natural Gas. Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of
1978 and the regulations promulgated by the Federal Energy Regulatory
Commission. In the past, the federal government has regulated the prices at
which natural gas could be sold. Deregulation of natural gas sales by producers
began with the enactment of the Natural Gas Policy Act. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining
Natural Gas Act and Natural Gas Policy Act price and non-price controls
affecting producer sales of natural gas effective January 1, 1993. Congress
could, however, reenact price controls in the future.
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<PAGE>
Our sales of natural gas are affected by the availability, terms and cost of
pipeline transportation. The price and terms for access to pipeline
transportation remain subject to extensive federal regulation. Beginning in
April 1992, the Federal Energy Regulatory Commission issued Order No. 636 and a
series of related orders, which required interstate pipelines to provide open-
access transportation on a basis that is equal for all natural gas suppliers.
The Federal Energy Regulatory Commission has stated that it intends for Order
No. 636 to foster increased competition within all phases of the natural gas
industry. Although Order No. 636 does not directly regulate our production and
marketing activities, it does affect how buyers and sellers gain access to the
necessary transportation facilities and how we and our competitors sell natural
gas in the marketplace. The courts have largely affirmed the significant
features of Order No. 636 and the numerous related orders, although some
appeals remain pending and the Federal Energy Regulatory Commission continues
to review and modify its regulations regarding the transportation of natural
gas. We cannot predict what action the Federal Energy Regulatory Commission
will take on these matters, nor can we accurately predict whether the Federal
Energy Regulatory Commission's actions will achieve the goal of increasing
competition in markets in which our natural gas is sold. However, we do not
believe that any action taken will affect us in a way that materially differs
from the way it affects other natural gas producers, gatherers and marketers.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the Federal Energy Regulatory Commission
and the courts. The natural gas industry historically has been very heavily
regulated; therefore, we cannot assure you that the less stringent regulatory
approach recently pursued by the Federal Energy Regulatory Commission and
Congress will continue.
Federal Regulation of Transportation of Oil. Sales of crude oil, condensate
and natural gas liquids by us are not currently regulated and are made at
market prices. Effective as of January 1, 1995, the Federal Energy Regulatory
Commission implemented regulations establishing an indexing system for
transportation rates for interstate common carrier oil pipelines. These rates
are generally indexed to inflation, subject to conditions and limitations.
These regulations may, over time, tend to increase transportation costs or
reduce wellhead prices for crude oil. However, we do not believe that these
regulations affect us any differently than other natural gas producers,
gatherers and marketers.
State Regulation. Our oil and gas operations are subject to various types of
regulation at the state and local levels. These regulations require drilling
permits, regulate the methods for developing new fields and the spacing and
operating of wells and waste prevention, and sometimes impose production
limitations. These regulations may limit our production from wells and the
number of wells or locations we can drill.
Some states have adopted regulations with respect to gathering systems.
These regulations have not had a material effect on the operation of our
gathering systems, but we cannot predict whether any future regulations in this
area may have a material impact on our gathering systems.
Federal, State and Indian Leases. Our operations on federal, state or Indian
oil and gas leases are subject to numerous restrictions, including
nondiscrimination statutes. We must conduct our operations on these leases
pursuant to permits and authorization and other regulations issued by the
Bureau of Land Management, Minerals Management Service and other agencies.
Environmental Regulations. Our operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. Our exploration and production
operations and facilities for gathering, treating, processing and handling
hydrocarbons and related exploration and production wastes are subject to
stringent environmental regulation. These laws and regulations sometimes
require government approvals before activities occur, limit or prohibit
activities because of protected areas or species, impose substantial
liabilities for pollution and provide penalties for non-compliance. As with the
industry generally, compliance with existing and anticipated regulations
increases our overall cost of business. These regulations, however, generally
affect us and our competitors similarly. Environmental laws and regulations are
subject to frequent change, and we are not able to predict the costs or other
impacts of environmental regulation on our future operations.
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<PAGE>
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on some classes of
persons that are considered to have contributed to the release or threat of
release of a "hazardous substance" into the environment. These persons include
the owner or operator of the disposal site or sites where the release occurred
and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources, and it is
not uncommon for neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the hazardous
substances released into the environment.
Our operations are also subject to regulation of air emissions under the
Clean Air Act and comparable state and local requirements. Implementation of
these laws could lead to the gradual imposition of new air pollution control
requirements on our operations. As a result, we may incur capital expenditures
over the next several years to upgrade our air pollution control equipment. We
do not believe that our operations would be materially affected by any such
requirements, nor do we expect such requirements to be any more burdensome to
us than to other companies our size involved in natural gas and oil exploration
and production activities.
In addition, legislation has been proposed in Congress from time to time
that would reclassify some natural gas and oil exploration and production
wastes as "hazardous wastes," which would make the reclassified wastes subject
to much more stringent handling, disposal and clean-up requirements. If
Congress were to enact this legislation, it could increase our operating costs,
as well as those of the natural gas and oil industry in general. Initiatives to
further regulate the disposal of natural gas and oil wastes are also pending in
some states, and these various initiatives could have a similar impact on us.
The Clean Water Act imposes restrictions and controls on the discharge of
oil and gas wastes and other forms of pollutants into waters of the United
States. Federal law also imposes strict liability on owners of facilities for
consequences of an oil spill where the spill is in navigable waters or along
shorelines. These laws impose penalties for unauthorized discharges and
substantial liability for costs of removal and damages resulting from an
unauthorized discharge. State laws for the control of water pollution provide
similar penalties and liabilities. The cost of compliance with water pollution
laws has not historically been material to our operations. There can be no
assurance that changes in federal, state or local water pollution laws and
programs will not materially adversely affect our operations in the future.
Our management believes that we are in substantial compliance with current
environmental laws and regulations that affect us and that continued compliance
with these requirements will not have a material adverse impact on us.
Employees
At September 30, 1999, we had 19 full-time employees. We believe that our
relationships with our employees are satisfactory. None of our employees is
covered by a collective bargaining agreement. From time to time, we use the
services of independent consultants and contractors to perform various
professional services, particularly in the areas of construction, design, well-
site surveillance, permitting and environmental assessment. Independent
contractors usually perform field and on-site production operation services for
us, including pumping, maintenance, dispatching, inspection and testing. In
addition, Mercury provides accounting services to us under a management
agreement. See "Certain Transactions--Mercury Operating Agreement".
Legal Proceedings
From time to time, we may be a party to various legal proceedings. We
currently are not a party to any material litigation.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of our
executive officers and directors as of October 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas F. Darden................. 46 Chairman of the Board, Chief Executive Officer
Glenn M. Darden.................. 44 President, Chief Operating Officer and Director
Bill Lamkin...................... 54 Executive Vice President, Chief Financial Officer
Houston Kauffman................. 45 Vice President-Acquisitions
Fred van Naerssen................ 58 Vice President and Controller
Robert N. Wagner................. 35 Vice President-Engineering
Frank Darden..................... 72 Director
D. Randall Kent.................. 73 Director
Steven M. Morris................. 47 Director
W. Yandell Rogers III............ 36 Director
Anne Darden Self................. 42 Director
Mark Warner...................... 36 Director
</TABLE>
The following biographies describe the business experience of our executive
officers and directors.
THOMAS F. DARDEN has served on our board since December 1997. Previously, he
served as President of Mercury. While he was President of Mercury, Mercury
developed and acquired interests in over 1,200 producing wells in Michigan,
Indiana, Kentucky, Wyoming, Montana, New Mexico and Texas. A graduate of Tulane
University with a BA in Economics in 1975, Mr. Darden had been employed by
Mercury or its parent corporation, Mercury Production Company, for 22 years. He
became a director and the President of MSR on March 7, 1997. On January 1,
1998, he was named Chairman of the Board and Chief Executive Officer of MSR.
Mr. Darden has been one of our directors and our President since our inception
in December 1997 and was elected Chairman of the Board and Chief Executive
Officer on March 4, 1999.
GLENN M. DARDEN has served on our board since December 1997. He also served
with Mercury for 18 years, and for the last five years was the Executive Vice
President of that company. Prior to working for Mercury, Mr. Darden worked as a
geologist for Mitchell Energy Corporation. He graduated from Tulane University
in 1979 with a BA in Earth Sciences. Mr. Darden became a director and Vice
President of MSR on March 7, 1997, and was named President and Chief Operating
Officer of MSR on January 1, 1998. Mr. Darden has been one of our directors
since our inception in December 1997. He served as our Vice President until he
was elected President and Chief Operating Officer on March 4, 1999.
BILL LAMKIN is a Certified Management Accountant and a Certified Cash
Manager with over 20 years of experience in the oil and gas industry. He
graduated from Texas Wesleyan University with a BBA in Accounting in 1968. He
served as Controller/Chief Financial Officer at Whittaker Corporation and
Sargeant Industries, Inc. between 1970 and 1978. Beginning in 1978, he worked
as Treasurer, Controller, and then Director of Financial Services at Union
Pacific Resources until he became our Executive Vice President and Chief
Financial Officer when he joined us in June 1999.
HOUSTON KAUFFMAN is a professional landman and graduated from the University
of Texas in 1978 with a degree in Petroleum Land Management. From 1979 to 1991,
he held various staff and supervisory positions with Amoco Production Company.
After receiving his Master's degree in Business Administration from Houston
Baptist University in 1991, he was a land manager and ultimately land
acquisition and divestment manager with CNG Producing Company. He became
manager of business development for Mercury in 1995 and is now our manager of
acquisitions, divestments and trades. On March 4, 1999, Mr. Kauffman was
elected our Vice President-Acquisitions.
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<PAGE>
FRED VAN NAERSSEN is a Certified Public Accountant with over 30 years
experience in public and industry accounting. He was with
PricewaterhouseCoopers for seven years before joining Union Pacific Corporation
in 1973. At Union Pacific he served in various capacities in the financial
field, including 13 years at Union Pacific Resources. Mr. van Naerssen joined
us in July 1999 after retiring from Union Pacific Corporation.
ROBERT N. WAGNER has served as our Vice President-Engineering since July
1999. From January 1999 to July 1999, he was our manager of eastern region
field operations. From November 1995 to January 1999, Mr. Wagner held the
position of district engineer with Mercury. Prior to 1995, Mr. Wagner was with
Mesa, Inc. and served as both a drilling engineer and production engineer. Mr.
Wagner received a BS in Petroleum Engineering from the Colorado School of Mines
in Golden, Colorado in 1987.
FRANK DARDEN is a registered professional engineer and Chairman of the Board
of Mercury. He founded Mercury's parent corporation and has served as its
Chairman of the Board since 1965 and as Chairman of Mercury since its founding
in 1978. Mr. Darden began his career in the oil and gas business with Humble
Oil and Refining Company in 1948. From 1954 through 1955, he was retained by
Empresa Colombiana de Petroleos to organize an engineering department and guide
the company's planning for the secondary recovery program in the La Cira Field
in the Magdelena Valley of Colombia. From 1956 through 1964, Mr. Darden served
as Manager of Operations for Newmont Oil Company, the energy subsidiary of
Newmont Mining Corporation, and as Executive Vice President and director of
Yucca Water Company. He was a director of MSR from March 7, 1997, until MSR's
merger with us. Mr. Darden became one of our directors upon our formation in
December 1997.
D. RANDALL KENT is a retired Vice President of the General Dynamics
Corporation. He joined General Dynamics/Fort Worth Division in 1949 and served
in various engineering management positions, including Vice President and Chief
Engineer of the F-16 Fighter Program. Following his retirement in 1991, Mr.
Kent served as a consultant to the Lockheed-Martin Corporation. He graduated
from Louisiana State University in 1947 with a BS in Mechanical Engineering,
and from Cornell University in 1949 with an MS in engineering. Mr. Kent was
elected a director of MSR in 1997 and, upon the merger of MSR with us, became
one of our directors.
STEVEN M. MORRIS is a Certified Public Accountant and President of Morris &
Co., a private investment firm in Houston, Texas. From 1988 to 1991, he was
Vice President of Finance for ITEX Enterprises, Inc. From 1981 to 1988, Mr.
Morris was Financial Vice President of Hanson Minerals Company, a Houston-based
oil and gas exploration company. From 1978 to 1981, he was a partner in the
certified public accounting firm of Haley & Morris. He served as Senior
Accountant with the Houston office of Arthur Young and Company from 1974 to
1977. Mr. Morris was elected a director of MSR in October 1994. Upon the merger
of MSR with us on March 4, 1999, Mr. Morris became one of our directors.
W. YANDELL ROGERS III has served as Vice President and General Manager of
Ridgway's, Inc., based in Houston, Texas, since July 1997. For more than five
years prior, he served as Regional Manager for Ridgway's, the largest privately
held reprographics firm in the U.S., with more than 60 locations nationwide. He
graduated from Southern Methodist University in 1987 with a BBA in Finance. Mr.
Rogers was elected a director of MSR in 1997 and, upon the merger of MSR into
us, became one of our directors.
ANNE DARDEN SELF is currently Senior Vice President of Human Resources for
Mercury, where she has worked since 1992. From 1988 to 1991, she was with
BancPLUS Savings Association in Houston, Texas. She was employed as Marketing
Director and then spent three years as Vice President of Human Resources. She
worked from 1987 to 1988 as an Account Executive for NW Ayer Advertising
Agency. Prior to 1987, she spent several years in real estate management. She
attended Sweet Briar College and graduated from the University of Texas in
Austin in 1980 with a BA in History. Ms. Self was elected as one of our
directors in September 1999.
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<PAGE>
MARK WARNER is currently a director of Domestic Energy Finance for Enron
North America Corp. in Houston, Texas, where he has worked since 1995. He
received a Bachelor's degree in Geological Engineering from the University of
Missouri-Rolla in 1985 and a Master's degree in Petroleum Engineering from the
University of Oklahoma in 1987. From 1987 to 1989, he was a reservoir engineer
with Marathon Oil Company in Lafayette, Louisiana. From 1989 to 1993, he
served as Manager of Petroleum Engineering for Remington Oil Company (formerly
Box Energy) in Dallas, Texas. In 1995, he received an MBA from Southern
Methodist University in Dallas. Mr. Warner currently serves as a member of the
board of directors of HV Marine Services, Inc. Mr. Warner was elected as one
of our directors at our 1999 meeting of stockholders.
Thomas F. Darden, Glenn M. Darden, and Anne Darden Self are siblings. Frank
Darden is their father.
Committees of the Board of Directors
Our audit committee currently consists of Messrs. Morris, Kent, Rogers and
Warner. The audit committee reviews, acts on and reports to the board of
directors with respect to various auditing and accounting matters, including
the selection of our independent accountants, the scope of the annual audit,
fees to be paid to the independent accountants, the performance of our
independent accountants and our accounting practices.
Our compensation committee currently consists of Messrs. Morris, Kent,
Rogers and Warner. This committee's responsibilities include establishment of
salaries, incentives and other forms of compensation for our officers and
other employees and administration of our incentive compensation and benefit
plans.
Compensation Committee Interlocks and Insider Participation
To date, no member of our compensation committee has served as an officer
or employee of our company or any of our subsidiaries. No member of our
compensation committee 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 our board of directors or its compensation committee.
Compensation of Directors
Directors receive no cash remuneration for serving on the board of
directors but are reimbursed for reasonable expenses incurred by them in
attending board and committee meetings. On May 25, 1999, our board of
directors approved the issuance of $10,000 of our common stock to each of
Messrs. Frank Darden, Steven Morris, Randall Kent and Yandell Rogers, III as
compensation for their services during 1998. Based upon the average of the
high and low closing prices of our common stock on that date, we plan to issue
1,600 shares of our common stock to each of these non-employee directors prior
to or shortly after completion of this offering.
Executive Compensation
Neither our Chairman of the Board nor any of our other officers received
any compensation during 1998. The following table sets forth the names of our
executive officers, the date each began employment with us and the current
annual salary of each officer.
<TABLE>
<CAPTION>
Date of
Name Employment Annual Salary
---- ------------- -------------
<S> <C> <C>
Thomas F. Darden.............................. December 1997 $150,000
Glenn M. Darden............................... December 1997 $150,000
Houston Kauffman.............................. March 1999 $105,000
Bill Lamkin................................... May 1999 $135,000
Fred van Naerssen............................. July 1999 $120,000
Robert N. Wagner.............................. July 1999 $100,000
</TABLE>
44
<PAGE>
Bonus Arrangements
In addition to their salaries, our executive officers are eligible for
bonuses each year equal to up to 100% of their salary. The bonuses vest over a
three year period at the rate of 50% in the year of award, and 25% in each of
the two years following. As much as 75% of each bonus is payable in cash, at
the option of the officer, and the remainder is payable in shares of our common
stock. Bonus awards are based on our achievement of growth targets. The
employee must be employed at the time of vesting to receive the bonus.
1999 Stock Option and Retention Stock Plan
Our Board of Directors adopted our 1999 Stock Option and Retention Stock
Plan on October 4, 1999. We plan to submit the stock option plan to our
stockholders for approval at their next annual meeting, expected to be held in
the second quarter of 2000. The stock option plan provides for the grant of
incentive stock options, non-qualified stock options, stock appreciation rights
and retention stock awards to our key employees. The purpose of the stock
option plan is to:
. strengthen our ability to reward performance which enhances long-term
stockholder value;
. increase employee stock ownership through performance based compensation
plans; and
. strengthen our ability to attract and retain an outstanding employee and
executive team.
We have reserved 1.3 million shares of common stock for issuance under the
stock option plan. As of the date of this prospectus, no shares had been issued
under the stock option plan, and no options or grants under the stock option
plan are outstanding. Shares of common stock subject to options issued under
the stock option plan which expire or terminate prior to exercise will be
available for future issuance under the stock option plan.
The Board's Compensation Committee administers the stock option plan. The
stock option plan administrator has discretion to determine which eligible
individuals are to receive option grants or other awards, and the terms and
conditions of such options or other awards.
The exercise price for options granted under the stock option plan may be
paid:
. in cash;
. by surrender to us at the time of exercise of shares of common stock
already owned by and issued to the optionee; or
. by authorizing us to withhold common stock otherwise issuable on
exercise of the option.
Shares surrendered to or withheld by us will be valued at the fair market
price of the shares on the date the option is exercised.
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<PAGE>
CERTAIN TRANSACTIONS
Our Formation
We were organized in December 1997 for the purpose of combining natural gas
and crude oil properties owned by Michigan Gas Partners, Mercury and QELC. At
the time of our formation, Mercury was the sole general partner of Michigan Gas
Partners and JEDI, an affiliate of Enron, was the sole limited partner. The
membership interests in QELC are owned by Mercury and members of the Darden
family: Frank Darden, Thomas F. Darden, Glenn Darden and Anne Darden Self. The
Darden family also owns, directly or indirectly, substantially all of the stock
of Mercury.
Effective January 1, 1998, Michigan Gas Partners was merged into us and
various assets and liabilities of Mercury and QELC were transferred to and
assumed by us. All of the debt owed by QELC to Trust Company of the West and by
Mercury and QELC to Bank of America was also assumed by us and restructured as
part of our formation.
As a result of the merger of Michigan Gas Partners into us, the separate
existence of Michigan Gas Partners ceased and we became the owner of Michigan
Gas Partners' Michigan natural gas and crude oil properties. All of the
partnership interests of JEDI in Michigan Gas Partners were converted into the
right to receive 1,340,405 shares of our common stock. The interests of Mercury
in Michigan Gas Partners were canceled without payment of any consideration and
all shares of our common stock outstanding prior to the merger, consisting of
1,000 shares held by QELC, were canceled without payment of any consideration.
Mercury transferred to us all of its oil and gas properties in the states of
Michigan, Montana and Wyoming, except for some of its excluded Michigan
properties. As consideration for the transfer, we assumed the liabilities of
Mercury relating to the transferred properties, including debt in the amount of
$34,600,000 owed by Mercury to Bank of America under a credit agreement dated
January 31, 1997. We also issued 3,251,820 shares of our common stock to
Mercury. In addition, at Mercury's request, 74,135 shares of our common stock
to which Mercury was entitled under the merger agreement were issued to
Mercury's employee, Jeff Cook, as part of his agreed compensation.
QELC transferred all of its oil and gas properties in the states of Michigan
and Montana to us as part of our formation. As consideration for this transfer,
we assumed the liabilities of QELC relating to the transferred properties and
debt in the amount of approximately $39,600,000 owed by QELC to TCW and Bank of
America under credit agreements dated November 14, 1996. We issued an
additional 3,030,860 shares of our common stock to QELC.
Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self and Jack L. Thurber
transferred to us the contractual after payout or net profits interests owned
by those individuals in some of the assets of Mercury or QELC that were
transferred to us in our formation. As consideration for those transfers of
contractual rights, we issued 242,922 shares of our common stock to each of
Frank Darden, Thomas F. Darden, Glenn Darden and Anne Darden Self and 301,488
shares of our common stock to Mr. Thurber.
We satisfied our debt assumed from QELC and owed to TCW under a credit
agreement dated November 14, 1996 by paying $17,075,000 in cash to TCW and
issuing 1,340,405 shares of our common stock to TCW, in exchange for a
$10,000,000 credit. Mercury later purchased all of the shares of our common
stock issued to TCW and TCW is no longer a shareholder of ours. Bank of America
financed the prepayment of the debt to TCW pursuant to the terms of a credit
agreement, dated April 9, 1998, between us, Bank of America, as Agent, and
other financial institutions named in our credit agreement. Mercury's and
QELC's debt to Bank of America that was assumed by us was restructured under
our credit agreement.
The numbers of our shares referred to in the above discussion have been
adjusted to reflect a stock dividend which was declared in February 1999 as
part of our merger with MSR described below.
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<PAGE>
MSR Merger
In early 1999, our stockholders approved the merger of MSR into us pursuant
to the terms of an agreement and plan of merger dated September 1, 1998. The
merger was completed on March 4, 1999.
Pursuant to the MSR merger agreement and as a result of the MSR merger:
. the separate corporate existence of MSR ceased, and all of the
properties, rights, privileges, powers and franchises of MSR vested in
us as the surviving corporation of the merger, and all the debts,
liabilities and duties of MSR became ours;
. each share of common stock of MSR outstanding immediately prior to the
effective time of the merger was converted into the right to receive one
tenth of one share of our common stock. The exchange ratio was
determined pursuant to arm's-length negotiations between us and the
disinterested directors of MSR. We issued a total of 2,577,694 shares to
the MSR stockholders in this merger.
At the time of the merger, Messrs. Thomas and Glenn Darden were each an
officer and director of ours and of MSR. Frank Darden was an officer and
director of ours and also a director of MSR. The Darden family and its
affiliated companies also owned approximately 43.7% of the outstanding MSR
common stock. In the merger, these MSR shares held by the Darden family were
converted into 1,128,002 shares of our common stock. In addition, Thomas and
Glenn Darden collectively owned options to purchase 228,570 shares of MSR
common stock at an exercise price of $0.875 per share, which were converted
into options to purchase 22,857 shares of our common stock at a purchase price
of $8.75 per share. Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self,
Mercury, Jack Thurber and Jeff Cook also collectively owned immediately
exercisable warrants to acquire an aggregate of 5,500,000 shares of MSR common
stock at an exercise price of $1.25 per share, as well as warrants for an
aggregate of 5,500,000 shares of MSR common stock at an exercise price of $2.00
per share. All of the warrants were converted into warrants to acquire a number
of shares of our common stock, at adjusted prices, in a manner similar to the
conversion of the options described above.
Paribas, a former lender to MSR, also held warrants to acquire MSR shares at
the time of the MSR merger. These warrants were converted into warrants to
acquire 28,000 of our shares at an exercise price of $33.75 per share and 5,750
of our shares at an exercise price of $.10 per share. The second of the two
warrants expires on October 31, 2002 and is exercisable only after the closing
price per share of our common stock on the American Stock Exchange reaches
$10.00.
Prior to the MSR merger, our bank debt was guaranteed by Mercury, Mercury
Production Company, and QELC. The bank debt was also secured by pledges of the
MSR stock and our stock owned by the Darden family, Mercury and QELC. As a
condition to the merger, the bank debt was restructured so as not to require
those guarantees and pledges.
Patrick Montalban
Mr. Patrick Montalban was a director and officer of MSR until his
resignation as an officer on December 31, 1998. Pursuant to a severance
agreement with MSR, Mr. Montalban continued to receive compensation from us,
totaling $54,453, for a period of seven months following his resignation. Mr.
Montalban remained as a director of MSR until completion of the MSR merger.
Mercury Operating Agreement
Prior to the MSR merger, we had no direct employees other than our top
manager and officers. Instead, our businesses were managed under a management
agreement entered into with Mercury in April 1998. According to the management
agreement, Mercury was responsible for the supervision and management of our
day-to-day operations. These services included administrative and management
activities. In addition, Mercury
47
<PAGE>
acted as the operator of our oil and gas properties in Michigan, Wyoming and
Montana. We paid Mercury a fee based on the number of hours each Mercury
employee spent on activities relating to our business, less overhead expenses
paid by MSR under any joint operating agreements. In addition, we reimbursed
Mercury for specified out of pocket expenses.
Upon completion of the merger, the prior management agreement terminated. We
and Mercury entered into a new agreement, which replaced the prior management
agreement. Under the new agreement, Mercury provides accounting services to us
and operates our oil and gas properties, including the daily activities of
producing oil and/or gas from individual wells and leases, and continues to
provide services as an operator under existing operating agreements. Mercury's
compensation consists of payments and overhead reimbursements to which it or we
are entitled as operator under existing and future operating agreements for the
properties. Mercury was paid $787,000 under the management agreement during the
first six months of 1999 and it is anticipated an additional $1,200,000 will be
paid during the remainder of 1999. During the first half of 1999 we reimbursed
Mercury or one of its affiliates for office rent, computer services, marketing
services, interest on debt and other administrative costs not covered under the
management agreement in the amount of $274,000, and it is anticipated an
additional $175,000 will be paid during the remainder of 1999.
Under the terms of our management agreement with Mercury, Mercury pays
accounts payable attributable to our operations and we then reimburse Mercury
on a regular basis. At any point in time, the average balance of the amount we
owe to Mercury as reimbursement ranges from $2,100,000 to $2,500,000. During
the six months ended June 30, 1999, we paid $3,107,000 for repayment of current
liabilities owed to Mercury. We are not charged interest on this amount by
Mercury.
Beaver Creek Pipeline
In June 1999, we and Mercury Michigan, Inc., an affiliate of our largest
stockholder, formed Beaver Creek Pipeline, L.L.C. We and Mercury Michigan, Inc.
each acquired a 50% interest in Beaver Creek. Beaver Creek purchased from Dow
Chemical a 125-mile natural gas pipeline extending from our Beaver Creek field
in northern Michigan to the Midland, Michigan industrial corridor. Because of
this pipeline's proximity to our Michigan reserves, we use it for the
transmission of our natural gas production and pay customary fees to Beaver
Creek Pipeline, L.L.C. for the transmission. The terms for transmission of our
natural gas production are no less favorable to us than could be obtained from
unaffiliated third parties.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL HOLDERS
The following table presents information regarding beneficial ownership of
our common stock as of September 1, 1999, and as adjusted to reflect the sale
of common stock in this offering, assuming there is no exercise of the over-
allotment option by the underwriters. The number of shares considered to be
outstanding for purposes of the percentages shown in the table does not include
404,381 contingently issuable shares of unregistered common stock currently
held in escrow to be released over a three year period in connection with the
acquisition of properties from Unocal or a total of 6,400 shares to be issued
to four of our non-employee directors prior to or shortly after completion of
this offering. The table presents the beneficial ownership for:
. each of our directors;
. each of our executive officers named in "Executive Compensation";
. each person who we know owns beneficially more than 5% of our common
stock;
. all our executive officers and directors as a group; and
. the Darden family as a group.
Unless otherwise indicated in the footnotes, each person listed has sole
voting and dispositive power over the shares indicated as owned by that person,
and the address of each stockholder is the same as our address.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Before the Owned After the
Offering Offering
------------------- -------------------
Executive Officers, Number of
Directors and 5% Shares
Stockholders Number Percent Offered Number Percent
------------------- ------------ ------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Directors
Frank Darden (1)(2)..... 464,043 3.6% - 464,043 2.3%
Glenn M. Darden (1)..... 495,850 3.8 - 495,850 2.5
Thomas F. Darden (1).... 501,110 3.9 - 501,110 2.5
Anne Darden Self (1).... 467,373 3.6 - 467,373 2.3
Steven M. Morris
(2)(3)................. 299,632 2.3 - 299,632 1.5
D. Randall Kent (2)..... 4,600 * - 4,600 *
W. Yandell Rogers III
(2).................... 6,600 * - 6,600 *
Mark Warner (4)......... - * - - *
Executive Officers not
named above
Houston Kauffman........ 3,900 * - 3,900 *
Bill Lamkin............. - * - - *
Fred van Naerssen....... - * - - *
Robert N. Wagner........ 1,000 * - 1,000 *
Directors and Executive
Officers as a
Group (5).............. 2,233,878 16.7 - 2,233,878 11.0
Holders of 5% or more
not named above
Mercury Exploration
Company (6)(7)......... 5,808,927 43.1 - 5,808,927 28.4
Quicksilver Energy, L.C.
(8).................... 3,030,861 23.5 - 3,030,861 15.2
Joint Energy Development
Investments Limited
Partnership (7)........ 1,340,405 10.4 - 1,340,405 6.7
Darden Family Group
(9).................... 10,757,934 77.1 - 10,757,934 51.4
</TABLE>
- --------
*Indicates less than 1%.
49
<PAGE>
(1) Does not include shares beneficially owned by Mercury or QELC. See
footnotes 3, 4 and 5 below. Does include with respect to each person
110,000 shares subject to immediately exercisable warrants. Also includes
with respect to each of Thomas F. Darden and Glenn M. Darden 11,428 shares
subject to immediately exercisable options. Also includes with respect to
each of Thomas F. Darden and Glenn M. Darden 18,660 and 15,250 shares
respectively, for which each is co-trustee for family member trusts. Also
includes with respect to Frank Darden 2,000 shares owned by his spouse.
(2) Number of shares indicated includes 1,600 shares to be issued to this non-
employee director as compensation for service during 1998. The address of
Steven M. Morris is 952 Echo Lane, Suite 335, Houston, Texas 77024. The
address of D. Randall Kent is 4421 Tamworth Road, Fort Worth, Texas 76116.
The address of W. Yandell Rogers III is 5711 Hillcroft, Houston, Texas
77036.
(3) Number of shares indicated includes 120,922 shares owned of record by Pozo
Resources, Inc., which shares are beneficially owned by Mr. Morris.
(4) Mr. Warner was designated by JEDI as director under the Stockholder's
Agreement dated April 9, 1998 between JEDI, us and others. The address for
Mark Warner is 1400 Smith Street, Houston, Texas, 77002.
(5) Includes 440,000 shares subject to immediately exercisable warrants, 22,856
shares subject to immediately exercisable options and a total of 6,400
shares to be issued to four non-employee directors. Does not include shares
beneficially owned by Mercury or QELC.
(6) Number of shares indicated includes 594,000 shares subject to immediately
exercisable warrants. Each of Frank Darden, Thomas F. Darden, Glenn M.
Darden and Anne Darden Self are directors and shareholders of Mercury and
share voting and investment power with respect to the 5,808,927 shares of
our common stock beneficially owned by Mercury. Each of these persons
disclaims beneficial ownership of all such shares.
(7) Does not reflect the effect, if any, of the right of Mercury to require
JEDI to transfer a portion of JEDI's shares to Mercury under a stock
transfer agreement. See "Description of Capital Stock--Stock Transfer
Agreement".
(8) Each of Frank Darden, Thomas F. Darden, Glenn M. Darden and Anne Darden
Self are members of QELC and share voting and investment power with respect
to the 3,030,861 shares of our common stock beneficially owned by QELC.
Each such person disclaims beneficial ownership of those shares.
(9) The Darden Family Group includes Darden family members, QELC, Mercury and
affiliates of Mercury which presently control 9,701,077, representing 75.3%
of the outstanding shares, and beneficially approximately 10,757,934,
representing 77.1% of our outstanding shares.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The description of our capital stock below is only a summary and is not
intended to be complete. For a complete description of our capital stock, we
urge you to read our restated certificate of incorporation and bylaws, which
have been filed with the Securities and Exchange Commission.
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $0.01 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. As of September 1, 1999, we had outstanding 12,888,500 shares
of common stock. No shares of preferred stock were outstanding. On completion
of this offering, we will have outstanding 19,888,500 shares of common stock,
or 20,938,500 shares if the underwriters' over-allotment option is exercised.
The outstanding share figures shown above do not include 404,381 contingently
issuable shares held in trust in connection with our acquisition of properties
from Unocal or a total of 6,400 shares to be issued to four of our non-employee
directors prior to or shortly after completion of this offering.
Common Stock
Subject to the preferential rights of any outstanding series of preferred
stock, the holders of our common stock are entitled to one vote per share on
all matters voted on by stockholders, including in the election of directors.
Our certificate of incorporation does not provide for cumulative voting in the
election of directors or grant preemptive rights with respect to future
issuances of our common stock. We may in the future, however, enter into
contracts with stockholders to grant holders preemptive rights.
Subject to any preferential rights of any series of preferred stock
outstanding, the holders of our common stock are entitled to dividends, if any,
as may be declared from time to time by our board from funds legally available
to pay dividends and, upon liquidation, are entitled to receive a pro rata
share of all of our assets that are available for distribution to stockholders.
All our common stock is fully paid and nonassessable.
Exchange Listing
Our common stock is listed on the American Stock Exchange and trades under
the symbol "KWK".
Transfer Agent
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
Preferred Stock
Our preferred stock may be issued from time to time in one or more series
without stockholder approval. With regard to the preferred stock, our board may
determine:
. the preferences;
. conversion or other rights;
. voting powers;
. restrictions;
. limitations on dividends; and
. qualifications and terms and conditions of redemption.
As a result, without stockholder approval, our board could authorize the
issuance of preferred stock with voting, conversion and other rights that could
dilute the voting power and other rights of the holders of common stock. Our
board has not authorized any shares of preferred stock.
51
<PAGE>
Stockholders Agreement
We, Mercury, QELC, the Darden family, Jeff Cook, Jack Thurber, TCW, JEDI and
Mercury Production Company, owner of 100% of Mercury, entered into a
Stockholders Agreement dated April 9, 1998, which was later amended on
September 1, 1998. On July 15, 1999, TCW transferred all of its shares of our
common stock to Mercury and TCW no longer has any rights or obligations under
the Stockholders Agreement. Mercury has succeeded to those rights and
obligations. Many provisions of the Stockholders Agreement expired when our
stock became publicly traded on March 4, 1999. Provisions that remain in effect
include:
. an agreement by all parties not to transfer their shares of our common
stock prior to March 4, 2000; and
. an obligation by Mercury, QELC and the Darden family to provide a right
of first refusal to JEDI in the event any of them then decide to
transfer any of their stock and to provide JEDI with a proportionate
right to join in any such transfers.
In addition, each of JEDI and Mercury, as long as it holds any of our common
stock, has the right to elect a number of members of our board of directors
representing a percentage of the entire board that is as close as possible to
the percentage of outstanding shares of our common stock held by it, but in no
case less than one. The Stockholders Agreement does not apply to any transfer
by Mercury to its employees, independent consultants or directors of options to
purchase from Mercury shares of our common stock not to exceed 200,000 shares
or to transfers by Mercury of our shares pursuant to the exercise of such
options.
We are bound by certain covenants contained in the Stockholders Agreement
concerning the conduct of our business, including a requirement to deliver
specific information about us to JEDI as long as it owns any of our common
stock. The other parties to the Stockholders Agreement have agreed to vote
their shares of our common stock to cause us not to breach those covenants as
long as JEDI holds any of our common stock.
Registration Rights
We, JEDI and Mercury, as a result of its purchase of shares from TCW in July
1999, are parties to a registration rights agreement, dated as of April 9,
1998. The registration rights agreement provides each of JEDI and Mercury with
demand registration rights and "piggyback" registration rights. No more than
three demands may be made by JEDI or Mercury. In connection with registration
of JEDI's or Mercury's shares of our common stock under the registration rights
agreement, we are responsible for all registration expenses such as
registration and filing fees and fees and disbursements to our counsel. JEDI
and Mercury are responsible for selling expenses, including underwriting fees,
discounts and selling commissions. On the second and third occasions of the
exercise of demand registration rights by JEDI, JEDI is also responsible for
registration expenses. In connection with this offering, JEDI and Mercury have
waived their rights to include their shares in this offering and have agreed
not to demand a registration of their shares for 180 days from the date of this
prospectus.
Warrants to acquire shares of our common stock held by Messrs. Frank, Thomas
and Glenn Darden, Anne Darden Self, Mercury, the Estate of Jack Thurber, Jeff
Cook and Paribas provide each of the holders of the warrants with "piggyback"
registration rights covering the warrant shares. One of the warrants held by
Paribas also provides Paribas with demand registration rights covering the
warrant shares. See "Certain Transactions--MSR Merger" for more information
regarding the warrants. In connection with this offering, all of the warrant
holders have waived their right to include their shares in this offering and
Paribas has agreed not to demand a registration of its warrant shares for 180
days from the date of this prospectus.
52
<PAGE>
Stock Transfer Agreement
To preserve the economic consequences of provisions of the Michigan Gas
Partners partnership agreement, which would have allowed Mercury's interest in
Michigan Gas Partners to increase from 10% to 85% upon JEDI's receipt of
distributions from the partnership equal to the amount invested by JEDI plus a
specified rate of return, Mercury and JEDI are parties to a stock transfer
agreement which provides Mercury with the right to require JEDI to transfer to
Mercury a portion of the 1,340,405 shares of our common stock that JEDI
received in our formation. This portion is the number of shares of our common
stock having an aggregate "market value" equal to 85% of the excess of the
"market value" of JEDI's shares of our common stock over the amount of
$20,995,205, plus interest compounded at a monthly rate of 1.530948% from
September 9, 1999. "Market value" is the average of the high and low sale
prices of our common stock on the American Stock Exchange over thirty trading
days, subject to adjustments for trading by Mercury or any of its affiliates
and for volumes of trading below or above specified parameters. Mercury may
request the transfer on only one occasion prior to the first anniversary of the
date on which our common stock became publicly traded.
Agreement Regarding Warrants
Mercury, the Darden family and JEDI are parties to an agreement regarding
warrants concerning warrants held by Mercury and the Darden family to acquire a
total of 517,000 shares of our common stock at an exercise price of $12.50 per
share. See "Certain Transactions -- MSR Merger" for more information regarding
the warrants. Mercury and the Darden family have agreed that they will not
exercise their warrants until either:
. the market value of our common stock owned by JEDI exceeds $20,995,200;
. JEDI no longer owns any of our common stock; or
. JEDI consents to the exercise in writing.
Business Combinations under Delaware Law
We are a Delaware corporation and are governed by Section 203 of the
Delaware General Corporation Law. Section 203 prevents an interested
stockholder, which is a person who owns 15% or more of our outstanding voting
stock, from engaging in business combinations with us for three years following
the time that the person becomes an interested stockholder. These restrictions
do not apply if:
. before the person becomes an interested stockholder, our board of
directors approves the transaction in which the person becomes an
interested stockholder or the business combination;
. upon completion of the transaction that results in the person becoming
an interested stockholder, the interested stockholder owns at least 85%
of our outstanding voting stock at the time the transaction began,
excluding for purposes of determining the number of shares outstanding
those shares owned by persons who are directors and also officers and
employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. following the transaction in which the person became an interested
stockholder, the business combination is approved by our board of
directors and authorized at an annual or special meeting of our
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of our outstanding voting stock not owned by the
interested stockholder.
In addition, the law does not apply to interested stockholders who became
interested stockholders before our common stock was listed on the American
Stock Exchange.
Delaware law defines the term "business combination" to encompass a wide
variety of transactions with, or caused by, an interested stockholder,
including mergers, asset sales and other transactions in which the interested
stockholder receives or could receive a benefit on other than a pro rata basis
with other stockholders. This law could have an anti-takeover effect with
respect to transactions not approved in advance by our board of directors,
including discouraging takeover attempts that might result in a premium over
the market price for the shares of our common stock.
53
<PAGE>
Limitation of Liability and Indemnification of Officers and Directors
Limitation of Liability. Delaware law authorizes corporations to limit or
eliminate the personal liability of their officers and directors to them and
their stockholders for monetary damages for breach of officers' and directors'
fiduciary duty of care. The duty of care requires that, when acting on behalf
of the corporation, officers and directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by Delaware law, officers and directors are
accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission.
Our certificate of incorporation limits the liability of our directors to us
or our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for monetary damages
for breach of a director's fiduciary duty in such capacity, except for
liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Indemnification. Delaware law also authorizes corporations to indemnify its
officers, directors, employees and agents for liabilities, other than
liabilities to the corporation, arising because that individual was an officer,
director, employee or agent of the corporation so long as the individual acted
in good faith and in a manner he or she reasonably believed to be in the best
interests of the corporation and not unlawful.
Our bylaws provide that our officers and directors will be indemnified by us
for liabilities arising because such individual was one of our officers or
directors to the fullest extent permitted by Delaware law. Our bylaws also
provide that we may, by action of our board of directors, provide similar
indemnification to our employees and agents.
These provisions in our certificate of incorporation and our bylaws may
reduce the likelihood of derivative litigation against our officers and
directors and may discourage or deter our stockholders or management from
bringing a lawsuit against our officers and directors for breach of their duty
of care, even though the action, if successful, might otherwise have benefitted
us and our stockholders.
These provisions in our certificate of incorporation and bylaws do not alter
the liability of our officers and directors under federal securities laws and
do not affect the right to sue under federal securities laws for violations
thereof.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
, 1999, between us and the underwriters, the underwriters named
below, who are represented by Bear, Stearns & Co. Inc.; Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated; and Morgan Keegan & Company, Inc.
have severally agreed to purchase from us the respective numbers of shares of
common stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc.........................................
Dain Rauscher Wessels...........................................
Morgan Keegan & Company, Inc....................................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of "comfort letters" from our accountants and no occurrence of an event
that would have a material adverse effect on our business. The underwriters are
obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 1,050,000 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The underwriters propose initially to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions.
Holders of 91% of our issued and outstanding shares of common stock have
agreed pursuant to lock-up agreements not to sell or offer to sell or otherwise
dispose of any shares of common stock for a period of 180 days after the date
of this prospectus without the prior written consent of Bear Stearns.
55
<PAGE>
In addition, we have agreed with the underwriters not to dispose of or hedge
any shares of common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus and
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of Bear Stearns. These agreements do not apply
to issuances or sales of common stock by us pursuant to any existing employee
benefit plans or upon conversion or exchange of any currently outstanding
convertible or exchangeable securities.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thereby creating a
short position in our common stock for their own account. In addition, to cover
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. The representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our common stock at a level
above that which might otherwise prevail in the open market. These transactions
may be made on the American Stock Exchange, in the over-the-counter market or
otherwise. The underwriters are not required to engage in these activities and,
if begun, may end any of these activities at any time.
In connection with this offering, some of the underwriters and selling group
members who are qualified market markers on the American Stock Exchange may
engage in passive market making transactions in our common stock on the
American Stock Exchange according to Rule 103 of Regulation M under the
Securities Exchange Act, during the business day prior to the pricing of the
offering and before the start of offers or sales of our common stock, passive
market markers must comply with volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid of such security. If all
independent bids are lowered below the passive market makers' bid, however, the
bid must then be lowered when specific purchase limits are exceeded.
We have agreed to indemnify the underwriters against a number of
liabilities, including liabilities under the Securities Act, or to contribute
to payments the underwriters may be required to make as a result of these
liabilities.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
From time to time, Bear Stearns and its affiliates have provided, and may
continue to provide in the future, investment banking, general financing, and
banking services to us and our affiliates, for which they have received, and
expect to receive, customary compensation.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions payable
by us.................. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
Our shares of common stock are listed on the American Stock Exchange under
the symbol "KWK."
56
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this
prospectus will be passed on for us by Cantey & Hanger, L.L.P., Fort Worth,
Texas. Certain legal matters relating to the common stock offered by this
prospectus will be passed on for the underwriters by Jenkens & Gilchrist, P.C.,
Dallas, Texas.
EXPERTS
Our audited combined consolidated balance sheets as of December 31, 1998 and
1997, and the related combined consolidated statement of income, stockholders'
equity and cash flows for the year ended December 31, 1998, the consolidated
balance sheet of MSR and subsidiaries as of December 31, 1997, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the period from inception March 7, 1997 to December 31, 1997, and the statement
of revenues and direct operating expenses of the Unocal Corporation's Spirit
Energy 76 unit interests for the year ended December 31, 1998 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The audited consolidated balance sheet of Mercury as of September 30, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1997, the audited consolidated balance sheet of Mercury as of December 31,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for the three-months then ended, the balance sheets of Michigan
Gas Partners as of December 31, 1997 and 1996, and the related statements of
operation, partners' capital and cash flows for each of the three years in the
period ended December 31, 1997, the statement of revenues and direct operating
expenses/Shell Michigan properties acquired of Mercury for the years ended
September 30, 1996 and 1995, and the statements of revenues and direct
operating expenses/Destec Michigan properties acquired of Mercury for the years
ended September 30, 1997 and 1996 included in this prospectus have been audited
by Weaver and Tidwell, L.L.P., independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The estimated reserve evaluations and related calculations of Holditch,
independent petroleum engineering consultants, included in this prospectus have
been included in reliance on the authority of said firm as experts in petroleum
engineering.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we have filed with the
Securities and Exchange Commission relating to our common stock. As permitted
by Securities and Exchange Commission rules, this prospectus does not contain
all of the information we have included in the registration statement and the
accompanying exhibits and schedules we filed with the Securities and Exchange
Commission. You may refer to the registration statement, exhibits and schedules
for more information about us and our common stock. You can read and copy the
registration statement, exhibits and schedules at the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Securities and Exchange Commission's regional offices located
at Seven World Trade Center, New York, New York 10048, and at 500 West Madison
Street, Chicago, Illinois 60661. You can obtain information about the operation
of the Securities and Exchange Commission's Public Reference Room by calling
the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the Securities and Exchange Commission. The address of
that site is http://www.sec.gov.
57
<PAGE>
We are required to file current reports, quarterly reports, annual reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy those reports, proxy statement and other
information at the Securities and Exchange Commission's Public Reference Room
and regional offices or through its Internet site. We currently furnish and
intend to continue to furnish our stockholders with annual reports that will
include a description of our operations and audited consolidated financial
statements certified by an independent public accounting firm.
58
<PAGE>
GLOSSARY OF OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus:
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in this
prospectus in reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas equivalent, determined using the
ratio of six Mcf of natural gas to one Bbl of crude 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.
Completion. The installation of permanent equipment for the production of
natural gas or oil, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
Condensate. Liquid hydrocarbons associated with the production of a
primarily natural gas reserve.
Developed acreage. The number of acres that are allocated or assignable to
productive wells or wells capable of production.
Development well. A well drilled into a proved natural gas or oil reservoir
to the depth of a stratigraphic horizon known to be productive.
Exploratory well. A well drilled to find and produce natural gas or oil
reserves that are not proved, to find a new reservoir in a field previously
found to be productive of natural gas or crude oil in another reservoir or to
extend a known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic level.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmbbls. One million barrels of crude oil or other liquid hydrocarbons.
Mmbtu. One million British Thermal Units.
Mmcf. One million cubic feet of natural gas.
Mmcf/d. One million cubic feet of gas per day.
Mmcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Productive well. A well that is found to be capable of producing sufficient
quantities of oil and gas so that proceeds from the sale of the production are
greater than production expenses and taxes.
59
<PAGE>
Prospect. A specific geographic area which, based on supporting geological,
geophysical or other data and also preliminary economic analysis using
reasonably anticipated prices and costs, is deemed to have potential for the
discovery of oil and natural gas.
Proved developed reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered from
new wells on developed acreage where the subject reserves cannot be recovered
without drilling additional wells.
PV-10 value. The estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%. These amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses, such as general and administrative expenses, debt service,
future income tax expense, or depreciation, depletion, and amortization.
Recompletion. The completion of an existing well for production from a
formation that exists behind the casing of the well.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible natural gas and/or oil that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in a natural gas and oil property entitling
the owner to a share of natural gas and oil production free of costs of
production.
Secondary recovery. A method of natural gas and oil recovery in which energy
sources from outside of the reservoir are used.
Standardized measure. The estimated future net cash flows from proved
natural gas and oil reserves computed using prices and costs, at a specific
date, after income taxes and discounted at 10%.
Steamflood. The injection of steam into a reservoir to heat the oil and
facilitate its production.
Tcf. One trillion cubic feet of natural gas.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Waterflood. The injection of water into a reservoir to fill pores vacated by
produced fluids, which maintains reservoir pressure and assists production.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and receive a
share of production.
Workover. Operations on a producing well to restore or increase production.
60
<PAGE>
QUICKSILVER RESOURCES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUICKSILVER RESOURCES INC.
Independent Auditors' Report............................................. F-3
Combined Consolidated Balance Sheets December 31, 1998 and 1997.......... F-4
Combined Consolidated Statement of Income for the Year ended December 31,
1998.................................................................... F-5
Combined Consolidated Statement of Stockholder's Equity for the Year
ended December 31, 1998................................................. F-6
Combined Consolidated Statement of Cash Flows for the Year ended December
31, 1998................................................................ F-7
Notes to Combined Consolidated Financial Statements for the Year ended
December 31, 1998....................................................... F-8
Condensed Consolidated Balance Sheets June 30, 1999 (Unaudited) and
December 31, 1998....................................................... F-20
Condensed Consolidated Statements of Operations for the Six Months ended
June 30, 1999 and 1998 (Unaudited)...................................... F-21
Condensed Consolidated Statements of Cash Flows for the Six Months ended
June 30, 1999 and 1998 (Unaudited)...................................... F-22
Condensed Notes to Consolidated Financial Statements for the Six Months
ended June 30, 1999 and 1998............................................ F-23
PREDECESSOR FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<S> <C>
MSR EXPLORATION LTD. AND SUBSIDIARIES
Independent Auditors' Report............................................. F-27
Consolidated Balance Sheet at December 31, 1997.......................... F-28
Consolidated Statement of Operations for the Period ended December 31,
1997.................................................................... F-29
Consolidated Statement of Stockholders' Equity for the Period ended
December 31, 1997....................................................... F-30
Consolidated Statement of Cash Flows for the Period ended December 31,
1997.................................................................... F-31
Notes to Consolidated Financial Statements............................... F-32
MERCURY EXPLORATION COMPANY--TRANSITION REPORTS
Independent Auditors' Report............................................. F-46
Consolidated Balance Sheets at September 30, 1997 and 1996............... F-47
Consolidated Statements of Income for the Years ended September 30, 1997,
1996 and 1995........................................................... F-48
Consolidated Statements of Stockholders' Equity for the Years ended
September 30, 1997, 1996 and 1995....................................... F-49
Consolidated Statements of Cash Flows for the Years ended September 30,
1997, 1996 and 1995..................................................... F-50
Notes to Consolidated Financial Statements............................... F-52
MERCURY EXPLORATION COMPANY--TRANSITION REPORTS
Independent Auditors' Report............................................. F-63
Consolidated Balance Sheet at December 31, 1997.......................... F-64
Consolidated Statement of Income for the Three Months ended December 31,
1997.................................................................... F-65
Consolidated Statement of Stockholders' Equity for the Three Months ended
December 31, 1997....................................................... F-66
Consolidated Statement of Cash Flows for the Three Months ended December
31, 1997................................................................ F-67
Notes to Consolidated Financial Statements............................... F-68
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
Independent Auditors' Report............................................. F-78
Balance Sheet at December 31, 1997 and 1996.............................. F-79
Statement of Operations for the Years ended December 31, 1997, 1996 and
1995.................................................................... F-80
Statement of Partners' Capital for the Years ended December 31, 1997,
1996 and 1995........................................................... F-81
Statement of Cash Flows for the Years ended December 31, 1997, 1996 and
1995.................................................................... F-82
Notes to Financial Statements............................................ F-83
</TABLE>
F-1
<PAGE>
QUICKSILVER RESOURCES INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
ACQUISITION BY QUICKSILVER RESOURCES INC.
</TABLE>
<TABLE>
<S> <C>
Independent Auditors' Report--Unocal Corporation's Spirit Energy 76 unit
interests................................................................ F-87
Statement of Revenues and Direct Operating Expenses Unocal Corporation's
Spirit Energy 76 unit interests for the year ended December 31, 1998..... F-88
Notes to Statement of Reserves and Direct Operating Expenses for the year
ended December 31, 1998.................................................. F-89
ACQUISITIONS BY PREDECESSOR
</TABLE>
<TABLE>
<S> <C>
Independent Auditors' Report--Shell Michigan Properties acquired of
Mercury Exploration Company years ended September 30, 1996 and 1995..... F-91
Statement of Revenues and Direct Operating Expenses Shell Michigan
Properties--acquired years ended September 30, 1996 and 1995............ F-92
Notes to Financial Statements............................................ F-93
Independent Auditors' Report--Destec Michigan Properties acquired of
Mercury Exploration Company years ended September 30, 1997 and 1996..... F-95
Statement of Revenues and Direct Operating Expenses--Destec Michigan
Properties--acquired years ended September 30, 1997 and 1996............ F-96
Notes to Financial Statements............................................ F-97
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have audited the accompanying combined consolidated balance sheets of
Quicksilver Resources Inc. (the Company) as of December 31, 1998 and 1997, and
the related combined consolidated statement of income, stockholders' equity and
cash flows for the year ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
March 29, 1999
F-3
<PAGE>
QUICKSILVER RESOURCES INC.
COMBINED CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
In thousands, except for share and per share data
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................. $ 294 $ 643
Accounts receivable........................................ 7,776 1,167
Inventories and other current assets....................... 751 687
-------- --------
Total current assets..................................... 8,821 2,497
Properties, plant, and equipment--net ("full cost").......... 134,810 131,060
Other assets................................................. 969 355
-------- --------
$144,600 $133,912
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt.......................... $ 67 $ 161
Accounts payable........................................... 5,772 1,362
Accrued liabilities........................................ 1,691 592
-------- --------
Total current liabilities................................ 7,530 2,115
Long-term debt............................................... 84,972 84,656
Unearned revenue............................................. 1,338 2,680
Deferred income taxes........................................ 11,953 9,617
Minority interest in MSR Exploration Ltd..................... 6,219 6,992
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares..............................
Issued and outstanding-none............................... - -
Common Stock, par value $0.01
Authorized 40,000,000 shares..............................
Issued and outstanding 11,510,800......................... 115 115
Additional paid in capital................................... 27,574 27,723
Retained earnings............................................ 4,899 14
-------- --------
Total stockholders' equity............................... 32,588 27,852
-------- --------
$144,600 $133,912
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
QUICKSILVER RESOURCES INC.
COMBINED CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1998
In thousands, except for per share data
<TABLE>
<S> <C>
REVENUES
Gas sales............................................................ $35,713
Oil sales............................................................ 6,367
Other income......................................................... 3,607
-------
Total revenues..................................................... 45,687
-------
EXPENSES
Operating expenses................................................... 17,781
Depletion and depreciation........................................... 12,365
General and administrative........................................... 1,430
Interest............................................................. 6,698
-------
Total expenses..................................................... 38,274
-------
Income before income taxes and minority interest....................... 7,413
-------
Minority interest in net loss of MSR Exploration Ltd................... 758
-------
Income before income taxes............................................. 8,171
-------
Income tax expense
Current.............................................................. 950
Deferred............................................................. 2,336
-------
Total income tax expense........................................... 3,286
-------
Net income............................................................. $ 4,885
=======
Basic and diluted earnings per share................................... $ 0.42
=======
Basic and diluted weighted average number of shares outstanding........ 11,511
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
QUICKSILVER RESOURCES INC.
COMBINED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1998
In thousands
<TABLE>
<CAPTION>
Common Stock
-------------
Paid in
Capital Total
In Excess Retained Stockholders'
Shares Amount Of Par Earnings Equity
------ ------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Inception January 1, 1998....... 100 $ 1 $27,851 $ - $27,852
Stock dividend retroactively
applied........................ 10,211 102 (102) -
Merger with MSR Exploration
Ltd., shares under common
control for merger effective on
March 4, 1999, retroactively
applied........................ 1,200 12 (26) 14 -
------ ---- ------- ------ -------
Adjusted balance January 1,
1998........................... 11,511 115 27,723 14 27,852
Stock registration fees......... (149) (149)
Net income...................... 4,885 4,885
------ ---- ------- ------ -------
Balance December 31, 1998....... 11,511 $115 $27,574 $4,899 $32,588
====== ==== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
QUICKSILVER RESOURCES INC
COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1998
In thousands
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income.......................................................... $ 4,885
Charges and credits to net income not affecting cash
Depletion and depreciation........................................ 12,365
Deferred income taxes............................................. 2,336
Recognition of unearned revenues.................................. (1,342)
Change in minority interest in subsidiary......................... (758)
Amortization of deferred loan costs............................... 66
Changes in assets and liabilities
Accounts receivable............................................... (6,609)
Inventory and other assets........................................ (97)
Accounts payable.................................................. 4,410
Accrued liabilities............................................... 1,099
--------
Net cash from (Used for) operating activities......................... 16,355
--------
INVESTING ACTIVITIES:
Acquisition of properties and equipment............................. (16,097)
--------
Net cash from (used for) investing activities......................... (16,097)
--------
FINANCING ACTIVITIES:
Notes payable, bank proceeds........................................ 10,493
Principal payments on long-term debt................................ (10,271)
Deferred financing costs............................................ (680)
Stock registration fees............................................. (149)
--------
Net cash from (used for) financing activities......................... (607)
--------
Net increase (decrease) in cash....................................... (349)
Cash at beginning of period........................................... 643
--------
Cash at end of period................................................. $ 294
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense.................................. $ 5,617
========
Cash payments for income taxes...................................... $ 600
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1998
1. Business Combination
Formation of Quicksilver
Quicksilver Resources, Inc. (the "Company" or "Quicksilver") was formed as a
Delaware Corporation in December 1997 to combine certain oil and gas properties
pursuant to a merger. On January 1, 1998, Mercury Exploration Company
("Mercury"), Quicksilver Energy, L.C. ("QELC"), Michigan Gas Partners Limited
Partnership ("Michigan Gas Partners"), Trust Company of the West ("TCW"), Joint
Energy Development Investments Limited Partnership ("JEDI"), and Quicksilver
Resources Inc. entered into an agreement and plan of reorganization and merger
to combine certain oil and gas properties owned by Mercury, QELC, and Michigan
Gas Partners by causing Michigan Gas Partners to be merged with Quicksilver and
by causing certain assets and liabilities of Mercury and QELC to be transferred
to and assumed by Quicksilver. Quicksilver was the surviving corporation of the
merger.
In exchange for the contribution of properties and debt Quicksilver issued
shares of common stock. The common stock was issued to contributing parties
based on their ownership interest in the oil and gas properties. The oil and
gas properties were evaluated based on the net present value of their reserves.
The reserves were discounted at 10% and reduced for any associated debt. The
conversion of debt to equity was valued at its face value. The net values for
all properties and debt were summarized and the percentage of each contributed
piece to the total was used to allocate shares of common stock back to the
stockholders.
In the business combination, the surviving corporation issued 1,340,405 (13%
of the outstanding) shares of common stock, $.01 par value, for all JEDI
partnership interests in Michigan Gas Partners. Mercury did not receive
consideration for its partnership interests in Michigan Gas Partners.
Quicksilver issued 3,325,955 shares of common stock to Mercury in exchange for
certain Mercury oil and gas properties in Michigan and Wyoming, and Quicksilver
assumed debts related to the oil and gas properties transferred from Mercury.
Quicksilver also issued 3,030,860 shares of Quicksilver common stock to QELC in
exchange for all of QELC's oil and gas properties in Michigan and Wyoming. In
addition, Quicksilver assumed debts related to QELC's oil and gas producing
properties. Quicksilver issued 1,273,176 shares of common stock to individuals
for their interests in the assets of Mercury and QELC to be transferred to
Quicksilver in the business combination. Quicksilver satisfied debt owed to TCW
under a credit agreement dated November 14, 1996 between TCW and QELC, by
paying $17,075,000 in cash to TCW and by issuing 1,340,404 (13% of the
outstanding) shares of common stock to TCW in exchange for a $10,000,000 credit
on the debt.
The formation of Quicksilver was accounted for under provisions of
Accounting Principal Board Opinion Number 16 (APB 16) "Business Combinations".
Under APB 16, Mercury and QELC were considered companies under common control
and were accounted for at historical cost. The merger of Michigan Gas Partners
into Quicksilver was accounted for using the purchase method with a fair value
of $10 million. The fair value of Michigan Gas Partners was based on the
conversion of the $10,000,000 of debt of TCW for 13% of Quicksilver's common
shares which was the same percentage issued to the partners of Michigan Gas
Partners. Michigan Gas Partners' net book value was $8,884,000 at January 1,
1998. All of the valuation adjustment was assigned to oil and gas properties.
An amount of $1,116,000 was allocated to Michigan Gas Partners' book value of
producing oil and gas properties to complete the accounting.
Merger of MSR Exploration Ltd. with and Into Quicksilver
On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd.
("MSR"). ABP 16, provides that exchanges or transfers of net assets between
companies under common control must be accounted for at
F-8
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
historical cost in a manner similar to that of pooling of interest accounting.
Furthermore, APB 16 indicates that the purchase method of accounting should be
used if the effect of a transfer or exchange is to acquire all of the
outstanding shares held by minority interests. Prior to the merge, QELC,
Mercury, and the principal stockholders of Mercury, comprised of the Darden
family (the "Mercury Group"), controlled Quicksilver though their approximate
74% ownership of Quicksilver. The Mercury Group was considered to control MSR
because the Mercury Group and two other individuals affiliated with Mercury
own approximately 46.5% of the MSR common stock, controlled MSR's executive
committee of its board of directors, and held warrants to purchase 11 million
shares of MSR common stock. Accordingly, Quicksilver was considered the
"accounting acquiror" and transferred approximately 46.5% of MSR's net assets
to Quicksilver at historical cost. The remainder of MSR's net assets,
approximately 53.5% that relate to minority interests, will be valued and
recorded based on the purchase method of accounting in 1999. Although the
merger did not occur until 1999, MSR's financial statements have been combined
with the Company's as the entities were under common control. Also, a minority
interest has been reflected on the December 31, 1998, balance sheet and
statement of income since the merger occurred subsequent to year end.
2. Mergers and Acquisitions
On March 4, 1999, the Company completed the MSR merger. The merger
qualified as a tax-free exchange and was accounted for in part as a pooling of
interest for entities under common control, with the minority interest
accounted for under the purchase method. In connection with the merger, the
Company issued 2,577,700 shares of its common stock in exchange for all of the
outstanding common stock of MSR based on a conversion ratio of 1 share (the
merger exchange ratio) of the Company's common stock for ten (10) shares of
MSR common stock. MSR's outstanding common stock options and warrants were
converted into Quicksilver common stock options and warrants to purchase
approximately 24,857 shares and 1,133,750 shares, respectively. The minority
interest reflected on the Company's balance sheet and statement of income is
approximately 53.5% of MSR's net assets and results of operations for the
period.
The Company's financial statements have been restated for the period prior
to the business combination to include the combined financial results of the
Company and MSR. Total revenues, income (loss) before income taxes, and net
income for the year ended December 31, 1998, for the individual companies
prior to the merger are as follows in thousands:
<TABLE>
<CAPTION>
Quicksilver MSR
Resources Exploration
Inc. Ltd. Total
----------- ----------- -------
<S> <C> <C> <C>
Total Revenues.............................. $41,873 $ 3,814 $45,687
Income (loss) before income taxes........... $ 8,829 $(1,416) $ 7,413
Net income (loss)........................... $ 5,559 $ (674) $ 4,885
</TABLE>
There were no significant intercompany transactions between the Company and
MSR Exploration Ltd.
3. Significant Accounting Policies
The nature of operations and other significant accounting policies are as
follows:
Nature of Operations
Quicksilver Resources Inc. was formed to own various oil and gas properties
in the states of Michigan and Wyoming. Substantially all of the Company's
revenue is derived from the production and sale of natural gas, crude oil,
condensate, and plant products.
F-9
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts Receivable
The Company's customers are large oil and natural gas purchasers. The
Company does not require collateral, and receivables are generally due in 30-60
days. Management considers all accounts receivable current and collectible;
accordingly, no allowance for doubtful accounts has been established.
Major Customers
At December 31, 1998, three purchasers accounted for approximately 21%, 19%,
and 17%, respectively, of the Company's total consolidated oil and gas sales.
The Company does not anticipate that the loss of any of its present purchasers
would adversely effect the Company's consolidated business. The Company also
believes that, in the event of a loss of a present purchaser, other oil and gas
purchasers located in the Company's areas of production would offer competitive
prices for such production.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market and consist of crude oil in tanks and well equipment spares and
supplies.
Properties, Plant, and Equipment
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration, and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by petroleum engineers. Investments in unproved
properties are not amortized until proven reserves associated with them can be
determined or until impairment occurs. Oil and natural gas reserves and
production are converted into equivalent units based upon estimated relative
energy content.
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments) or
fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.
Other plant and equipment are depreciated on the straight-line basis as
follows:
Gas processing plants and gathering systems--over fifteen to twenty
years
Other equipment--over ten years
Building--over forty years
Potential impairment of producing properties and significant unproved
properties and other plant and equipment are assessed annually (unless economic
events warrant more frequent reviews). In addition, a
F-10
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
quarterly impairment analysis of aggregated properties is performed by the
Company using discounted future net cash flows determined based upon current
prices and costs.
Revenue Recognition
The Company recognized revenue as quantities of oil and gas are sold or
volumes of gas are transported to the buyer, and utilizes the sales method of
accounting for oil and gas imbalances. The Company's net imbalance was
immaterial at December 31, 1998.
Environmental Compliance and Remediation
Environmental compliance costs, including on going maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.
Deferred Charges
Financing charges related to the acquisition of debt are deferred and
amortized on a straight line basis over the term of that debt.
Joint Venture Operations
Certain of the Company's exploration and development activities relating to
oil and gas are conducted jointly with others. The accompanying financial
statements reflect only the Company's proportionate interest in such
activities.
Income Taxes
Income taxes provide for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
primarily related to differences between the basis of properties, plant, and
equipment for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Cash Equivalents and Time Deposits
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Investments with an
original maturity in excess of three months are considered to be time deposits.
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments include cash, time deposits, accounts
receivable, and notes payable, accounts payable, and long-term debt. The fair
value of long-term debt is estimated at the present value of future cash flows
discounted at rates consistent with comparable maturities for credit risk. The
carrying amounts reflected in the balance sheet for financial assets classified
as current assets and the carrying amounts for financial liabilities classified
as current liabilities approximate fair value due to the short maturity of such
instruments.
F-11
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per share"
("EPS") which established new standards for computing and presenting EPS. SFAS
No. 128 replaced the presentation of primary EPS with a presentation of basic
EPS. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Earnings per share amounts for 1998
have been presented to conform to the SFAS No. 128 requirements.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of general-
purpose statements. It requires (a) classification of items of other
comprehensive income by their nature in a financial statement and (b) display
of the accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in surplus in the equity section of the statement
of financial position. The Company adopted SFAS No. 130 on January 1, 1998. Net
income and comprehensive income are the same.
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," became effective for fiscal years beginning after December 15,
1997. This statement establishes standards for defining and reporting business
segments. The Company adopted SFAS No. 131 on January 1, 1998. As substantially
all of the Company's revenue is derived from the production and sale of natural
gas, crude oil, condensate and plant products, which are operated as one
segment, this standard did not have a significant impact on the Company's
financial statements.
The FASB has also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which was originally effective for fiscal
years beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Management is currently evaluating the effect of adopting SFAS No. 133 on the
Company's financial statements.
Certain Reclassifications
Certain reclassifications have been made for presentation adopted in 1999.
Revenues have been restated to remove marketing and processing deductions which
are now reflected as operating expenses.
F-12
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Properties, Plants, and Equipment
Capitalized costs are shown below in thousands.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Proved oil and gas
properties............. $178,128 $166,843
Unproved oil and gas
interests.............. 3,584 3,216
Accumulated depletion
and depreciation....... (53,225) (41,217)
-------- --------
$128,487 $128,842
Other equipment......... 10,064 5,620
Accumulated
depreciation........... $ (3,741) $ (3,402)
-------- --------
$134,810 $131,060
======== ========
</TABLE>
5. Other Assets
Other assets, in thousands, consist of:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Deferred loan cost....................... $755 $118
Less accumulated amortization............ (91) (4)
---- ----
Net deferred loan costs.................. 664 114
Environmental escrow bonds............... 305 241
---- ----
$969 $355
==== ====
</TABLE>
6. Notes Payable and Long-Term Debt
Long-term debt, in thousands, consists of:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Notes payable to a bank
(7.1% at December 31, 1998)............ $84,841 $84,453
Various loans............................ 198 364
------- -------
85,039 84,817
Less current maturities................ (67) (161)
------- -------
$84,972 $84,656
======= =======
</TABLE>
Long-term debt maturities are as follows, in thousand of dollars:
<TABLE>
<CAPTION>
Periods Ending December 31, 1998
-------------- -----------------
<S> <C>
1998....................................................... $ -
1999....................................................... 67
2000....................................................... 20
2001....................................................... 20
2002....................................................... 4
2003....................................................... 4
Thereafter................................................. 84,924
-------
$85,039
=======
</TABLE>
As part of merger of the Company with MSR on March 4, 1999, the Company
entered into a new five year Credit Facility agreement. The existing debt of
$73,993,000 and $10,848,000 from Quicksilver and MSR was transferred into the
new Credit Facility. The Credit Facility permits the Company to obtain
revolving credit
F-13
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
loans and to issue letters of credit for the account of the Company from time
to time in an aggregate amount not to exceed $200 million. The Borrowing Base
is currently $85 million and is subject to semi-annual determination and
certain other redeterminations based upon a variety of factors, including the
discounted present value of estimated future net cash flow from oil and gas
production. At the Company's option, loans may be prepaid, and revolving credit
commitments may be reduced, in whole or in part at any time in certain minimum
amounts. The Company can designate the interest rate on amounts outstanding at
either the London Interbank Offered Rate (LIBOR) + 1.65% or bank prime. On
March 4, 1999, the Company locked in its interest rate at 7.38% for the next
six months. The collateral for this loan agreement consists of substantially
all of the existing assets of the Company and any future reserves acquired. The
loan agreement contains certain dividend restrictions and restrictive
covenants, which, among other things, require the maintenance of a minimum
current ratio, net worth, and debt service ratio. The Company currently is in
compliance with all such restrictions.
7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1998,
and December 31, 1997 are as follows, in thousands:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets
Tax credit sale and unearned income....................... $ 3,811 $ 4,597
Net operating loss carryforwards.......................... 2,500 2,301
Investment tax credits.................................... - 171
------- -------
Total deferred tax assets............................... $ 6,311 $ 7,069
Deferred tax liabilities
Properties, plant, and equipment.......................... $18,264 $16,686
------- -------
Net deferred tax liabilities.......................... $11,953 $ 9,617
======= =======
</TABLE>
No valuation allowance is required because the deferred tax assets will be
utilized by the reversal of the deferred tax liabilities. As the deferred tax
liabilities reverse and create taxable income, the tax assets will offset this
tax liability.
The provisions for income taxes for the year ended December 31, 1998 are as
follows, in thousands:
<TABLE>
<S> <C>
United States Federal
Current............................................................. $ 950
Deferred............................................................ 2,336
------
$3,286
======
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate for the year ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
U.S. federal statutory tax rate........................................ 34.0%
Statutory reduction of net operating loss carryforwards................ 6.2%
----
Effective income tax rate.............................................. 40.2%
====
</TABLE>
F-14
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under Internal Revenue Code Section 382, a change of ownership was deemed to
have occurred for MSR. Due to the limitations imposed by Section 382, a portion
of MSR's net operating losses could not be utilized. However, starting in 1999,
the Company has approximately $7,500,000 of net operating loss carryforwards
available from MSR to reduce future U.S. taxable income. These U.S. net
operating loss carryforwards will begin to expire in 2001.
8. Unearned Revenues
The Quicksilver Properties include certain properties which carry IRS code
Section 29 income tax benefits. Code Section 29 allows a credit against regular
federal income tax liability for certain eligible gas production. During 1997
these credits were conveyed through the sale of the working interests to a
bank. The agreement with the bank provided that the Company would receive cash,
payment for future production on the properties, and payment for a portion of
tax credits taken by the bank. The agreement included a fixed payment note
which provides for the Company to receive a minimum of approximately $7 million
plus interest for the future production on the properties. A portion of the
initial cash payment represented an advance payment for the first eighteen
months of tax benefits. As of December 31, 1998 and December 31, 1997, a
balance of $1,338,000 and $2,680,000 respectively, in unearned revenues existed
as a result of the cash consideration received in excess of the tax benefit
earned. At December 31, 1998 and December 31, 1997, $538,000 and $2,005,000
respectively, of the unearned revenues represented advance payments on tax
benefits, which will be recognized as earned through 1999. The balance of
$800,000 will remain unearned until the tax benefits of the IRS Code Section 29
expire at December 31, 2002.
9. Stockholders' Equity
The Company is authorized to issue 40 million shares of common stock with a
par value of one cent ($0.01) and 10 million shares of preferred stock with a
par value of one cent ($0.01). At December 31, 1998, the Company had 100,000
shares of common stock outstanding.
As part of the merger with MSR, the Company agreed to exchange one share of
its common stock for each 10 shares of MSR common stock. To effect the exchange
ratio, the present shareholders of the Company will be issued an additional
10,210,800 shares in the form of a stock dividend. Upon completion of the
merger the founding shareholders will own 10,310,800 (80%) of the shares of the
Company and former MSR shareholders will own approximately 2,577,700 (20%) of
the common shares of the Company. All references in the financial statements to
numbers of shares and per share amounts have been restated to reflect the stock
dividend.
The Company currently has 11,510,800 shares of common stock outstanding.
MSR's outstanding options and warrants were converted into options and warrants
to purchase Company common stock. As a result of the merger, the Company has
outstanding warrants to purchase common stock of 550,000 shares at $12.50 per
share, 550,000 shares at $20.00 per share, 28,000 shares at $33.75 per share,
and 5,750 shares at $0.10 per share and options to purchase 24,857 shares of
common stock at $8.75 per share.
Stock Option Plan
Pursuant to the merger agreement with MSR, the Company converted the
outstanding options of MSR into options to purchase Quicksilver common shares.
During 1997, an aggregate of 24,857 shares were granted
under MSR's plan at an exercise price of $8.75 per share. Options are totally
vested and must be exercised within five years of the date of grant. No
additional options will be granted under the plan.
F-15
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Related Party Transactions
When the Company was formed on January 1, 1998, it entered into a Management
Agreement (the Management Agreement) for Mercury Exploration Company (Mercury)
to act as operator of the Company's oil and gas properties in Michigan, Wyoming
and Montana under a joint operating agreement. The Company has no operating
employees; Mercury performs all operations on behalf of the Company. In its
capacity as operator, Mercury pays all costs and expenses of operations and
distributes all net revenues associated with the Company's properties. The
Company reimburses Mercury for its actual cost for direct and indirect expenses
incurred by Mercury for the benefit of the Company and its properties. The
indirect expenses for which Mercury is reimbursed include employee
compensation, office rent, office supplies, and employee benefits. During 1998,
the Company paid Mercury a total of approximately $1.2 million under the
management agreement.
Mercury generally allocated its expenses among the Company and other
entities for which Mercury's services are provided by multiplying the aggregate
amount of indirect expenses incurred by Mercury by the time that the employees
of Mercury spend on managing Quicksilver properties and dividing by the
aggregate time that the employees of Mercury spend on all the entities for
which Mercury provides similar services. Management believes the allocated
method and amounts are reasonable.
Mercury owns 3,899,822 (30.3%) shares of the Company's common stock, and
three of Mercury's directors--Frank Darden, Thomas Darden, and Glenn Darden--
are also directors and officers of the Company.
11. Supplemental Information for Oil and Gas Producing Activities (Unaudited)
The Company's proved oil and gas reserves at December 31, 1998, have been
estimated by Holditch-Reservoir Technologies Consulting Services and at
December 31, 1997, by Citadel Engineering, Ltd. and Mercury in accordance with
guidelines established by the Securities and Exchange Commission ("SEC").
Accordingly, the following reserve estimates are based upon existing economic
and operating conditions.
There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only and should
not be construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties
or the cost that would be incurred to obtain equivalent reserves.
F-16
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the continental United States, are as
follows:
Reserve Quantities
<TABLE>
<CAPTION>
Oil Gas
------ -------
(Mbbl) (Mmcf)
<S> <C> <C>
Proved reserves
As of January 1, 1997..................................... 21,137 100,918
Purchase of reserves.................................... 3,646 50,701
Revisions of previous estimates......................... 686 332
Production for 1997..................................... (933) (13,117)
------ -------
As of January 1, 1998..................................... 24,536 138,834
Purchase of reserves.................................... - -
Revision of estimates................................... (5,886) -
Extensions and discoveries.............................. - 29,683
Production for 1998..................................... (667) (15,315)
------ -------
As of December 31, 1998................................... 17,983 153,202
====== =======
Proved Developed Reserves
As of January 1, 1997..................................... 5,335 91,729
As of January 1, 1998..................................... 8,932 119,669
As of December 31, 1998................................... 9,829 123,743
</TABLE>
Standardized Measure
The following tables present the Company's standardized measure of
discounted future net cash flows and changes therein relating to proved oil and
gas reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate, and
gas price structure utilized to project future net cash flows reflects current
prices at each date presented and have been escalated only when known and
determinable price changes are provided by contract. Future production,
development, and net abandonment costs are based on current costs without
escalation. The resulting net future cash flows have been discounted to their
present values based on a 10% annual discount factor for the years ended
December 31, 1998 and 1997, in thousands of dollars.
F-17
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Future cash flows....................................... $ 607,336 $ 629,499
Future production and development costs................. (331,599) (300,273)
Future income tax expense............................... (55,106) (46,733)
--------- ---------
Future net cash flows................................... 220,631 282,493
10% annual discount for estimated timing of cash flows.. (92,212) (134,848)
--------- ---------
Standardized measure of discounted future net cash
flows.................................................. $ 128,419 $ 147,645
========= =========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net changes in price and production costs................. $ 3,199 $ (5,362)
Development costs incurred................................ 8,283 3,303
Revision of estimates..................................... (21,708) 2,908
Changes in estimated future development costs............. (13,763) (1,654)
Purchases of reserves..................................... 1,715 32,247
Extensions, discoveries and improved recovery, net of
future production and development costs.................. 18,246 -
Net changes in income taxes............................... (7,871) 13,519
Sales of oil and gas net of production costs.............. (24,346) (28,013)
Accretion of discount..................................... 14,765 11,558
Other..................................................... 2,254 (10,217)
-------- --------
Net increase (decrease)................................... $(19,226) $ 18,289
======== ========
</TABLE>
Estimated future cash inflows are computed by applying year end prices of
oil and gas to year end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves in future years, based on year end costs and assuming continuation of
existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to the
Company.
Costs incurred in oil and gas property acquisition, exploration, and
development activities for the year ended December 31, 1998, in thousands:
<TABLE>
<S> <C>
Acquisition of properties........................................... $ 1,715
Exploration costs................................................... 1,095
Development costs................................................... 8,283
-------
Total............................................................. $11,093
=======
</TABLE>
F-18
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized cost for oil and gas properties at December 31, 1998 and 1997,
in thousands:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Proved oil and gas properties............................ $178,128 $166,843
Unproved oil and gas interests........................... 3,584 3,216
Accumulated depletion and depreciation................... (53,225) (41,217)
-------- --------
$128,487 $128,842
======== ========
</TABLE>
Results of operations from producing activities, for the year ended December
31, 1998, in thousands:
<TABLE>
<S> <C>
Oil and gas sales................................................ $ 38,923
Operating expenses............................................... (14,577)
Depletion and depreciation....................................... (12,198)
--------
12,148
Income taxes..................................................... (4,130)
--------
Results of operations from producing activities (excluding
corporate overhead and interests costs)......................... $ 8,018
========
</TABLE>
F-19
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except for share and per share amounts
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 157 $ 294
Accounts receivable, net of allowance for
doubtful accounts of $1,350 at June 30,
1999........................................ 7,609 7,776
Inventories and other current assets......... 751 751
-------- --------
Total current assets....................... 8,517 8,821
Properties, plant and equipment--net ("full
cost")........................................ 167,478 134,810
Other assets................................... 1,689 969
-------- --------
$177,684 $144,600
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............ $ 30 $ 67
Accounts payable............................. 2,665 5,772
Accrued liabilities.......................... 1,476 1,691
-------- --------
Total current liabilities.................. 4,171 7,530
Long-term debt................................. 114,945 84,972
Unearned revenue............................... 892 1,338
Deferred income taxes.......................... 14,953 11,953
Minority interest in MSR Exploration Ltd....... - 6,219
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.01
Authorized 10,000,000 shares, issued and
outstanding--none......................... - -
Common stock, $.01 par value
Authorized 40,000,000 shares, issued and
outstanding 12,888,500 and 11,510,800..... 129 115
Paid in capital in excess of par value....... 37,956 27,574
Retained earnings............................ 4,638 4,899
-------- --------
Total stockholders' equity................. 42,723 32,588
-------- --------
$177,684 $144,600
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1999 and 1998
In thousands, except for per share data
<TABLE>
<CAPTION>
1999 1998
------- -------
(unaudited)
<S> <C> <C>
REVENUE
Gas sales.................................................. $16,264 $17,865
Oil sales.................................................. 3,483 3,844
Other income............................................... 2,150 1,376
------- -------
Total revenues........................................... 21,897 23,085
------- -------
EXPENSES
Operating expenses......................................... 9,381 9,057
Depletion and depreciation................................. 6,129 6,043
Provision for doubtful accounts............................ 1,350 -
General and administrative................................. 1,836 548
Interest................................................... 3,738 3,660
------- -------
Total expenses........................................... 22,434 19,308
------- -------
Income (loss) before income taxes and minority interest...... (537) 3,777
Minority interest in net loss of MSR Exploration Ltd......... 141 268
------- -------
Income (loss) before income taxes............................ (396) 4,045
Income taxes (benefit)....................................... (135) 1,459
------- -------
Net income (loss)............................................ (261) $ 2,586
======= =======
Basic and diluted earnings per share......................... $ (0.02) $ 0.22
======= =======
Basic and diluted weighted average number of shares
outstanding for the periods................................. 12,417 11,511
======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-21
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
In thousands
<TABLE>
<CAPTION>
1999 1998
----------- -------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ (261) $ 2,586
Charges and credits to net income not affecting cash
Depletion and depreciation............................ 6,129 6,043
Deferred income taxes................................. (135) 1,459
Recognition of unearned revenue....................... (446) (723)
Minority interest in loss of subsidiary............... (141) (268)
Amortization of deferred loan costs................... 182 -
Provision for doubtful accounts....................... 1,350 -
Charges in assets and liabilities
Accounts receivable................................... (1,183) (4,477)
Inventory, prepaid expenses and other................. 18 (31)
Accounts payable...................................... (3,107) 4,948
Accrued liabilities................................... (215) 1,611
-------- -------
NET CASH FROM OPERATING ACTIVITIES........................ 2,191 11,148
-------- -------
INVESTING ACTIVITIES
Acquisition of properties and equipment................. (31,097) (7,638)
-------- -------
NET CASH USED FOR INVESTING ACTIVITIES.................... (31,097) (7,638)
-------- -------
FINANCING ACTIVITIES
Notes payable, bank proceeds............................ 33,231 6,850
Principal payments on long-term debt.................... (3,295) (10,182)
Deferred financing costs................................ (871) (244)
Stock registration fees................................. (296) -
-------- -------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES............. 28,769 (3,576)
-------- -------
NET DECREASE IN CASH...................................... (137) (66)
CASH AT BEGINNING OF PERIOD............................... 294 643
-------- -------
CASH AT END OF PERIOD..................................... $ 157 $ 577
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest expense...................... $ 3,547 $ 1,918
======== =======
Cash payments for income taxes.......................... $ - $ -
Common stock used for acquisition of minority interest
in MSR................................................. 1,377 -
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Six Months ended June 30, 1999 and 1998
1. Accounting Policies and Disclosures
In the opinion of management of Quicksilver Resources Inc. (Quicksilver or
the "Company"), the Company's Condensed Consolidated Financial Statements
contain all adjustments (consisting of only normal, recurring accruals)
necessary to present fairly the financial position of the Company as of June
30, 1999, and the results of operations and cash flows for the three and six
months ended June 30, 1999, and June 30, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended December 31, 1998. The
results of operations for the three-and six-month periods ended June 30, 1999,
are not necessarily indicative of the operating results to be expected for the
full fiscal year.
Certain reclassifications have been made for presentation adopted in 1999.
Revenues have been restated to remove marketing and processing deductions which
are now reflected as operating expenses.
Merger of MSR Exploration Ltd. with and into Quicksilver
On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd.
(the "MSR merger"). Accounting Principles Board Opinion (APB) No. 16 provides
that exchanges or transfers of net assets between companies under common
control be accounted for at historical cost in a manner similar to that of
pooling of interest accounting. Furthermore, APB 16 indicates that the purchase
method of accounting should be used if the effect of a transfer or exchange is
to acquire all of the outstanding shares held by minority interests. Prior to
the merger Quicksilver Energy, L.C., Mercury Exploration Company, and the
principal stockholders of Mercury Exploration Company, comprised of the Darden
family (the "Mercury Group"), controlled Quicksilver through their approximate
74% ownership of Quicksilver. The Mercury Group was considered to control MSR
because the Mercury Group and two other individuals affiliated with Mercury
owned approximately 46.5% of MSR's common stock, controlled MSR's executive
committee of its board of directors, and held warrants to purchase 11 million
shares of MSR common stock. Accordingly, Quicksilver was considered the
"accounting acquirer" and transferred approximately 46.5% of MSR's net assets
to Quicksilver at historical cost. The remainder of MSR's net assets, the
approximate 53.5% related to minority interests, was valued and recorded based
on the purchase method of accounting in March 1999. Although the merger did not
occur until 1999, MSR's financial statements as of December 31, 1998, and June
30, 1998, have been combined with the Company's since the entities were under
common control.
2. Mergers and Acquisitions
MSR Merger
On March 4, 1999, the Company completed the MSR merger. The merger qualified
as a tax-free exchange and was accounted for in part as a pooling of interests
for entities under common control, with the minority interest accounted for
under the purchase method. In connection with the merger, the Company issued
2,577,700 shares of its common stock in exchange for all of the outstanding
common stock of MSR Exploration Ltd. based on a conversion ratio of one share
of the Company's common stock for ten shares of MSR common stock (the merger
exchange ratio). MSR's outstanding common stock options and warrants were
converted into Quicksilver common stock options and warrants to purchase
approximately 24,857 shares and 1,133,750 shares, respectively. The minority
interest reflected on the Company's December 31, 1998 balance sheet and
statements of operations is approximately 53.5% of MSR's net assets and results
of operations for the periods prior to March 4, 1999.
F-23
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
For the Six Months ended June 30, 1999 and 1998
Unocal Property Acquisition
On May 17, 1999, the Company and Union Oil Company of California ("Unocal")
completed the previously announced purchase by the Company from Unocal of
substantially all of Unocal's natural gas and crude oil assets in Michigan.
The assets purchased, consisting of ownership interests in the Garfield unit
and the Beaver Creek unit, include approximately 20,000 net leasehold acres and
about 13,000 Mcfe production per day. Quicksilver's ownership in Garfield
increased to 99% from 54%.
The purchase price for the Unocal acquisition consisted of $27 million in
cash, subject to certain adjustments, which resulted in a final purchase price
of $25.8 million cash and 404,381 unregistered shares of the Company's common
stock. The stock component of the purchase price was placed in escrow and will
be distributed to Unocal over a three-year period, subject to downward
adjustment in correlation to certain costs, expenses, and liabilities incurred
during this period. The purchase price was determined in an arms length
negotiation with Unocal following a competitive bid process. The Company
financed the cash portion of the purchase price with borrowings under a bank
credit facility, which permits the Company to obtain revolving credit loans and
to issue letters of credit from time to time in an aggregate amount not to
exceed the lesser of a borrowing base limitation or $200 million. Lenders under
the bank credit facility include NationsBank, N.A., Frost National Bank, and
Paribas.
3. Long-Term Debt
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
Long-term debt, in thousands, consists of:
Notes payable to banks
(7.38% at June 30, 1999 and
7.1% at December 31, 1998)............... $ 84,867 $84,841
Line of credit
(7.015% at June 30, 1999)................ 30,000
Various loans.............................. 108 198
-------- -------
114,975 85,039
Less current maturities.................... (30) (67)
-------- -------
$114,945 $84,972
======== =======
</TABLE>
Long-term debt maturities are as follows, in thousands of dollars:
<TABLE>
<CAPTION>
Periods Ending June 30, 1999 December 31, 1998
-------------- ------------- -----------------
(unaudited)
<S> <C> <C>
1999......................................... $ 30 $ 67
2000......................................... 720 20
2001......................................... 20 20
2002......................................... 4 4
2003......................................... 4 4
Thereafter................................... 114,197 84,924
-------- -------
$114,975 $85,039
======== =======
</TABLE>
F-24
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
For the Six Months ended June 30, 1999 and 1998
As part of the merger of the Company with MSR on March 4, 1999, the Company
entered into a new five year Credit Facility agreement. The existing debt of
$73,993,000 and $10,848,000 from, respectively, Quicksilver and MSR was
transferred into the new Credit Facility. The Credit Facility permits the
Company to obtain revolving credit loans and to issue letters of credit for the
account of the Company from time to time in an aggregate amount not to exceed
the lesser of $200 million on the Borrowing Bases. Under an amendment to the
Credit Facility dated May 17, 1999 the Borrowing Base is $115 million at June
30, 1999 and is subject to semi-annual determination and certain other
redeterminations based upon a variety of factors, including the discounted
present value of estimated future net cash flow from the Company's natural gas
and crude oil production. At the Company's option, loans may be prepaid, and
revolving credit commitments may be reduced in whole or in part at any time in
certain minimum amounts. The Company can designate the interest rate on amounts
outstanding at either the London Interbank Offered Rate (LIBOR) + 2.375%, or at
bank prime rate. On March 4, 1999, the Company locked in its interest rate at
7.38% for six months. The collateral for this loan agreement consists of
substantially all of the existing assets of the Company and any future reserves
acquired. The loan agreement contains certain dividend restrictions and
restrictive covenants, which, among other things, require the maintenance of a
minimum current ratio. The Company currently is in compliance with all such
restrictions.
4. Unearned Revenues
The Quicksilver properties include certain properties which carry IRS code
Section 29 income tax benefits. Code Section 29 allows a credit against regular
federal income tax liability for certain eligible natural gas production.
During 1997, these credits were conveyed through the sale of the working
interests to a bank. The agreement with the bank provided that the Company
would receive cash payment for future production on the properties and payment
for a portion of the tax credits taken by the bank. The agreement included a
fixed payment note which provides for the Company to receive a minimum of
approximately $7 million plus interest for the future production on the
properties. A portion of the initial cash payment represented an advance
payment for the first eighteen months of tax benefits. As of June 30, 1999, and
December 31, 1998, a balance of $892,000 and $1,338,000, respectively, in
unearned revenues existed as a result of the cash consideration received in
excess of the tax benefit earned.
5. Stockholders' Equity
The Company is authorized to issue 40 million shares of common stock with a
par value of one cent ($0.01) and 10 million shares of preferred stock with a
par value of one cent ($0.01).
As part of the merger with MSR Exploration Ltd., the Company agreed to
exchange one share of its common stock for each ten shares of MSR common stock.
To effect the exchange ratio, the founding stockholders of the Company were
issued an additional 10,210,800 shares, prior to the merger, in the form of a
stock dividend. Upon completion of the merger, the founding stockholders owned
10,310,800 (80%) of the shares of the Company and former MSR shareholders owned
approximately 2,577,700 (20%) of the common shares of the Company. A total of
1,200,000 shares of MSR common stock were held under common control, and
1,377,700 shares were held by minority shareholders. All references to numbers
of shares and per share amounts in the financial statements dated prior to the
effective date of the merger, March 4, 1999, have been restated to reflect the
stock dividend plus 1,200,000 shares held under common control or a total of
11,510,800 common shares.
The Company now has 12,888,500 shares of common stock outstanding. As part
of the Unocal Property addition, the Company placed 404,381 unregistered shares
in escrow (see note 2 and 6). Outstanding options
F-25
<PAGE>
QUICKSILVER RESOURCES INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued)
For the Six Months ended June 30, 1999 and 1998
and warrants for MSR stock were converted into options and warrants to purchase
Company common stock. As a result of the merger, the Company has outstanding
warrants to purchase common stock of 550,000 shares at $12.50 per share,
550,000 shares at $20.00 per share, 28,000 shares at $33.75 per share, and
5,750 shares at $0.01 per share, and options to purchase 24,857 shares of
common stock at $8.75 per share. Such options and warrants are anti-dilutive at
June 30, 1999 and therefore are not included in earnings per share.
6. Contingencies
The Company's customers are large natural gas and crude oil purchasers. The
Company does not generally require collateral, and receivables are usually due
and collected in 30 to 60 days. On March 10, 1999, one of the Company's natural
gas purchasers filed for protection under Chapter 11 of the Federal Bankruptcy
Code. Management considers a portion of the approximately $2,450,000 account
receivable associated with this purchaser to be uncollectible; accordingly, an
allowance for doubtful accounts of $1,350,000 was established in the first
quarter and remains in place at June 30, 1999. All contracts with that
purchaser have been terminated, and the gas has been recontracted with a
credit-worthy purchaser. The Company believes that based on information
currently available regarding the bankruptcy proceeding, the net receivable
will be recovered.
In connection with the purchase of certain properties from Unocal (see note
2), the Company placed 404,381 unregistered shares of Company common stock in
escrow. These shares will be distributed to Unocal over a three-year period,
subject to downward adjustment pending the resolution of certain contingencies.
Such shares, which are not considered outstanding at June 30, 1999, will become
outstanding as they are distributed following the resolution of the
contingencies.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MSR Exploration Ltd. and Subsidiaries
Fort Worth, Texas
We have audited the accompanying consolidated balance sheet of MSR
Exploration Ltd. and subsidiaries (the Company) as of December 31, 1997, and
the related consolidated statement of operations, stockholders' equity and cash
flows for the period from inception March 7, 1997 to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the period from
inception March 7, 1997 to December 31, 1997, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
March 25, 1998
(December 18, 1998 as to Note 12)
F-27
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents....................................... $ 528,000
Time deposits................................................... 59,000
Accounts receivable............................................. 507,000
Inventories..................................................... 248,000
Prepaid expenses................................................ 32,000
-----------
Total current assets.......................................... 1,374,000
PROPERTIES, PLANT AND EQUIPMENT--NET ("full cost")................ 24,234,000
OTHER ASSETS...................................................... 355,000
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY $25,963,000
===========
CURRENT LIABILITIES
Current portion of long-term debt............................... $ 88,000
Accounts payable................................................ 652,000
Accrued liabilities............................................. 592,000
-----------
Total current liabilities..................................... 1,332,000
-----------
LONG-TERM DEBT.................................................... 10,560,000
-----------
DEFERRED INCOME TAXES............................................. 1,001,000
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value
Authorized 50,000,000 shares, issued and outstanding
25,777,014................................................... 258,000
Paid in capital in excess of par value.......................... 12,812,000
Foreign currency translation adjustment......................... (30,000)
Retained earnings............................................... 30,000
-----------
13,070,000
-----------
$25,963,000
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period from Inception, March 7, 1997 to
December 31, 1997
<TABLE>
<S> <C>
REVENUE
Oil sales...................................................... $ 257,000
Gas sales...................................................... 570,000
Interest and other income...................................... 27,000
-----------
Total revenues............................................... 854,000
-----------
EXPENSES
Operating expenses............................................. 228,000
Production taxes............................................... 68,000
Depletion and depreciation..................................... 220,000
General and administrative..................................... 146,000
Interest....................................................... 147,000
-----------
Total expenses............................................... 809,000
-----------
Income before income taxes....................................... 45,000
Income tax (expense) benefit..................................... (15,000)
-----------
Net income..................................................... $ 30,000
===========
Basic and diluted earnings per share............................. $ -
===========
Basic weighted average number of shares outstanding for the
period.......................................................... 14,801,000
===========
Diluted weighted average number of shares outstanding for the
period.......................................................... 14,838,000
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from Inception, March 7, 1997 to
December 31, 1997
<TABLE>
<CAPTION>
Cumulative
Paid in Foreign Total
Common Stock Capital Currency Stock-
------------------- in Excess Translation Retained holders'
Shares Amount of Par Adjustment Earnings Equity
---------- -------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Inception March 7, 1997
Issuance of shares in
exchange for oil and
gas properties....... 12,000,000 $120,000 $ 337,000 $ - $ - $ 457,000
Merger--Issuance of
shares in exchange for
Old MSR shares (Note
1)..................... 13,777,014 138,000 12,400,000 12,538,000
Warrants payable--60,000
warrants issued in
payment of bank
commitment fee......... 75,000 75,000
Translation
adjustments............ (30,000) (30,000)
Net income.............. 30,000 30,000
---------- -------- ----------- -------- ------- -----------
Balance at December 31,
1997................... 25,777,014 $258,000 $12,812,000 $(30,000) $30,000 $13,070,000
========== ======== =========== ======== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from Inception, March 7, 1997 to December 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 30,000
Charges and credits to net loss not affecting cash
Depletion and depreciation..................................... 220,000
Deferred income taxes.......................................... 15,000
Changes in assets and liabilities
Receivables.................................................... 236,000
Inventories and prepaid expenses............................... (22,000)
Accounts payable and accrued liabilities....................... (153,000)
-----------
NET CASH FROM (USED FOR) OPERATING ACTIVITIES...................... 326,000
-----------
INVESTING ACTIVITIES
Property, plant and equipment expenditures....................... (592,000)
Cash received in merger.......................................... 350,000
Change in cumulative foreign currency translation................ (30,000)
-----------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES...................... (272,000)
-----------
FINANCING ACTIVITIES
Principal payments on long-term debt............................. 10,575,000
Proceeds from debt borrowings.................................... (10,040,000)
Payment of financing costs....................................... (61,000)
-----------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES...................... 474,000
-----------
CASH AT END OF PERIOD.............................................. $ 528,000
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MSR Exploration Ltd. (the Company), and its wholly owned subsidiaries. The
Company's consolidated financial statements include the operations of the
Company from its inception on March 7, 1997 and Old MSR's operations since
October 31, 1997, the effective date of the Merger. All significant inter-
company transactions and balances have been eliminated in consolidation.
Principal Business Activity and Merger
MSR Exploration Ltd. ( "the Company"), formerly Mercury Montana, Inc., was
organized on March 7, 1997, under the laws of the State of Delaware for the
purpose of acquiring from Mercury Exploration Company (Mercury) and thereafter
exploring, developing and operating all of the Company's oil and natural gas
properties located in Montana (the "Mercury Properties"). Upon formation of the
Company, Mercury conveyed to the Company the Mercury Properties and associated
debt in exchange for a majority of the then outstanding Company common stock
and warrants to purchase additional shares of Company common stock. Certain
directors, officers and agents of Mercury also conveyed to the Company certain
contractual rights in the Mercury Properties in exchange for shares of Company
common stock and warrants. The Mercury Properties included approximately 75
crude oil producing wells which were subject to a prior production payment,
forward-sale agreement between Mercury and a third party covering a period from
October 1996 through December 1997. The agreement was the obligation of
Mercury; consequently the oil revenue and associated expenses from these
properties belonged to Mercury through December 31, 1997, and started accruing
to the Company on January 1, 1998.
On March 26, 1997, MSR Exploration Ltd., ("Old MSR") , an Alberta, Canada
corporation, entered into an agreement with the Company, then known as Mercury
Montana, Inc. and its majority shareholder at that time, Mercury, both of Fort
Worth, Texas, to combine all of the Company's oil and gas assets in Montana
with all the oil and gas assets of Old MSR by way of a merger of the Company
and Old MSR. The Company was the surviving corporation in the merger and
changed its name to MSR Exploration Ltd. after the merger was effective. The
merger was accounted for under the purchase method of accounting.
At a combined Annual, General and Special Meeting of Shareholders of the Old
MSR held on October 30, 1997, the shareholders elected directors and approved
the domestication or continuance of Old MSR from Alberta, Canada to Delaware,
U.S.A. The domestication of Old MSR into Delaware was required for the merger
to become effective. The merger was subsequently approved on October 31, 1997,
by written consent of the stockholders of Old MSR.
As part of the merger, the Company issued to Old MSR shareholders one share
of common stock of the Company for each of the 13,777,014 outstanding shares of
Old MSR common stock. Each of the 12,000,000 shares of common stock of the
Company outstanding prior to the merger remained outstanding. The combined
total number of outstanding shares is 25,777,014. All such shares are listed
for trading on the American Stock Exchange. In addition, the Company paid $4
million of Mercury Exploration Company bank debt. Outstanding warrants to
purchase 5.5 million shares of common stock of the Company at $1.25 per share
and 5.5 million shares at $2.00 per share also remained outstanding after the
merger, as did Company stock options to purchase an aggregate of 228,570 shares
of Company common stock at $0.875 per share granted in lieu of salaries. An
outstanding warrant to purchase 280,000 shares of common stock of the Old MSR
at $3.375 per share was converted to an equivalent right to acquire shares of
the Company.
F-32
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three members of Old MSR's Board of Directors, Otto J. Buis, Patrick M.
Montalban and Steven M. Morris, together with two independent directors, D.
Randall Kent and W. Yandell Rogers, III, were elected to the Board of Directors
of Old MSR at its October 30, 1997 meeting. With the completion of the merger,
Messrs. Buis, Montalban, Morris, Kent and Rogers became directors of the
Company joined by Frank Darden, Thomas F. Darden and Glenn M. Darden, the
directors of the Company prior to the merger and also directors of Mercury.
On October 31, 1997, the Company restructured the Old MSR's revolving credit
facility and entered into a new credit agreement with a bank. The closing of
the loan was subject to the successful completion of the Company's merger with
Old MSR. The new agreement is for a $25,000,000 senior secured revolving credit
facility with an initial borrowing base of $12,000,000, which matures in five
years.
U.S. Dollar Reporting
The majority of the Company's business is transacted in U.S. dollars and,
accordingly, the consolidated financial statements are expressed in that
currency.
Accounts Receivable
The Company's customers are large oil and natural gas purchasers. The
Company does not require collateral, and receivables are generally due in 30-60
days. Management considers all accounts receivable current and collectible;
accordingly, no allowance for doubtful accounts has been established.
Major Customers
For the period from inception March 7, 1997 to December 31, 1997, three
purchasers, Rio Vista Energy, Ltd., Montana Power Company, and J.N. Petroleum
Marketing, Inc., accounted for approximately 42%, 22% and 11%, respectively of
the Company's total consolidated oil and gas sales. The Company has a contract
with Montana Power Company which expires January 1, 2004 to sell all gas
processed through one of the company's gas plants. Gas prices are re-determined
each January during the contract term. The Company does not anticipate that the
loss of any of its present purchasers would adversely effect the Company's
consolidated business. The Company also believes that, in the event of a loss
of a present purchaser, other oil and gas purchasers located in the Company's
areas of production would offer competitive prices for such production.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market and consist of crude oil in tanks and well equipment spares and
supplies.
Properties, Plant and Equipment
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved
F-33
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
properties are not amortized until proven reserves associated with them can be
determined or until impairment occurs. Oil and natural gas reserves and
production are converted into equivalent units based upon estimated relative
energy content.
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments) or
fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.
Other plant and equipment are depreciated on the straight-line basis as
follows:
Gas processing plants and gathering systems--over eight years
Other equipment--over three to seven years
Potential impairment of producing properties and significant unproved
properties and other plant and equipment are assessed annually (unless economic
events warrant more frequent reviews). In addition, a quarterly impairment
analysis of aggregated properties is performed by the Company using discounted
future net cash flows determined based upon current prices and costs.
Revenue Recognition
The Company recognizes revenue as quantities of oil and gas sold or volumes
of gas transported, and utilizes the entitlement method of accounting for oil
and gas imbalances. Under this method, the Company recognizes revenue for its
proportionate share of volumes sold. Any over-produced amount is recorded as
deferred revenue and any under-produced amount is recorded as current revenue
and revenue receivable. The Company had no significant over or under-produced
positions as of December 31, 1997.
Environmental Compliance and Remediation
Environmental compliance costs, including on going maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.
Deferred Charges
Financing charges related to the acquisition of debt are deferred and
amortized over the term of that debt using the effective interest method.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency; therefore, translation is performed for balance
sheet accounts using current exchange rates in effect at the balance sheet
date, and for revenue and expense accounts using a weighted average exchange
rate for the year.
F-34
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Joint Venture Operations
Certain of the Company's exploration and development activities relating to
oil and gas are conducted jointly with others. The accompanying financial
statements reflect only the Company's proportionate interest in such
activities.
Income Taxes
Income taxes provide for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of properties, plant and
equipment for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Earnings per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
("EPS") which established new standards for computing and presenting EPS. SFAS
No. 128 replaced the presentation of primary EPS with a presentation of basic
EPS. Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The diluted weighted average number
of shares outstanding includes 16,000 shares for the period attributable to the
assumed exercise of dilutive common stock options. Earnings per share amounts
for 1997 have been presented to conform to the SFAS No. 128 requirements.
Cash Equivalents and Time Deposits
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Investments with an
original maturity in excess of three months are considered to be time deposits.
Stock-Based Compensation
Compensation expense is recorded with respect to stock option grants to
employees using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25. The Company has not elected the fair value method of
accounting for stock-based compensation encouraged, but not required, by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation."
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments include cash, time deposits, accounts
receivable, notes payable, accounts payable and long-term debt. The Company
estimates that the carrying amount of these items is a reasonable estimate of
their fair value.
Accounting 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-35
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose statements. It requires (a) classification of items of other
comprehensive income by their nature in a financial statement and (b) display
of the accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in surplus in the equity section of the statement
of financial position. The Company plans to adopt SFAS No. 130 for the quarter
ended March 31, 1998.
2. Production Payment/Forward Sale of Oil
The Mercury Properties contributed to the Company by Mercury, upon its
inception, were subject to a production payment. Mercury and Supply Development
Group, Inc. (SDG) entered into a Production Payment Agreement in October 1996.
Pursuant to the agreement SDG was entitled to an aggregate of 320,000 barrels
of oil produced from certain properties of Mercury, including the Mercury
Properties. Mercury could satisfy this obligation by delivering to SDG proceeds
from the sale of oil produced rather than delivering the oil "in kind", unless
SDG elected to take oil "in kind". Pursuant to the Merger Agreement among the
Company, Old MSR, and Mercury dated as of March 26, 1997, as amended, Mercury
was entitled to all of the oil revenue and income attributable to the Mercury
Properties until the Production Payment Amount had been delivered to SDG;
provided that Mercury must reimburse the Company for all costs and expenses of
oil production. Mercury's obligation to SDG was satisfied on December 31, 1997.
No amounts associated with the Production Payment Agreement are reflected in
the Company's financial statements, as the Production Payment Agreement was an
obligation of Mercury.
3. Pro Forma Condensed Consolidated Data
The following pro forma condensed consolidated data for the years ended
December 31, 1997 and 1996 are presented as if the merger of the Company with
Old MSR had been consummated on January 1, 1996, which includes adjustments to
Old MSR. The Company's revenue and expenses subject to a prior forward sale
were excluded from the Company's statements of operations and from this pro
forma data. Oil revenues and direct operating expenses subject to the forward
sale for 1997 were approximately $2,180,000 and $1,536,000 respectively, and
for 1996 were approximately $689,000 of revenues and $308,000 of associated
expenses. For 1996 the oil revenues and associated expenses subject to the
forward sale relate to the final three months of 1996. Revenues and expenses
associated with the forward sale began to accrue to the Company on January 1,
1998.
F-36
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In thousands except for per share amounts
<TABLE>
<CAPTION>
January 1
To From Inception
March 6 March 7 to
Predecessor December 31 Pro Forma
1997 Historical Historical Unaudited
- ---- ----------- -------------- ---------
<S> <C> <C> <C>
Revenue.................................. $ 57 $ 854 $4,454
Expenses................................. 31 824 4,604
------ ------ ------
Net income (loss)........................ $ 26 $ 30 $ (150)
====== ====== ======
Basic and diluted earnings (loss) per
share................................... $ - $ - $(0.01)
====== ====== ======
Weighted average number of shares
outstanding............................. 12,000 12,000 25,777
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Predecessor Pro Forma
1996 Historical Unaudited
- ---- ----------- ---------
<S> <C> <C>
Revenue................................................... $ 2,070 $6,446
Expenses.................................................. 1,188 6,512
------- ------
Net income (loss)....................................... $ 882 $ (66)
======= ======
Basic and diluted earnings (loss) per share............... $ -
=======
Weighted average number of shares outstanding............. $12,000
=======
</TABLE>
4. Bankruptcy
On February 2, 1992, Old MSR filed for bankruptcy protection under Chapter
11 of the U.S. Bankruptcy Code. Old MSR elected to voluntarily file for
bankruptcy primarily due to its substantial net losses and its inability to
negotiate an agreeable restructuring of indebtedness with its then primary
lender.
On September 12, 1992, Old MSR filed a plan of reorganization with the
Bankruptcy Court which was subsequently amended on December 11, 1992 and March
2, 1993, to reflect agreements between Old MSR and its creditors. As of
December 31, 1997, the remaining amounts due to these creditors totaled
$150,500.
5. Properties Plant and Equipment
Capitalized costs at December 31, 1997, are shown below in thousands.
<TABLE>
<S> <C>
Proved oil and gas properties....................................... $39,930
Unproved oil and gas interests...................................... 847
Accumulated depletion and depreciation.............................. (17,917)
-------
22,860
-------
Gas processing plants and gathering systems......................... 3,851
Other equipment..................................................... 830
Accumulated depreciation............................................ (3,307)
-------
1,374
-------
$24,234
=======
</TABLE>
F-37
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Other Assets
Other assets included deferred charges related to the acquisition of long-
term debt (amortized over the life of that debt using the effective interest
method) and restricted cash (held in a letter of credit in lieu of a plugging
and abandonment bond required by the U.S. Environmental Protection Agency).
Amounts presented in thousands.
<TABLE>
<CAPTION>
1997
----
<S> <C>
Deferred loan cost..................................................... $118
Less accumulated amortization.......................................... (4)
----
Net deferred loan cost................................................. 114
Restricted cash........................................................ 241
----
Total other assets................................................... $355
====
</TABLE>
7. Note Payable and Long-Term Debt
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Long-term debt, in thousands, consists of:
Note payable to a bank (7.6% at December 31, 1997)................. $10,498
Various pre-petition claims at interest rates ranging from 6% to
10%, due in monthly, quarterly and annual installments, including
interest.......................................................... 150
-------
10,648
Less current maturities............................................ (88)
-------
$10,560
=======
</TABLE>
Long-term debt maturities are as follows, in thousands of dollars:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- -------
<S> <C>
1998................................................................ $ 88
1999................................................................ 62
2000................................................................ -
2001................................................................ -
2002................................................................ 10,498
Thereafter.......................................................... -
-------
$10,648
=======
</TABLE>
As part of the formation of the Company on March 7, 1997, the Company agreed
to guarantee the repayment of $4.0 million of debt owed by Mercury Exploration
Company to a bank. On October 31, 1997, the Company restructured the Old MSR
revolving credit facility and entered into a new credit agreement with a bank.
Proceeds from the new facility were used to repay the $4.0 million of debt
guarantee by the Company and repay $6.0 million of debt owed by Old MSR. The
closing of the loan was subject to the successful completion of the Company's
merger with Old MSR. The new agreement is for a $25,000,000 senior secured
revolving credit facility with an initial borrowing base of $12,000,000, which
matures in five years. The Company can designate the interest rate on amounts
outstanding at either the London Interbank Offered Rate (LIBOR) + 1.75%, or
bank prime plus 1%. The collateral for this loan agreement consists of
substantially all of the existing assets of the Company and any future reserves
acquired. The loan agreement contains certain restrictive covenants, which,
among other things, require the maintenance of a minimum current ratio, net
worth, debt service ratio and contains certain dividend restrictions.
F-38
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1997
are as follows in thousands:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Deferred tax assets:
Operating loss carryforwards....................................... $2,301
Investment tax credits............................................. 171
------
Total deferred tax assets........................................ 2,472
Deferred tax liabilities:
Properties, plant and equipment.................................... 3,473
------
Total deferred tax liabilities................................... 3,473
------
Net deferred tax liabilities................................... $1,001
======
</TABLE>
The income tax expense for the period from inception March 7, 1997 to
December 31, 1997 was $15,000. This amount represents a deferred provision as
no current tax provision or benefit was realized. No valuation allowance is
required because the deferred tax assets will be used up by the reversal of the
deferred tax liabilities. As the deferred tax liabilities reverse and create
taxable income, the tax assets will offset this tax liability.
The Company has U.S. net operating loss carryforwards of approximately
$6,500,000 available to reduce future U.S. taxable income subject to certain
limitations. These U.S. net operating loss carryforwards begin to expire in
2001. The Company also has Canadian expense carryforwards totaling
approximately $2,000,000 available to reduce future Canadian taxable income.
These Canadian expense carryforwards have no expiration date. Use of these U.S.
and Canadian carryforwards is dependent on future taxable income.
9. Stockholders' Equity
The Company is authorized to issue 50,000,000 of common stock with a par
value of one cent ($0.01) and 10,000,000 shares of preferred stock with a par
value of one cent ($0.01). The Company currently has outstanding 25,777,014
shares of common stock, warrants to purchase additional shares of common stock,
5,500,000 shares at $1.25 per share, 5,500,000 shares at $2.00 per share, and
options to purchase 248,570 shares of common stock at $0.875 per share, and
common stock warrants for 280,000 shares at $3.375 per share, and 57,500 shares
at $0.01 per share.
As a result of the merger of Old MSR with and into the Company on October
31, 1997 pursuant to the terms of the Agreement and Plan of Merger, dated as of
March 26, 1997, as amended, among Old MSR, the Company and Mercury Exploration
Company, each outstanding share of common stock, no par value per share, of Old
MSR outstanding immediately prior to the effective time of the Merger, was
converted into the right to receive one share of common stock, par value $0.01
per share, of the Company. In accordance with Rule 12g-3(a) of the Securities
Exchange Act of 1934, as amended, the Company has succeeded to the obligations
of Old MSR under the Exchange Act and will continue to file reports with the
Securities and Exchange Commission using the Commission File Number (No. 1-
8523) utilized by its predecessor. In connection with the Merger, the Company
changed its name from Mercury Montana, Inc. to MSR Exploration Ltd.
F-39
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plan
The 1997 Stock Option Plan of the Company (the "Plan") was adopted by the
Board of Directors of the Company and approved by its shareholders and became
effective as of March 7, 1997. The Plan permits the granting of options to
purchase shares of the Company's common stock. All employees and directors of
the Company are eligible to participate in the Plan. An aggregate of 250,000
shares of the Company's common stock have been authorized and reserved for
issuance under the Plan. The Company's Board of Directors has increased the
authorized share to a total of 500,000 shares, subject to shareholder approval.
As of December 31, 1997, options to purchase an aggregate of 248,570 shares of
the Company's common stock have been granted under the Plan at an exercise
price of $0.875 per share. Options are totally vested when granted and must be
exercised within five years of the date of grant. The Company's Compensation
Committee of the Board of Directors determines who shall be granted options
under the Plan and the terms thereof, and administers the Plan. No options may
be granted under the Plan after March 7, 2007.
No compensation cost has been recognized at date of grant of the stock
options because the exercise price at date of grant was equal to the fair value
of the common stock at date of grant. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date for
awards under the plan, the Company's net income would have been reduced by
$62,000 for the period ended December 31, 1997. The fair value of the options
were calculated in accordance with the Black-Scholes option pricing model using
an expected volatility of 26%, expected option term of five years and a risk-
free rate of return of 6%. Pro forma basic and diluted earnings per share were
$0.00.
10. Related Party Transactions
On October 31, 1997, the Company and Mercury Exploration Company (Mercury)
have entered into a Management Agreement. Pursuant to the Agreement, Mercury
will be managing all of the operations of the Company's various oil and gas
properties and gas gathering and compression facilities located in Montana and
Texas. Mercury will also provide accounting, administrative, and advisory
services.
The Company agreed to reimburse Mercury for its costs and expenses incurred
in connection with managing such operations and pay a management fee equal to
10% of such costs and expenses. The term of the Management Agreement is for two
years and thereafter for successive one-year terms. At December 31, 1997 the
Company owed Mercury approximately $52,000 for payment of costs incurred on
behalf of the Company . No management fee has been paid or accrued for the
period ended December 31, 1997.
Mercury owns 6,480,000 shares of the Company's common stock and three of
Mercury's directors and officers--Frank Darden, Thomas Darden, and Glenn
Darden--are also directors and officers of the Company.
F-40
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Supplemental Cash Flow Information
For the period from inception, March 7, 1997, to December 31, 1997, in
thousands:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Cash paid during the year:
Interest............................................................. $ 134
=======
Income taxes......................................................... $ -
=======
Non-cash financing activities
Purchase of the net assets of Old MSR by issuance of 13,777,014
shares of common stock. Amount includes assets totaling $20,034,000,
including cash of $350,000, and liabilities totaling $8,496,000,
including long-term debt of $6,114,000.............................. $12,538
=======
Consideration for financing costs by issuance of common stock
warrants............................................................ $ 75
=======
</TABLE>
12. Statements of Revenue and Direct Operating Expenses
<TABLE>
<CAPTION>
For the Period Twelve Months
From January 1 Ended
to March 6, December 31,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Revenues
Oil sales...................................... $ - $1,855
Gas sales...................................... 57 215
--- ------
Total........................................ 57 2,070
--- ------
Direct operating expenses
Operating expenses............................. - 989
Production taxes............................... 7 199
--- ------
Total........................................ 7 1,188
--- ------
Excess of revenues over direct operating
expenses........................................ $50 $ 882
=== ======
</TABLE>
a. Basis of Presentation
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented for the period for January 1 to March 6, 1997, and for the
year ended December 31, 1996, as such information is neither readily available
on an individual property basis nor meaningful for the properties included in
the Merger. Accordingly, this statement of revenues and direct operating
expenses is presented in lieu of the financial statements required under Rule
3-05 of Securities and Exchange Commission Regulation S-X.
The accompanying statement of revenues and direct operating expenses
represent the Company's pre-Merger net ownership interest in the properties
included in the Merger and are presented on the full cost accrual basis of
accounting. Depreciation, depletion, and amortization, allocated general and
administrative expenses, interest expense, and income taxes have been excluded
because the property interests included in the Merger were from a newly formed
business, and the expenses incurred would not necessarily be indicative of the
expenses to be incurred by the Company after the Merger.
F-41
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
b. Forward Sale of Oil Revenues
The Mercury Properties were subject to a Production Payment Agreement
entered into in October 1996 between Mercury and a third party. The Agreement
was the obligation of Mercury and was for the period from October 1, 1996 to
December 31, 1997. The Company's oil revenues and associated operating expenses
included in the statements of revenues and direct operating expenses do not
include any amounts which were subject to the Agreement. The oil revenues and
associated expenses relating to the production payment forward sale started
accruing to the Company on January 1, 1998.
The oil revenues and associated expenses dedicated to the production payment
forward sale from October 1, 1996, through December 31, 1996 were excluded from
the Statement of Revenues and Direct Operating Expenses. Such amounts were also
excluded from the Company's statement of operations for the period from
Inception, March 7, 1997, to December 31, 1997. To provide information about
the Company for 1998 and beyond, revenues subject to the forward sales
agreement amounted to $689,000 for 1996. Direct operating expenses subject to
the sale were $308,000 for 1996.
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
The following information about the Company's oil and gas producing
activities has been prepared in accordance with Statement of Financial
Standards No. 69, Disclosures about Oil and Gas Producing Activities.
The Company believes that the valuation method prescribed by Statement of
Financial Standards No. 69 does not provide the best estimate of current
economic value of its oil and gas reserves as unproved reserves are not
attributed any economic value and the use of year end price assumptions and a
10% discount rate are arbitrary. The pro forma amounts for 1996 are presented
as if the Company had been in existence, owned the Mercury Properties, and had
been combined with Old MSR since January 1, 1996.
F-42
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proved Oil and Gas Quantities
The following information summarizes the Company's estimated net quantities
of proved and proved-developed oil and gas reserves. The December 31, 1997 and
1996 end of year reserves are based on estimates of Citadel Engineering Ltd.,
petroleum consultants.
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Oil Gas
------ ------
(Mbbl) (Mmcf)
<S> <C> <C>
Proved reserved
Beginning of year--pro forma............................... 5,281 1,339
Revisions of previous estimates............................ 686 332
Purchase of reserves in place--Old MSR..................... 3,646 19,870
Production................................................. (143) (322)
----- ------
End of year................................................ 9,470 21,219
===== ======
Proved developed reserves
Beginning of year--pro forma............................... 1,628 1,339
===== ======
End of year................................................ 4,412 16,484
===== ======
Year ended December 31, 1996--pro forma
<CAPTION>
Oil Gas
------ ------
(Mbbl) (Mmcf)
<S> <C> <C>
Proved reserves
Beginning of year.......................................... 5,291 1,401
Revisions of previous estimates............................ 120 25
Production................................................. (130) (87)
----- ------
End of year................................................ 5,281 1,339
===== ======
Proved developed reserves
Beginning of year.......................................... 1,638 1,401
===== ======
End of year................................................ 1,628 1,339
===== ======
</TABLE>
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
(Unaudited)
The following standardized measure of discounted future net cash flows
relating to proved oil and gas reserves has been computed using year end
prices, except where contractual arrangements in place at year end provide for
future price changes and costs, in thousands.
<TABLE>
<CAPTION>
As of December 31,
--------------------
1997 1996
--------- ---------
Pro Forma
<S> <C> <C>
Future cash flows...................................... $ 178,672 $ 119,585
Future production and development costs................ (70,242) (71,893)
Future income tax expense.............................. (25,474) (10,200)
--------- ---------
82,956 37,492
10% annual discount for timing of cash flows........... (44,581) (20,445)
--------- ---------
Standardized measure of discounted cash flows.......... $ 38,375 $ 17,047
========= =========
</TABLE>
F-43
<PAGE>
MSR EXPLORATION LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The standardized measure of discounted cash flows does not include any
value relating to the Company's gathering, processing, and transmission of gas
reserves owned by other companies. The following table sets out in aggregate
the principle source of change in the standardized measure of discounted
future net cash flows for the year ended December 31, 1997, in thousands.
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Sales of oil and gas produced, net of production costs............. $ (531)
Net changes in price and production costs.......................... (5,628)
Purchase of reserves in place...................................... 20,817
Revisions of previous quantity estimates........................... 2,908
Development costs incurred during the year......................... 62
Accretion of discount.............................................. 1,705
Net change in income taxes......................................... 1,234
Other.............................................................. 761
-------
Net increase (decrease)............................................ 21,328
Balance at beginning of year--pro forma............................ 17,047
-------
Balance at end of year............................................. $38,375
=======
</TABLE>
Costs incurred in oil and gas property acquisition, exploration and
development activities, in thousands:
<TABLE>
<CAPTION>
Inception-
March 7, 1997 to Year Ended
December 31, December 31,
1997 1996
---------------- ------------
<S> <C> <C>
Property acquisition costs..................... $19,583 $ -
======= ===
Exploration costs.............................. $ 530 $ -
======= ===
Development costs.............................. $ 62 $84
======= ===
</TABLE>
Results of operations from producing activities, in thousands:
<TABLE>
<CAPTION>
Inception-
March 7, 1997 to Year Ended
December 31, December 31,
1997 1996
---------------- ------------
<S> <C> <C>
Oil and gas sales............................. $ 827 $ 2,070
Operating expenses............................ (228) (1,054)
Production taxes.............................. (68) (199)
Depletion and depreciation.................... (220) (273)
----- -------
311 544
Income taxes.................................. (106) (185)
----- -------
Results of operations from producing
activities (excluding corporate overhead and
interest costs).............................. $ 205 $ 359
===== =======
</TABLE>
F-44
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
The following table summarizes selected quarterly financial data for the
fourth quarter ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
1997
--------------
(in thousands)
<S> <C>
Revenue....................................................... $729
----
Net income (loss)............................................. $(19)
====
Basic and diluted earnings (loss) per share................... -
====
</TABLE>
F-45
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Mercury
Exploration Company as of September 30, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
Exploration Company as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting
principles.
As described in Note 13, the Company has changed its accounting policy for
accounting for oil and gas properties from the successful efforts method to the
full cost method.
Weaver and Tidwell, L.L.P.
Fort Worth, Texas
October 26, 1998
F-46
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ $ 4,530 $ 2,958
Securities available for sale............................... 30 40
Trade accounts receivable................................... 9,226 6,494
Other accounts receivable................................... 110 -
Inventory, at lower of average cost or market............... 754 887
Notes receivable--current portion........................... 27 40
-------- -------
Total current assets.................................... 14,677 10,419
Investment in partnerships.................................... 6,937 6,200
PROPERTY AND EQUIPMENT
Oil and gas properties ("full cost")
Proven.................................................... 85,665 25,979
Unproven.................................................. 1,305 1,710
Land, buildings and leasehold improvements.................. 1,579 1,174
Furniture and equipment..................................... 594 478
Transportation equipment.................................... 582 502
-------- -------
89,725 29,843
Less accumulated depreciation and depletion................. 8,621 2,720
-------- -------
81,104 27,123
Other assets
Drilling bonds.............................................. 162 274
Deposit on property acquisition............................. - 6,170
-------- -------
162 6,444
-------- -------
Total assets............................................ $102,880 50,186
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt........................ $ 13,534 $ 3,415
Accounts payable............................................ 6,055 4,655
Accrued liabilities......................................... 1,698 3,635
Advances payable............................................ 2,360 2,839
Royalties payable........................................... 1,984 1,483
Accounts payable--related partnerships...................... 107 168
Income taxes payable........................................ - 37
Unearned income............................................. 2,072 -
-------- -------
Total current liabilities............................... 27,810 16,232
Deferred income taxes......................................... 6,650 3,939
LONG-TERM LIABILITIES
Long-term debt.............................................. 47,174 19,560
Minority interest in subsidiaries............................. 5,930 28
STOCKHOLDERS' EQUITY
Common shares, no par value, 1,000,000 shares authorized;
250,950 shares issued and outstanding...................... 1,087 1,087
Retained earnings........................................... 14,229 9,340
-------- -------
15,316 10,427
-------- -------
Total liabilities and stockholders' equity.............. $102,880 $50,186
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OIL AND GAS REVENUE.............................. $ 41,328 $ 17,388 $ 6,703
COSTS AND EXPENSES
Production..................................... 16,454 11,907 3,849
General and administrative expenses............ 1,784 1,372 1,234
Depreciation, depletion and amortization....... 5,918 986 349
-------- -------- --------
Income from operations....................... 17,172 3,123 1,271
OTHER INCOME (EXPENSE)
Gain on sale of assets......................... - - 5
Interest expense............................... (5,414) (1,620) (324)
Interest income................................ 196 200 239
Equity in partnership income................... 731 1,010 884
Management fee income.......................... 204 176 162
Rental income.................................. 221 189 99
Miscellaneous income (expense)................. 386 417 (189)
-------- -------- --------
Income before minority interest and income
taxes....................................... 13,496 3,495 2,147
MINORITY INTEREST IN INCOME OF SUBSIDIARIES...... 5,687 28 -
-------- -------- --------
Income before income taxes................... 7,809 3,467 2,147
INCOME TAXES..................................... 2,694 1,219 684
-------- -------- --------
NET INCOME....................................... $ 5,115 $ 2,248 $ 1,463
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 250,950 250,950 250,950
======== ======== ========
EARNINGS PER SHARE............................... $ 20.38 $ 8.96 $ 5.83
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Common Retained
Shares Earnings Total
------ -------- -------
<S> <C> <C> <C>
BALANCE,
September 30, 1994.................................. 1,087 $ 5,629 $ 6,716
Net income.......................................... - 1,463 1,463
----- ------- -------
BALANCE,
September 30, 1995.................................. 1,087 7,092 8,179
Net income.......................................... - 2,248 2,248
----- ------- -------
BALANCE,
September 30, 1996.................................. 1,087 9,340 10,427
Distribution to shareholders........................ - (226) (226)
Net income.......................................... - 5,115 5,115
----- ------- -------
BALANCE,
September 30, 1997.................................. 1,087 $14,229 $15,316
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers.................... $ 39,687 $ 15,568 $ 7,111
Rent received................................... 221 188 99
Interest received............................... 196 200 239
Cash paid to suppliers and employees............ (19,204) (10,290) (5,002)
Interest paid................................... (5,414) (1,620) (295)
Income tax paid................................. (130) (95) (49)
-------- -------- -------
Net cash provided by operating activities..... 15,356 3,951 2,103
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable equity
securities..................................... 14 3 9
Proceeds from sale of assets.................... 586 560 -
Redemption of bonds............................. 112 - 58
Repayment of advance from affiliates............ - 313 854
Distribution received from partnerships......... 1,194 1,192 225
Purchases of bonds.............................. - (71) 90
Payments received on notes receivable........... 12 60 (156)
Advance from affiliates......................... (61) - (16)
Purchases of marketable equity securities....... (4) (14) (27)
Deposits paid on property acquisitions.......... - (4,370) (1,800)
Investments in partnerships..................... (1,200) - (2,838)
Capital expenditures............................ (54,231) (19,779) (2,227)
-------- -------- -------
Net cash used in investing activities......... (53,578) (22,106) (5,828)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................... 89,052 17,888 5,950
Payment on advance from stockholders............ - - (47)
Proceeds from production loans.................. 5,271 - -
Payments on production loans.................... (3,199) - -
Distributions to minority interest.............. (11) - -
Principal paid on long-term debt................ (51,319) (1,093) (52)
-------- -------- -------
Net cash provided by financing activities..... 39,794 16,795 5,851
-------- -------- -------
Net increase (decrease) in cash............... 1,572 (1,360) 2,126
CASH, beginning of period......................... 2,958 4,318 2,192
-------- -------- -------
CASH, end of period............................... $ 4,530 $ 2,958 $ 4,318
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income........................................ $ 5,115 $ 2,248 $ 1,463
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and depletion...................... 5,918 986 349
Minority interest in income..................... 5,687 28 -
Gain on sale of assets.......................... - - (5)
Partnership income.............................. (731) (1,010) (884)
Deferred income taxes........................... 2,710 1,114 622
Changes in operating assets and liabilities
Accounts receivable........................... (2,732) 2,322 (731)
Inventory..................................... 134 (499) (388)
Prepaid expenses.............................. - - 2,094
Accounts payable.............................. 1,400 261 931
Accrued liabilities........................... (1,937) 2,434 (87)
Advances payable.............................. (479) 891 (3,440)
Royalties payable............................. 501 (4,735) 1,866
Income taxes payable.......................... (147) 10 12
Other......................................... (83) (99) 301
------- ------- -------
Net cash provided by operating activities........ $15,356 $ 3,951 $ 2,103
======= ======= =======
</TABLE>
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1997, notes payables were issued in exchange for assets of
approximately $152,000.
In 1997, stockholders' equity was reduced by approximately $226,000 as a
result of transfer of property to shareholders.
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
MERCURY EXPLORATION COMPANY
Note 1. Summary of Significant Accounting Policies
The nature of operations and significant accounting policies are as follows:
Nature of Operations
Mercury Exploration Company's (the Company) operations consist primarily of
oil and gas development and production in Texas, New Mexico, Montana, Wyoming,
Michigan, Indiana, Kansas, Oklahoma, Kentucky and North Dakota.
Consolidation Policy
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary, Mercury Michigan, Inc., Quicksilver
Pipeline, L.L.C. (organized in 1996) of which the Company owns 52%, Quicksilver
Energy, L.C. (organized in 1996) of which the Company owns 52%, and Mercury
Montana, Inc. (organized in 1997) of which the Company owns 54%. As a result of
the consolidation, intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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.
Financial Instruments
Financial instruments of the Company consist of cash, marketable equity
securities, accounts receivable, notes receivable, investments in partnerships,
accounts payable and debt. Recorded values of cash, accounts receivable, notes
receivable and accounts payable approximate fair values due to the short
maturities of the instruments. Investments in partnerships consist of ownership
interests in privately held entities with no quoted market prices. An estimate
of fair value cannot be made without incurring excessive costs. Investments in
marketable equity securities were determined by quoted prices. Recorded values
of notes payable approximate fair values based upon current interest rates.
Inventory
Inventory consists of oil and gas equipment available for use in production.
Oil and Gas Property and Equipment
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved properties are not amortized until proven reserves associated with
them can be determined or until impairment occurs. Oil and natural gas reserves
and production are converted into equivalent units based upon estimated
relative energy content.
F-52
<PAGE>
MERCURY EXPLORATION COMPANY
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments) or
fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.
Other Property and Equipment
Property and equipment is stated at cost. Depreciation is provided for using
the straight-line and accelerated methods. Depreciation methods are designed to
amortize the cost of assets over their estimated useful lives. Estimated useful
lives of major categories of property and equipment are as follows:
<TABLE>
<S> <C>
Land, buildings and leasehold improvements........................ 40 years
Furniture and equipment........................................... 5-10 years
Transportation equipment.......................................... 5 years
</TABLE>
Maintenance, repairs, renewals and betterments, which do not enhance the
value or increase the basic productive capacity of assets are charged to
expense as incurred.
Investments in Securities
The Company has adopted Statement No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued by the Financial Accounting
Standards Board. In accordance with Statement No. 115, the Company's
investments in securities are classified as follows:
TRADING SECURITIES--Investments in debt and equity securities held
principally for resale in the near term are classified as trading securities
and recorded at their fair values. Unrealized gains and losses on trading
securities are included in other income. The Company does not, nor does it
intend to, trade investments that it owns.
SECURITIES TO BE HELD TO MATURITY--Debt securities for which the Company has
the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts which are
recognized in interest income using the interest method over the period to
maturity.
SECURITIES AVAILABLE FOR SALE--Securities available for sale consist of its
debt and equity securities not classified as trading securities nor as
securities to be held to maturity.
Unrealized holding gains and losses on securities available for sale if
material, are reported as a net amount in a separate component of stockholders'
equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
Accounts Receivable
The Company has not provided an allowance for doubtful accounts. All
receivables considered doubtful have been charged to current operations, and it
is management's opinion that no additional material amounts are doubtful of
collection.
F-53
<PAGE>
MERCURY EXPLORATION COMPANY
Cash Flow Presentation
For purposes of the statement of cash flows, time deposits that mature in
three months or less, certificates of deposit and restricted cash are
considered cash and cash equivalents.
Earnings Per Common Share
The Company has adopted Statement No. 128, Earnings Per Share, issued by the
Financial Standards Accounting Board. Adoption of Statement No. 128 had no
effect upon 1997, 1996 or 1995 earnings per share computations.
Basic earnings per common share was computed based on the weighted average
number of common shares outstanding for the period. Diluted earnings per share
have not been presented since the Company has no outstanding options or
warrants to purchase its common stock.
Concentration of Credit Risk
The Company regularly maintains cash in bank deposit accounts, which exceed
FDIC insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Accounting Changes
The Financial Accounting Standards Board has issued the following Statements
of Financial Accounting Standards effective for fiscal years beginning after
December 15, 1997:
No. 130--Reporting Comprehensive Income
Requires that all items are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
No. 131--Disclosures About Segments of an Enterprise and Related Information
Requires disclosure of operating segments based upon information used
internally for evaluating segment performance and allocating resources.
No. 132--Employers' Disclosures About Pensions and other Post-retirement
Benefits
Revises employers' disclosures about pensions and other post-retirement
plans.
The Company will adopt the above standards effective January 1, 1998.
Adoption is not expected to have a significant effect upon current financial
statements.
Note 2. Securities Available For Sale
Securities available for sale consist of equity securities and are carried
at cost, which approximates market at September 30, 1997 and 1996. Market value
was determined by quoted prices.
Included in net income for the years ended September 30, 1997 and 1996 is a
$241 gain and $161 loss, respectively, from sales of marketable equity
securities. The cost of the securities sold was determined by the specific
identity method.
F-54
<PAGE>
MERCURY EXPLORATION COMPANY
Note 3. Trade Accounts Receivable
Trade accounts receivable at September 30 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Oil and gas revenue receivable.............................. $ 8,235 $ 6,188
Joint interest billings receivable.......................... 991 306
------- -------
$ 9,226 $ 6,494
======= =======
</TABLE>
Note 4. Investment In Partnerships
Investment in partnerships is stated at cost plus the proportionate share of
invested accumulated income. The Company's investment in partnerships consists
of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest in Frederic HOF
Limited Partnership, and a 50% interest in Wilderness Energy, L.C. None of
these entities individually is considered a significant subsidiary of the
Company. The following is a summary of the combined financial position and
combined results of operations of the Company's investments in partnerships as
of and for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current assets...................................... $ 5,127 $ 7,311 $ 8,085
Property, plant and equipment....................... 40,102 44,392 45,916
Other assets........................................ 25 274 299
------- ------- -------
Total assets...................................... $45,254 $51,977 $54,300
======= ======= =======
Current liabilities................................. $ 200 $ 3,502 $ 4,358
Partnership equity.................................. 45,054 48,475 49,942
------- ------- -------
Total liabilities and partnership equity.......... $45,254 $51,977 $54,300
======= ======= =======
Oil and gas revenue................................. $ 9,830 $ 9,973 $ 8,116
======= ======= =======
Net income.......................................... $ 2,857 $ 3,840 $ 3,889
======= ======= =======
Company's investment................................ $ 6,937 $ 6,200 $ 6,285
======= ======= =======
</TABLE>
F-55
<PAGE>
MERCURY EXPLORATION COMPANY
Note 5. Long-Term Debt
Long-term debt at September 30 consists of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Note payable to bank with interest at prime, due in monthly
payments of $82,750, with final payment due on December 31,
2002, retired in 1997, secured by investment in Wilderness
Energy, L.C. and Frederic HOF Limited Partnership............ $ - $ 3,000
Notes payable to various entities, due in monthly payments
ranging from $186 to $3,895, including interest ranging from
7% to 10.63%, secured by land, buildings and equipment....... 673 615
Note payable to bank, interest at 8.75%, unsecured, due on
October 17, 1998, retired in 1997............................ - 8,800
Note payable to bank, due in monthly installments of $210,000
in 1997, including interest at 8.18%, secured by the assets
of Mercury Exploration, Inc. in Wyoming and Montana, retired
in 1997...................................................... - 10,560
Note payable to bank, due in monthly payments ranging from
$165,000 to $88,333, including interest at 7.655%, secured by
producing oil and gas properties............................. 8,680 -
Line of credit to bank, due on January 1, 2002, including
interest at Libor + 1.125%, secured by producing oil and gas
properties................................................... 4,900 -
Note payable to bank, due in monthly payments of $82,750, with
interest at prime + .25%, with final payment due January 1,
2003, secured by oil and gas producing properties............ 4,255 -
Note payable to bank, due in monthly payments of $866,667,
including interest at 7.59% (based on rate swap), with final
payment due on December 27, 2000, secured by oil and gas
producing properties and investment in Quicksilver Energy,
L.C.......................................................... 15,200 -
Note payable to bank, due in quarterly payments ranging from
$1,400,000 to $600,000, beginning in August 1999, including
interest at 9%, with final payment due on March 31, 2007,
secured by oil and gas producing properties and investment in
Quicksilver Energy, L.C...................................... 27,000 -
------- -------
60,708 22,975
------- -------
Less current maturities....................................... 13,534 3,415
------- -------
$47,174 $19,560
======= =======
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................................................. $13,534
1999................................................................. 10,335
2000................................................................. 7,170
2001................................................................. 6,220
2002................................................................. 10,353
Thereafter........................................................... 13,096
-------
$60,708
=======
</TABLE>
F-56
<PAGE>
MERCURY EXPLORATION COMPANY
Note 6. Income Taxes
The Company provides for deferred income taxes resulting from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. Temporary differences result primarily from intangible
development costs being capitalized and amortized for financial reporting
purposes but expensed for tax reporting purposes and different income
recognition criteria for debt extinguishments. Also included in income taxes is
the portion of state taxes based on income.
The Company's income tax provision is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
(in thousands)
<S> <C> <C> <C>
Current.................................................. $ (16) $ 105 $ 62
Deferred................................................. 2,710 1,114 622
------ ------ ----
$2,694 $1,219 $684
====== ====== ====
</TABLE>
The tax effects of net operating loss carryforwards and temporary
differences at September 30, 1997 and 1996 that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards............................ $ 539 $ 128
Tax credit carryforwards.................................... 253 322
------ ------
$ 792 $ 450
------ ------
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax liabilities
Property and equipment...................................... $5,458 $2,114
Long term debt.............................................. 1,198 1,559
Investments................................................. 786 716
------ ------
7,442 4,389
------ ------
Total deferred taxes, net................................. $6,650 $3,939
====== ======
</TABLE>
There is no material difference between the statutory tax rate and the
provision for taxes used in the accompanying financial statements.
The Company has U.S. net operating loss carryforwards of approximately
$1,600,000 available to reduce future U.S. taxable income subject to certain
limitations. These U.S. net operating loss carryforwards will expire in 2012.
Note 7. Profit Sharing and Savings Plan
The Company sponsors a defined contribution pension plan. All full-time
employees are eligible for participation upon completion of one year's service.
Employee contributions to the plan for the year ended September 30, 1997, 1996
and 1995 were $199,000, $162,000 and $106,000, respectively. The Company made
contributions of $200,000, $117,000 and $78,000 in 1997, 1996 and 1995,
respectively.
F-57
<PAGE>
MERCURY EXPLORATION COMPANY
Note 8. Operating Leases
The Company's leasing operations consist principally of the leasing of
automobiles under operating leases that expire over the next three years.
The future minimum annual rentals on noncancellable leases in effect at
September 30, 1997, which have initial or remaining terms of more than one
year, are as follows:
<TABLE>
<S> <C>
1998................................................................. $87,000
1999................................................................. 70,000
2000................................................................. 17,000
</TABLE>
Total rental expense under operating leases was $129,000, $115,000 and
$162,000 in 1997, 1996 and 1995, respectively.
Note 9. Futures Contract
There were no significant realized or unrealized gains or losses on this
agreement at September 30, 1997. The Company has entered into this agreement as
a hedge against any downward movement in the commodity price of oil through
December 31, 1997. The agreement terminates at December 31, 1997. The Company
has received a cash payment in advance of the delivery of the oil at a fixed
price of approximately $17.48 per barrel. The market price for oil at September
30, 1997, was less than this price.
Note 10. Contingencies
The Company is a defendant in a lawsuit filed by a former employee with
potential exposure of $500,000. The Company believes the lawsuit is without
merit and is vigorously defending its position, and does not expect the
ultimate outcome to materially affect the Company's financial position.
Note 11. Subsequent Events
The Company settled a lawsuit in December of 1997, which resulted in a gain
of approximately $2,781,000.
In October 1997, Mercury Montana, Inc. merged with MSR Exploration, Ltd. As
a result of the merger, Mercury Exploration Company obtained an approximate 25%
ownership interest in MSR Exploration, Ltd.
Effective January 1, 1998, Mercury transferred substantially all producing
oil and gas properties to a newly formed related company, Quicksilver Resources
Inc., in exchange for common stock in Quicksilver.
Subsequently on September 1, 1998, Quicksilver Resources Inc. entered into a
merger agreement with MSR Exploration Ltd.
Note 12. Acquisitions
On November 14, 1996, Quicksilver Energy L.C., a 52% owned subsidiary of
Mercury, consummated the acquisition of certain property interests from Shell
Western Exploration & Production, Inc. (the Shell Properties). Such interests
are primarily located in Michigan and, as of January 1, 1998, had combined
proved reserves of approximately 42.5 Bcfe. The aggregate purchase price for
the interests was approximately $57.7 million, which was paid in cash
principally with bank debt.
F-58
<PAGE>
MERCURY EXPLORATION COMPANY
The following unaudited pro forma summary presents the consolidated results
of operations of Mercury for the years ended September 30, 1997, 1996 and 1995
as if the acquisition had occurred at the beginning of each fiscal year.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, 1997 September 30, 1996 September 30, 1995
------------------ ------------------ ------------------
(in thousands, except for per share data)
<S> <C> <C> <C>
Revenues........... $44,599 $47,802 $26,783
Net income......... 5,457 10,227 5,832
Earnings per
share............. 21.74 40.75 23.39
</TABLE>
On October 9, 1997, Mercury consummated the acquisition of certain property
interests from ECT Enocene Enterprises II (the Destec Properties). Such
interests are primarily located in Michigan and, as of January 1, 1998, had
combined proved reserves of approximately 25.4 Bcfe. The aggregate purchase
price for the interests was approximately $23.5 million, which was paid in cash
principally with debt from Mercury's credit facility.
The following unaudited pro forma summary presents the consolidated results
of operations of Mercury for the years ended September 30, 1997 and 1996 as if
the acquisition had occurred at the beginning of each fiscal year. The 1996 pro
forma amounts also give effect to the Shell Properties acquisition discussed
above.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1997 September 30, 1996
-------------------- --------------------
(in thousands, except for per share data)
<S> <C> <C>
Revenues................ $51,856 $54,026
Net income.............. 8,330 12,646
Earnings per share...... 33.19 50.38
</TABLE>
Note 13. Change in Method of Accounting for Oil and Gas Properties
Pursuant to the merger agreement with MSR Exploration Ltd. dated September
1, 1998, the Company has changed its accounting policy for oil and gas
properties from the successful efforts method to the full cost method.
Accordingly, the Company's financial statements have been restated to apply the
change retroactively. The effect of the accounting change on income as
previously reported for 1997, 1996 and 1995 is:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(in thousands)
<S> <C> <C> <C>
Effect on:
Income before extraordinary item and net income....... $4,219 $1,169 $ 200
Earnings per common share............................. $16.81 $ 4.66 $0.80
</TABLE>
Adoption of the full cost method of accounting for oil and gas properties
was mandated in the September 1998 merger agreement with MSR and is consistent
with the accounting policy of MSR previously disclosed to its shareholders and
the general public. In addition, the Company believes the full cost method of
accounting for oil and gas properties more accurately reflects management's
exploration objectives and results by including all costs incurred in oil and
gas producing activities as integral to the acquisition, discovery and
development of whatever reserves ultimately result from its efforts as a whole.
F-59
<PAGE>
MERCURY EXPLORATION COMPANY
Note 14. Supplemental Oil and Gas Reserve Data (Unaudited)
The Company's proved oil and gas reserves at September 30, 1997 have been
estimated by the Company's petroleum engineers in accordance with guidelines
established by the Securities and Exchange Commission ("SEC"). Accordingly, the
following reserve estimates are based upon existing economic and operating
conditions.
There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only and should
not be construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties
or the cost that would be incurred to obtain equivalent reserves.
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the continental United States, are as
follows:
Reserve Quantities
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Proved reserves:
Crude Oil (Mbbls)
Beginning of period....................... 20,473 980 997
Revisions of previous estimates........... - 450 -
Purchase of reserves in place............. 1,436 19,608 -
Production................................ (835) (565) (17)
-------- -------- --------
End of period............................. 21,074 20,473 980
======== ======== ========
Minority interest end of period........... 374 - -
======== ======== ========
Natural Gas (Mmcf):
Beginning of period....................... 20,571 22,523 23,127
Revisions of previous estimates........... (881) (3,041) -
Purchase of reserves in place............. 66,114 2,029 -
Production................................ (7,852) (940) (604)
-------- -------- --------
End of period............................. 77,952 20,571 22,523
======== ======== ========
Minority interest end of period........... 21,401 - -
======== ======== ========
Proved developed reserves:
Crude Oil (Mbbls)
Beginning of period....................... 5,955 113 130
End of period............................. 6,873 5,955 113
Minority interest end of period........... 374 - -
Natural Gas (Mmcf):
Beginning of period....................... 18,542 19,295 19,899
End of period............................. 69,883 18,542 19,295
Minority interest end of period........... 21,401 - -
Company's proportional interest in proved
reserves of investee's accounted for by the
equity method--end of year................... 1,352 1,701 2,641
</TABLE>
F-60
<PAGE>
MERCURY EXPLORATION COMPANY
Standardized Measure
The following tables present the Company's standardized measure of
discounted future net cash flows and changes therein relating to proved oil and
gas reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate and
gas price structure utilized to project future net cash flows reflects current
prices at each date presented and have been escalated only when known and
determinable price changes are provided by contract. Future production,
development and net abandonment costs are based on current costs without
escalation. The resulting net future cash flows have been discounted to their
present values based on a 10% annual discount factor.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
Standardized Measure (in thousands): 1997 1996 1995
------------------------------------ --------- --------- --------
<S> <C> <C> <C>
Future cash flows........................... $ 457,196 $ 375,012 $ 56,067
Future production and development costs..... (255,999) (231,817) (30,418)
Future income tax expense................... (48,301) (41,985) (6,675)
--------- --------- --------
152,896 101,210 18,974
10% annual discount for timing of cash
flows...................................... (70,805) (51,810) (10,556)
--------- --------- --------
Standardized measure of discounted cash
flows...................................... $ 82,091 $ 49,400 $ 8,418
========= ========= ========
Company's share of equity method investee's
standardized measure of discounted future
net cash flows............................. $ 1,101 $ 1,048 $ 1,189
========= ========= ========
Primary changes in standardized measure of discounted future net cash flows
(in thousands):
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Net changes in prices and production costs.. $ (2,176) $ (2,201) $ 2,845
Development costs incurred.................. (1,755) (2,832) (405)
Changes in estimated future development
costs...................................... (1,654) (4,395) -
Purchases of reserves-in-place.............. 62,355 71,115 -
Net change in income taxes.................. (5,932) (17,531) (994)
Sales of oil and gas, net of production
costs...................................... (21,923) (5,482) (2,854)
Accretion of discount....................... 4,940 842 614
Other....................................... (1,164) 1,466 458
--------- --------- --------
$ 32,691 $ 40,982 $ (336)
========= ========= ========
</TABLE>
Estimated future cash inflows are computed by applying year end prices of
oil and gas to year end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves in future years, based on year end costs and assuming continuation of
existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standard Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to Mercury.
F-61
<PAGE>
MERCURY EXPLORATION COMPANY
Costs incurred in oil and gas property acquisition, exploration and
development activities (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Property acquisition costs........................ $ 53,162 $ 14,631 $ -
Exploration costs................................. $ 3,027 $ 778 $ 550
Development costs................................. $ - $ - $ 2,095
Company's share of equity method investee's costs
of property acquisition, exploration and
development...................................... $ - $ 120 $ 511
</TABLE>
Results of operations from producing activities (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Oil and gas sales.............................. $ 34,440 $ 12,169 $ 2,106
Operating expenses............................. (17,312) (11,945) (4,321)
Production taxes............................... (2,169) (739) (78)
Depletion and depreciation..................... (5,361) (796) (271)
-------- -------- -------
9,598 (1,311) (2,564)
Income taxes................................... (3,263) - -
-------- -------- -------
Results of operations from producing activities
(excluding corporate overhead and internal
costs)........................................ $ 6,335 $ (1,311) $(2,564)
======== ======== =======
Minority interest in results of operations..... $ (5,667) $ - $ -
======== ======== =======
Company's share of equity method investee's
results of operations from producing
activities.................................... $ (81) $ 85 $ 7
======== ======== =======
</TABLE>
Note 15. Capitalized Costs Relating to Oil and Gas Producing Activities
For the Years Ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Unproved oil and gas properties..................... $ 1,305 $ 1,710 $1,003
Proved oil and gas properties....................... 85,665 25,979 7,986
------- ------- ------
86,970 27,689 8,989
Less accumulated depreciation and depletion......... 6,729 1,067 271
------- ------- ------
Net capitalized costs............................... $80,241 $26,622 $8,718
======= ======= ======
Company's share of equity method investee's net
capitalized costs.................................. $ 911 $ 1,005 $1,189
======= ======= ======
</TABLE>
F-62
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying consolidated balance sheet of Mercury
Exploration Company as of December 31, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for the three months
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
Exploration Company as of December 31, 1997, and the results of its operations
and its cash flows for the three months then ended in conformity with generally
accepted accounting principles.
Weaver and Tidwell, L.L.P.
Fort Worth, Texas
November 30, 1998
F-63
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEET
December 31, 1997
(in thousands)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash................................................................ $ 6,844
Securities available for sale....................................... 27
Trade accounts receivable........................................... 9,635
Inventory, at lower of average cost or market....................... 899
Notes receivable--current portion................................... 81
--------
Total current assets.............................................. 17,486
INVESTMENT IN MSR EXPLORATION, LTD.................................... 119
INVESTMENT IN PARTNERSHIPS............................................ 6,556
PROPERTY AND EQUIPMENT
Oil and gas properties................................................ 109,591
Land, buildings and leasehold improvements............................ 1,407
Furniture and equipment............................................... 683
Transportation equipment.............................................. 45
--------
112,426
--------
Less accumulated depreciation and depletion........................... 10,383
102,043
OTHER ASSETS.......................................................... 302
--------
TOTAL ASSETS...................................................... $126,506
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................................ $ 13,335
Accounts payable.................................................... 6,744
Accrued liabilities................................................. 826
Advances payable.................................................... 3,420
Royalties payable................................................... 1,631
Income taxes payable................................................ 854
--------
Total current liabilities......................................... 26,810
--------
UNEARNED REVENUES..................................................... 2,567
DEFERRED INCOME TAXES................................................. 7,070
LONG-TERM DEBT........................................................ 65,275
MINORITY INTEREST IN SUBSIDIARIES..................................... 7,114
STOCKHOLDERS' EQUITY
Capital Stock, No Par Value 1,000,000 shares authorized; 250,950
shares issued and outstanding...................................... 1,087
Retained earnings................................................... 6,583
--------
17,670
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $126,506
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-64
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF INCOME
For The Three Months Ended December 31, 1997
(in thousands)
<TABLE>
<S> <C>
Oil and gas revenues.................................................. $ 11,049
Costs and expenses
Operating expenses.................................................... 4,736
Depletion and Depreciation............................................ 2,466
General and administrative............................................ 532
--------
Income from operations................................................ 3,315
--------
Other income (expense)................................................ (1,879)
Interest expense...................................................... 27
Interest income....................................................... 78
Equity in partnerships................................................ 78
Management fee income................................................. 54
Rental income......................................................... 32
Miscellaneous income.................................................. 461
Income from litigation settlement..................................... 2,781
--------
Income before income taxes and minority interest...................... 4,869
Minority interest in income of subsidiary............................. 1,277
--------
Income before income taxes............................................ 3,592
Income taxes.......................................................... 1,238
Net income............................................................ $ 2,354
========
Weighted average shares outstanding................................... 250,950
========
Earnings per share.................................................... $ 9.38
========
</TABLE>
F-65
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Common Shares Retained Earnings Total
------------- ----------------- -------
<S> <C> <C> <C>
BALANCE
September 30, 1997...................... $1,087 $14,229 $15,316
Net income.............................. - 2,354 2,354
------ ------- -------
BALANCE
December 31, 1997....................... $1,087 $16,583 $17,670
====== ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-66
<PAGE>
MERCURY EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Three Months Ended December 31, 1997
(in thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 2,354
Adjustments to reconcile net income to net cash provided by
operating activities...............................................
Depreciation and depletion.......................................... 2,466
Minority interest in undistributed subsidiary earnings.............. 1,277
Partnership income.................................................. (78)
Reduction of unearned revenues...................................... (1,593)
Deferred income taxes............................................... 273
Changes in operating assets and liabilities
Accounts Receivable............................................... (7)
Inventory......................................................... (223)
Accounts payable.................................................. 575
Accrued liabilities............................................... (859)
Advances payable.................................................. 1,060
Royalties payable................................................. (353)
Income taxes payable.............................................. 964
Other............................................................. (205)
-------
Net cash provided by operating activities........................... 5,651
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................ (27,750)
Proceeds from sale of marketable equity securities.................. 4
Proceeds from bond maturities....................................... 65
Distribution received from partnerships............................. 458
Advances on notes receivable........................................ (15)
Investments in common stock not held for resale..................... (119)
-------
Net cash used in investing activities............................... (27,327)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable......................................... 25,435
Receipt of unearned revenues........................................ 2,088
Principal paid on long-term debt.................................... (3,533)
-------
Net cash provided by financing activities......................... 23,990
-------
Net increase (decrease) in cash................................... 2,314
Cash, beginning of period........................................... 4,530
-------
Cash, end of period................................................. $ 6,844
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-67
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The nature of operations and significant accounting policies are as follows:
Nature of Operations
Mercury Exploration Company's (the Company) operations consist primarily of
oil and gas development and production in Texas, New Mexico, Wyoming, Michigan,
Indiana, Kansas, Oklahoma, Kentucky and North Dakota.
Consolidation Policy
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiary, Mercury Michigan, Inc., Quicksilver
Pipeline, L.L.C. (organized in 1996) of which the Company owns 52%, and
Quicksilver Energy, L.C. (organized in 1996) of which the Company owns 52%. As
a result of the consolidation, intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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.
Financial Instruments
Financial instruments of the Company consist of cash, marketable equity
securities, accounts receivable, notes receivable, investments in partnerships,
accounts payable and debt. Recorded values of cash, accounts receivable, notes
receivable and accounts payable approximate fair values due to the short
maturities of the instruments. Investments in partnerships consist of ownership
interests in privately held entities with no quoted market prices. An estimate
of fair value cannot be made without incurring excessive costs. Investments in
marketable equity securities were determined by quoted prices. Recorded values
of notes payable approximate fair values based upon current interest rates.
Inventory
Inventory consists of oil and gas equipment available for use in production.
Oil and Gas Property and Equipment
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved properties are not amortized until proven reserves associated with
them can be determined or until impairment occurs. Oil and natural gas reserves
and production are converted into equivalent units based upon estimated
relative energy content.
F-68
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments) or
fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.
Other Property and Equipment
Property and equipment is stated at cost. Depreciation is provided for using
the straight-line and accelerated methods. Depreciation methods are designed to
amortize the cost of assets over their estimated useful lives. Estimated useful
lives of major categories of property and equipment are as follows:
<TABLE>
<S> <C>
Land, buildings and leasehold improvements........................ 40 years
Furniture and equipment........................................... 5-10 years
Transportation equipment.......................................... 5 years
</TABLE>
Maintenance, repairs, renewals and betterments, which do not enhance the
value or increase the basic productive capacity of assets are charged to
expense as incurred.
Investments in Securities
The Company has adopted Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, issued by the Financial Accounting
Standards Board. In accordance with Statement No. 115, the Company's
investments in securities are classified as follows:
TRADING SECURITIES--Investments in debt and equity securities held
principally for resale in the near term are classified as trading securities
and recorded at their fair values. Unrealized gains and losses on trading
securities are included in other income. The Company does not, nor does it
intend to, trade investments that it owns.
SECURITIES TO BE HELD TO MATURITY--Debt securities for which the Company has
the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts which are
recognized in interest income using the interest method over the period to
maturity.
SECURITIES AVAILABLE FOR SALE--Securities available for sale consist of its
debt and equity securities not classified as trading securities nor as
securities to be held to maturity.
Unrealized holding gains and losses on securities available for sale if
material, are reported as a net amount in a separate component of stockholders'
equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
Accounts Receivable
The Company has not provided an allowance for doubtful accounts. All
receivables considered doubtful have been charged to current operations, and it
is management's opinion that no additional material amounts are doubtful of
collection.
F-69
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Flow Presentation
For purposes of the statement of cash flows, time deposits that mature in
three months or less and certificates of deposit are considered cash and cash
equivalents.
Earnings per Common Share
The Company has adopted Statement No. 128, Earnings per Share, issued by the
Financial Standards Accounting Board. Adoption of Statement No. 128 had no
effect upon 1997 earnings per share computations.
Basic earnings per common share was computed based on the weighted average
number of common shares outstanding for the period. Diluted earnings per share
have not been presented since the Company has no outstanding options or
warrants to purchase its common stock.
Concentration of Credit Risk
The Company regularly maintains cash in bank deposit accounts, which exceed
FDIC insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Accounting Changes
The Financial Accounting Standards Board has issued the following Statements
of Financial Accounting Standards effective for fiscal years beginning after
December 15, 1997:
NO. 130--Reporting Comprehensive Income
Requires that all items are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
No. 131--Disclosures about Segments of an Enterprise and Related Information
Requires disclosure of operating segments based upon information used
internally for evaluating segment performance and allocating resources.
No. 132--Employers' Disclosures about Pensions and Other Post-Retirement
Benefits
Revises employers' disclosures about pensions and other post-retirement
plans.
The Company will adopt the above standards effective January 1, 1998.
Adoption is not expected to have a significant effect upon current financial
statements.
Note 2. Securities Available for Sale
Securities available for sale consist of equity securities and are carried
at cost, which approximates market at December 31, 1997. Market value was
determined by quoted prices.
Included in net income for the three months ended December 31, 1997 is a
$594 gain from sales of marketable equity securities. The cost of the
securities sold was determined by the specific identity method.
F-70
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Trade Accounts Receivable
Trade accounts receivable at December 31, 1997, consist of the following:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Oil and gas revenue receivable................................ $8,023
Joint interest billings receivable............................ 1, 612
------
$9,635
======
</TABLE>
Note 4. Investment in Partnerships
Investment in partnerships is stated at cost plus the proportionate share of
invested accumulated income. The Company's investment in partnerships consists
of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest in Frederic HOF
Limited Partnership, and a 50% interest in Wilderness Energy, L.C. The
following is a summary of the combined financial position and combined results
of operations of the Company's investments in partnerships as of and for the
three months ended December 31, 1997:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current assets................................................ $ 4,141
Property, plant and equipment................................. 37,831
-------
Total assets................................................ $41,972
=======
Current liabilities........................................... $ 674
Partnership equity............................................ 41,298
-------
Total liabilities and partnership equity.................... $41,972
=======
Oil and gas revenue........................................... $ 3,209
=======
Net income.................................................... $ 767
=======
Company's investment.......................................... $ 6,556
=======
</TABLE>
Note 5. Capitalized Costs Relating to Oil and Gas Producing Activities
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
For December 31, 1997
Unproved oil and gas properties........................... $ 3,079
Proved and oil and gas properties......................... 106,512
--------
109,591
Less accumulated depreciation and depletion................. 9,127
--------
Net capitalized costs..................................... $100,464
========
Company's share of equity method investee's net capitalized
costs...................................................... $ 911
========
</TABLE>
F-71
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Long-Term Debt
Long-term debt at December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Notes payable to various entities, due in monthly payments
ranging from 7% to 10.63%, secured by land, buildings and
equipment.................................................. $ 645
Note payable to bank, due in monthly payments ranging from
$165,000 to $88,333, including interest at 7.655%, secured
by producing oil and gas properties........................ 8,020
Line of credit to bank, due on January 1, 2002, including
interest at Libor + 1.125%, secured by producing oil and
gas properties............................................. 26,335
Note payable to bank, due in monthly payments of $82,750,
with interest at prime + .25%, with final payment due
January 1, 2003, secured by oil and gas producing
properties................................................. 4,010
Note payable to bank, due in monthly payments of $866,667,
including interest at 7.59% (based on rate swap), with
final payment due on December 27, 2000, secured by oil and
gas producing properties and investment in Quicksilver
Energy, L.C................................................ 12,600
Note payable to bank, due in quarterly payments ranging from
$1,400,000 to $600,000, beginning in August 1999, including
interest at 9%, with final payment due on March 31, 2007,
secured by oil and gas producing properties and investment
in Quicksilver Energy, L.C................................. 27,000
-------
78,610
Less current maturities..................................... 13,335
-------
$65,275
=======
Aggregate maturities of long-term debt are as follows:
1999........................................................ $13,335
2000........................................................ 8,896
2001........................................................ 6,876
2002........................................................ 6,034
2003........................................................ 31,874
Thereafter.................................................. 11,595
-------
$78,610
=======
</TABLE>
Note 7. Income Taxes
The Company provides for deferred income taxes resulting from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. Temporary differences result primarily from intangible
development costs being capitalized and amortized for financial reporting
purposes but expensed for tax reporting purposes and different income
recognition criteria for debt extinguishments. Also included in income taxes is
the portion of state taxes based on income.
The Company's income tax provision at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Current....................................................... $ 965
Deferred...................................................... 273
------
$1,238
======
</TABLE>
F-72
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects temporary differences at December 31, 1997, that give rise
to significant portions of deferred tax assets and deferred tax liabilities
are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Deferred tax assets
Tax credit carryforwards.................................... $ 738
------
738
------
Deferred tax liabilities
Property and equipment...................................... 5,992
Long term debt.............................................. 1,187
Investments................................................. 629
------
$7,808
======
Total deferred taxes, net................................. $7,070
======
</TABLE>
There is no material difference between the statutory tax rate and the
provision for taxes used in the accompanying financial statements.
The Company has tax credit carryforwards available to offset regular
federal income taxes of approximately $738,000 due to expire in 2002.
Note 8. Profit Sharing and Savings Plan
The Company sponsors a defined contribution pension plan. All full-time
employees are eligible for participation upon completion of one year's
service. Employee contributions to the plan for the three months ended
December 31, 1997 were $61,500. The Company made no contributions for the
three months ended December 31, 1997.
Note 9. Operating Leases
The Company's leasing operations consist principally of the leasing of
automobiles under operating leases that expire over the next three years.
The future minimum annual rentals on noncancellable leases in effect at
December 31, 1997, which have initial or remaining terms of more than one
year, are as follows:
<TABLE>
<S> <C>
1998................................................................ $108,000
1999................................................................ 81,000
2000................................................................ 33,000
</TABLE>
Total rental expense under operating leases was $26,000, for the three
months ended December 31, 1997.
Note 10. Futures Contract
The Company has entered into an agreement for the future delivery of
approximately 41,800 barrels of oil. The contract qualifies as a hedge for
financial reporting purposes. Accordingly, changes in the value of the
contract are recognized in income when the effects of changes in oil prices
are recognized. There were no significant realized or unrealized gains or
losses on this agreement at September 30, 1997. The Company has entered into
this agreement as a hedge against any downward movement in the commodity price
of oil through December 31, 1997. The agreement terminates at December 31,
1997. The Company has received a cash payment in advance of the delivery of
the oil at a fixed price of approximately $17.48 per barrel. The market price
for oil at September 30, 1997, was less than this price.
F-73
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Tax Credit Sale
In December 1997, the Company transferred certain properties, which carry
IRS Code Section 29 income tax benefits, to an unrelated party and received
consideration as follows:
a. Initial payment of $2,553,000
b. Fixed payment of $5,093,000
c. Credit payment note
d. Production payment
Code Section 29 allows a credit against regular federal income tax liability
for certain eligible gas production. A portion of the initial cash payment
represented an advance payment for the first eighteen months of tax benefits.
As of December 31, 1997, a balance of $2,448,000 in unearned revenues existed
as a result of cash consideration received in excess of the tax benefit earned.
For accounting purposes, the transfer does not qualify for sale or gain
recognition. Accordingly, the accompanying financial statements continue to
include the Company's costs, revenues and expenses associated with the assets
transferred.
Note 12. Supplemental Cash Flow Information
In October 1998, the Company exchanged its 54% interest in a subsidiary,
Mercury Montana, Inc., for a 25% interest in MSR Exploration Ltd. The
investment in MSR Exploration Ltd. is being accounted for under the equity
method of accounting. Assets and liabilities of Mercury Montana, Inc. at the
date of exchange were as follows:
Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Assets
Inventory..................................................... $ 78
Oil and gas properties, net................................... 4,345
Other assets.................................................. 50
------
Total Assets................................................ $4,473
======
Liabilities
Accounts payable.............................................. 395
Accrued liabilities........................................... 13
Deferred income taxes......................................... (147)
Long-term debt................................................ 4,000
Minority interest in subsidiaries............................. 93
------
Total Liabilities........................................... $4,354
======
Investment in MSR Exploration, Ltd............................ $ 119
======
</TABLE>
Note 13. Contingencies
The Company is a defendant in a lawsuit filed by a former employee with
potential exposure of $500,000. The Company believes the lawsuit is without
merit and is vigorously defending its position, and does not expect the
ultimate outcome to materially affect the Company's financial position.
F-74
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Subsequent Events
Effective January 1, 1998, Mercury transferred substantially all producing
oil and gas properties to a newly formed related company, Quicksilver Resources
Inc., in exchange for common stock in Quicksilver.
Subsequently on September 1, 1998, Quicksilver Resources Inc. entered into a
merger agreement with MSR Exploration Ltd.
Note 15. Supplemental Oil and Gas Reserve Data (Unaudited)
The Company's proved oil and gas reserves at December 31, 1997, have been
estimated by the Company's petroleum engineers in accordance with guidelines
established by the Securities and Exchange Commission ("SEC"). Accordingly, the
following reserve estimates are based upon existing economic and operating
conditions.
There are numerous uncertainties inherent in establishing quantities of
proved reserves. The following reserve data represent estimates only and should
not be construed as being exact. In addition, the present values should not be
construed as the current market value of the Company's oil and gas properties
or the cost that would be incurred to obtain equivalent reserves.
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, all of which are located in the continental United States, are as
follows:
Reserve Quantities December 31, 1997
<TABLE>
<CAPTION>
Petroleum Natural
Liquids Gas
(Bbls) Mmcf)
-------------- -------
(in thousands)
<S> <C> <C>
Reserves at September 30, 1997..................... 21,074 77,952
Purchases of reserves-in-place..................... - 30,831
Sale of reserves-in-place.......................... (5,840) (1,339)
Production......................................... (168) (3,339)
------ -------
Reserves at December 31, 1997...................... 15,066 104,105
====== =======
Total proved developed reserves at December 31,
1997.............................................. 4,520 90,585
====== =======
Company's proportional interest in reserves of
investee's accounted for by the equity method-end
of year........................................... - -
====== =======
</TABLE>
Standardized Measure
The following tables present the Company's standardized measure of
discounted future net cash flows and changes relating to proved oil and gas
reserves and were computed using reserve valuations based on regulations
prescribed by the SEC. These regulations provide that the oil, condensate and
gas price structure utilized to project future net cash flows reflects current
prices at each date presented and have been escalated only when known and
determinable price changes are provided by contract. Future production,
development and net abandonment costs are based on current costs without
escalation. The resulting net future cash flows have been discounted to their
present values based on a 10% annual discount factor.
F-75
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standardized Measure (in thousands): December 31, 1997
<TABLE>
<S> <C>
Future cash inflows............................................. $ 417,051
Future development and production costs......................... (213,408)
Future income tax expense....................................... (40,965)
---------
Future net cash flows........................................... 162,678
10% annual discount............................................. (71,774)
Standardized measure of discounted future cash flows............ $ 90,904
=========
Company's share of equity method
Investee's standardized measure of discounted future net cash
flows.......................................................... $ 1,101
=========
</TABLE>
Primary changes in standardized measure of discounted future net cash flows
(in thousands) for the three months ended December 31, 1997:
<TABLE>
<S> <C>
Net changes in prices and production costs......................... $ 1,708
Sale of reserves-in-place.......................................... (20,443)
Development costs incurred......................................... (1,486)
Changes in estimated future development costs...................... -
Purchase of reserves-in-place...................................... 32,247
Net change in income taxes......................................... 2,052
Sales of oil and gas, net of production costs...................... (6,313)
Accretion of discount.............................................. 2,052
Other.............................................................. (1,004)
--------
$ 8,813
========
</TABLE>
Estimated future cash inflows are computed by applying year end prices of
oil and gas to year end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves in future years, based on year end costs and assuming continuation of
existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to the
Company.
F-76
<PAGE>
MERCURY EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs incurred in oil and gas property acquisition, exploration and
development activities (in thousands):
For the three months ended December 31, 1997
<TABLE>
<S> <C>
Property acquisition costs........................................ $25,152
Exploration costs................................................. 32
Development costs................................................. 2,566
Company's share of equity
Method investee's costs of Property acquisition, Exploration and
development.................................................... $ -
Results of operations from producing activities (in thousands):
For the three months ended December 31, 1997
Oil and gas sales............................................... $ 9,456
Operating expenses.............................................. (2,661)
Production taxes................................................ (563)
Depletion and depreciation...................................... (2,442)
-------
$ 3,790
Income taxes...................................................... (1,289)
Results of operations from producing activities (excluding
corporate overhead and interests costs).......................... $ 2,501
=======
Minority interests in results of operations....................... $ 1,269
=======
Company's share of equity method investee's results of operations
for producing activities......................................... $ 12
=======
</TABLE>
F-77
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Partners
Michigan Gas Partners Limited Partnership
We have audited the accompanying balance sheets of Michigan Gas Partners
Limited Partnership as of December 31, 1997 and 1996 and the related statements
of operations, partners' capital and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership'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 financial position of Michigan Gas Partners
Limited Partnership as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years ended December 31,
1997, in conformity with generally accepted accounting principles.
As described in Note 8, the Company has changed its accounting policy for
accounting for oil and gas properties from the successful efforts method to the
full cost method.
Weaver and Tidwell, L.L.P.
Fort Worth, Texas
October 26, 1998
F-78
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
BALANCE SHEET
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................... $ 56 $ 55
Oil and gas revenue receivable................................. 669 444
------ -------
Total current assets......................................... 725 499
PROPERTY AND EQUIPMENT
Producing oil and gas leases................................... 13,668 13,655
Less accumulated depletion, depreciation and amortization...... 4,558 3,603
------ -------
9,110 10,052
------ -------
TOTAL ASSETS................................................. $9,835 $10,551
====== =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................... $ 150 $ 238
Deferred liabilities........................................... 232 -
------ -------
Total current liabilities.................................... 382 238
PARTNERS' CAPITAL................................................ 9,453 10,313
------ -------
TOTAL LIABILITIES AND PARTNERS' CAPITAL...................... $9,835 $10,551
====== =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-79
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Oil and gas sales..................................... $2,894 $3,212 $1,732
Gas compressor reimbursement.......................... 110 156 198
Other income.......................................... 17 - -
------ ------ ------
Total revenues...................................... 3,021 3,368 1,930
COSTS AND EXPENSES
Lease Operating expenses.............................. 1,922 1,853 1,183
Production taxes...................................... 114 133 70
Depletion, depreciation and amortization.............. 955 1,067 839
Impairment of oil and gas properties.................. - 902 423
General and administrative............................ 11 30 28
------ ------ ------
Total costs and expenses............................ 3,002 3,985 2,543
------ ------ ------
NET INCOME (LOSS)....................................... $ 19 $ (617) $ (613)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-80
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<S> <C>
BALANCE, DECEMBER 31, 1994............................................. $ 8,482
Distributions........................................................ (494)
Capital contributed.................................................. 4,838
Net Loss............................................................. (613)
-------
BALANCE, DECEMBER 31, 1995............................................. 12,213
Distributions........................................................ (1,283)
Net loss............................................................. (617)
-------
BALANCE, DECEMBER 31, 1996............................................. 10,313
Distributions........................................................ (879)
Net income........................................................... 19
-------
BALANCE, DECEMBER 31, 1997............................................. $ 9,453
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-81
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from oil and gas sales.............. $ 2,938 $ 3,211 $ 1,561
Cash received from gas compressor reimbursement... 90 74 173
Cash paid to suppliers and employees.............. (2,135) (1,913) (1,148)
------- ------- -------
Net cash provided by operating activities..... 893 1,372 586
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (13) (132) (4,837)
------- ------- -------
Net cash used in investing activities......... (13) (132) (4,837)
CASH FLOWS FROM FINANCING ACTIVITIES:
Partnership distributions......................... (879) (1,283) (494)
Capital contributions............................. - - 4,838
------- ------- -------
Net cash provided by (used in) financing
activities................................... (879) (1,283) 4,344
------- ------- -------
Net increase (decrease) in cash............... 1 (43) 93
Cash, beginning of period........................... 55 98 5
------- ------- -------
Cash, end of period................................. $ 56 $ 55 $ 98
======= ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss)................................. $ 19 $ (617) $ (613)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization.......... 955 1,067 839
Impairment of oil and gas properties.............. - 902 423
Changes in operating assets and liabilities
Oil and gas revenue receivable.................. (225) (83) (196)
Accounts payable................................ (88) 103 133
Deferred liabilities............................ 232 - -
------- ------- -------
Net cash provided by operating activities..... $ 893 $ 1,372 $ 586
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-82
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting policy relative to the carrying value of property and
equipment is indicated in the caption on the balance sheets. The nature of
operations and other significant accounting policies are as follows:
Nature of Operations
Michigan Gas Partners Limited Partnership was formed to own and operate
various oil and gas properties in the state of Michigan. Substantially all of
the Company's revenue is derived from the production and sale of natural gas.
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.
Oil and Gas Property and Equipment
The Partnership follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost centers
established on a country-by-country basis. Such costs include land acquisition
costs, geological and geophysical expenses, carrying charges on non-producing
properties, costs of drilling both productive and non-productive wells, and
overhead charges directly related to acquisition, exploration and development
activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by independent petroleum engineers. Investments
in unproved properties are not amortized until proven reserves associated with
them can be determined or until impairment occurs. Oil and natural gas reserves
and production are converted into equivalent units based upon estimated
relative energy content.
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments) or
fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.
Statement of Cash Flows
For purposes of the statement of cash flows, the Partnership considers all
highly liquid investments with an original maturity of ninety days or less to
be cash equivalents.
F-83
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Federal Income Taxes
Federal income taxes are not recorded, as the results of operations are not
taxable to the Partnership, but are includable in the respective income tax
returns of the partners.
Note 2. Related Party Transactions
In accordance with the partnership agreement, the Partnership contracts with
a partner for all property exploration costs and continuing costs of
operations. In addition, approximately $220,000 and $209,000, respectively, of
oil and gas receivables at December 31, 1997 and 1996 are due from the partner
and substantially all accounts payable for 1997 and 1996 are due to the
partner.
Note 3. Sale of Properties
In December 1997, the Partnership transferred certain properties with a cost
of $6,195,000 to an unrelated party and received consideration as follows:
a. Initial payment of $232,000
b. Fixed payment note of $2,017,000
c. Credit payment note with a maximum amount of $4,000,000
d. Production payment
For accounting purposes, the transfer does not qualify for sale or gain
recognition. Accordingly, the accompanying financial statements continue to
include the partnership's costs, revenues and expenses associated with the
assets transferred. Any gain on the properties transferred will be recognized
based upon future production of the properties.
Note 4. Allocation of Net Income or Losses and Distribution of Cash Flows
Net income equal to adjusted federal taxable income, as defined, is
allocated to the partners' capital accounts to the extent of cash flows, so
distributable, as defined. Remaining net income and net loss, as defined, are
allocated to the partners' capital accounts in proportion to their prospective
capital accounts and partnership interests in a manner specified in the
partnership agreement.
Note 5. Impairment of Property and Equipment
In 1996 and 1995, the Partnership recognized an impairment loss for certain
oil and gas properties based upon revision of the properties' reserves by
independent petroleum engineers. The impairment loss recognized in the
accompanying 1996 and 1995 financial statements was measured as the amount by
which the carrying amount of the oil and gas properties exceeded their fair
value. Fair value was determined based upon estimated future cash flows for the
properties, discounted at a 10% annual rate.
Note 6. Subsequent Events
Effective January 1, 1998, the Michigan Gas Partners transferred
substantially all producing oil and gas properties to a newly formed related
company, Quicksilver Resources Inc., in exchange for common stock of
Quicksilver.
F-84
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 7. Supplementary Information Related to Oil and Gas Activities--Unaudited
Quantities of Oil and Gas Reserves
The following table presents estimates of the Partnership's proved reserves,
all of which have been prepared by the engineers of the Partnership's General
Partner. Substantially all of the Partnership's crude oil and natural gas
activities are conducted in the United States.
Reserve Quantities for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Proved reserves:
Natural Gas (Mmcf):
Beginning of period.............................. 17,014 26,405 30,487
Production....................................... (1,199) (1,306) (915)
Revisions of previous estimates.................. (2,288) (8,085) (3,167)
------ ------ ------
End of period.................................... 13,527 17,014 26,405
====== ====== ======
Proved developed reserves:
Natural Gas (Mmcf):
Beginning of year................................ 15,956 25,667 24,190
End of year...................................... 12,600 15,956 25,667
</TABLE>
The reduction in the reserves of Michigan Gas Partners from 1996 to 1997 is
due primarily to the decision not to spend $3.2 million for drilling and
development of existing leases. Michigan Gas Partners put its properties up for
sale in 1997 and elected not to spend the capital to develop its reserves.
Because no additional development was planned, the 1997 reserve report removed
those potential reserves from its report and increased the decline in
production. No reasonable sales price was received for the properties, and the
assets were eventually merged into Quicksilver in 1998.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Reserves.
The following standardized measure of discounted future net cash flows was
computed in accordance with the rules and regulations of the Securities and
Exchange Commission and Financial Accounting Standards Board Statement No. 69
using year end prices and costs. No values are given to unproved properties or
to probable reserves that may be recovered from proved properties.
The inexactness associated with estimating reserve quantities, future
production and revenue streams and future development and production
expenditures, together with the assumptions applied in valuing future
production, substantially diminishes the reliability of this data. The values
so derived are not considered to be an estimate of fair market value. The
Partnership therefore cautions against its simplistic use.
F-85
<PAGE>
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following tabulation reflects the Partnership's estimated discounted
future cash flows from natural gas production:
For the years ended December 31, 1997, 1996 and 1995, in thousands.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Future cash flows............................ $ 39,203 $ 42,342 $ 55,715
Future production and development costs...... (23,680) (27,266) (34,926)
Future income tax expense.................... - - -
-------- -------- --------
10% annual discount for timing of cash
flows....................................... 15,523 15,076 20,789
(4,509) (4,600) (8,900)
-------- -------- --------
Standardized measure of discounted cash
flows....................................... $ 11,014 $ 10,476 $ 11,889
======== ======== ========
</TABLE>
Primary changes in the standardized measure of discounted future net cash
flows, in thousands:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Sales of oil and gas produced, net of
production costs.............................. $ (858) $ (326) $ (479)
Net changes in price and production costs...... 3,164 1,848 (6,354)
Change in estimated future development costs... 468 445 5,539
Revisions of previous quantity estimates....... (2,254) (5,535) (1,648)
Development costs incurred during the year..... (13) (132) (4,837)
Accretion of discount.......................... 1,047 1,189 1,768
Other.......................................... (1,016) 1,098 217
------- ------- -------
Net increase (decrease)........................ 538 (1,413) (5,794)
Balance at beginning of year................... 10,476 11,889 17,683
------- ------- -------
Balance at end of year......................... $11,014 $10,476 $11,889
======= ======= =======
</TABLE>
Changes in the supply and demand for oil, natural gas liquids, hydrocarbon
price volatility, inflation, timing of production, reserve revisions and other
factors make these estimates inherently imprecise and subject to substantial
revision. As a result, these measures are not the Partnership's estimates for
future cash flows nor do these measures serve as an estimate of current market
value.
Note 8. Change in Method of Accounting for Oil and Gas Properties
Pursuant to the merger agreement with MSR Exploration Ltd. dated September
1, 1998, the partnership has changed its accounting policy for oil and gas
properties from the successful efforts method to the full cost method.
Accordingly, the Partnership's financial statements have been restated to apply
the change retroactively. The effect of the accounting change on income as
previously reported for 1997, 1996, and 1995 is:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
(in thousands)
<S> <C> <C> <C>
Effect on:
Income before extraordinary item and net income...... $1,738 $(659) $(812)
</TABLE>
Adoption of the full cost method of accounting for oil and gas properties
was mandated in the September 1998 merger agreement with MSR and is consistent
with the accounting policy of MSR previously disclosed to its shareholders and
the general public. In addition, the Company believes the full cost method of
accounting for oil and gas properties more accurately reflects management's
exploration objectives and results by including all costs incurred in oil and
gas producing activities as integral to the acquisition, discovery and
development of whatever reserves ultimately result from its efforts as a whole.
F-86
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have audited the accompanying statement of revenues and direct operating
expenses of the Unocal Corporation's Spirit Energy 76 unit interests, as
described in Note 1, for the year ended December 31, 1998. This financial
statement is the responsibility of management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and direct operating expenses
reflects the revenues and direct operating expenses attributable to the Unocal
Corporation's Spirit Energy 76 unit interests, as described in Note 2, and is
not intended to be a complete presentation of the revenues and expenses of the
Unocal Corporation's Spirit Energy 76 unit interests.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenues and direct operating expenses of the
Unocal Corporation's Spirit Energy 76 unit interests, as described in Note 1,
for the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 22, 1999
F-87
<PAGE>
SPIRIT ENERGY 76 UNIT INTERESTS
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
1998
------
<S> <C>
REVENUES--Oil, gas and related product sales............................ $9,718
DIRECT OPERATING EXPENSES--Lease operating expenses..................... 2,670
------
EXCESS OF REVENUES OVER DIRECT OPERATING EXPENSES....................... $7,048
======
</TABLE>
See notes to statement of revenues and direct operating expenses.
F-88
<PAGE>
SPIRIT ENERGY 76 UNIT INTERESTS
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1998
1. The Properties
The accompanying statement represents the revenues and direct operating
expenses attributable to the net interest in Unocal Corporation's Spirit Energy
76 unit interests in producing wells and certain non-producing leases primarily
in the Garfield and Beaver Creek Fields sold to Quicksilver Resources Inc.
("Quicksilver"). The purchase price was $30 million, consisting of $27 million
in cash and 404,381 unregistered shares of Quicksilver's common stock. The
stock component of the purchase price was placed in escrow and will be
distributed to Unocal over a three-year period, subject to downward adjustment
for certain costs, expenses, and liabilities incurred during this period.
Quicksilver financed the cash portion of the purchase price with $27 million of
borrowings under a bank credit facility, which permits Quicksilver to obtain
revolving credit loans and to issue letters of credit from time to time in an
aggregate amount not to exceed the lesser of a borrowing base limitation or
$200 million. The properties are located in the state of Michigan. The
acquisition closed in May 1999. These acquired properties and their related
operations are included in Quicksilver's consolidated financial statements from
the date of closing.
2. Basis Of Presentation
The historical financial statements reflecting financial position, results
of operations and cash flows required by generally accepted accounting
principles, are not presented as such information is neither readily available
on an individual property basis nor meaningful for the properties acquired
because the entire acquisition cost is being assigned to oil and gas
properties. Accordingly, the statement of revenues and direct operating
expenses is presented in lieu of the financial statements required under Rule
3-05 of Securities and Exchange Commission Regulation S-X.
The accompanying statement of revenues and direct operating expenses
represents Unocal Corporation's net ownership interest in the properties
acquired by Quicksilver and is represented on the full cost accrual basis of
accounting. Depreciation, depletion and amortization; allocated general and
administrative expenses; interest expense and income; and income taxes have
been excluded because the property interest acquired represents only a portion
of a business and the expenses incurred are not necessarily indicative of the
expense to be incurred by Quicksilver.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of certain revenues for the
reported period. Estimates and assumptions are also required in the disclosure
of contingent assets and liabilities as of the date of the financial
statements. Actual results may differ from such estimates.
3. Contingent Liabilities
Given the nature of the properties acquired and as stipulated in the
purchase agreement, Quicksilver is subject to loss contingencies, if any,
pursuant to existing or expected environmental laws, regulations and leases
covering the acquired properties.
F-89
<PAGE>
SPIRIT ENERGY 76 UNIT INTERESTS
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--(Continued)
For the Year Ended December 31, 1998
4. Oil And Natural Gas Reserves Information (unaudited)
Unaudited reserve information related to the properties being acquired is
presented in the table below and is derived from the January 1, 1999 oil and
natural gas reserve report prepared by Quicksilver's independent petroleum
engineers and calculated as of January 1, 1998 by adding production for 1998 to
the January 1, 1999 amount.
<TABLE>
<CAPTION>
Oil
------
(Mbbl)
<S> <C>
Estimated Quantities of Proved Reserves:
January 1, 1998.................................................... 2,938
Production....................................................... (239)
-----
December 31, 1998.................................................. 2,699
=====
Proved Developed Reserves:
As of December 31, 1998.......................................... 621
=====
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Related to Oil and Natural Gas Reserves--The standardized measure of discounted
future net cash flows ("Standardized Measure") relating to oil and natural gas
reserves being acquired is calculated in accordance with Statement of Financial
Accounting Standards No. 69, "Disclosures About Oil And Gas Producing
Activities". The Standardized Measure has been prepared assuming year-end
selling prices adjusted for future fixed and determinable contractual price
changes, year-end development and production costs, and a 10% annual discount
rate. The reserves and the related Standardized Measure at December 31, 1998,
derived from the oil and natural gas reserve report prepared by Quicksilver's
independent petroleum engineers, were adjusted for production during 1998, and
in addition, the Standardized Measure was adjusted for price changes to derive
reserves and the Standardized Measure as of December 31, 1998. The Standardized
Measure is not a fair market value of the mineral interests purchased, and the
Standardized Measure presented for the proved oil and natural gas reserves does
not purport to present the fair market value of the oil and natural gas
properties. An estimate of such value should consider, among other factors,
anticipated future prices of oil and natural gas, the probability of recoveries
of existing proved reserves, the value of probable reserves and acreage
prospects, and, perhaps, different discount rates. It should be noted that
estimates of reserve quantities are inherently imprecise and subject to
substantial revision.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
(in thousands)
<S> <C>
Future cash inflows..... $149,842
Future production and
development costs...... (65,499)
Future income tax ex-
pense.................. (19,497)
--------
Future net cash flows
undiscounted........... 64,846
10% annual discount for
estimated timing of
cash flows............. (26,550)
--------
Standardized measure of
discounted future net
cash flows............. $ 38,296
========
</TABLE>
The following are principal sources of changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
(in thousands)
<S> <C>
Standardized measure of discounted future net cash flows
at beginning of period................................. $39,028
Changes resulting from:
Net change in prices................................ (1,986)
Sales of oil and natural gas produced, net of
production costs................................... (7,048)
Accretion of discount............................... 3,903
Net change in income taxes.......................... 4,399
-------
Standardized measure of discounted future net cash flows
at end of period....................................... $38,296
=======
</TABLE>
F-90
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying statements of revenues and direct operating
expenses/Shell Michigan properties acquired of Mercury Exploration Company for
the years ended September 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
The accompanying statements of revenues and direct operating expenses/Shell
Michigan properties acquired reflect the revenues and direct operating expenses
attributable to Mercury Exploration Company described in Note 2 to the
financial statements and is not intended to be a complete presentation of the
revenues and expenses of Mercury Exploration Company.
In our opinion, the accompany financial statements referred to above present
fairly, in all material respects, the revenues and direct operating
expenses/Shell Michigan properties acquired of Mercury Exploration Company for
the years ended September 30, 1996 and 1995 in conformity with generally
accepted accounting principles.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 23, 1998
F-91
<PAGE>
MERCURY EXPLORATION COMPANY
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
SHELL MICHIGAN PROPERTIES ACQUIRED
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revenues
Gas revenues................................................. $25,543 $16,539
Oil revenues................................................. 1,152 892
Condensate revenues.......................................... 3,719 2,649
------- -------
Total revenues............................................. 30,414 20,080
======= =======
Direct Operating Expenses
Operating expenses........................................... 3,147 2,902
Production taxes............................................. 1,648 1,390
------- -------
Total direct operating expenses............................ 4,795 4,292
------- -------
Excess of Revenues Over Direct Operating
Expenses/Shell Michigan Properties Acquired.................. $25,619 $15,788
======= =======
</TABLE>
F-92
<PAGE>
MERCURY EXPLORATION COMPANY
SHELL MICHIGAN PROPERTIES ACQUIRED
NOTES TO FINANCIAL STATEMENTS
Note 1. Business Combination
On November 14, 1996 Mercury Exploration Company consummated the Shell
acquisition from Shell Western E & P, Inc. The acquisition consisted of 64
wells located in Michigan with combined proved reserves of approximately 75
Bcfe at the effective date of July 1, 1996. The aggregate purchase price for
the interests was approximately $57.7 million, which was paid in cash with bank
debt.
Note 2. Basis Of Presentation
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the properties included in the
business combination. Accordingly, these statements of revenues and direct
operating expenses/properties acquired are presented in lieu of the financial
statements required under Rule 3-05 of Securities and Exchange Commission
Regulation S-X. The accompanying financial statements include the direct
revenues and expenses of properties acquired by Mercury Exploration Company in
the business combination referred to in Note 1. All of the statements and
disclosures are stated in U.S. dollars.
The accompanying statements of revenues and direct operating
expenses/properties acquired represent Mercury's net ownership interest in the
properties included in the business combination and are presented on the full
cost accrual basis of accounting. Depreciation, depletion and amortization,
allocated general and administrative expenses, interest expense, and income
taxes have been excluded because the property interests included in the
business combination are from a newly formed business and the expenses incurred
are not necessarily indicative of the expenses to be incurred by Mercury.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Note 3. Disclosures About Oil And Gas Activities (Unaudited)
The changes in proved reserves for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural Gas
Liquids (Bbls) (Mmcf)
-------------- -----------
(in thousands)
<S> <C> <C>
Reserves at September 30, 1994.................... 1,944 83,542
Production...................................... (241) (6,760)
----- -------
Reserves at September 30, 1995.................... 1,703 76,782
Production...................................... (267) (10,668)
----- -------
Reserves at September 30, 1996.................... 1,436 $66,114
===== =======
Total proved developed reserves
September 30, 1997.............................. 644 18,291
===== =======
September 30, 1996.............................. 911 28,959
===== =======
</TABLE>
F-93
<PAGE>
MERCURY EXPLORATION COMPANY
SHELL MICHIGAN PROPERTIES ACQUIRED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The standardized measure of discounted estimated future net cash flows, and
changes therein, related to proved oil and gas reserves (in thousands) for 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Future cash inflows..................................... $138,460 $174,704
Future development and production costs................. (35,525) (43,198)
Future income tax expense............................... - -
-------- --------
Future net cash flows................................... 102,935 131,506
10% annual discount..................................... (40,580) (43,485)
-------- --------
Standardized measure of discounted future cash flows.... $ 62,355 $ 88,021
======== ========
</TABLE>
Primary changes in standardized measure of discounted future net cash flows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Net changes in prices and production costs............... $ (5,130) $(1,807)
Sales of oil and gas, net of production costs............ (25,619) (15,788)
Accretion of discount.................................... 8,036 8,296
Other.................................................... (2,953) 1,858
-------- -------
$(25,666) $(7,441)
======== =======
</TABLE>
Estimated future cash inflows are computed by applying year end prices of
oil and gas to year end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves in future years, based on year end costs and assuming continuation of
existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the Securities and Exchange
Commission. Because of unpredictable variances in expenses and capital
forecasts, crude oil and natural gas price changes, and the fact that the bases
for such estimates vary significantly, management believes the usefulness of
these projections is limited. Estimates of future net cash flows do not
necessarily represent management's assessment of future profitability or future
cash flow to the Company.
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Mercury Exploration Company
Fort Worth, Texas
We have audited the accompanying statements of revenues and direct operating
expenses/Destec Michigan Properties acquired of Mercury Exploration Company for
the years ended September 30, 1997 and 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.
The accompanying statements of revenues and direct operating expenses/Destec
Michigan properties acquired reflect the revenues and direct operating expenses
attributable to Mercury Exploration Company described in Note 2 to the
financial statements and is not intended to be a complete presentation of the
revenues and expenses of Mercury Exploration Company.
In our opinion, the accompanying financial statements referred to above
present fairly, in all material respects, the revenues and direct operating
expenses/Destec Michigan properties acquired of Mercury Exploration Company for
the years ended September 30, 1997 and 1996 in conformity with generally
accepted accounting principles.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 23, 1998
F-95
<PAGE>
MERCURY EXPLORATION COMPANY
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
DESTEC MICHIGAN PROPERTIES ACQUIRED
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revenues
Gas revenues.................................................. $7,257 $6,224
------ ------
Total revenues.............................................. 7,257 6,224
------ ------
Direct Operating Expenses
Operating expenses............................................ 1,289 1,689
Production taxes.............................................. 303 262
------ ------
Total direct operating expenses............................. 1,592 1,951
------ ------
Excess of Revenues Over Direct Operating Expenses/Destec
Michigan Properties Acquired................................... $5,665 $4,273
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
MERCURY EXPLORATION COMPANY
DESTEC MICHIGAN PROPERTIES ACQUIRED
NOTES TO FINANCIAL STATEMENTS
Note 1. Business Combination
On October 9, 1997 Mercury Exploration Company consummated the Destec
acquisition from ECT Enocene Enterprises II, Inc. Such properties consist of
143 wells located in Michigan with combined proved reserves of approximately
30.8 Bcfe as of the effective date of August 1, 1997. The aggregate purchase
price for the interests was approximately $23.5 million, which was paid in cash
with bank debt.
Note 2. Basis Of Presentation
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the properties included in the
business combination. Accordingly, these statements of revenues and direct
operating expenses/properties acquired are presented in lieu of the financial
statements required under Rule 3-05 of Securities and Exchange Commission
Regulation S-X. The accompanying financial statements include the direct
revenues and expenses of properties acquired by Mercury Exploration Company in
the business combination referred to in Note 1. All of the statements and
disclosures are stated in U.S. dollars.
The accompanying statements of revenues and direct operating expenses/
properties acquired represent Mercury's net ownership interest in the
properties included in the business combination and are presented on the full
cost accrual basis of accounting. Depreciation, depletion and amortization,
allocated general and administrative expenses, interest expense, and income
taxes have been excluded because the property interests included in the
business combination are from a newly formed business and the expenses incurred
are not necessarily indicative of the expenses to be incurred by Mercury.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Note 3. Disclosures About Oil And Gas Activities (unaudited)
The changes in proved reserves for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Petroleum Natural Gas
Liquids (Bbls) (Mmcf)
-------------- -----------
(in thousands)
<S> <C> <C>
Reserves at September 30, 1995.................... - 36,781
Production...................................... - (3,042)
--- ------
Reserves at September 30, 1996.................... - 33,739
Production...................................... - (2,908)
--- ------
Reserves at September 30, 1997.................... - 30,831
--- ------
Total proved developed reserves
September 30, 1997.............................. - 26,755
--- ------
September 30, 1996.............................. - 29,663
=== ======
</TABLE>
F-97
<PAGE>
MERCURY EXPLORATION COMPANY
DESTEC MICHIGAN PROPERTIES ACQUIRED
NOTES TO FINANCIAL STATEMENTS--(Continued)
The standardized measure of discounted estimated future net cash flows, and
changes therein, related to proved oil and gas reserves (in thousands) for 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Future cash inflows........................................ $75,746 $58,031
Future development and production costs.................... (15,776) (12,440)
Future income tax expense.................................. - -
------- -------
Future net cash flows...................................... 59,970 45,591
10% annual discount........................................ (27,723) (23,305)
------- -------
Standardized measure of discounted future cash flows....... $32,247 $22,286
======= =======
</TABLE>
Primary changes in standardized measure of discounted future net cash flows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net changes in prices and production costs................ $10,861 $(1,369)
Sales of oil and gas, net of production costs............. (5,665) (4,273)
Accretion of discount..................................... 2,229 2,082
Other..................................................... (2,536) (643)
------- -------
$(9,961) $(1,465)
======= =======
</TABLE>
Estimated future cash inflows are computed by applying year end prices of
oil and gas to year end quantities of proved developed reserves. Estimated
future development and production costs are determined by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves in future years, based on year end costs and assuming continuation of
existing economic conditions.
These estimates are furnished and calculated in accordance with requirements
of the Financial Accounting Standards Board and the SEC. Because of
unpredictable variances in expenses and capital forecasts, crude oil and
natural gas price changes, and the fact that the bases for such estimates vary
significantly, management believes the usefulness of these projections is
limited. Estimates of future net cash flows do not necessarily represent
management's assessment of future profitability or future cash flow to the
Company.
F-98
<PAGE>
Holditch--Reservoir Technologies Consulting Services
Schlumberger
1310 Commerce Drive
Park Ridge 1
Pittsburgh, PA 15275-1011
Tel: 412-787-5403
Fax: 412-787-2906
15 October, 1999
Quicksilver Resources, Inc.
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
Dear Gentlemen:
At the request of Quicksilver Resources, Inc. (QUICKSILVER), Holditch-
Reservoir Technologies Consulting Services (H-RT) has prepared a reserve and
economic audit of certain proved oil and gas interests as of September 1, 1999.
The 1998 year end reserve forecasts prepared by H-RT were reviewed with the
updated production and adjusted as necessary. Major changes from the 1998 year
end reserve report are the result of higher product prices, significant reserve
additions in Michigan and Canada as a result of the acquisitions of Spirit
Energy and the Monogram Unit respectively, and adjustments to the undeveloped
reserves in the South Central Cut Bank Sand Unit in Montana. The results of
this study are summarized in Table 1.
TABLE 1
ESTIMATED NET RESERVES & INCOME
CERTAIN OIL AND GAS INTERESTS AUDITED FOR
QUICKSILVER RESOURCES
AS OF SEPTEMBER 1, 1999
<TABLE>
<CAPTION>
Proved
Proved Non- Proved Total
Producing producing Undeveloped Proved
Reserves Reserves Rese rves Reserves
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Remaining Net Reserves
Oil--Mbbls 7,904.640 7,275.210 9,303.210 24,483.060
Gas--MMscf 117,137.100 26,242.100 67,465.780 210,845.000
NGL--Mbbls 600.330 358.150 88.020 1046.500
Income Data (M$)
Future Net Revenue 525,116.500 228,254.500 404,088.900 1,157,460.000
Deductions 288,857.471 62,807.730 184,914.090 536,579.270
Future Net Income (FNI) 236,259.100 165,446.700 219,174.700 620,880.600
Discounted PV @ 10% (M$) 144,834.700 101,095.200 102,636.800 348,566.700
</TABLE>
A-1
<PAGE>
Holditch-Reservoir Technologies Consulting Services Schlumberger
15 October, 1999
Page 2
RESERVES ESTIMATES
A combination of conventional decline curve analysis, reservoir simulation, and
type curves were used in the January 1, 1999 evaluation to estimate the
remaining reserves in the MI Antrim formation. The reservoir simulation was
conducted using SHALEGAS, H-RT's multi-phase reservoir simulator designed
specifically for evaluating fractured shale formations. For the September 1,
1999 audit we reviewed the total MI Antrim Proved Producing production plot and
determined that our original forecast as a whole was in excellent agreement.
Based on this, no MI Antrim forecasts were changed.
The MI Non-Antrim formations were evaluated using decline curve analysis,
volumetrics, and production data analysis. The production data analysis was
conducted using PROMAT, H-RT's production data analysis software. Volumetric
calculations were based on data and maps provided to us by QUICKSILVER. All
forecasts from the January 1, 1999 evaluation were reviewed and changed where
applicable.
The reserves in the remaining properties were evaluated using decline curve
analysis for the producing properties, and volumetrics, analogies, and
simulation results for the behind pipe and undeveloped properties. For
producing properties under waterflood, watercut versus cumulative oil plots
were used to aid in decline curve estimates.
Reserve estimates are strictly technical judgments. The accuracy of any reserve
estimate is a function of the quality of data available and of engineering and
geological interpretations. The reserve estimates presented in this report are
believed reasonable; however, they are estimates only and should be accepted
with the understanding that reservoir performance subsequent to the date of the
estimate may justify their revision.
RESERVES ADDITIONS & MODIFICATIONS
Acquisitions and development activity during the first half of 1999 have
impacted Quicksilver's reserves. Acquisition of Spirit Energy and the Monogram
Unit added significant reserves in Michigan and Canada. Development activity in
the South Central Cut Bank Sand Unit in Montana resulted in a reduction of the
undeveloped reserves in the Unit.
QUICKSILVER acquired several MI Spirit Energy properties in May of 1999. New
properties included the Beaver Creek UPdC, the Beaver Creek Richfield Unit, the
Beaver Creek Richfield Non-unit, and the Detroit River Sour. QUICKSILVER also
obtained additional working and net revenue interests in the Garfield 8 and
Garfield Richfield properties. The Spirit acquisition added 1,438 MBbls of oil,
28,378 MMscf of gas, and 66 MBbls of NGL to the proved net reserves.
Total proved reserves in Canada increased by 10,077 MMscf as the result of the
acquisition of the Monogram Unit in southern Alberta. Quicksilver acquired
controlling (89%) interest in MGV Energy (MGV), a Calgary-based natural gas
company, in August, 1999. The Monogram Unit is MGV's first acquisition.
Proved undeveloped reserves in the South Central Cut Bank Sand Unit (SCCBSU)
were reduced by 872 MBO (16%) from the 1998 Year End reserve report based on
the results of
A-2
<PAGE>
Holditch-Reservoir Technologies Consulting Services Schlumberger
15 October, 1999
Page 3
recent drilling. The reserves were part of the Lower Cretaceous infill drilling
and waterflood optimization project outlined for the Unit. During 1999 QRI
drilled five Lower Cretaceous zone wells in the SCCBSU with limited success.
The reduction in reserves relates to the locations in the channels adjacent to
the recent drilling where the high permeability sand is swept.
RESERVE CATEGORIES
Reserves were assigned to the proved producing (PDP), proved non-producing
(PDNP), and proved undeveloped (PUD) reserve categories. Oil and gas reserves
by definition fall into one of the following categories: proved, probable, and
possible. The proved category is further divided into: developed and
undeveloped. The developed reserve category is even further divided into the
appropriate reserve status subcategories: producing and non-producing. Non-
producing reserves include shut-in and behind-pipe reserves. Only proved
reserves were evaluated in this report and all reserve categories used in this
report conform to the Securities and Exchange Commission Regulation S-X, Rule
4-10 (a).
The reserves and income attributable to the various reserve categories included
in this report have not been adjusted to reflect the varying degrees of risk
associated with them.
ECONOMIC TERMS
Net revenue (sales) is defined as the total proceeds from the sale of oil,
condensate, natural gas liquids (NGL), and gas before any deductions. Future
net income (cashflow) is future net revenue less net lease operating,
transportation, processing, and marketing expenses, and state severance or
production taxes. Future net income (cashflow) includes only those deductions
for general and administrative expenses charged by the operator to each
particular well on a monthly basis. No provisions for State or Federal income
taxes are made in this evaluation. The present worth (discounted cashflow) at
various discount rates is calculated on a monthly basis.
PRICING AND ECONOMIC PARAMETERS
All product prices, costs, and economic parameters used in this report were
supplied by QUICKSILVER. Data from QUICKSILVER were accepted as presented. All
pricing and costs were held constant for the life of the projects (no
escalation). All economics were run to economic life or 40 years which ever
occurs first. All prices used in this report were based on current contracts or
8/31/99 NYMEX pricing plus or minus local differentials. The base NYMEX prices
used were $22.86/Bbl for oil and $2.825/MMBtu for gas. Quicksilver currently
has two oil price contracts that apply to the entire company oil volumes. The
first is for 1000 BOPD at $20.65/Bbl and expires 7/31/2000, the second is for
500 BOPD at $19.35/Bbl and expires 4/30/2004. The oil price used for this
report is a yearly weighted average price of the contract volumes and prices
and the remaining volumes at the 8/31/99 NYMEX price of $22.86/Bbl. Total
proved working interest volumes were used for the weighted average with a 12.5%
royalty burden applied to the net oil stream to calculate the working interest
volumes.
A-3
<PAGE>
Holditch-Reservoir Technologies Consulting Services Schlumberger
15 October, 1999
Page 4
OWNERSHIP
The leasehold interests were supplied by QUICKSILVER and were accepted as
presented. No attempt was made by the undersigned to verify the title or
ownership of the interests evaluated.
GENERAL
All data used in this study were obtained from QUICKSILVER, public industry
information sources, or the non-confidential files of H-RT. A field inspection
of the properties was not made in connection with the preparation of this
report.
The potential environmental liabilities attendant to ownership and/or operation
of the properties have not been addressed in this report. Abandonment and
clean-up costs and possible salvage value of the equipment were not considered
in this report.
In auditing the information at our disposal related to this report, we have
excluded from our consideration all matters which require a legal or accounting
interpretation, or any interpretation other than those of an engineering or
geological nature. In assessing the conclusions expressed in this report
pertaining to all aspects of oil and gas evaluations, especially pertaining to
reserve audits, there are uncertainties inherent in the interpretation of
engineering data, and such conclusions represent only informed professional
judgments.
Data and worksheets used in the preparation of this audit will be maintained in
our files in Pittsburgh and will be available for inspection by anyone having
proper authorization by QUICKSILVER.
This report was prepared solely for the use of the party to whom it is
addressed and any disclosure made of this report and/or the contents by said
party thereof shall be solely the responsibility of said party, and shall in no
way constitute any representation of any kind whatsoever of the undersigned
with respect to the matters being addressed.
We appreciate the opportunity to perform this audit and are available should
you need further assistance in this matter.
Sincerely yours,
<TABLE>
<S> <C>
/s/ Nelson R. Fairchild Jr. /s/ Joseph H. Frantz, Jr., P.E.
Nelson R. Fairchild Jr. Joseph H. Frantz, Jr., P.E.
Senior Petroleum Engineer Operations Manager
Eastern U.S.
</TABLE>
A-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses of this offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $14,126.74
AMEX listing fee.............................................. 17,500.00
NASD filing fee............................................... 5,581.56
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Engineering fees and expenses................................. *
Blue Sky fees and expenses (including legal fees)............. *
Printing expenses............................................. *
Transfer Agent fees........................................... *
Miscellaneous................................................. *
----------
TOTAL....................................................... $
==========
</TABLE>
--------
*To be provided by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys fees)
actually and reasonably incurred in connection with the defense or settlement
of such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that 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 unless and only to the extent that the Delaware Court of Chancery
or such other court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
of the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Delaware Court of Chancery or such
other court shall deem proper.
Our bylaws provide that indemnification shall be to the fullest extent
permitted by the DGCL for all of our current or former directors.
As permitted by the DGCL, our certificate of incorporation provides that our
directors shall have no personal liability to us or our stockholders for
monetary damages for breach of fiduciary duty as a director,
II-1
<PAGE>
except (1) for any breach of the directors duty of loyalty to us or our
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) for unlawful payments
of dividends or unlawful stock repurchases or redemptions as provided under
Section 174 of the DGCL or (4) for any transaction from which a director
derived an improper personal benefit.
The Underwriting Agreement that we will enter into with respect to the offer
and sale of the common stock covered by this registration statement will
contain certain provisions for the indemnification of our directors and
officers and the underwriters, as applicable, against civil liabilities under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities
We have sold and issued (without registration and without payment of any
selling commission to any person) the following securities since December 18,
1997, the date of our formation. The share amounts shown are adjusted for a
stock dividend which was declared in February 1999:
(1) Effective January 1, 1998, Michigan Gas Partners merged into us, and
all of the partnership interests of JEDI in Michigan Gas Partners were
converted into the right to receive 1,340,405 shares of our common stock.
(2) Effective January 1, 1998, Mercury transferred to us all of its oil
and gas properties in the states of Michigan, Montana and Wyoming, except
for some of its excluded Michigan properties. As consideration for the
transfer, we assumed the liabilities of Mercury relating to the transferred
properties, including debt in the amount of $34,600,000 owed by Mercury to
Bank of America under a credit agreement dated January 31, 1997. We also
issued 3,251,820 shares of our common stock to Mercury. In addition, at
Mercurys request, 74,135 shares of our common stock to which Mercury was
entitled were issued to Mercurys employee, Jeff Cook, as part of his agreed
compensation.
(3) Effective January 1, 1998, QELC transferred all of its oil and gas
properties in the states of Michigan and Montana to us as part of our
formation. As consideration for this transfer, we assumed the liabilities
of QELC relating to the transferred properties and debt in the amount of
approximately $39,600,000 owed by QELC to Trust Company of the West and
Bank of America under credit agreements dated November 14, 1996. We issued
an additional 3,030,860 shares of our common stock to QELC.
(4) Effective January 1, 1998, Messrs. Frank, Thomas and Glenn Darden,
Anne Darden Self and Jack L. Thurber transferred to us the contractual
after payout or net profits interests owned by those individuals in some of
the assets of Mercury or QELC that were transferred to us in our formation.
As consideration for those transfers of contractual rights, we issued
242,922 shares of our common stock to each of Frank Darden, Thomas F.
Darden, Glenn Darden and Anne Darden Self and 301,488 shares of our common
stock to Mr. Thurber.
(5) Effective January 1, 1998, we satisfied our debt assumed from QELC
and owed to TCW under a credit agreement dated November 14, 1996 by paying
$17,075,000 in cash to TCW and issuing 1,340,405 shares of our common stock
to TCW, in exchange for a $10,000,000 credit. Mercury later purchased all
of the shares of our common stock issued to TCW and TCW is no longer a
shareholder of ours.
(6) On May 17, 1999, we completed a purchase from Unocal Corporations
Spirit Energy 76 unit of substantially all of Unocal's natural gas and
crude oil assets in Michigan. The assets purchased, consisting of ownership
interests in the Garfield Unit and the Beaver Creek Unit, include
approximately 20,000 net leasehold acres and about 13,000 Mcfe production
per day. The purchase price for the Unocal acquisition was $30 million,
consisting of $27 million in cash, adjusted to $25.8 million cash at
closing, and 404,381 unregistered shares of our common stock. The stock
component of the purchase price was placed in escrow and will be
distributed to Unocal over a three year period, subject to downward
adjustment in correlation to costs, expenses, and liabilities which may be
incurred during this period.
(7) On May 25, 1999, our board of directors approved the issuance of
$10,000 worth of our common stock to each of Messrs. Frank Darden, Steven
Morris, Randall Kent and Yandell Rogers, III
II-2
<PAGE>
as compensation for their services during 1998. Based upon the average of
the high and low closing prices for our common stock on that date, we plan
to issue 1,600 shares of our common stock to each of these non-employee
directors prior to completion of this offering.
The sale of the above securities described in this Item 15 were exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<C> <S>
*1.1 --Form of Underwriting Agreement
+3.1 --Restated Certificate of Incorporation of Quicksilver Resources Inc.
(filed as Exhibit 4.1 to the Company's Form S-4 File No. 333-66709,
filed November 3, 1998 and included herein by reference).
+3.2 --Bylaws of Quicksilver Resources Inc. (filed as Exhibit 4.2 to the
Company's Form S-4 File No. 333-66709, filed November 3, 1998 and
included herein by reference).
+4.1 --Form of Quicksilver Resources Inc. Common Stock Certificate (filed
as Exhibit 4.3 to the Company's Form S-4/A File No. 333-66709, filed
January 20, 1999 and included herein by reference).
*5.1 --Opinion of Cantey & Hanger, L.L.P. regarding legality of the shares
being registered.
+10.1 --Agreement and Plan of Reorganization and Merger, dated March 31,
1998, by and among Quicksilver Resources Inc., Quicksilver Energy,
L.C., Michigan Gas Partners Limited Partnership, Mercury Exploration
Company and Joint Energy Development Investments Limited Partnership
(filed as Exhibit 10.2 to the Company's Form S-4 file No. 333-66709,
filed November 3, 1998 and included herein by reference).
+10.2 --Agreement Regarding Merger Agreement, dated April 9, 1998, by and
among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan
Gas Partners Limited Partnership, Mercury Exploration Company, Trust
Company of the West and Joint Energy Development Investments Limited
Partnership (filed as Exhibit 10.3 to the Company's Form S-4 File
No. 333-66709, filed November 3, 1998 and included herein by
reference).
+10.3 --Registration Rights Agreement, dated April 9, 1998, by and among
Quicksilver Resources Inc., Joint Energy Development Investments
Limited partnership and Trust Company of the West (filed as Exhibit
10.4 to the Company's Form S-4 File No. 333-66709, filed November 3,
1998 and included herein by reference).
+10.4 --Stockholders Agreement, dated April 9, 1998, by and among
Quicksilver Resources, Inc., Mercury Exploration Company,
Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M.
Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust Company
of the West, Joint Energy Development Investments Limited
Partnership and Mercury Production Company (filed as Exhibit 10.5 to
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference).
+10.5 --Amendment No. 1 to Stockholders Agreement, dated September 1, 1998,
by and among Quicksilver Resources Inc., Mercury Exploration
Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust
Company of the West, Joint Energy Development Investments Limited
Partnership and Mercury Production Company (filed as Exhibit 10.7 to
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference.)
+10.6 --Stock Transfer Agreement, dated April 9, 1998, by and among Mercury
Exploration Company and Joint Energy Development Investment Limited
Partnership (filed as Exhibit 10.7 to the Company's Form S-4 File
No. 333-66709, filed November 3, 1998 and included herein by
reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
+10.7 --Amendment No. 1 to Stock Transfer Agreement, dated September 1,
1998, by and among Mercury Exploration Company and Joint Energy
Development Investment Limited Partnership (filed as Exhibit 10.8
to the Company's Form S-4 File No. 333-66709, filed November 3,
1998 and included herein by reference).
*10.8 --Second Amended and Restated Credit Agreement, dated March 1, 1999,
by and among Quicksilver Resources Inc. and NationsBank, N.A.,
Paribas, Bank One Texas, N.A. and Frost National Bank.
*10.9 --First Amendment to Second Amended and Restated Credit Agreement,
dated May 17, 1999, by and among NationsBank, N.A., Paribas, Bank
One Texas, N.A. and Frost National Bank.
*10.10 --Master Gas Purchase and Sale Agreement, dated March 1, 1999, by and
between Quicksilver Resources Inc. and Reliant Energy Services,
Inc.
+10.11 --Agreement regarding Warrants, dated September 1, 1998, by and among
Quicksilver Resources Inc., Mercury Exploration Company, Frank
Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Joint
Energy Development Investments Limited Partnership and Trust
Company of the West (filed as Exhibit 10.13 to the Company's Form
S-4 File No. 333-66709, filed November 3, 1998 and included herein
by reference).
+10.12 --Management Agreement, dated September 1, 1998, by and among Mercury
Exploration Company and Quicksilver Resources Inc. (filed as
Exhibit 10.15 to the Company's Form S-4 File No. 333-66709, filed
November 3, 1998 and included herein by reference).
+10.13 --Wells Agreement (filed as an exhibit to the Registration Statement
on Form S-4 File No. 333-29769, and incorporated herein by
reference).
+10.14 --Agreement and Plan of Merger, dated September 1, 1998, among
Quicksilver Resources Inc. and MSR Exploration Ltd. (filed as
Appendix A to the Proxy Statement/Prospectus included in Part I of
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference).
+10.15 --Purchase and Sale Agreement, dated March 31, 1999, between Union
Oil Company of California and Quicksilver Resources Inc. (filed as
Exhibit 2.1 to the Company's Form 8-K File No. 001-14837, filed May
28, 1999 and included herein by reference).
+10.26 --Amendment to Purchase and Sale Agreement dated May 17, 1999,
between Union Oil Company of California and Quicksilver Resources
Inc. (filed as Exhibit 2.2 to the Company's Form 8-K File No. 001-
14837, filed May 28, 1999 and included herein by reference).
*10.27 --Quicksilver Resources Management Incentive Plan
*10.28 --Quicksilver Resources Inc. 1999 Stock Option and Retention Stock
Plan
*10.29 --Second Amendment to Second Amended and Restated Credit Agreement,
dated October 6, 1999, by and among Quicksilver Resources Inc.,
Bank of America, N.A., Paribas, Frost National Bank, CIBC, Inc.,
and Christiana Bank.
*21.1 --List of subsidiaries of Quicksilver Resources Inc.
*23.1 --Consent of Deloitte & Touche LLP
*23.2 --Consent of Weaver and Tidwell, L.L.P.
*23.3 --Consent of Holditch-Reservoir Technologies Consulting Services
23.4 --Consent of Cantey & Hanger, L.L.P. (contained in Exhibit 5.1
hereto)
24.1 --Power of Attorney (included on the signature page to this
Registration Statement)
*27 --Financial Data Schedule
</TABLE>
- --------
*Filed herewith
+Previously filed
(b) Consolidated Financial Statement Schedules:
All schedules are omitted because the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related notes.
II-4
<PAGE>
Item 17. Undertakings
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.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the calculation of Registration Fee table in the
effective registration statement; and (iii) to include any additional or
changed material information on the plan of distribution.
(2) that, for purposes of determining any liability under the Securities
Act of 1933, 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.
(3) that, for the purpose of determining any liability under the
Securities Act of 1933, 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 thereto.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort
Worth, State of Texas, on the 18th day of October, 1999.
Quicksilver Resources Inc.
/s/ Thomas F. Darden
By: _________________________________
Name: Thomas F. Darden
Title: Chairman of the Board and
Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Glenn M. Darden and Bill Lamkin, or either of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any additional registration
statements pursuant to Rule 462(b), and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
ratifying and confirming all that said attorney-in-fact and agent or his
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated and on the 18th day of October, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Thomas F. Darden Chairman of the Board and
______________________________________ Chief Executive Officer
Thomas F. Darden and Director (Principal
Executive Officer)
/s/ Glenn M. Darden President, Chief Operating
______________________________________ Officer and Secretary
Glenn M. Darden
/s/ Bill Lamkin Executive Vice President
______________________________________ and Chief Financial
Bill Lamkin Officer (Principal
Financial and Accounting
Officer)
/s/ Frank Darden Director
______________________________________
Frank Darden
/s/ Steven M. Morris Director
______________________________________
Steven M. Morris
/s/ D. Randall Kent Director
______________________________________
D. Randall Kent
/s/ W. Yandell Rogers III Director
______________________________________
W. Yandell Rogers III
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director
______________________________________
Mark Warner
/s/ Anne Darden Self Director
______________________________________
Anne Darden Self
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement
+3.1 --Restated Certificate of Incorporation of Quicksilver Resources Inc.
(filed as Exhibit 4.1 to the Company's Form S-4 File No. 333-66709,
filed November 3, 1998 and included herein by reference).-- Restated
Certificate of Incorporation of Quicksilver Resources Inc. (filed as
Exhibit 4.1 to the Company's Form S-4 File No. 333-66709, filed
November 3, 1998 and included herein by reference).
+3.2 --Bylaws of Quicksilver Resources Inc. (filed as Exhibit 4.2 to the
Company's Form S-4 File No. 333-66709, filed November 3, 1998 and
included herein by reference).
+4.1 --Form of Quicksilver Resources Inc. Common Stock Certificate (filed
as Exhibit 4.3 to the Company's Form S-4/A File No. 333-66709, filed
January 20, 1999 and included herein by reference).
*5.1 --Opinion of Cantey & Hanger, L.L.P. regarding legality of the shares
being registered.
+10.1 --Agreement and Plan of Reorganization and Merger, dated March 31,
1998, by and among Quicksilver Resources Inc., Quicksilver Energy,
L.C., Michigan Gas Partners Limited Partnership, Mercury Exploration
Company and Joint Energy Development Investments Limited Partnership
(filed as Exhibit 10.2 to the Company's Form S-4 file No. 333-66709,
filed November 3, 1998 and included herein by reference).
+10.2 --Agreement Regarding Merger Agreement, dated April 9, 1998, by and
among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan
Gas Partners Limited Partnership, Mercury Exploration Company, Trust
Company of the West and Joint Energy Development Investments Limited
Partnership (filed as Exhibit 10.3 to the Company's Form S-4 File
No. 333-66709, filed November 3, 1998 and included herein by
reference).
+10.3 --Registration Rights Agreement, dated April 9, 1998, by and among
Quicksilver Resources Inc., Joint Energy Development Investments
Limited partnership and Trust Company of the West (filed as Exhibit
10.4 to the Company's Form S-4 File No. 333-66709, filed November 3,
1998 and included herein by reference).
+10.4 --Stockholders Agreement, dated April 9, 1998, by and among
Quicksilver Resources, Inc., Mercury Exploration Company,
Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M.
Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust Company
of the West, Joint Energy Development Investments Limited
Partnership and Mercury Production Company (filed as Exhibit 10.5 to
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference).
+10.5 --Amendment No. 1 to Stockholders Agreement, dated September 1, 1998,
by and among Quicksilver Resources Inc., Mercury Exploration
Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden,
Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust
Company of the West, Joint Energy Development Investments Limited
Partnership and Mercury Production Company (filed as Exhibit 10.7 to
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference.)
+10.6 --Stock Transfer Agreement, dated April 9, 1998, by and among Mercury
Exploration Company and Joint Energy Development Investment Limited
Partnership (filed as Exhibit 10.7 to the Company's Form S-4 File
No. 333-66709, filed November 3, 1998 and included herein by
reference).
+10.7 --Amendment No. 1 to Stock Transfer Agreement, dated September 1,
1998, by and among Mercury Exploration Company and Joint Energy
Development Investment Limited Partnership (filed as Exhibit 10.8 to
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference).
*10.8 --Second Amended and Restated Credit Agreement, dated March 1, 1999,
by and among Quicksilver Resources Inc. and NationsBank, N.A.,
Paribas, Bank One Texas, N.A. and Frost National Bank.
*10.9 --First Amendment to Second Amended and Restated Credit Agreement,
dated May 17, 1999, by and among NationsBank, N.A., Paribas, Bank
One Texas, N.A. and Frost National Bank.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*10.10 --Master Gas Purchase and Sale Agreement, dated March 1, 1999, by and
between Quicksilver Resources Inc. and Reliant Energy Services, Inc.
+10.11 --Agreement regarding Warrants, dated September 1, 1998, by and among
Quicksilver Resources Inc., Mercury Exploration Company, Frank
Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Joint
Energy Development Investments Limited Partnership and Trust Company
of the West (filed as Exhibit 10.13 to the Company's Form S-4 File
No. 333-66709, filed November 3, 1998 and included herein by
reference).
+10.12 --Management Agreement, dated September 1, 1998, by and among Mercury
Exploration Company and Quicksilver Resources Inc. (filed as Exhibit
10.15 to the Company's Form S-4 File No. 333-66709, filed November
3, 1998 and included herein by reference).
+10.13 --Wells Agreement (filed as an exhibit to the Registration Statement
on Form S-4 File No. 333-29769, and incorporated herein by
reference).
+10.14 --Agreement and Plan of Merger, dated September 1, 1998, among
Quicksilver Resources Inc. and MSR Exploration Ltd. (filed as
Appendix A to the Proxy Statement/Prospectus included in Part I of
the Company's Form S-4 File No. 333-66709, filed November 3, 1998
and included herein by reference).
+10.15 --Purchase and Sale Agreement, dated March 31, 1999, between Union Oil
Company of California and Quicksilver Resources Inc. (filed as
Exhibit 2.1 to the Company's Form 8-K File No. 001-14837, filed May
28, 1999 and included herein by reference).
+10.26 --Amendment to Purchase and Sale Agreement dated May 17, 1999, between
Union Oil Company of California and Quicksilver Resources Inc.
(filed as Exhibit 2.2 to the Company's Form 8-K File No. 001-14837,
filed May 28, 1999 and included herein by reference).
*10.27 --Quicksilver Resources Management Incentive Plan
*10.28 --Quicksilver Resources Inc. 1999 Stock Option and Retention Stock
Plan
*10.29 --Second Amendment to Second Amended and Restated Credit Agreement,
dated October 6, 1999, by and among Quicksilver Resources Inc., Bank
of America, N.A., Paribas, Frost National Bank, CIBC, Inc., and
Christiana Bank.
*21.1 --List of subsidiaries of Quicksilver Resources Inc.
*23.1 --Consent of Deloitte & Touche LLP
*23.2 --Consent of Weaver and Tidwell, L.L.P.
*23.3 --Consent of Holditch-Reservoir Technologies Consulting Services
23.4 --Consent of Cantey & Hanger, L.L.P. (contained in Exhibit 5.1 hereto)
24.1 --Power of Attorney (included on the signature page to this
Registration Statement)
*27 --Financial Data Schedule
</TABLE>
- --------
*Filed herewith
+Previously filed
<PAGE>
EXHIBIT 1.1
7,000,000 Shares of Common Stock
QUICKSILVER RESOURCES INC.
UNDERWRITING AGREEMENT
----------------------
_________ __, 1999
BEAR, STEARNS & CO. INC.
Dain Rauscher Wessels
Morgan Keegan & Company, Inc.
as Representatives of the several Underwriters
Named in Schedule I hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Quicksilver Resources Inc., a corporation organized and existing under the
laws of Delaware (the "Company"), proposes, subject to the terms and conditions
-------
stated herein, to issue and sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), acting severally and not jointly, an aggregate of
------------
7,000,000 shares (the "Firm Shares") of the Company's common stock, par value
-----------
$.01 per share (the "Common Stock"). The Company also proposes to issue and
------------
sell to the several Underwriters, for the sole purpose of covering over-
allotments in connection with the sale of the Firm Shares, and at the option of
the Underwriters, up to an additional 1,050,000 shares (the "Additional Shares")
-----------------
of Common Stock. The Firm Shares and the Additional Shares are referred to
herein collectively as the "Shares." The Shares are more fully described in the
------
Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and may have filed an amendment or
----------
amendments thereto, on Form S-1 (Registration No. 333-_______), and related
preliminary prospectuses, as amended, for the registration under the Securities
Act of 1933, as amended (the "Securities Act"), of 8,050,000 shares (including
--------------
the Additional Shares) of Common Stock, which registration statement, as so
amended, has been declared effective by the Commission on the date hereof and
copies of which have heretofore been delivered to the Underwriters. The
registration statement, as amended at the time it became effective, including
the exhibits and information (if any) deemed to be a part of the registration
statement at the time of effectiveness pursuant to paragraph (b) of Rule 430A or
Rule
<PAGE>
434 of the rules and regulations of the Commission under the Securities Act
(the "Securities Act Regulations"), and any post-effective amendments thereto
--------------------------
under Rule 462(d) through the Closing Date (as defined below) is hereinafter
called the "Registration Statement." If the Company has filed or is required
----------------------
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Securities Act Regulations registering additional shares of
Common Stock (a "Rule 462(b) Registration Statement"), then, and unless
----------------------------------
otherwise specified, any reference herein to the term "Registration Statement"
shall be deemed to include such Rule 462(b) Registration Statement. Other than
a Rule 462(b) Registration Statement, if any, which became effective upon
filing, no other document with respect to the Registration Statement has
heretofore been filed with the Commission (other than prospectuses filed
pursuant to Rule 424(b) of the Securities Act Regulations, each in the form
heretofore delivered to the Underwriters). No stop order suspending the
effectiveness of the Registration Statement (including any Rule 462(b)
Registration Statement) has been issued and no proceeding for that purpose has
been initiated or, to the Company's knowledge, threatened by the Commission.
The prospectus relating to the Shares, in the form in which it is to be filed
with the Commission pursuant to Rule 424(b) of the Securities Act Regulations,
is hereinafter referred to as the "Prospectus," except that, subject to Sections
----------
4(a) and 4(b) below, if any revised prospectus or prospectus supplement shall be
provided to the Underwriters by the Company for use in connection with the
offering and sale of the Shares (the "Offering") which differs from the
--------
Prospectus (whether or not such revised prospectus or prospectus supplement is
required to be filed by the Company pursuant to Rule 424(b) of the Securities
Act Regulations), the term "Prospectus" shall refer to such revised prospectus
or prospectus supplement, as the case may be, from and after the time it is
first provided to the Underwriters for such use. Any preliminary prospectus or
prospectus subject to completion included in the Registration Statement or filed
with the Commission as described in Rule 430A or Rule 424 of the Securities Act
is hereafter called a "Preliminary Prospectus." All references in this
----------------------
Agreement to the Registration Statement, the Rule 462(b) Registration Statement,
a Preliminary Prospectus and the Prospectus, or any amendments or supplements to
any of the foregoing, shall be deemed to include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
-----
(b) The Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto, at the time the Registration Statement became
effective, at the time any post-effective amendment to the Registration
Statement is filed with the Commission, at the time the Prospectus is first
filed with the Commission, at the time any supplement or amendment to the
Prospectus is filed with the Commission and as of the Closing Date, and
Additional Closing Date, if any (as hereinafter respectively defined), and the
Preliminary Prospectus, and any amendments thereof or supplements thereto, as of
the date thereof, complied and comply in all material respects with the
requirements of the Securities Act and the Securities Act Regulations, and did
not and as of the Closing Date, and Additional Closing Date, if any, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus, as of the date hereof (unless the term
"Prospectus" refers to a prospectus which has been provided to the Underwriters
by the Company for use in connection with the offering of the Shares which
differs from the Prospectus filed with the Commission pursuant to Rule 424(b) of
the Securities Act Regulations, in which case at the time it
2
<PAGE>
is first provided to the Underwriters for such use) and on the Closing Date, and
Additional Closing Date, if any, does not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and warranties
in this Section (1)(b) shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in conformity
with information relating to any Underwriter furnished to the Company in writing
by any Underwriter expressly for use in the Registration Statement or the
Prospectus. Each Preliminary Prospectus and Prospectus filed as part of the
Registration Statement, as part of any amendment thereto or pursuant to Rule 424
under the Securities Act Regulations, if filed by electronic transmission
pursuant to Regulation S-T under the Securities Act, was identical to the copy
thereof delivered to the Underwriters for use in connection with the offer and
sales of the Shares (except as may be permitted by Regulation S-T under the
Securities Act). There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement under the Securities Act that have not been described or filed therein
as required, and there are no business relationships or related-party
transactions directly or indirectly involving the Company or any other person
required to be described in the Prospectus that have not been described therein
as required.
(c) Deloitte & Touche LLP, who has certified certain financial
statements of the Company and has delivered its report with respect to the
Company's audited financial statements included in the Registration Statement,
the Prospectus and any Preliminary Prospectus, are independent public
accountants as required by the Securities Act and the Securities Act
Regulations. Weaver & Tidwell, L.L.P., who has certified certain financial
statements of predecessors of the Company, Mercury Exploration, Michigan Gas
Partners Limited Partnership and predecessor company acquisitions and who has
delivered its report with respect to such predecessor companies' audited
financial statements included in the Registration Statement, the Prospectus and
any Preliminary Prospectuses, are independent public accountants as required by
the Securities Act Regulations.
(d) Holditch-Reservoir Technologies Consulting Services ("Holditch"),
--------
petroleum engineers from whose reserve reports information is set forth in the
Registration Statement, the Prospectus and each Preliminary Prospectus, are
independent petroleum engineers with respect to the Company. The factual
information underlying the estimates of the reserves of the Company which was
provided by the Company to Holditch for purposes of preparing the reserve
information referenced in the Registration Statement, the Prospectus and each
Preliminary Prospectus (the "Reserve Information") including, without
-------------------
limitation, production, volumes, sales prices for production, contractual
pricing provisions under gas sales or marketing contracts, hedging arrangements,
incurred costs of operations and development, and working interest and net
revenue information relating to the Company's ownership interests in properties,
was true and correct in all material respects on the date such information was
furnished to Holditch and as of the date hereof; the estimates of future capital
expenditures and other future exploration and development costs supplied to
Holditch were prepared in good faith and with a reasonable basis. The
information provided to Holditch for purposes of preparing the Reserve
Information was prepared in accordance with customary industry practices.
Except as described in the Prospectus, the Company is not aware
3
<PAGE>
of any facts or circumstances that would result in a material adverse change in
its reserves in the aggregate, or the aggregate present value of estimated
future net revenues or the standardized measure of discounted future net cash
flows therefrom, as described in the Prospectus and reflected in the Reserve
Information. Estimates of the reserves and the present value of the estimated
future net revenues and the discounted future net cash flows derived therefrom
as described in the Prospectus and reflected in the Reserve Information comply
in all material respects to the applicable requirements of Regulation S-X of the
Securities Act Regulations and Industry Guide 2 under the Securities Act.
(e) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or otherwise) affairs or management of the Company, whether or not arising from
transactions in the ordinary course of business, and since the date of the
latest balance sheet presented in the Registration Statement and the Prospectus,
the Company has not incurred or undertaken any liabilities or obligations,
direct or contingent, which are material to the Company, except for liabilities
or obligations which are reflected in the Registration Statement and the
Prospectus.
(f) The Company (i) has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, (ii) has
all requisite corporate power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
to carry on its business as it is currently being conducted and as described in
the Registration Statement and the Prospectus and to own, lease and operate its
properties, (iii) other than MGV Energy, Inc. (the "Subsidiary") has no
subsidiaries and (iv) is duly qualified and in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification except, with respect to clauses (i) (as it relates to good
standing) and (iv), where the failure to be in good standing or so qualified
does not and could not reasonably be expected to (x) individually or in the
aggregate, result in a material adverse effect on the business, prospects,
properties, operations, condition (financial or otherwise), affairs or
management of the Company, (y) interfere with or adversely affect the issuance
or marketability of the Shares pursuant hereto or (z) in any manner draw into
question the validity of this Agreement or the transactions described in the
Prospectus under the caption "Use of Proceeds" (any of the events set forth in
clauses (x), (y) or (z), being referred to as a "Material Adverse Effect").
-----------------------
(g) The Subsidiary (i) has been duly organized and is validly existing as
a corporation in good standing under the laws of the Province of Alberta,
Canada, (ii) has all requisite corporate power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or governmental agencies
and bodies, to carry on its business as it is currently being conducted and as
described in the Registration Statement and the Prospectus and to own, lease and
operate its properties, (iii) the Subsidiary has no subsidiaries and (iv) is
duly qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property
4
<PAGE>
requires such qualification except, with respect to clauses (i) (as it relates
to good standing) and (iv), where the failure to be in good standing or so
qualified does not and could not reasonably be expected to (x) individually or
in the aggregate, result in a material adverse effect on the business,
prospects, properties, operations, condition (financial or otherwise), affairs
or management of the Subsidiary, (y) interfere with or adversely affect the
issuance or marketability of the Shares pursuant hereto or (z) in any manner
draw into question the validity of this Agreement or the transactions described
in the Prospectus under the caption "Use of Proceeds" (any of the events set
forth in clauses (x), (y) or (z), being referred to as a "Material Adverse
----------------
Effect").
- ------
(h) This Agreement and the transactions contemplated hereby have been
duly and validly authorized by the Company. This Agreement has been duly and
validly executed and delivered by the Company, and is the legal, valid, binding
agreement of the Company.
(i) The execution, delivery, and performance of this Agreement, the
issuance, offering and sale of the Shares, and the consummation of the
transactions contemplated hereby and in the Prospectus do not and will not (i)
violate, conflict with or constitute a breach of any of the terms and provisions
of, or constitute a default (or an event which with notice or lapse of time, or
both, would constitute a default) or require consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any properties or
assets of the Company, or result in an acceleration of any indebtedness of the
Company pursuant to (A) the Restated Certificate of Incorporation or By-Laws of
the Company, (B) any bond, debenture, note, indenture, mortgage, deed of trust,
contract or other agreement or instrument to which the Company or any subsidiary
is a party or by which the Company or any of its subsidiaries or their
respective properties or assets are or may be bound, (C) any statute, rule or
regulation applicable to the Company or any of its subsidiaries or any of their
respective properties or assets (D) any judgment, order or decree of any court
or governmental agency or authority having jurisdiction over the Company or any
of its subsidiaries or any of their respective properties or assets. No
consent, approval, authorization, order, registration, filing, qualification,
license or permit of or with (i) any court or any governmental agency or
authority having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties or assets or (ii) any other person is required
for (A) the execution, delivery and performance by the Company of this
Agreement, (B) the issuance, sale and delivery of the Shares to be issued, sold
and delivered by the Company hereunder and the consummation of the transactions
contemplated hereby, except such as have been obtained under the Securities Act
and such consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters.
(j) All of the outstanding shares of Common Stock under this Agreement,
are duly authorized and validly issued, and are fully paid and nonassessable and
were not issued and are not now in violation of or subject to any preemptive or
similar rights. The Shares being sold by the Company under this Agreement are
duly authorized, and, when issued, delivered and paid for in accordance with
this Agreement, will be validly issued, and fully paid and nonassessable, and
will not have been issued in violation of or be subject to any preemptive or
similar rights. As of June 30,
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<PAGE>
1999, after giving effect to the issuance and sale of the Shares pursuant hereto
and the application of the net proceeds from the sale thereof, the Company had
the pro forma capitalization as set forth in the Prospectus under the caption
"Capitalization." 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.
(k) Except as disclosed in the Prospectus, there are not currently, and
will not be as a result of the Offering, any outstanding subscriptions, rights,
warrants, calls, commitments of sale or options to acquire or instruments
convertible into or exchangeable for, any capital stock or other equity interest
of the Company or any of its subsidiaries (other than options issued pursuant to
the Company's stock option plans).
(l) There is (i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or foreign, now
pending or, to the best knowledge of the Company, threatened or contemplated to
which the Company is a party or to which the business or property of the Company
is subject, (ii) no statute, rule, regulation or order that has been enacted,
adopted or issued by any governmental agency or that has been proposed by any
governmental body and (iii) no injunction, restraining order or order of any
nature by a federal or state court or foreign court of competent jurisdiction to
which the Company or any of its subsidiaries is or may be subject or to which
the business, assets, or property of the Company or any of its subsidiaries are
or may be subject, that, in the case of clauses (i), (ii) and (iii) above, is
required to be disclosed in the Registration Statement and the Prospectus and
which could, individually or in the aggregate, result in a Material Adverse
Effect.
(m) The Company has not directly or indirectly (a) taken (other than
through the actions, if any, of the Underwriters) any action designed to, or
that might reasonably be expected to, cause or result in or which constitutes 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 Shares or (b) since the filing of the Preliminary Prospectus
(i) sold, bid for, purchased or paid any person any compensation for soliciting
purchases of, shares of Common Stock or (ii) paid or agreed to pay to any person
any compensation for soliciting another to purchase any other securities of the
Company.
(n) The financial statements, together with the related notes, included
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) present fairly in all material respects the financial
position, results of operations, cash flows, and changes in stockholders' equity
of the Company and its predecessors as of and at the dates indicated and for the
periods specified. Such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, and comply with Regulation S-X of the
Securities Act Regulations. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Consolidated Financial Data,"
"Selected Consolidated Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the audited
financial statements contained in the Prospectus.
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<PAGE>
(o) There are no holders of securities of the Company who, by reason of
the execution by the Company of this Agreement or the consummation by the
Company of the transactions contemplated hereby, have the right to request or
demand that the Company register under the Securities Act or analogous foreign
laws and regulations securities held by them, other than such that have been
duly exercised or waived.
(p) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, (i) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), or be subject to
----------------------
registration under the Investment Company Act, or (ii) a "holding company" or a
"subsidiary company" or an "affiliate" of a holding company within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
(q) The Common Stock is registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is listed
------------
for quotation on the American Stock Exchange, and the Company has taken no
action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the American Stock Exchange, nor has the Company received any
notification that the Commission or the American Stock Exchange is contemplating
terminating such registration or listing.
(r) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby, including, without limitation,
the corporate power and authority to issue, sell and deliver the Shares as
provided herein and the corporate power to effect the use of proceeds from the
Offering as described in the Prospectus.
(s) The Company is not (i) in violation of its Restated Certificate of
Incorporation or By-Laws, (ii) in breach or default (nor does any condition
exist that, with notice, the passage of time or both, would constitute a breach
or default) in the performance of any obligation, agreement or condition
contained in any bond, debenture, note, indenture, mortgage, deed of trust or
other agreement or instrument to which it is a party or by which it is bound or
to which any of its properties is subject, or (iii) in violation of any local,
state or federal law, statute, ordinance, rule, regulation, requirement,
judgment or court decree applicable to the Company or any of its subsidiaries or
any of their respective assets or properties (whether owned or leased).
(t) No action has been taken and no statute, rule, regulation or order
has been enacted, adopted or issued by any governmental agency that prevents the
issuance of the Shares or prevents or suspends the use of the Prospectus; no
injunction, restraining order or order of any kind by a federal or state court
of competent jurisdiction has been issued that prevents the issuance of the
Shares, prevents or suspends the sale of the Shares in any jurisdiction or that
could adversely affect the consummation of the transactions contemplated by this
Agreement or the Prospectus; and every request of any securities authority or
agency of any jurisdiction for additional information has been
7
<PAGE>
complied with in all material respects.
(u) There is (i) no significant unfair labor practice complaint pending
against the Company nor, to the best knowledge of the Company, threatened
against it, before the National Labor Relations Board, any state or local labor
relations board or any foreign labor relations board, and no significant
grievance or significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company nor, to the
best knowledge of the Company, threatened against it, (ii) no strike, labor
dispute, slowdown or stoppage pending against the Company nor, to the best
knowledge of the Company, threatened against it and (iii) to the best knowledge
of the Company, no union representation question existing with respect to the
employees of the Company. To the best knowledge of the Company, no collective
bargaining organizing activities are taking place with respect to the Company.
The Company has not violated (A) any federal, state or local law or foreign law
relating to discrimination in hiring, promotion or pay of employees, (B) any
applicable wage or hour laws or (C) any provision of the Employee Retirement
Income Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA").
-----
(v) The Company is not in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials ("Environmental
-------------
Laws") and the Company has received all permits, licenses and other approvals
required of them under applicable federal and state occupational safety and
health and environmental laws and regulations to conduct its business, and the
Company 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,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect. There has been no storage, disposal, generation,
transportation, handling or treatment of hazardous substances or solid wastes by
the Company (or to the knowledge of the Company any of its predecessors in
interest) at, upon or from any of the property now or previously owned or leased
by the Company in violation of any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit which would require remedial action by the
Company under any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit except for those which have already been remedied, have been
assumed by a third party, or which would not result in, or which would not be
reasonably likely to result, individually or in the aggregate, in a Material
Adverse Effect. There has been no spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any solid wastes or hazardous
substances due to or caused by the Company, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which has
already been remedied, has been assumed by a third party, or which would not
result, or which would not be reasonably expected to result, individually or in
the aggregate, in a Material Adverse Effect. The terms "hazardous substances"
and "solid wastes" shall have the meanings set forth in any currently applicable
local, state, and federal laws or regulations with respect to environmental
protection.
(w) The Company has (i) good and marketable title in fee simple to all
items of real
8
<PAGE>
property and marketable title to all personal property owned by it, free and
clear of all security interests, liens, charges, encumbrances, equities,
restrictions, claims and other defects, except such as are described in the
Prospectus or as would not have a Material Adverse Effect, and (ii) peaceful and
undisturbed possession of its properties under all material leases to which it
is a party as lessee. The Company has good and defensible title (i) to its oil
and gas properties, including its wells and its leasehold interest therein, and
(ii) to its net revenue interests therein in accordance with such leases, free
and clear of all security interests, liens, charges, encumbrances, equities,
restrictions, claims and other defects, except such as are described in the
Prospectus or as would not have a Material Adverse Effect. The working interests
in oil and gas leases held by the Company reflect in all material respects the
right of the Company to explore or receive production from such underlying
leases, and the care taken by the Company with respect to acquiring or otherwise
procuring such leases was generally consistent with standard industry practices
for acquiring or procuring such leases. All material leases to which the Company
is a party are valid and binding, and no default by the Company has occurred and
is continuing thereunder and, to the best knowledge of the Company, no material
defaults by the landlord are existing under any such lease that could result in
a Material Adverse Effect.
(x) Except as described in the Prospectus (i) all royalties, rentals,
deposits and other amounts due on the oil and gas properties of the Company have
been properly and timely paid, and no proceeds from the sale or production
attributable to the oil and gas properties of the Company are currently being
held in suspense by any purchaser thereof, and (ii) there are no claims under
take-or-pay contracts pursuant to which natural gas purchasers have any make-up
rights affecting the interests of the Company in its oil and gas properties.
(y) As of the date hereof, the aggregate undiscounted monetary liability
of the Company for oil or natural gas taken or received under any operating or
other agreement relating to its oil and gas properties that permits any person
to receive any portion of the interest of the Company in oil and natural gas or
to receive cash or other payments to balance any disproportionate allocation of
oil or natural gas could not have a Material Adverse Effect.
(z) The Company has (i) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and has made all
declarations and filings with, all federal, state and local authorities, all
self-regulatory authorities and all courts and other tribunals (each an
"Authorization") necessary to engage in the business conducted by it in the
- --------------
manner described in the Prospectus, except as described in the Prospectus or
where failure to hold such Authorizations would not, individually or in the
aggregate, have a Material Adverse Effect and (ii) no reason to believe that any
governmental body or agency is considering limiting, suspending or revoking any
such Authorization. Except where the failure to be in full force and effect
would not have a Material Adverse Effect, all such Authorizations are valid and
in full force and effect, and the Company is in compliance in all material
respects with the terms and conditions of all such Authorizations and with the
rules and regulations of the regulatory authorities having jurisdiction with
respect thereto.
(aa) Neither the Company nor, to the best knowledge of the Company, any
of its officers, directors, partners, employees, agents or affiliates or any
other person acting on behalf of the
9
<PAGE>
Company, has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, official or employee of any governmental agency (domestic or
foreign), instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other person
who was, is or may be in a position to help or hinder the business of the
Company (or assist the Company in connection with any actual or proposed
transaction), which (i) might subject the Company, or any other individual or
entity, to any damage or penalty in any civil, criminal or governmental
litigation or proceeding (domestic or foreign), (ii) if not given in the past,
might have had a Material Adverse Effect or (iii) if not continued in the
future, might have a Material Adverse Effect.
(bb) All material tax returns required to be filed by the Company in all
jurisdictions have been so filed. All taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due or claimed to be
due from such entities or that are due and payable have been paid, other than
those being contested in good faith through appropriate proceedings diligently
pursued and for which adequate reserves have been provided or those currently
payable without penalty or interest. To the knowledge of the Company, there are
no material proposed additional tax assessments against the Company or the
assets or property of the Company. The Company has made adequate (in the
opinion of the Company) charges, accruals and reserves in the applicable
financial statements included in the Prospectus in respect of all federal, state
and foreign income and franchise taxes for all periods presented therein as to
which the tax liability of the Company has not been finally determined.
(cc) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance 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 accountability for assets; (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 thereto.
(dd) The Company maintains insurance covering its properties,
operations, personnel and businesses with institutions it believes to be
financially responsible. Such insurance insures against such losses and risks as
are adequate in accordance with customary industry practice to protect the
Company and its business. The Company has not received notice from any insurer
or agent of such insurer that substantial capital improvements or other
expenditures will have to be made in order to continue such insurance. All such
insurance is outstanding and duly in force on the date hereof, subject only to
changes made in the ordinary course of business, consistent with past practice,
which do not, either individually or in the aggregate, materially alter the
coverage thereunder or the risks covered thereby. The Company has no reason to
believe that it will not be able (a) to renew its existing insurance coverage as
and when such policies expire or (b) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted or as presently contemplated and at a cost that would not result in a
Material Adverse Effect.
10
<PAGE>
(ee) The Company and any "employee benefit plan" (as defined under ERISA)
established or maintained by the Company or its "ERISA Affiliates" (as defined
below) are in compliance in all material respects with ERISA. "ERISA Affiliate"
---------------
means, with respect to the Company, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company is a member. No "reportable event" (as
----
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company
or any of its ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates, if such "employee
benefit plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA
Affiliates has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company or any of
its ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(ff) Subsequent to the respective dates as of which information is given
in the Prospectus and up to the Closing Date, except as set forth in the
Prospectus, (i) the Company has not incurred any liabilities or obligations,
direct or contingent, that are or will be material, either individually or in
the aggregate, to the Company and its subsidiaries taken as a whole, nor entered
into any transaction not in the ordinary course of business, (ii) there has not
been, either individually or in the aggregate, any change or development that
could reasonably be expected to result in a Material Adverse Effect; (iii) the
Company has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its capital
stock; and (iv) there has been no [material] change in the capital stock, short-
term debt or long-term debt of the Company, except in each case as described in
the Prospectus, or if the Prospectus is not in existence the most recent
Preliminary Prospectus.
(gg) Except pursuant to this Agreement, there are no contracts, agreements
or understandings between the Company and any other person that would give rise
to a valid claim against the Company or any of the Underwriters for a brokerage
commission, finder's fee or like payment in connection with the issuance,
purchase and sale of the Shares.
(hh) The statements (including the assumptions described therein) included
in the Prospectus (i) are within the coverage of Rule 175(b) under the
Securities Act to the extent such data constitute forward looking statements as
defined in Rule 175(c) and (ii) were made by the Company with a reasonable basis
and reflect the Company's good faith estimate of the matters described therein.
(ii) The Company has implemented Year 2000 compliance programs designed to
ensure that its computer systems and applications will function properly beyond
1999. The Company believes that adequate resources have been allocated for this
purpose and expects the Company's Year 2000 date programs to be completed on a
timely basis, except as could not have a Material Adverse
11
<PAGE>
Effect.
(jj) The Company does not have any debt securities or preferred stock
which is rated by any "nationally recognized statistical rating organization" as
defined for purposes of Rule 436(g) under the Securities Act.
(kk) The Company has the power to submit, and pursuant to this Agreement
has legally, validly, effectively and irrevocably submitted, to the jurisdiction
of any federal or state court in the State of New York, County of New York, and
has the power to designate, appoint and empower and pursuant to this Agreement
has legally, validly, effectively and irrevocably designated, appointed and
empowered an agent for service of process in any suit or proceeding based on or
arising under this Agreement in any federal or state court in the State of New
York, County of New York, as provided in Section 13 hereof.
(ll) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters pursuant to this Agreement
shall be deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
The Company acknowledges that each of the Underwriters and, for purposes of
the opinions to be delivered to the Underwriters pursuant to Sections 6(b) and
6(c) hereof, counsel to the Company and counsel to the Underwriters, will rely
upon the accuracy and truth of the foregoing representations and hereby consents
to such reliance.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, (i) the Company agrees to issue and sell [7,000,000] of the Firm Shares
to the Underwriters and the Underwriters, severally and not jointly, agree to
purchase from the Company, at a purchase price per share of $_______, the number
of Firm Shares set forth opposite the respective names of the Underwriters in
Schedule I hereto plus any additional number of Shares which such Underwriter
may become obligated to purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates for,
the Shares shall be made at the office of Jenkens & Gilchrist, a Professional
Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas, 75202, or at such
other place as shall be agreed upon by you and the Company, at 10:00 A.M. on the
third or fourth business day (as permitted by Rule 15c6-1 under the Exchange
Act) (unless postponed in accordance with the provisions of Section 10 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Securities Act
Regulations, the third or fourth business day (as permitted by Rule 15c6-1 under
the Exchange Act) after the determination of the public offering price of the
Shares), or such other time not later than ten business days after such date as
shall be agreed upon by you and the Company (such time and date of payment and
delivery being herein called the "Closing Date"). Payment shall
------------
12
<PAGE>
be made to the Company by wire transfer in same day funds, against delivery to
you for the respective accounts of the Underwriters of certificates for the
Shares to be purchased by them. Certificates for the Shares shall be registered
in such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Closing Date. The Company
will permit you to examine and package such certificates for delivery at least
one full business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the option
to purchase up to 1,050,000 Additional Shares at the same purchase price per
share to be paid by the Underwriters to the Company for the Firm Shares as set
forth in Section 2(a) hereof, for the sole purpose of covering over-allotments,
if any, in the sale of Firm Shares by the Underwriters. This option may be
exercised at any time, in whole or in part, on or before the thirtieth day
following the date of the Prospectus, by written notice to the Company from
Bear, Stearns & Co. Inc. ("Bear Stearns") on behalf of the Underwriters. Such
------------
notice shall set forth the aggregate number of Additional Shares as to which the
option is being exercised and the date and time, as reasonably determined by
Bear Stearns on behalf of the Underwriters, when the Additional Shares are to be
delivered (such date and time being herein sometimes referred to as the
"Additional Closing Date"); provided, however, that the Additional Closing Date
- ------------------------ -------- -------
shall not be earlier than the Closing Date or, if thereafter, earlier than the
second full business day after the date on which the option shall have been
exercised nor later than the eighth full business day after the date on which
the option shall have been exercised (unless such time and date are postponed in
accordance with the provisions of Section 10 hereof). Certificates for the
Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall be the
number which bears the same ratio to the aggregate number of Additional Shares
being purchased as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
Section 11 hereof) bears to 7,000,000 subject, however, to such adjustments to
eliminate any fractional shares as Bear Stearns on behalf of the Underwriters in
its sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer in same
day funds at the offices of Jenkens & Gilchrist, a Professional Corporation,
1445 Ross Avenue, Suite 3200, Dallas, Texas, 75202, or such other location as
may be agreed upon between you and the Company, upon delivery of the
certificates for the Additional Shares to you for the respective accounts of the
Underwriters.
3. Offering. Upon your authorization of the release of the Firm Shares,
--------
the Underwriters propose to offer the Firm Shares for sale to the public upon
the terms set forth in the Prospectus.
13
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4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective on
the date of this Agreement, the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on Rule
434, the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.
The Company will notify you immediately (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission and
(vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will use
its best efforts to prevent the issuance of any such stop order and, if issued,
to obtain the lifting of such order as soon as possible. The Company will not
file any amendment to the Registration Statement or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b)or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or after the
effective date of the Registration Statement to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is required
to be delivered under the Securities Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in the
judgment of the Underwriters or the Company, include an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Securities Act or the Securities Act Regulations, the Company will
notify you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to you) which will
correct such statement or omission and will use its best efforts to have any
amendment to the Registration Statement declared effective as soon as possible.
14
<PAGE>
(c) The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number of copies
of any preliminary prospectus, the Prospectus, the Registration Statement, and
all amendments of and supplements to such documents, if any, as you may
reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you, at
or prior to the time of effectiveness of the Registration Statement, to qualify
the Shares for offering and sale under the securities laws relating to the
offering or sale of the Shares of such jurisdictions as you may designate and to
maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Securities Act Regulations) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement.
(f) During the period of 180 days from the date hereof, the Company will
not, and will not permit any of its affiliates, directly or indirectly, to
issue, sell, offer or agree to sell, grant any option for the sale of, pledge,
make any short sale or maintain any short position, establish or maintain a "put
equivalent position" (within the meaning of Rule 16a-1(h) under the Exchange
Act), enter into any swap, derivative transaction or other arrangement that the
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock (whether any such transaction is to be settled by
delivery of Common Stock, other securities, cash or other consideration) or
otherwise dispose of, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock) or any interest therein or
announce any intention to do any of the foregoing without the prior written
consent of Bear Stearns. The Company will obtain the undertaking of each of its
officers and directors and such of its stockholders as have been heretofore
designated by you and listed on Schedule II attached hereto not to engage in any
of the aforementioned transactions or to announce their intention to do any of
the foregoing on their own behalf, other than the Company's sale of Shares
hereunder and the Company's issuance of Common Stock pursuant to any existing
employee benefit plans or upon the exercise, conversion or exchange of any
currently outstanding stock options or warrants.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
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(h) The Company will apply its net proceeds from the sale of the Shares
as set forth under the caption "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares to be
listed on the American Stock Exchange.
(j) The Company will report the use of its net proceeds from the Offering
to the extent required pursuant to Rule 463 of the Securities Act Regulations.
5. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any Preliminary Prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement) and all other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as herein above
stated), (ii) the issuance, transfer and delivery of the shares to the
underwriters, including any transfer or other taxes payable thereon, (iii) the
qualification of the shares under state or foreign securities or blue sky laws,
including the costs of printing and mailing a preliminary and final "Blue Sky
Survey" and the fees of counsel for the Underwriters and such counsel's
disbursements in relation thereto, (iv) listing the shares on the American Stock
Exchange, (v) filing fees of the Commission and the National Association of
Securities Dealers, Inc. (the "NASD"), (vi) the cost of printing certificates
representing the Shares and (vii) the cost and charges of any transfer agent or
registrar for the common stock.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Jenkens & Gilchrist
("Underwriters' Counsel") pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m., New York time, on the date of this Agreement, or at such later
time and date as shall have been consented to in writing by you; if the Company
shall have elected to rely upon Rule 430A or Rule 434 of the Securities Act
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and, at or prior to the
closing date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof
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shall have been issued and no proceedings therefor shall have been initiated or
threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of Cantey &
Hanger LLP, counsel for the Company, dated the Closing Date addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel, to
the effect that:
(i) The Company and each of its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of the state of incorporation. The Company and each of is subsidiaries is
duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned, leased
or licensed) or the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good standing
which will not in the aggregate have a Material Adverse Effect. The Company and
each of its subsidiaries has all requisite corporate authority to own, lease and
license their respective properties and conduct its business as now being
conducted and as described in the Registration Statement and the Prospectus.
Except as disclosed in the Prospectus, all of the outstanding shares of capital
stock of the Company's subsidiaries are owned beneficially and of record by the
Company and have been validly authorized and issued and are fully paid and
nonassessable and, except as described in the Prospectus, there are no other
equity securities of any subsidiary or any securities convertible into capital
stock of any subsidiary, or are there any options, warrants, or other rights to
acquire capital stock or other equity securities of any subsidiary of the
Company.
(ii) The Company has an authorized capital stock as set forth in the
Registration Statement and the Prospectus. All of the outstanding shares of
Common Stock are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject to any preemptive
rights, and no preemptive rights of stockholders exist with respect to any of
the Company's Common Stock. The Shares to be delivered by the Company on the
Closing Date have been duly and validly authorized and, when delivered by the
Company against payment therefor in accordance with this Agreement, will be duly
and validly issued, fully paid and nonassessable and will not have been issued
in violation of or subject to any preemptive or similar rights. The
certificates for the Common Stock are in due and proper form. The Common Stock,
the Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(iii) The shares of Common Stock currently outstanding are listed,
and the Shares (including the Additional Shares) have been approved for listing,
on the American Stock Exchange, subject only to notice of issuance.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Company.
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(v) There is no litigation or governmental or other action, suit,
proceeding or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or business
of, the Company, which is of a character required to be disclosed in the
Registration Statement and the Prospectus which has not been properly disclosed
therein.
(vi) The execution, delivery, and performance of this Agreement,
the issuance, offering and sale of the Shares and the consummation of the
transactions contemplated hereby by the Company do not and will not violate,
conflict with or constitute a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default), or result in the creation or imposition of any
lien, charge or encumbrance upon any properties or assets of the Company or any
of its subsidiaries or result in any acceleration of any indebtedness of the
Company pursuant to (A) any bond, debenture, note, indenture, mortgage, deed of
trust, contract or other agreement known to such counsel to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective properties or assets are or may be bound (B)
any statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their respective properties or assets or (C) to the best
knowledge of such counsel, any judgment, order or decree of any court or
governmental agency or authority having jurisdiction over the Company or any of
its subsidiaries or any of their respective properties or assets. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any governmental agency or authority having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters (as to which such counsel need express no
opinion) and (2) such as have been made or obtained under the Securities Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial statements
and other financial data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Securities Act and the Securities Act Regulations.
(viii) The Registration Statement is effective under the Securities
Act, and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Securities Act Regulations have been made.
(ix) There are no holders of securities of the Company who, by
reason of the execution by the Company of this Agreement or the consummation by
the Company of the transactions contemplated hereby, have the right to request
or demand that the Company register under the Securities Act or analogous
foreign laws and regulations securities held by them, other than those such that
have been duly exercised or waived.
18
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(x) The statements in the Prospectus which purport to summarize
the provisions of statutes, regulations, contracts, and other documents, insofar
as such statements constitute a summary of documents referred to therein or
matters of law, are, in all material respects, accurate summaries and fairly and
correctly present the information required to be shown with respect to such
matters and documents.
(xi) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or Prospectus which are not so filed or described as
required.
(xii) The Company has all approvals, licenses and permits required
to conduct its business lawfully, except where the failure to so possess would
not have a Material Adverse Effect.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents and the Prospectus and related
matters were discussed and, no facts have come to the attention of such counsel
which would lead such counsel to believe that either the Registration Statement
at the time it became effective (including the information deemed to be part of
the Registration Statement at the time of effectiveness pursuant to Rule 430A(b)
or Rule 434, if applicable), or any amendment thereof made prior to the Closing
Date as of the date of such amendment, contained an 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 as of its date (or any amendment thereof or supplement thereto made
prior to the Closing Date as of the date of such amendment or supplement) and as
of the Closing Date contained or contains an untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements and other
financial data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the federal laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel. The opinion of such counsel for the Company shall state
that the opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying thereon.
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<PAGE>
(c) All proceedings taken in connection with the sale of the Firm Shares
and the Additional Shares as herein contemplated shall be satisfactory in form
and substance to you and to Underwriters' Counsel, and the Underwriters shall
have received from said Underwriters' Counsel a favorable opinion, dated as of
the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(d) At the Closing Date you shall have received a certificate of the
President and Chief Executive Officer and the Chief Financial Officer of the
Company, dated the Closing Date to the effect that (i) the condition set forth
in subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior thereto
have been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with its business 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 material adverse change, in the business, prospects,
properties, operations, condition (financial or otherwise), affairs or
management of the Company, except in each case as described in or contemplated
by the Prospectus.
(e) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter from Deloitte & Touche LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, stating that, among other things: (i) they
are independent certified public accountants with respect to the Company within
the meaning of the Securities Act and the Securities Act Regulations and stating
that the information provided in response to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) in their opinion, the
financial statements and schedules of the Company included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act and the applicable published rules and regulations of the
Commission thereunder; (iii) on the basis of procedures consisting of a reading
of the latest available unaudited interim financial statements of the Company, a
reading of the minutes of meetings and consents of the stockholders and Board of
Directors of the Company and the committees of such Board of Directors
subsequent to December 31, 1998, inquiries of officers and other employees of
the Company who have responsibility for financial and accounting matters of the
Company with respect to transactions and events subsequent to December 31, 1998,
a review of interim financial information in accordance with the standards
established by the American Institute of Certified Public Accountants in
Statement of Auditing Standards No. 71, Interim Financial Information with
respect to the [nine]-month period ended [September]30, 1999 and other specified
procedures and inquiries to a date not more than five days prior to the date of
such letter, nothing has come to their attention that would cause them to
believe that: (A) the unaudited financial statements
20
<PAGE>
and schedules of the Company presented in the Registration Statement and the
Prospectus, including the quarterly information set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," do not comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and, if applicable, the
Exchange Act and the applicable published rules and regulations of the
Commission thereunder or that such unaudited consolidated financial statements
are not fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and the Prospectus;
(B) with respect to the period subsequent to June 30, 1999, there were, as of
the date of the most recently available monthly consolidated financial
statements of the Company, if any, and as of a specified date not more than five
days prior to the date of such letter, any changes in the capital stock or long-
term indebtedness of the Company or any decrease in the net current assets or
shareholders' equity of the Company, in each case as compared with the amounts
shown in the most recent balance sheet presented in the Registration Statement
and the Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter; (C) that during the period from July 1, 1999 to the
date of the most recent available monthly financial statements of the Company,
if any, and to a specified date not more than five days prior to the date of
such letter, there was any decrease, as compared with the corresponding period
in the prior fiscal year, in total revenues, or total or per share net income,
except for decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; (D)
the unaudited pro forma income statements and balance sheets presented in the
Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and, if applicable, the Exchange Act and the applicable published rules and
regulations of the Commission thereunder, that such unaudited pro forma income
statements and balance sheets are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Registration Statement and the Prospectus or that the pro forma adjustments have
not been properly applied to the historical amounts in the compilation of those
statements; or (E) any other unaudited pro forma income statement data or
balance sheet items included in the Registration Statement or Prospectus do not
agree with the corresponding amounts in the pro forma income statements or
balance sheets included in the Registration Statement and Prospectus; and (iv)
they have compared specific dollar amounts, numbers of shares, percentages of
revenues and earnings, and other financial information pertaining to the Company
set forth in the Registration Statement and the Prospectus, which have been
specified by you prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages, and information may be derived from the general
accounting and financial records of the Company or from schedules furnished by
the Company, and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you set forth in such
letter, and found them to be in agreement.
(f) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter from Weaver & Tidwell, L.L.P., independent
accountants for predecessor entities to the Company, including Mercury
Exploration Company and Michigan Gas Partners Limited
21
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Partnership and certain acquired properties (collectively, the "Predecessor
Entities"), dated, respectively, as of the date of this Agreement and as of the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to you, stating that, among other things: (i) they are independent
certified public accountants with respect to the Predecessor Entities within the
meaning of the Securities Act and the Securities Act Regulations and stating
that the information provided in response to Item 10 of the Registration
Statement is correct insofar as it relates to them; (ii) in their opinion, the
financial statements and schedules of the Predecessor Entities included in the
Registration Statement and the Prospectus and covered by their opinion therein
comply as to form in all material respects with the applicable accounting
requirements of the Securities Act and the applicable published rules and
regulations of the Commission thereunder; and (iii) they have compared specific
dollar amounts, number of shares, percentages of revenues and earnings, and
other information pertaining to the Predecessor Entities set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent such amounts, numbers,
percentages and information may be derived from the general accounting records
of the Company or the Predecessor Entities from schedules furnished by the
Company, and excluding any questions requiring an interpretation by legal
counsel, and other appropriate procedures specified by you set forth in such
letter, and found them to be in agreement.
(g) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(h) You shall have received from each person who is a director or officer
of the Company or such stockholder as have been heretofore designated by you and
listed on Schedule II hereto a 180 day lock-up agreement, in form and substance
satisfactory to the Underwriters and Underwriters' Counsel.
(i) At the Closing Date, all of the Shares (including the Additional
Shares) shall have been approved for listing on the American Stock Exchange,
subject only to notice of issuance.
(j) You shall have received from Holditch a letter, dated as of the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to you, stating, among other things (i) they are independent
petroleum engineers with respect to the Company, and (ii) nothing has come to
their attention that would lead them to conclude that the Reserve Information
referenced in the Registration Statement or the Prospectus is inaccurate or
incomplete in any material respect.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Underwriters'
Counsel pursuant to this Section 6 shall not be in all [material] respects
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, all obligations of the Underwriters hereunder may be canceled by you
at, or at any time prior to, the Closing Date and the obligations of the
Underwriters to purchase the Additional Shares may be canceled by you at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company in writing, or by telephone, telex or telegraph,
confirmed in writing.
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7. Indemnification.
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(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 Securities Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or severally, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that the Company will not be liable in any
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such case to the extent but only to the extent that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information referred to
in Section 9(c) furnished to the Company by or on behalf of any Underwriter
through you expressly for use therein. This indemnity agreement will be in
addition to any liability which the Company may otherwise have, including under
this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify and
hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or severally, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein; provided, however, that in no case shall any
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Underwriter be liable or responsible for any amount in excess of
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the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have, including under this Agreement. The Company
acknowledges that the statements set forth in the ___________, ____________ and
___________ paragraphs under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement relating to the
Shares as originally filed or in any amendment thereof, any related Preliminary
Prospectus or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be.
(c) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld. No
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indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
or claims that are the subject matter of such proceeding.
8. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses
24
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of the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act,
officers of the Company who signed the Registration Statement and directors of
the Company) as incurred to which the Company and one or more of the
Underwriters may be subject, in such proportions as is appropriate to reflect
the relative benefits received by the Company and the Underwriters from the
offering of the Shares or, if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and of the Underwriters 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 and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for
25
<PAGE>
contribution may be made against another party or parties, notify each party or
parties from whom contribution may be sought, but the omission to so notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have under this Section 8 or
otherwise. No party shall be liable for contribution with respect to any action
or claim settled without its consent; provided, however, that such consent was
-------- -------
not unreasonably withheld.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the Firm
Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within five calendar days
after such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Sections 5, 7 and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which the
default relates are to be purchased by the non-defaulting Underwriters, or are
to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares.
26
<PAGE>
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including representations of the Company in Section
1, the agreements contained in Section 5, the indemnity agreements contained in
Section 7, the contribution agreements contained in Section 8 and the agreements
contained in Section 13, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8, 11(d) and 13 hereof shall survive the termination of this Agreement,
including termination pursuant to Sections 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7, 8 and 13 hereof shall at all times be in
full force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, on the New
York or American Stock Exchanges by the New York or American Stock Exchanges or
by order of the Commission or any other governmental authority having
jurisdiction; or (C) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may be,
shall have become effective; or (D) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(ii) if there shall have been such change in political, financial or economic
conditions if the effect of any such event in (i) or (ii) as in your judgment
makes it impracticable or inadvisable to proceed with the offering, sale and
delivery of the Firm Shares or the Additional Shares, as the case may be, on the
terms contemplated by the Prospectus.
27
<PAGE>
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all
reasonable out-of-pocket expenses (including the reasonable fees and expenses of
their counsel), incurred by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be
-------
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, NY 10167, Attention: Amos Levy, with a copy to: Jenkens & Gilchrist, a
Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas 75202,
Attention: L. Steven Leshin; if sent to the Company, shall be mailed, delivered,
or telegraphed and confirmed in writing to the Company, 1619 Pennsylvania
Avenue, Fort Worth, Texas 76104, Attention: Chief Financial Officer, with a
copy to Cantey & Hanger, LLP, 801 Cherry Street, Suite 2100, Fort Worth, Texas
76102, Attention: Sloan Blair.
13. Consent to Jurisdiction; Waiver of Immunities; Appointment of
-------------------------------------------------------------
Agent for Service.
- -----------------
(a) The Company:
(i) irrevocably submits to the nonexclusive jurisdiction of any New
York State or federal court sitting in the State of New York, County of New York
and any appellate court from any thereof in any action, suit or proceeding
arising out of or relating to this Agreement or any other document delivered in
connection herewith and irrevocably waives any immunity from such action or
proceeding it may otherwise enjoy in the aforementioned courts;
(ii) irrevocably agrees that all claims in respect of any such
action or proceeding may be heard and determined in such New York State court or
in such federal court;
(iii) irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action or
proceeding; and
28
<PAGE>
(iv) irrevocably designates, appoints and empowers CT Corporation
System, 1633 Broadway, New York, New York 10019 as its designee, appointee and
authorized agent to receive for and on its behalf service of any and all legal
process, summons, notices and documents that may be served in any action, suit
or proceeding brought against it, with respect to its obligations, liabilities
or any other matter arising out of or relating to this Agreement or any other
document delivered in connection herewith and that such service may be made on
such designee, appointee and authorized agent in accordance with legal
procedures prescribed for such courts, and it being understood that the
designation and appointment of CT Corporation System as such authorized agent
shall become effective immediately without any further action; and each further
agrees that to the extent permitted by law, proper service of process upon CT
Corporation System (or its successors as agent for service of process), shall be
deemed in every respect effective service of process upon it in any such action,
suit or proceeding.
(b) Nothing in this Section 13 shall affect the right of any person to
serve legal process in any other manner permitted by law or affect the right of
any person to bring any action or proceeding against the Company or its
properties in the courts of other jurisdictions.
(c) The provisions of this Section 13 shall survive any termination of
this Agreement, in whole or in part.
14. Parties. This Agreement shall insure solely to the benefit of, and
-------
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors, officers and others referred to in Sections 7 and 8, and
their respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
15. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York for contracts made and to
be fully performed in such state without regard to principles of conflicts of
law.
16. Counterparts. This Agreement may be executed and delivered
------------
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
29
<PAGE>
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
QUICKSILVER RESOURCES INC.
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
Dain Rauscher Wessels
Morgan Keegan & Company, Inc.
as representatives of the several Underwriters
Named in Schedule I hereto
c/o Bear Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
By: Bear, Stearns & Co. Inc.
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
30
<PAGE>
SCHEDULE I
Total Number of Firm
Total Number of Firm
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
Bear, Stearns & Co. Inc......................
Dain Rauscher Wessels........................
Morgan Keegan & Company, Inc.................
Total......................... [7,000,000]
31
<PAGE>
SCHEDULE II
Thomas F. Darden
Glenn M. Darden
Houston Kauffmann
William Lamkin
Fred Van Naerssen
Frank Darden
Steven M. Morris
D. Randall Kent
W. Yandell Rogers, III
Mark Warner
Anne Darden Self
Mercury Exploration Company
Quicksilver Energy L.C.
Joint Energy Development Investments Limited Partnership
32
<PAGE>
Exhibit 5.1
October 18, 1999
Quicksilver Resources Inc.
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
Ladies and Gentlemen:
We have assisted in the preparation and filing by Quicksilver Resources
Inc. (the "Company") of a Registration Statement on Form S-1, dated October 18,
1999 (the "Registration Statement"), with the Securities and Exchange
Commission, relating to the sale of up to 8,050,000 shares (the "Shares") of
Common Stock, $0.01 par value (the "Common Stock"), of the Company. A form of
underwriting agreement (the "Underwriting Agreement") is filed as an exhibit to
the Registration Statement.
Our opinion is limited in all respects to the substantive law of the State
of Texas, the federal law of the United States, and the Delaware General
Corporation Law, and we assume no responsibility as to the applicability
thereto, or the effect thereon, of the laws of any other jurisdiction.
As counsel to the Company, we have examined the Registration Statement, the
Company's Restated Certificate of Incorporation, its Bylaws, and other corporate
records of the Company and have made such other investigations as we have deemed
necessary as a basis for the opinion hereinafter set forth. For purposes of
this opinion we have assumed the genuineness of all signatures on all documents,
the authenticity of all documents submitted to us as originals, the conformity
to the originals of all documents submitted to us as copies, and the correctness
and accuracy of all facts set forth in all certificates and documents that we
have examined.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and, when sold and paid for in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
This opinion is limited to the matters stated herein and no opinion is
implied or may be inferred beyond the matters expressly stated. We hereby
consent to the use of our name in the Registration Statement under the caption
"Legal Matters" in the related Prospectus and consent to the filing of this
opinion as an exhibit thereto.
Very truly yours,
CANTEY & HANGER, L.L.P.
By: /s/ Dean A. Tetirick
-----------------------
Dean A. Tetirick, Partner
<PAGE>
EXHIBIT 10.8
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
among
QUICKSILVER RESOURCES INC.,
as Borrower,
NATIONSBANK, N.A.,
as Administrative Agent,
and
The Financial Institutions Listed on Schedule 1 Hereto,
as Banks
$200,000,000
dated as of
March 1, 1999
NATIONSBANC MONTGOMERY SECURITIES LLC,
as Sole Lead Arranger and Book Manager
PARIBAS, as Documentation Agent
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
ARTICLE I
AMENDMENT AND RESTATEMENT
ARTICLE II
TERMS DEFINED
SECTION 2.1. Definitions.................................................... 2
SECTION 2.2. Accounting Terms and Determinations............................ 25
SECTION 2.3. Petroleum Terms................................................ 25
SECTION 2.4. Money.......................................................... 25
ARTICLE III
THE CREDIT
SECTION 3.1. Commitments.................................................... 25
SECTION 3.2. Notes.......................................................... 30
SECTION 3.3. Interest Rates; Payments....................................... 30
SECTION 3.4. Mandatory Prepayments Resulting From Borrowing Base Deficiency. 32
SECTION 3.5. Voluntary Prepayments.......................................... 32
SECTION 3.6. Voluntary Reduction of Commitments............................. 32
SECTION 3.7. Termination of Commitments; Final Maturity..................... 32
SECTION 3.8. Unused Commitment Fee.......................................... 32
SECTION 3.9. Agency and other Fees.......................................... 33
ARTICLE IV
GENERAL PROVISIONS
SECTION 4.1. Delivery and Endorsement of Notes.............................. 33
SECTION 4.2. General Provisions as to Payments.............................. 33
ARTICLE V
CHANGE IN CIRCUMSTANCES
SECTION 5.1. Increased Cost and Reduced Return.............................. 34
SECTION 5.2. Limitation on Types of Loans................................... 36
SECTION 5.3. Illegality..................................................... 36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 5.4. Treatment of Affected Loans.................................... 36
SECTION 5.5. Compensation................................................... 37
SECTION 5.6. Taxes.......................................................... 37
SECTION 5.7. Discretion of Banks as to Manner of Funding.................... 39
ARTICLE VI
BORROWING BASE
SECTION 6.1. Reserve Report; Proposed Borrowing Base........................ 39
SECTION 6.2. Scheduled Redeterminations of the Borrowing Base and
the Conforming Borrowing Base; Procedures and Standards........ 39
SECTION 6.3. Special Redetermination........................................ 40
SECTION 6.4. Borrowing Base Deficiency...................................... 41
SECTION 6.5. Initial Borrowing Base and Conforming Borrowing Base........... 41
ARTICLE VII
COLLATERAL AND GUARANTEES
SECTION 7.1. Security....................................................... 41
SECTION 7.2. Guarantees..................................................... 42
ARTICLE VIII
CONDITIONS PRECEDENT
SECTION 8.1. Conditions to Amendment and Restatement and Initial Borrowing
and Participation in Letter of Credit Exposure................. 42
SECTION 8.2. Conditions to Each Borrowing and each Letter of Credit......... 47
SECTION 8.3. Materiality of Conditions...................................... 47
SECTION 8.4. Termination of Agreement....................................... 47
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
SECTION 9.1. Existence and Power............................................ 48
SECTION 9.2. Credit Party and Governmental Authorization; Contravention..... 48
SECTION 9.3. Binding Effect................................................. 48
SECTION 9.4. Financial Information.......................................... 49
SECTION 9.5. Litigation..................................................... 50
SECTION 9.6. ERISA.......................................................... 50
SECTION 9.7. Taxes and Filing of Tax Returns................................ 50
SECTION 9.8. Ownership of Properties Generally.............................. 51
SECTION 9.9. Mineral........................................................ 51
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 9.10. Licenses, Permits, Etc.................................... 51
SECTION 9.11. Compliance with Law....................................... 52
SECTION 9.12. Full Disclosure........................................... 52
SECTION 9.13. Organizational Structure; Nature of Business.............. 52
SECTION 9.14. Environmental Matters..................................... 52
SECTION 9.15. Burdensome Obligations.................................... 53
SECTION 9.16. Fiscal Year............................................... 53
SECTION 9.17. No Default................................................ 53
SECTION 9.18. Government Regulation..................................... 53
SECTION 9.19. Insider................................................... 54
SECTION 9.20. Gas Balancing Agreements and Advance Payment Contracts.... 54
SECTION 9.21. Closing Documents; Management Agreement................... 54
SECTION 9.22. Year 2000 Matters......................................... 54
ARTICLE X
AFFIRMATIVE COVENANTS
SECTION 10.1. Information............................................... 55
SECTION 10.2. Business of Borrower...................................... 57
SECTION 10.3. Maintenance of Existence.................................. 57
SECTION 10.4. Title Data................................................ 57
SECTION 10.5. Right of Inspection....................................... 57
SECTION 10.6. Maintenance of Insurance.................................. 57
SECTION 10.7. Payment of Taxes and Claims............................... 58
SECTION 10.8. Compliance with Laws and Documents........................ 58
SECTION 10.9. Operation of Properties and Equipment..................... 58
SECTION 10.10. Environmental Law Compliance.............................. 59
SECTION 10.11. ERISA Reporting Requirements.............................. 59
SECTION 10.12. Additional Documents...................................... 60
SECTION 10.13. Environmental Review...................................... 60
SECTION 10.14. Required Purchase Contracts............................... 60
SECTION 10.15. Year 2000 Compatibility................................... 60
ARTICLE XI
NEGATIVE COVENANTS
SECTION 11.1. Incurrence of Debt........................................ 61
SECTION 11.2. Restricted Payments....................................... 61
SECTION 11.3. Negative Pledge........................................... 61
SECTION 11.4. Consolidations and Mergers................................ 61
SECTION 11.5. Asset Dispositions........................................ 61
SECTION 11.6. Amendments to Organizational Documents; Other
Material Agreements....................................... 62
SECTION 11.7. Use of Proceeds........................................... 62
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 11.8. Investments............................................... 62
SECTION 11.9. Transactions with Affiliates.............................. 62
SECTION 11.10. ERISA..................................................... 62
SECTION 11.11. Hedge Transactions........................................ 62
SECTION 11.12. Fiscal Year............................................... 63
SECTION 11.13. Change in Business........................................ 63
ARTICLE XII
FINANCIAL COVENANTS
ARTICLE XIII
DEFAULTS
SECTION 13.1. Events of Default......................................... 63
ARTICLE XIV
AGENTS
SECTION 14.1. Appointment, Powers, and Immunities....................... 65
SECTION 14.2. Reliance by Agents........................................ 66
SECTION 14.3. Defaults.................................................. 66
SECTION 14.4. Rights as Bank............................................ 66
SECTION 14.5. Indemnification........................................... 67
SECTION 14.6. Non-Reliance on Agents and Other Banks.................... 67
SECTION 14.7. Resignation of Agents..................................... 67
ARTICLE XV
MISCELLANEOUS
SECTION 15.1. Notices................................................... 68
SECTION 15.2. No Waivers................................................ 68
SECTION 15.3. Expenses; Indemnification................................. 68
SECTION 15.4. Right of Set-off; Adjustments............................. 69
SECTION 15.5. Amendments and Waivers.................................... 70
SECTION 15.6. Survival.................................................. 70
SECTION 15.7. Limitation on Interest.................................... 70
SECTION 15.8. Invalid Provisions........................................ 71
SECTION 15.9. Waiver of Consumer Credit Laws............................ 71
SECTION 15.10. Assignments and Participations............................ 71
SECTION 15.11. TEXAS LAW................................................. 73
SECTION 15.12. Consent to Jurisdiction; Waiver of Immunities............. 73
SECTION 15.13. Counterparts; Effectiveness............................... 73
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
SECTION 15.14. No Third Party Beneficiaries.............................. 74
SECTION 15.15. COMPLETE AGREEMENT........................................ 74
SECTION 15.16. WAIVER OF JURY TRIAL...................................... 74
SECTION 15.17. Confidentiality........................................... 74
</TABLE>
v
<PAGE>
EXHIBITS
--------
EXHIBIT A FORM OF PLEDGE AGREEMENT
EXHIBIT B FORM OF NOTE
EXHIBIT C FORM OF GUARANTY
EXHIBIT D FORM OF REQUEST FOR BORROWING
EXHIBIT E FORM OF REQUEST FOR LETTER OF CREDIT
EXHIBIT F FORM OF NOTICE OF CONTINUATION OR CONVERSION
EXHIBIT G FORM OF CERTIFICATE OF OWNERSHIP INTERESTS
EXHIBIT H FORM OF CERTIFICATE OF FINANCIAL OFFICER
EXHIBIT I FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
EXHIBIT J FORM OF CERTIFICATE OF EFFECTIVENESS
SCHEDULES
---------
SCHEDULE 1 FINANCIAL INSTITUTIONS
SCHEDULE 2 INVESTMENTS
SCHEDULE 3 LITIGATION
SCHEDULE 4 CAPITALIZATION
SCHEDULE 5 ENVIRONMENTAL DISCLOSURE
vi
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is
---------
entered into as of the 1/st/ day of March, 1999, among QUICKSILVER RESOURCES
INC., a Delaware corporation ("Borrower"), NATIONSBANK, N.A., successor by
--------
merger to NationsBank of Texas, N.A., as Administrative Agent ("Administrative
--------------
Agent"), and the financial institutions listed on Schedule 1 hereto as Banks
- ----- ----------
(individually a "Bank" and collectively "Banks").
---- -----
W I T N E S S E T H:
-------------------
WHEREAS, Borrower, NationsBank, N.A., successor by merger to NationsBank of
Texas, N.A., as Agent, and NationsBank, N.A., successor by merger to NationsBank
of Texas, N.A., as the sole Bank ("NationsBank"), are parties to that certain
-----------
Amended and Restated Credit Agreement dated as of April 9, 1998, pursuant to
which NationsBank provided certain loans and other extensions of credit to
Borrower (the "Existing QRI/NationsBank Credit Agreement"); and
-----------------------------------------
WHEREAS, MSR Exploration Ltd., a Delaware corporation ("MSR"), Paribas
---
(formerly known as Banque Paribas), as Agent and Paribas ("Paribas") and the
-------
other financial institutions named therein are parties to that certain Credit
Agreement dated as of October 31, 1997, pursuant to which Paribas and such other
financial institutions provided a revolving credit facility to MSR in the
maximum aggregate amount of $25,000,000 (the "MSR/Paribas Credit Agreement");
----------------------------
and
WHEREAS, immediately prior to the execution of this Agreement, NationsBank
has entered into Assignment and Acceptance Agreements (collectively, the
"Assignments") with each of Paribas, Bank One, Texas, N.A. ("Bank One"), and
----------- --------
Frost National Bank ("FNB," and together with Paribas and Bank One collectively
---
referred to herein as the "New Banks"), pursuant to which NationsBank assigned
---------
to the New Banks, and each of the New Banks (i) acquired from NationsBank a
portion of NationsBank's Commitment and a portion of the Revolving Loan and
Letter of Credit Exposure held by NationsBank under and as defined in the
Existing QRI/NationsBank Credit Agreement and each of the other Loan Papers (as
defined in the Existing QRI/NationsBank Credit Agreement), (ii) assumed and
agreed to perform a portion of NationsBank's obligations under the Existing
QRI/NationsBank Credit Agreement and the other Loan Papers (as defined therein),
and (iii) became a party to, and a "Bank" under, the Existing QRI/NationsBank
Credit Agreement and the other Loan Papers (as defined therein); and
WHEREAS, after giving effect to the Assignments and the amendment and
restatement of the Existing QRI/NationsBank Credit Agreement pursuant to the
terms hereof, the Commitment Percentage (as herein defined) of each Bank
(including NationsBank and each New Bank) hereunder will be as set forth on
Schedule 1 hereto; and
- ----------
WHEREAS, pursuant to the Merger Documents (as herein defined), MSR will
merge with and into Borrower with Borrower being the surviving entity (the
"Merger"); and
------
1
<PAGE>
WHEREAS, pursuant to the terms of the Merger and the Merger Documents,
Borrower will assume and agree to perform as primary obligor, all obligations of
MSR under the MSR/Paribas Credit Agreement; and
WHEREAS, immediately after giving effect to the Assignments and the Merger,
the parties hereto desire to amend and restate the Existing QRI/NationsBank
Credit Agreement in the form of this Agreement and Borrower desires to obtain
Borrowings (as herein defined) (a) to refinance the indebtedness under the
Existing QRI/NationsBank Credit Agreement, (b) to refinance the indebtedness
assumed by Borrower under the MSR/Paribas Credit Agreement, (c) to increase from
$100,000,000 to $200,000,000 the aggregate Commitments of Banks, and (d) for
other purposes permitted herein; and
WHEREAS, subject to and upon the terms and conditions herein contained,
Banks are willing to provide the credit facility described herein; and
WHEREAS, pursuant to Article XIV of this Agreement, NationsBank, N.A. has
-----------
been appointed Administrative Agent for Banks hereunder; and
WHEREAS, pursuant to certain separate agreements among NationsBank, N.A.,
NationsBanc Montgomery Securities LLC ("NMS") and Borrower, NMS has been
---
appointed Sole Lead Arranger and Book Manager for the credit facility provided
herein.
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, Administrative Agent, and Banks agree as follows:
ARTICLE I
AMENDMENT AND RESTATEMENT
Subject to (i) Section 8.4 hereof, and (ii the satisfaction of each
-----------
condition precedent contained in Section 8.1 hereof, the satisfaction of which
-----------
shall be evidenced by the execution by Borrower and Administrative Agent of the
Certificate of Effectiveness (as hereinafter defined), the Existing
QRI/NationsBank Credit Agreement shall be amended and restated as of the Closing
Date in the form of this Agreement.
ARTICLE II
TERMS DEFINED
SECTION 2.1. Definitions. The following terms, as used herein, have the
-----------
following meanings:
2
<PAGE>
"Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest
------------------------
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) determined by Administrative Agent to be equal to the
quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan
for such Interest Period by (b) 1 minus the Reserve Requirement for such
Eurodollar Loan for such Interest Period.
"Administrative Agent" means NationsBank, N.A. in its capacity as
--------------------
administrative agent for Banks hereunder or any successor thereto.
"Advance Payment Contract" means any contract whereby any Credit Party
------------------------
either (a) receives or becomes entitled to receive (either directly or
indirectly) any payment (an "Advance Payment") to be applied toward payment of
---------------
the purchase price of Hydrocarbons produced or to be produced from Mineral
Interests owned by any Credit Party and which Advance Payment is paid or to be
paid in advance of actual delivery of such production to or for the account of
the purchaser regardless of such production, or (b) grants an option or right of
refusal to the purchaser to take delivery of such production in lieu of payment,
and, in either of the foregoing instances, the Advance Payment is, or is to be,
applied as payment in full for such production when sold and delivered or is, or
is to be, applied as payment for a portion only of the purchase price thereof or
of a percentage or share of such production; provided that inclusion of the
-------- ----
standard "take or pay" provision in any gas sales or purchase contract or any
other similar contract shall not, in and of itself, constitute such contract as
an Advance Payment Contract for the purposes hereof.
"Affiliate" means, as to any Person, any Subsidiary of such Person, or any
---------
other Person which, directly or indirectly, controls, is controlled by, or is
under common control with, such Person and, with respect to any Credit Party,
means, any director, executive officer, general partner or manager of such
Credit Party and any Person who holds five percent (5%) or more of the voting
stock, partnership interests, membership interests or other ownership interests
of such Credit Party. For the purposes of this definition, "control" (including,
with correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
membership interests or partnership interests, or by contract or otherwise.
"Agent" means Administrative Agent, Sole Lead Arranger or Book Manager and
-----
"Agents" means Administrative Agent, Sole Lead Arranger and Book Manager,
------
collectively.
"Agreement" means this Second Amended and Restated Credit Agreement as the
---------
same may hereafter be modified, amended or supplemented from time to time.
"Applicable Environmental Law" means any federal, state or local law,
----------------------------
common law, ordinance, regulation or policy, as well as order, decree, permit,
judgment or injunction issued, promulgated, approved, or entered thereunder,
relating to the environment, health and safety, or Hazardous Substances
(including, without limitation, the use, handling, transportation, production,
disposal, discharge or storage thereof) or to industrial hygiene or the
environmental conditions on, under, or about any real property owned, leased or
operated at any time by any Credit Party or any
3
<PAGE>
real property owned, leased or operated by any other party including, without
limitation, soil, groundwater, and indoor and ambient air conditions.
"Applicable Lending Office" means, for each Bank and for each Type of Loan,
-------------------------
the "Lending Office" of such Bank (or of an affiliate of such Bank) designated
for such Type of Loan on the signature pages hereof or such other office of such
Bank (or an affiliate of such Bank) as such Bank may from time to time specify
to Administrative Agent and Borrower by written notice in accordance with the
terms hereof as the office by which Loans of such Type are to be made and
maintained.
"Applicable Margin" means, on any date, with respect to each Eurodollar
-----------------
Loan, an amount determined by reference to the ratio of Outstanding Credit to
the Borrowing Base on such date in accordance with the table below:
<TABLE>
<CAPTION>
=====================================================================
Ratio of Outstanding Applicable Margin for
Credit to Conforming Borrowing Base Eurodollar Tranches
<S> <C>
---------------------------------------------------------------------
*.50 to 1 1.125%
---------------------------------------------------------------------
** .50 to 1 * .75 to 1 1.375%
---------------------------------------------------------------------
** .75 to 1 * 1.00 to 1 1.625%
---------------------------------------------------------------------
** 1.00 to 1 2.250%
=====================================================================
</TABLE>
* less than or equal to
** greater than
"Approved Petroleum Engineer" means LaRoche Petroleum Consultants, Ltd.,
---------------------------
Albrecht & Associates, Inc. and S. A. Holditch and Associates, Inc., or any
other reputable firm of independent petroleum engineers as shall be selected by
Borrower and approved by Required Banks, such approval not to be unreasonably
withheld.
"Assignment and Acceptance Agreement" has the meaning given such term in
-----------------------------------
Section 15.10(a).
- ----------------
"Assignment of Notes and Liens" means those certain Assignments of Notes
-----------------------------
and Liens and Amendments to Mortgages to be entered into among Borrower,
Administrative Agent and Existing MSR Agent, in form and substance acceptable to
Administrative Agent, pursuant to which the notes and instruments evidencing all
indebtedness outstanding under the MSR/Paribas Credit Agreement and all Liens
securing payment thereof (including, without limitation, the Existing MSR
Mortgages) shall be assigned to Administrative Agent for the ratable benefit of
each Bank to secure the Obligations.
"Assignments" has the meaning assigned to such term in the recitals hereto.
-----------
"Authorized Officer" means, as to any Person, its Chief Executive Officer,
------------------
its President, its Chief Financial Officer, any of its Vice Presidents, its
Treasurer or its corporate Secretary.
"Availability" means, as of any date, the remainder of (a) the Borrowing
------------
Base in effect on such date, minus (b) the Outstanding Credit on such date.
4
<PAGE>
"Bank" means any financial institution reflected on Schedule 1 hereto as
---- ----------
having a Commitment and its successors and permitted Assignees, and "Banks"
-----
shall mean all Banks.
"Bank One" means Bank One, Texas, N.A.
--------
"Base Rate" means, for any day, the rate per annum equal to the higher of
---------
(a) the Federal Funds Rate for such day plus one-half of one percent (.5%) and
(b) the Prime Rate for such day. Any change in the Base Rate due to a change in
the Prime Rate or the Federal Funds Rate shall be effective automatically and
without notice to Borrower or any Bank on the effective date of such change in
the Prime Rate or Federal Funds Rate.
"Base Rate Loan" means the portion of the principal of the Loan bearing
--------------
interest with reference to the Base Rate.
"Book Manager" means NationsBanc Montgomery Securities LLC in its capacity
------------
as book manager for the credit facility hereunder or any successor thereto.
"Borrower" means Quicksilver Resources Inc., a Delaware corporation.
--------
"Borrower Pledge Agreement" means a Pledge Agreement substantially in the
-------------------------
form of Exhibit A hereto (with applicable conforming changes) to be executed by
---------
Borrower pursuant to which Borrower shall pledge to Administrative Agent, for
the ratable benefit of Banks, one-hundred percent (100%) of the issued and
outstanding Equity of each existing or hereafter acquired Subsidiary of Borrower
to secure the Obligations.
"Borrowing" means any disbursement to Borrower under, or to satisfy the
---------
obligations of any Credit Party under, any of the Loan Papers. Any Borrowing
which will constitute a part of the Base Rate Loan is referred to herein as a
"Base Rate Borrowing," and any Borrowing which will constitute a Eurodollar Loan
-------------------
is referred to herein as a "Eurodollar Borrowing."
--------------------
"Borrowing Base" means the loan value attributable to certain of Borrower's
--------------
Mineral Interests as determined in accordance with Article VI hereof.
----------
"Borrowing Base Deficiency" means, as of any date, the amount, if any, by
-------------------------
which the Outstanding Credit on such date exceeds the Borrowing Base in effect
on such date; provided, that, for purposes of determining the existence and
-------- ----
amount of any Borrowing Base Deficiency, Letter of Credit Exposure will not be
deemed to be outstanding to the extent it is secured by cash in the manner
contemplated by Section 3.1(b).
--------------
"Borrowing Base Properties" means all Mineral Interests evaluated by Banks
-------------------------
for purposes of establishing the Borrowing Base. The Borrowing Base Properties
on the Closing Date are described in the Property Description and constitute all
of the Mineral Interests described in the Initial Reserve Reports.
5
<PAGE>
"Borrowing Date" means the Eurodollar Business Day or the Domestic Business
--------------
Day, as the case may be, upon which the proceeds of any Borrowing are made
available to Borrower or to satisfy any obligation of any Credit Party.
"Certificate of Effectiveness" means a Certificate of Effectiveness in the
----------------------------
form of Exhibit J attached hereto to be executed by Borrower and Administrative
---------
Agent upon the satisfaction of each of the conditions precedent contained in
Section 8.1 hereof.
- -----------
"Certificate of Ownership Interests" means a Certificate of Ownership
----------------------------------
Interests in the form of Exhibit G attached hereto to be executed and delivered
---------
by an Authorized Officer of Borrower pursuant to Section 8.1(a)(xvi) hereof.
-------------------
"Change of Control" means that, for any reason, the Darden Group fails to
-----------------
own and control, directly or indirectly, fifty-one percent (51%) or more of the
outstanding voting power of the issued and outstanding capital stock of every
class of Borrower.
"Closing Date" means the date upon which all of the conditions precedent
------------
set forth in Section 8.1 have been satisfied, and Borrower and Administrative
-----------
Agent have executed and delivered the Certificate of Effectiveness; provided,
--------
that, in no event shall such date be later than March 31, 1999.
- ----
"Closing Documents" means the Merger Documents and all other material
-----------------
documents, instruments and agreements executed or delivered by Borrower, MSR, or
any Credit Party in connection with or otherwise pertaining to the Merger or the
Closing Transactions.
"Closing Transactions" means the transactions to occur on the Closing Date
--------------------
pursuant to the Closing Documents and this Agreement, including, without
limitation, (a) the Merger, (b) the termination of the MSR/Paribas Credit
Agreement, including, without limitation, (i) the refinancing of all Debt of MSR
under the MSR/Paribas Credit Agreement with proceeds of the Loan, (ii)
cancellation of all letters of credit outstanding thereunder, and (iii) the
assignment of all Liens securing the obligations of MSR (including, without
limitation, the Existing MSR Mortgages) under the MSR/Paribas Credit Agreement
to Administrative Agent, for the ratable benefit of each Bank, to secure the
Obligations, (c) the cancellation of the Mercury Pledge Agreement, the QELC
Pledge Agreement, the Darden Family Pledge Agreements and the Facility
Guarantees (as each such term is defined in the Existing QRI/NationsBank Credit
Agreement), and (d) the payment of all fees and expenses of Administrative Agent
and its Affiliates in connection with the credit facility provided herein.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Collateral Assignment" means, collectively, that certain (i) Second
---------------------
Amended and Restated Collateral Assignment of Promissory Notes and Contract
Rights dated as of the Closing Date executed by Borrower in favor of
Administrative Agent, and (ii) Amended and Restated Collateral Assignment of
Promissory Notes and Contract Rights dated as of the Closing Date executed by
Borrower in favor of Administrative Agent, pursuant to which Borrower assigns to
Administrative Agent and grants Administrative Agent a security interest in
certain of the Section 29 Documents.
6
<PAGE>
"Commitment" means, with respect to any Bank, the commitment of such Bank
----------
to lend its Commitment Percentage of the Total Commitment to Borrower pursuant
to Section 3.1 hereof, as such Commitment may be terminated and reduced from
-----------
time to time in accordance with the provisions hereof. On the Closing Date the
amount of each Bank's Commitment is the amount set forth opposite such Bank's
name on Schedule 1 hereto; provided, that, after giving effect to any Assignment
---------- -------- ----
and Acceptance Agreement, the Commitment of each Bank shall be the amount set
forth in the Register maintained by Administrative Agent pursuant to Section
-------
15.10(b).
- --------
"Commitment Percentage" means, with respect to each Bank, the Commitment
---------------------
Percentage for such Bank set forth on Schedule 1 hereto; provided, that, after
---------- -------- ----
giving effect to any Assignment and Acceptance Agreement, the Commitment of each
Bank shall be the amount set forth in the Register maintained by Administrative
Agent pursuant to Section 15.10(b).
----------------
"Conforming Borrowing Base" has the meaning set forth in Section 6.1
------------------------- -----------
hereof.
"Consolidated Current Assets" means, for any Person at any time, the
---------------------------
current assets of such Person and its Consolidated Subsidiaries at such time,
plus, in the case of Borrower, the Availability at such time.
"Consolidated Current Liabilities" means, for any Person at any time, the
--------------------------------
current liabilities of such Person and its Consolidated Subsidiaries at such
time, but, in the case of Borrower, excluding current maturities of Long Term
Debt of Borrower and its Consolidated Subsidiaries outstanding at such time.
"Consolidated Subsidiary" or "Consolidated Subsidiaries" means, for any
----------------------- -------------------------
Person, any Subsidiary or other entity the accounts of which would be
consolidated with those of such Person in its consolidated financial statements.
"Consumers Power" means Consumers Power Company, a Michigan corporation.
---------------
"Consumers Power Contract" means that certain Gas Purchase Agreement dated
------------------------
October 1, 1994, by and between Mercury, as seller, and Consumers Power, as
buyer, pursuant to which Consumers Power has agreed to purchase certain gas
owned or controlled by Mercury.
"Continue," "Continuation," and "Continued" shall refer to the continuation
-------- ------------ ---------
pursuant to Section 3.3(c) and/or Article V hereof of a Eurodollar Loan from one
-------------- ---------
Interest Period to the next Interest Period.
"Convert," "Conversion," and "Converted" shall refer to a conversion
------- ---------- ---------
pursuant to Section 3.3(c) and/or Article V hereof of one Type of Loan into
-------------- ---------
another Type of Loan.
"Credit Parties" means, collectively, Borrower and each Subsidiary of
--------------
Borrower, and "Credit Party" means any one of the foregoing.
------------
"Darden Group" means, collectively, Mercury, QELC, Frank Darden, Anne
------------
Darden Self, Glenn Darden and Thomas Darden and their respective designees,
heirs and estates.
7
<PAGE>
"Debt" means, for any Person at any time, without duplication, (a) all
----
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (c)
all other indebtedness (including capitalized lease obligations, other than
usual and customary oil and gas leases) of such Person on which interest charges
are customarily paid or accrued, (d) all Guarantees by such Person, (e) the
unfunded or unreimbursed portion of all letters of credit issued for the account
of such Person, (f) any amount owed by such Person representing the deferred
purchase price of property or services other than accounts payable incurred in
the ordinary course of business and in accordance with customary trade terms and
which have not been outstanding for more than ninety (90) days past the invoice
date, (g) all obligations of such Person secured by a Lien on any property or
asset owned or held by that Person regardless of whether the indebtedness
secured thereby shall have been assumed by that Person or is non-recourse to the
credit of that Person, and (h) all liability of such Person as a general partner
of a partnership for obligations of such partnership of the nature described in
(a) through (g) preceding.
"Default" means any condition or event which constitutes an Event of
-------
Default or which with the giving of notice, lapse of time or both would, unless
cured or waived, become an Event of Default.
"Default Rate" means, in respect of any principal of the Loan or any other
------------
amount payable by Borrower under any Loan Paper which is not paid when due
(whether at stated maturity, by acceleration, or otherwise), a rate per annum
during the period commencing on the due date until such amount is paid in full
equal to the sum of (i) three percent (3%), plus (ii) the Base Rate as in effect
from time to time (provided, that if such amount in default is principal of a
-------- ----
Eurodollar Borrowing and the due date is a day other than the last day of an
Interest Period therefor, the "Default Rate" for such principal shall be, for
------------
the period from and including the due date and to but excluding the last day of
the Interest Period therefor, (a) three percent (3%), plus (b) the Applicable
Margin, plus (c) the Eurodollar Rate for such Borrowing for such Interest Period
as provided in Section 3.3 hereof, and thereafter, the rate provided for above
-----------
in this definition).
"Distribution" by any Person, means (a) with respect to any stock issued by
------------
such Person or any partnership, joint venture, limited liability company,
membership or other interest of such Person, the retirement, redemption,
purchase, or other acquisition for value of any such stock or partnership, joint
venture, limited liability company, membership or other interest, (b) the
declaration or payment of any dividend or other distribution on or with respect
to any stock, partnership, joint venture, limited liability company, membership
or other interest of any Person, and (c) any other payment by such Person with
respect to such stock, partnership, joint venture, limited liability company,
membership or other interest of such Person.
"Domestic Business Day" means any day except a Saturday, Sunday or other
---------------------
day on which national banks in Dallas, Texas, are authorized by Law to close.
"Domestic Lending Office" means, as to each Bank, (a) its office located at
-----------------------
its address identified on Schedule 1 hereto as its Domestic Lending Office, (b)
----------
its office located at its address identified on the Register (as defined in
Section 15.10(b)) as its Domestic Lending Office, or (c) such other office as
- ----------------
such Bank may hereafter designate as its Domestic Lending Office by notice to
Borrower and Administrative Agent.
8
<PAGE>
"Eligible Assignee" means (i) a Bank, (ii) an Affiliate of a Bank, and
-----------------
(iii) any other Person approved by Administrative Agent and, unless an Event of
Default has occurred and is continuing at the time any assignment is effected in
accordance with Section 15.10, Borrower, such approval not to be unreasonably
-------------
withheld or delayed by Borrower and such approval to be deemed given by Borrower
if no objection is received by the assigning Bank and Administrative Agent from
Borrower within two (2) Domestic Business Days after notice of such proposed
assignment has been provided by the assigning Bank to Borrower; provided,
--------
however, that neither Borrower nor an Affiliate of Borrower shall qualify as an
- -------
Eligible Assignee.
"Environmental Complaint" means any complaint, summons, citation, notice,
-----------------------
directive, order, claim, litigation, investigation, proceeding, judgment, letter
or other communication from any federal, state or municipal authority or any
other party against any Credit Party involving (a) a Hazardous Discharge from,
onto or about any real property owned, leased or operated at any time by any
Credit Party, (b) a Hazardous Discharge caused, in whole or in part, by any
Credit Party or by any Person acting on behalf of or at the instruction of any
Credit Party, or (c) any violation of any Applicable Environmental Law by any
Credit Party.
"Equity" means shares of capital stock or a partnership, profits, capital,
------
member or other equity interest, or options, warrants or any other rights to
substitute for or otherwise acquire the capital stock or a partnership, profits,
capital, member or other equity interest of any Credit Party.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"ERISA Affiliate" means any corporation or trade or business under common
---------------
control with any Credit Party as determined under section 4001(a)(14) of ERISA.
"Eurodollar Business Day" means any Domestic Business Day on which
-----------------------
commercial banks are open for international business (including dealings in
dollar deposits) in the applicable eurodollar interbank market.
"Eurodollar Lending Office" means, as to each Bank, (a) its office, branch
-------------------------
or affiliate located at its address identified on Schedule 1 hereto as its
----------
Eurodollar Lending Office, (b) its office, branch or affiliate located at its
address identified on the Register (as defined in Section 15.10(b)) as its
----------------
Eurodollar Lending Office, or (c) such other office, branch or affiliate of such
Bank as it may hereafter designate as its Eurodollar Lending Office by notice to
Borrower and Administrative Agent.
"Eurodollar Loans" means Loans that bear interest at rates based upon the
----------------
Adjusted Eurodollar Rate.
"Eurodollar Rate" means, for any Loan which is the subject of a Eurodollar
---------------
Tranche for any Interest Period therefor, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or
any successor page) as the London interbank offered rate for deposits in Dollars
at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior
to the first day of such Interest Period for a term comparable to such Interest
Period. If for any reason such rate is not available, the term "Eurodollar Rate"
---------------
shall mean, for the principal amount of the Loan which is the subject of a
Eurodollar Tranche for any Interest Period therefor, the rate per
9
<PAGE>
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Reuters Screen LIBO Page as the London interbank offered rate for deposits in
Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business
Days prior to the first day of such Interest Period for a term comparable to
such Interest Period; provided, however, if more than one rate is specified on
-------- -------
Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of
all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%).
"Events of Default" has the meaning set forth in Section 13.1.
----------------- ------------
"Exhibit" refers to an exhibit attached to this Agreement and incorporated
-------
herein by reference, unless specifically provided otherwise.
"Existing Credit Agreements" means the Existing QRI/NationsBank Credit
--------------------------
Agreement and the MSR/Paribas Credit Agreement.
"Existing MSR Agent" means Paribas, as Agent under the MSR/Paribas Credit
------------------
Agreement.
"Existing MSR Mineral Interests" means the Mineral Interests owned by MSR
------------------------------
or its Subsidiaries on the Closing Date prior to giving effect to the Closing
Transactions.
"Existing MSR Mortgages" means the mortgages, deeds of trust, security
----------------------
agreements, assignments, pledges and other documents, instruments and agreements
described in each of the Assignments of Notes and Liens, which establish Liens
on certain of the Existing MSR Mineral Interests to secure MSR's obligations
under the MSR/Paribas Credit Agreement.
"Existing QRI/NationsBank Credit Agreement" has the meaning assigned to
-----------------------------------------
such term in the recitals hereto.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Domestic Business Day next
succeeding such day; provided that (a) if the day for which such rate is to be
-------- ----
determined is not a Domestic Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Domestic Business
Day as so published on the next succeeding Domestic Business Day, and (b) if
such rate is not so published on such next succeeding Domestic Business Day, the
Federal Funds Rate for any day shall be the average rate charged to
Administrative Agent on such day on such transactions as determined by
Administrative Agent.
"Financial Officer" of any Person means its Chief Financial Officer;
-----------------
provided, that if no Person serves in such capacity, "Financial Officer" shall
- -------- ---- -----------------
mean the highest ranking executive officer of such Person with responsibility
for accounting, financial reporting, cash management and similar functions.
"Fiscal Quarter" means the three (3) month periods ending on March 31, June
--------------
30, September 30 and December 31 of each Fiscal Year.
10
<PAGE>
"Fiscal Year" means a twelve (12) month period ending December 31.
-----------
"FNB" means Frost National Bank.
---
"GAAP" means those generally accepted accounting principles and practices
----
which are recognized as such by the American Institute of Certified Public
Accountants acting through its Accounting Principles Board or by the Financial
Accounting Standards Board or through other appropriate boards or committees
thereof and which are consistently applied for all periods after the Closing
Date so as to properly reflect the financial condition, and the results of
operations and changes in financial position, of a Person and its Consolidated
Subsidiaries, except that any accounting principle or practice required to be
changed by the said Accounting Principles Board or Financial Accounting
Standards Board (or other appropriate board or committee of the said Boards) in
order to continue as a generally accepted accounting principle or practice may
be so changed.
"Gas Balancing Agreement" means any agreement or arrangement whereby any
-----------------------
Credit Party, or any other party having an interest in any Hydrocarbons to be
produced from Mineral Interests in which any Credit Party owns an interest, has
a right to take more than its proportionate share of production therefrom.
"Governmental Authority" means any court or governmental department,
----------------------
commission, board, bureau, agency, or instrumentality of any nation or of any
province, state, commonwealth, nation, territory, possession, county, parish, or
municipality, whether now or hereafter constituted or existing.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
---------
such Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt or other obligation (whether arising by virtue of partnership arrangements,
by agreement to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions, by "comfort letter"
or other similar undertaking of support or otherwise) or (b) entered into for
the purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
-------- ----
not include endorsements for collection or deposit in the ordinary course of
business.
"Hazardous Discharge" means any releasing, spilling, leaking, pumping,
-------------------
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping of any Hazardous Substance from or onto any real property
owned, leased or operated at any time by any Credit Party or any real property
owned, leased or operated by any other party.
"Hazardous Substance" means any pollutant, toxic substance, hazardous
-------------------
waste, compound, element or chemical that is defined as hazardous, toxic,
noxious, dangerous or infectious pursuant to any Applicable Environmental Law or
which is otherwise regulated by any Applicable Environmental Law or is required
to be investigated and/or remediated by or pursuant to any Applicable
Environmental Law.
11
<PAGE>
"Hedge Transaction" means any commodity, interest rate, currency or other
-----------------
swap, option, collar, futures contract or other contract pursuant to which a
Person hedges risks related to commodity prices, interest rates, currency
exchange rates, securities prices or financial market conditions. Hedge
Transactions expressly includes Oil and Gas Hedge Transactions.
"Hydrocarbons" means oil, gas, casinghead gas, drip gasolines, natural
------------
gasoline, condensate, distillate, and all other liquid and gaseous hydrocarbons
produced or to be produced in conjunction therewith, and all products, by-
products and all other substances derived therefrom or the processing thereof,
and all other minerals and substances, including, but not limited to, sulphur,
lignite, coal, uranium, thorium, iron, geothermal steam, water, carbon dioxide,
helium, and any and all other minerals, ores, or substances of value, and the
products and proceeds therefrom, including, without limitation, all gas
resulting from the in-situ combustion of coal or lignite.
"Initial Borrowing Base" means a Borrowing Base in the amount of
----------------------
$85,000,000, which shall be in effect during the period commencing on the
Closing Date and continuing until the first Redetermination after the Closing
Date.
"Initial Conforming Borrowing Base" means a Conforming Borrowing Base in
---------------------------------
the amount of $75,000,000, which shall be in effect during the period commencing
on the Closing Date and continuing until the first Redetermination after the
Closing Date.
"Initial Reserve Reports" means the following reserve reports which contain
-----------------------
an evaluation of the Borrowing Base Properties: (a) reserve report dated as of
July 1, 1998 prepared by LaRoche Petroleum Consultants, Ltd., (b) reserve report
dated August 1, 1997 prepared by Albrecht & Associates, Inc., (c) reserve report
dated as of January 1, 1998 prepared by S. A. Holditch and Associates, Inc.
(with respect to certain Mineral Interests owned by QELC prior to the Closing
Date under and as defined in the Existing QRI/NationsBank Credit Agreement), and
(d) reserve report dated as of January 1, 1998 prepared by S. A. Holditch and
Associates, Inc. (with respect to certain Mineral Interests owned by MGP prior
to the Closing Date under and as defined in the Existing QRI/NationsBank Credit
Agreement).
"Interest Period" means, with respect to each Eurodollar Borrowing and each
---------------
Continuation of Eurodollar Loans and each Conversion of all or part of the Base
Rate Loan to Eurodollar Loans, the period commencing on the date of such
Borrowing, Continuation or Conversion and ending one (1), two (2), three (3)
and, if available to all Banks, six (6) months thereafter, as Borrower may elect
in the applicable Request for Borrowing or Notice of Continuation or Conversion;
provided that:
- -------- ----
(a) any Interest Period which would otherwise end on a day which is
not a Eurodollar Business Day shall be extended to the next succeeding
Eurodollar Business Day unless such Eurodollar Business Day falls in
another calendar month, in which case such Interest Period shall end
on the next preceding Eurodollar Business Day;
(b) any Interest Period which begins on the last Eurodollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in
12
<PAGE>
the calendar month at the end of such Interest Period) shall, subject
to clause (c) below, end on the last Eurodollar Business Day of a
calendar month;
(c) if any Interest Period includes a date on which any payment of
principal of the Eurodollar Loans which are the subject of such
Borrowing, Continuation or Conversion is required to be made
hereunder, but does not end on such date, then (i) the principal
amount of such Eurodollar Loans required to be repaid on such date
shall have an Interest Period ending on such date, and (ii) the
remainder of each such Eurodollar Loans shall have an Interest Period
determined as set forth above; and
(d) no Interest Period shall extend past the Termination Date.
"Investment" means, with respect to any Person, any loan, advance,
----------
extension of credit, capital contribution to, investment in or purchase of the
stock or other securities of, or interests in, any other Person; provided, that
-------- ----
"Investment" shall not include customer and trade accounts which are payable in
----------
accordance with customary trade terms.
"Laws" means all applicable statutes, laws, ordinances, regulations,
----
orders, writs, injunctions, or decrees of any state, commonwealth, nation,
territory, possession, county, township, parish, municipality or Governmental
Authority.
"Lending Office" means, as to any Bank, its Domestic Lending Office or its
--------------
Eurodollar Lending Office, as the context may require.
"Letter of Credit Exposure" of any Bank means such Bank's aggregate
-------------------------
participation in the unfunded portion and the funded but unreimbursed portion of
Letters of Credit outstanding at any time.
"Letter of Credit Fee" means, with respect to any Letter of Credit issued
--------------------
hereunder, a fee in an amount equal to a percentage of the stated amount of such
Letter of Credit (calculated on a per annum basis based on the stated term of
such Letter of Credit) determined by reference to the ratio of the Outstanding
Credit to the Conforming Borrowing Base in effect on the date such Letter of
Credit is issued in accordance with the table below:
<TABLE>
<CAPTION>
======================================================================
Ratio of Outstanding Per Annum Letter of
Credit to Conforming Borrowing Base Credit Fee
----------------------------------------------------------------------
<S> <C>
* .50 to 1 1.125%
----------------------------------------------------------------------
** .50 to 1 * .75 to 1 1.375%
----------------------------------------------------------------------
** .75 to 1 * 1.00 to 1 1.625%
----------------------------------------------------------------------
** 1.00 to 1 2.250%
======================================================================
</TABLE>
* less than or equal to
** greater than
"Letter of Credit Fronting Fee" means, with respect to any Letter of Credit
-----------------------------
issued hereunder, a fee equal to one hundred twenty five one thousandths of one
percent (.125%) per annum of the stated amount of such Letter of Credit.
13
<PAGE>
"Letters of Credit" means letters of credit issued for the account of
-----------------
Borrower pursuant to Section 3.1(b).
--------------
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, Borrower and its Subsidiaries shall be
deemed to own subject to a Lien any asset which is acquired or held subject to
the interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.
"Loan" means the revolving credit loan in an amount outstanding at any time
----
not to exceed the amount of the Total Commitment then in effect less the amount
of the Letter of Credit Exposure then outstanding to be made by Banks to
Borrower in accordance with Section 3.1 hereof. The Loan may be comprised of
-----------
the Base Rate Loan and one or more Eurodollar Loans as Borrower may select in a
Request for Borrowing or a Notice of Continuation and Conversion.
"Loan Papers" means this Agreement, the Notes, any Subsidiary Guaranty
-----------
(which may hereafter be executed), all Mortgages now or at any time hereafter
delivered pursuant to Section 7.1, the Collateral Assignments, any Borrower
-----------
Pledge Agreement (which may hereafter be executed), any Subsidiary Pledge
Agreement (which may hereafter be executed), the Assignments of Notes and Liens,
and all other certificates, documents or instruments delivered in connection
with this Agreement, as the foregoing may be amended from time to time.
"Long Term Debt" means Debt which matures more than one year from the date
--------------
it is incurred, or which can be extended at the option of the obligor(s) to a
date more than one year from the date it is incurred.
"Management Agreement" means that certain Management Agreement dated
--------------------
September 1, 1998, to be effective on the Closing Date, by and between Mercury
and Borrower, pursuant to which Mercury shall operate all of Borrower's Mineral
Interests and provide certain general and administrative services necessary for
the operation of Borrower's business and properties.
"Margin Regulations" means Regulations T, U and X of the Board of Governors
------------------
of the Federal Reserve System, as in effect from time to time.
"Margin Stock" means "margin stock" as defined in Regulation U.
------------
"Material Adverse Change" means any circumstance or event that has had or
-----------------------
would reasonably be expected to have (a) a material and adverse effect on the
financial condition, business operations, prospects, properties or assets of any
Credit Party, (b) an adverse effect on (i) the validity and enforceability of
any Loan Paper, or (ii) the perfection or priority of any Lien purported to be
created thereby, or (c) a material adverse effect on the right or ability of any
Credit Party to fully, completely and timely pay and perform its obligations
under the Loan Papers.
"Material Agreement" means any material written or oral agreement,
------------------
contract, commitment, or understanding to which a Person is a party, by which
such Person is directly or indirectly bound,
14
<PAGE>
or to which any assets of such Person may be subject, which is not cancelable by
such Person upon notice of thirty (30) days or less without liability for
further payment other than nominal penalty.
"Material Gas Imbalance" means, with respect to all Gas Balancing
----------------------
Agreements to which any Credit Party is a party or by which any Mineral Interest
owned by any Credit Party is bound, a net negative gas imbalance to any Credit
Party in excess of $250,000.
"Maximum Lawful Rate" means, for each Bank, the maximum rate (or, if the
-------------------
context so permits or requires, an amount calculated at such rate) of interest
which, at the time in question would not cause the interest charged on the
portion of the Loan owed to such Bank at such time to exceed the maximum amount
which such Bank would be allowed to contract for, charge, take, reserve, or
receive under applicable Laws after taking into account, to the extent required
by applicable Laws, any and all relevant payments or charges under the Loan
Papers. To the extent the Laws of the State of Texas are applicable for
purposes of determining the "Maximum Lawful Rate," such term shall mean the
-------------------
"indicated rate ceiling" from time to time in effect under Chapter 1D of the
Texas Credit Title, Revised Civil Statutes of Texas, 1925, as amended,
substituted for or restated, or, if permitted by applicable Law and effective
upon the giving of the notices required by such Chapter 1D (or effective upon
any other date otherwise specified by applicable Law), the "quarterly ceiling"
or "annualized ceiling" from time to time in effect under such Chapter 1D,
whichever Administrative Agent (with the approval of Required Banks) shall elect
to substitute for the "indicated rate ceiling," and vice versa, each such
---- -----
substitution to have the effect provided in such Chapter 1D, and Administrative
Agent (with the approval of Required Banks) 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 Chapter 1D.
"Mercury" means Mercury Exploration Company, a Texas corporation.
-------
"Merger" means the merger of MSR with and into Borrower pursuant to, and in
------
accordance with, the Merger Agreement and the Merger Certificate, with Borrower
being the surviving entity.
"Merger Agreement" means that certain Agreement and Plan of Merger and
----------------
Reorganization dated as of September 1, 1998, by and between Borrower and MSR,
as amended by that certain First Amendment to Agreement and Plan of Merger and
Reorganization dated as of January 27, 1999, by and between Borrower and MSR.
"Merger Certificate" means that certain Certificate of Merger to be filed
------------------
on the Closing Date with the Secretary of State of Delaware, and certified
copies of which shall subsequently be filed in such jurisdictions as
Administrative Agent shall require.
"Merger Documents" means, collectively, (a) the Merger Agreement, (b) the
----------------
Merger Certificate, and (c) all other material documents, instruments and
agreements executed or delivered by any Credit Party pursuant to the Merger
Agreement, the Merger Certificate or the Merger.
"MGP" means Michigan Gas Partners, Limited Partnership, formerly a Texas
---
limited partnership prior to its merger with and into Borrower.
15
<PAGE>
"Mineral Interests" means rights, estates, titles, and interests in and to
-----------------
oil and gas leases and any oil and gas interests, royalty and overriding royalty
interest, production payment, net profits interests, oil and gas fee interests,
and other rights therein, including, without limitation, any reversionary or
carried interests relating to the foregoing, together with rights, titles, and
interests created by or arising under the terms of any unitization,
communization, and pooling agreements or arrangements, and all properties,
rights and interests covered thereby, whether arising by contract, by order, or
by operation of Laws, which now or hereafter include all or any part of the
foregoing without limiting the foregoing, in the case of Borrower, "Mineral
-------
Interests" also includes all rights of Borrower under the Section 29 Documents.
- ---------
"Monthly Date" means the fifteenth day of each calendar month.
------------
"Mortgages" means all mortgages, deeds of trusts, amendments to mortgages,
---------
security agreements, amendments to security agreements, assignments of
production, amendments to assignments of production, pledge agreements,
collateral mortgages, collateral chattel mortgages, collateral assignments,
financing statements and other documents, instruments and agreements evidencing,
creating, perfecting or otherwise establishing the Liens required by Section 7.1
-----------
hereof. All Mortgages shall be in form and substance satisfactory to
Administrative Agent in its sole discretion.
"MSR" means MSR Exploration Ltd., a Delaware corporation, and which
---
pursuant to, and upon the effective date of, the Merger, will be merged with and
into Borrower with Borrower being the surviving entity.
"MSR/Paribas Credit Agreement" has the meaning assigned to such term in the
----------------------------
recitals hereto.
"NationsBank" means NationsBank, N.A., a national banking association, in
-----------
its capacity as a Bank.
"New Bank" means Paribas, Bank One or FNB, and "New Banks" means Paribas,
-------- ---------
Bank One and FNB, collectively.
"NMS" means NationsBank Montgomery Securities LLC.
---
"Non-Recourse Debt" means indebtedness (a) secured solely by the assets
-----------------
acquired with the proceeds of such indebtedness, (b) with respect to which no
Credit Party shall have any liability for repayment beyond the assets pledged,
and (c) with respect to which Borrower has delivered to Banks an opinion in a
form satisfactory to Required Banks of counsel acceptable to Administrative
Agent stating that such indebtedness meets the criteria set forth in (a) and (b)
preceding.
"Note" means a promissory note of Borrower payable to the order of a Bank,
----
in substantially the form of Exhibit B hereto, in the amount of such Bank's
---------
Commitment, evidencing the obligation of Borrower to repay to such Bank its
Commitment Percentage of the Loan, together with all modifications, extensions,
renewals, and rearrangements thereof, and "Notes" means all of such Notes
-----
collectively.
16
<PAGE>
"Notice of Continuation or Conversion" has the meaning set forth in Section
------------------------------------ -------
3.3(c).
- ------
"Obligations" means all present and future indebtedness, obligations and
-----------
liabilities, and all renewals and extensions thereof, or any part thereof, of
each Credit Party to Administrative Agent or to any Bank or any Affiliate of any
Bank arising pursuant to the Loan Papers or pursuant to any Hedge Transaction
entered into with any Bank or any Affiliate of any Bank, and all interest
accrued thereon and costs, expenses, and attorneys' fees incurred in the
enforcement or collection thereof, regardless of whether such indebtedness,
obligations and liabilities are direct, indirect, fixed, contingent, liquidated,
unliquidated, joint, several or joint and several.
"Oil & Gas Hedge Transaction" means a Hedge Transaction pursuant to which
---------------------------
any Person hedges the price to be received by it for future production of
Hydrocarbons.
"Outstanding Credit" means, on any date, the sum of (a) the aggregate
------------------
outstanding Letter of Credit Exposure on such date, including the Letter of
Credit Exposure attributable to Letters of Credit to be issued on such date,
plus (b) the aggregate outstanding principal balance of the Loan on such date,
including the amount of any Borrowing to be made on such date.
"Paribas" means Paribas in its capacity as a Bank.
-------
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Permitted Encumbrances" means with respect to any asset:
----------------------
(a) Liens (if any) securing the Notes in favor of Banks;
(b) minor defects in title which do not secure the payment of money
and otherwise have no material adverse effect on the value or the operation of
the subject property, and for the purposes of this Agreement, a minor defect in
title shall include, but not be limited to, easements, rights-of-way,
servitudes, permits, surface leases and other similar rights in respect of
surface operations, and easements for pipelines, streets, alleys, highways,
telephone lines, power lines, railways and other easements and rights-of-way,
on, over or in respect of any of the properties of any Credit Party that are
customarily granted in the oil and gas industry;
(c) inchoate statutory or operators' Liens securing obligations for
labor, services, materials and supplies furnished to Mineral Interests which are
not delinquent (except to the extent permitted by Section 10.7);
------------
(d) mechanic's, materialmen's, warehouseman's, journeyman's and
carrier's Liens and other similar Liens arising by operation of Law in the
ordinary course of business which are not delinquent (except to the extent
permitted by Section 10.7);
------------
(e) Liens for Taxes or assessments not yet due or not yet delinquent,
or, if delinquent, that are being contested in good faith in the normal course
of business by appropriate action, as permitted by Section 10.7;
------------
17
<PAGE>
(f) lease burdens payable to third parties which are deducted in the
calculation of discounted present value in the Reserve Report including, without
limitation, any royalty, overriding royalty, net profits interest, production
payment, carried interest or reversionary working interest;
(g) the Section 29 Mortgages; and
(h) the TCW Royalty Documents.
"Permitted Investments" means (a) readily marketable direct obligations of
---------------------
the United States of America (or investments in mutual funds or similar funds
which invest solely in such obligations), (b) fully insured time deposits and
certificates of deposit with maturities of one year or less of any commercial
bank operating in the United States having capital and surplus in excess of
$500,000,000, (c) commercial paper of a domestic issuer if at the time of
purchase such paper is rated in one of the two highest ratings categories of
Standard and Poor's Corporation or Moody's Investors Service, (d) Investments
described on Schedule 2 hereto, and (e) other Investments; provided that, the
---------- -------- ----
aggregate amount of all other Investments made pursuant to this clause (e)
outstanding at any time shall not exceed $500,000 (measured on a cost basis).
"Person" means an individual, a corporation, a partnership, an association,
------
a trust or any other entity or organization, including a Government Authority.
"Plan" means an employee benefit plan within the meaning of section 3(3) of
----
ERISA, and any other similar plan, policy or arrangement, including an
employment contract, whether formal or informal and whether legally binding or
not, under which any Credit Party or an ERISA Affiliate of a Credit Party has
any current or future obligation or liability or under which any present or
former employee of any Credit Party or an ERISA Affiliate of a Credit Party, or
such present or former employee's dependents or beneficiaries, has any current
or future right to benefits resulting from the present or former employee's
employment relationship with any Credit Party or an ERISA Affiliate of a Credit
Party.
"Prime Rate" means the per annum rate of interest established from time to
----------
time by NationsBank as its prime rate, which rate may not be the lowest rate of
interest charged by NationsBank to its customers.
"Property Description" means the legal description of Mineral Interests
--------------------
attached to the Certificate of Ownership Interests.
"Proved Mineral Interests" means, collectively, Proved Producing Mineral
------------------------
Interests, Proved Nonproducing Mineral Interests, and Proved Undeveloped Mineral
Interests.
"Proved Nonproducing Mineral Interests" means all Mineral Interests which
-------------------------------------
constitute proved developed nonproducing reserves.
"Proved Producing Mineral Interests" means all Mineral Interests which
----------------------------------
constitute proved developed producing reserves.
18
<PAGE>
"Proved Undeveloped Mineral Interests" means all Mineral Interests which
------------------------------------
constitute proved undeveloped reserves.
"QELC" means Quicksilver Energy, L.C., a Michigan limited liability
----
company.
"Quarterly Date" means the last day of each March, June, September and
--------------
December.
"Recognized Value" means, with respect to Mineral Interests, the discounted
----------------
present value of the estimated net cash flow to be realized from the production
of Hydrocarbons from such Mineral Interests as determined by NationsBank for
purposes of determining the portion of the Borrowing Base which it attributes to
such Mineral Interests in accordance with Article VI hereof.
----------
"Redetermination" means (i) any Scheduled Redetermination, or (ii) any
---------------
Special Redetermination.
"Redetermination Date" means (a) each June 1 and December 1, commencing
--------------------
June 1, 1999, and (b) with respect to any Special Redetermination, the first day
of the first month which is not less than twenty (20) Domestic Business Days
following the date of a request for a Special Redetermination.
"Regulation A" means Regulation A of the Board of Governors of the Federal
------------
Reserve System, 12 C.F.R. Part 221, as in effect from time to time.
"Request for Borrowing" has the meaning set forth in Section 3.1(d).
--------------------- --------------
"Request for Letter of Credit" has the meaning set forth in Section 3.1(e).
---------------------------- --------------
"Required Banks" means Banks holding at least sixty-six and two-thirds
--------------
percent (66 2/3%) of the Total Commitment.
"Required Reserve Value" means Proved Mineral Interests that have a
----------------------
Recognized Value of not less than eighty percent (80%) of the Recognized Value
of all Proved Mineral Interests held by Borrower and its Subsidiaries.
"Reserve Report" means an unsuperseded engineering analysis of the Mineral
--------------
Interests owned by Borrower, in form and substance reasonably acceptable to
Required Banks, prepared in accordance with customary and prudent practices in
the petroleum engineering industry and Financial Accounting Standards Board
Statement 69. Each Reserve Report required to be delivered by March 31 of each
year pursuant to Section 6.1 shall be prepared by the Approved Petroleum
-----------
Engineer. Each other Reserve Report shall be prepared by Borrower's in-house
staff. Notwithstanding the foregoing, in connection with any Special
Redetermination requested by Borrower, the Reserve Report shall be in form and
scope mutually acceptable to Borrower and Required Banks. Until superseded,
each of the Initial Reserve Reports shall be considered a Reserve Report.
19
<PAGE>
"Reserve Requirement" means, at any time, the maximum rate at which
-------------------
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against in the case of
Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation
D). Without limiting the effect of the foregoing, the Reserve Requirement shall
reflect any other reserves required to be maintained by such member banks with
respect to (i) any category of liabilities which includes deposits by reference
to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category
of extensions of credit or other assets which include Eurodollar Loans. The
Adjusted Eurodollar Rate shall be adjusted automatically on and as of the
effective date of any change in the Reserve Requirement.
"Restricted Payment" means, with respect to any Person, (a) any
------------------
Distribution by such Person, or (b) the retirement, redemption or prepayment
prior to scheduled maturity by such Person or any Affiliate of such Person of
any Debt of such Person.
"Schedule" means a "schedule" attached to this Agreement and incorporated
--------
herein by reference, unless specifically indicated otherwise.
"Scheduled Redetermination" means any Redetermination of the Borrowing Base
-------------------------
pursuant to Section 6.2.
-----------
"Section" refers to a "section" or "subsection" of this Agreement unless
-------
specifically indicated otherwise.
"Section 29 Documents" means each of the following documents, instruments
--------------------
and agreements:
(a) Assignment, dated as of December 1, 1997, by and between Mercury,
as assignor, and MA Gas LLC ("MAG"), as assignee, and recorded in the
---
county records of (i) Antrim County, Michigan, December 23, 1997, under
Liber 477, Page 1232, (ii) Crawford County, Michigan, December 23, 1997,
under Liber 444, Page 01, (iii) Montmorency County, Michigan, December 22,
1997, under Liber 405, Page 01, and (iv) Otsego County, Michigan, December
22, 1997, under Liber 662, Page 579;
(b) Assignment by and between Mercury, as assignor, and Borrower, as
assignee, and recorded in the county records of (i) Antrim County,
Michigan, April 15, 1998, under Liber 485, Page 1046, and Liber 485, Page
1087, (ii) Crawford County, Michigan, April 15, 1998, under Liber 451, Page
251, (iii) Montmorency County, Michigan, April 15, 1998, under Liber 408,
Page 0008, and (iv) Otsego County, Michigan, April 15, 1998, under Liber
675, Page 217;
(c) Partial Assignment of Reversionary Interest, dated effective as of
December 1, 1997, by and between Borrower, as assignor, and MAG, as
assignee, and recorded in the county records of Antrim, Crawford,
Montmorency and Otsego Counties, Michigan;
20
<PAGE>
(d) Conveyance of Production Payment, dated as of December 1, 1997, by
and between MAG, as assignor, and Mercury, as assignee, and recorded in the
county records of (i) Antrim County, Michigan, December 23, 1997, under
Liber 477, Page 1273, (ii) Crawford County, Michigan, December 23, 1997,
under Liber 444, Page 42, (iii) Montmorency County, Michigan, December 22,
1997, under Liber 405, Page 42, and (iv) Otsego County, Michigan, December
22, 1997, under Liber 662, Page 620;
(e) Amendment to Conveyance of Production, dated effective as of
December 1, 1997, by and between MAG, as assignor, and Borrower, as
assignee, and recorded in the county records of Antrim, Crawford,
Montmorency and Otsego Counties, Michigan;
(f) Mortgage, dated as of December 1, 1997, by and between MAG, as
mortgagor, and Mercury, as mortgagee, and recorded in the county records of
(i) Antrim County, Michigan, December 23, 1997, under Liber 477, Page 1413,
(ii) Crawford County, Michigan, December 23, 1997, under Liber 444, Page
182, (iii) Montmorency County, Michigan, December 22, 1997, under Liber
134, Page 528, and (iv) Otsego County, Michigan, December 22, 1997, under
Liber 662, Page 760;
(g) Assignment, dated as of December 1, 1997 by and between MGP, as
assignor, and MGP Gas L.L.C. ("MGPG"), as assignee, and recorded in the
----
county records of (i) Antrim County, Michigan, December 23, 1997, under
Liber 478, Page 1, and (ii) Otsego County, Michigan, December 22, 1997,
under Liber 662, Page 802;
(h) Partial Assignment of Reversionary Interest, dated effective as of
December 1, 1997, by and between Borrower, as assignor, and MGPG, as
assignee, and recorded in the county records of Antrim and Otsego Counties,
Michigan;
(i) Conveyance of Production Payment, dated as of December 1, 1997, by
and between MGPG, as assignor, and MGP, as assignee, and recorded in the
county records of (i) Antrim County, Michigan, December 23, 1997, under
Liber 478, Page 9, and (ii) Otsego County, Michigan, December 22, 1997,
under Liber 662, Page 810;
(j) Amendment to Conveyance of Production Payment, dated effective as
of December 1, 1997, by and between MGPG, as assignor, and Borrower, as
assignee, and recorded in the county records of Antrim and Otsego Counties,
Michigan;
(k) Mortgage, dated as of December 1, 1997, by and between MGPG, as
mortgagor, and MGP, as mortgagee, and recorded in the county records of (i)
Antrim County, Michigan, December 23, 1997, under Liber 478, Page 37, and
(ii) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 838;
(l) Purchase and Sale Agreement, dated as of December 1, 1997, by and
between Mercury, as Seller, and MAG, as buyer;
(m) Credit Payment Note, dated December 1, 1997, executed by MAG, as
maker, payable to the order of Mercury, as payee;
21
<PAGE>
(n) Fixed Payment Note, dated December 1, 1997, executed by MAG, as
maker, payable to the order of Mercury, as payee, in the original principal
amount of $5,092,721;
(o) Assignment of Enforcement Rights, dated effective December 1,
1997, by and between MAG and Mercury, and acknowledged and consented to by
State Street and Antrim;
(p) Management Agreement, dated as of December 1, 1997, by and between
MAG and Mercury, as manager;
(q) Purchase and Sale Agreement, dated as of December 1, 1997, by and
between MGP, as seller, and MGPG, as buyer;
(r) Credit Payment Note, dated December 1, 1997, executed by MGPG, as
maker, payable to the order of MGP, as payee;
(s) Fixed Payment Note, dated December 1, 1997, executed by MGPG, as
maker, payable to the order of MGP, as payee, in the original principal
amount of $2,017,373;
(t) Assignment of Enforcement Rights, dated effective December 1,
1997, by and between MGPG and MGP, and acknowledged and consented to by
State Street and Antrim; and
(u) Management Agreement, dated as of December 1, 1997, by and between
MGPG and MGP, as manager.
"Section 29 Mortgages" means each of the following documents, instruments
--------------------
and agreements:
(a) Mortgage, dated as of December 1, 1997, by and between Mercury, as
mortgagor, and MAG, as mortgagee, and recorded in the county records of (i)
Antrim County, Michigan, December 23, 1997, under Liber 477, Page 1370,
(ii) Crawford County, Michigan, December 23, 1997, under Liber 444, Page
139; (iii) of Montmorency County, Michigan, December 22, 1997, under Liber
134, Page 485; and (iv) Otsego County, Michigan, December 22, 1997, under
Liber 662, Page 717; and
(b) Mortgage, dated as of December 1, 1997, by and between MGPG, as
mortgagor, and MGP, as mortgagee, and recorded in the county records of (i)
Antrim County, Michigan, December 23, 1997, under Liber 478, Page 37; and
(ii) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 838.
"Special Redetermination" means any Redetermination of the Borrowing Base
-----------------------
pursuant to Section 6.3.
-----------
"Sole Lead Arranger" means NationsBank Montgomery Securities LLC in its
------------------
capacity as sole lead arranger for the credit facility hereunder or any
successor thereto.
22
<PAGE>
"Subsidiary" means, for any Person, any corporation or other entity of
----------
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions (including that of a general partner) are at the time directly or
indirectly owned, collectively, by such Person and any Subsidiaries of such
Person. The term Subsidiary shall include Subsidiaries of Subsidiaries (and so
on).
"Subsidiary Guaranty" means a Guaranty substantially in the form of Exhibit
------------------- -------
C hereto to be executed by each existing and future Subsidiary of Borrower in
- -
favor of Banks pursuant to which each Subsidiary of Borrower guaranties payment
and performance in full of the Obligations.
"Subsidiary Pledge Agreement" means a Pledge Agreement substantially in the
---------------------------
form of Exhibit A attached hereto (with applicable conforming changes) to be
---------
executed by each existing and future Subsidiary of Borrower (for purposes of
this definition and Section 7.1(d) hereof, such Subsidiary is referred to herein
--------------
and therein as a "First Tier Subsidiary"), pursuant to which such First Tier
---------------------
Subsidiary shall pledge to Administrative Agent, for the ratable benefit of
Banks, one hundred percent (100%) of the issued and outstanding Equity of each
existing or hereafter created Subsidiary of such First Tier Subsidiary to secure
the Obligations.
"Taxes" means all taxes, assessments, filing or other fees, levies,
-----
imposts, duties, deductions, withholdings, stamp taxes, capital transaction
taxes, foreign exchange taxes or other charges, or other charges of any nature
whatsoever, from time to time or at any time imposed by Law or any Governmental
Authority. "Tax" means any one of the foregoing.
---
"TCW Royalty Documents" means, collectively, (a) the Royalty Agreement
---------------------
dated November 14, 1996 by and between Borrower and TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P., as amended by a First Amendment to Royalty
Agreement dated as of April 9, 1998, and (b) the Conveyance of Adjustable
Overriding Royalty Interest dated November 14, 1996 granted by Borrower to TCW
Portfolio No. 1555 DR V Sub-Custody Partnership, L.P., as amended by an
Amendment to Conveyance of Overriding Royalty Interest dated as of April 9,
1998.
"Termination Date" means March 4, 2004.
----------------
"Total Commitment" means the Commitments of all Banks in an initial
----------------
aggregate amount of $200,000,000 as such amount may be reduced from time to time
pursuant to Section 3.6.
-----------
"Tranche" means the Base Rate Loan or a Eurodollar Loan and "Tranches"
------- --------
means the Base Rate Loan or Eurodollar Loans or any combination thereof.
"Type" means with reference to a Loan, the characterization of such Loan as
----
the Base Rate Loan or a Eurodollar Loan based on the method by which the accrual
of interest on such Tranche is calculated.
"Unused Commitment Fee Percentage" means three hundred seventy-five one
--------------------------------
thousandths of one percent (.375%) per annum.
23
<PAGE>
SECTION 2.2 Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP,
applied on a basis consistent with the most recent audited consolidated
financial statements of Borrower and its Consolidated Subsidiaries delivered to
Banks prior to the date hereof except for changes concurred in by Borrower's
independent certified public accountants and which are disclosed to
Administrative Agent on the next date on which financial statements are required
to be delivered to Banks pursuant to Section 10.1.
------------
SECTION 2.3 Petroleum Terms. As used herein, the terms "proved
--------------- ------
reserves," "proved developed reserves," "proved developed producing reserves,"
- -------- ------------------------- -----------------------------------
"proved developed nonproducing reserves," and "proved undeveloped reserves" have
-------------------------------------- ---------------------------
the meaning 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.
SECTION 2.4 Money. Unless expressly stipulated otherwise, all references
-----
herein to "dollars," "money," "funds," "payments," "prepayments" or other
------- ----- ----- -------- -----------
similar financial or monetary terms, are references to currency of the United
States of America.
ARTICLE III
THE CREDIT
SECTION 3.1 Commitments. (a) Each Bank severally agrees, subject to
-----------
Sections 3.1(c), 8.1, 8.2 and 8.4 and the other terms and conditions set forth
- -------------------- --- ---
in this Agreement, to lend to Borrower from time to time prior to the
Termination Date amounts requested by Borrower not to exceed in the aggregate at
any one time outstanding, the amount of such Bank's Commitment reduced by an
amount equal to such Bank's Letter of Credit Exposure. Each Borrowing shall be
in an aggregate principal amount of $1,000,000 or any larger integral multiple
of $100,000 (except that any Base Rate Borrowing may be in an amount equal to
the Availability at such time), and (ii) shall be made from Banks ratably in
accordance with their respective Commitment Percentages. Subject to the
foregoing limitations and the other provisions of this Agreement, prior to the
Termination Date Borrower may borrow under this Section 3.1(a), repay amounts
--------------
borrowed and request new Borrowings to be made under this Section 3.1(a).
--------------
(b) Administrative Agent will, from time to time prior to the
Termination Date, upon request by Borrower, issue Letters of Credit for the
account of Borrower, so long as (i) the sum of (A) the total Letter of Credit
Exposure then existing, and (B) the amount of the requested Letter of Credit
does not exceed ten percent (10%) of the Conforming Borrowing Base, and (ii)
Borrower would be entitled to a Borrowing under Sections 3.1(a) and 3.1(c) in
--------------- ------
the amount of the requested Letter of Credit. Not less than three (3) Domestic
Business Days prior to the requested date of issuance of any such Letter of
Credit, Borrower shall execute and deliver to Administrative Agent,
Administrative Agent's customary letter of credit application. Each Letter of
Credit shall be in the minimum amount of $10,000 and shall be in form and
substance acceptable to Administrative Agent. No Letter of Credit shall have an
expiration date later than the Termination Date. Upon the date of
24
<PAGE>
issuance of a Letter of Credit, Administrative Agent shall be deemed to have
sold to each other Bank, and each other Bank shall be deemed to have
unconditionally and irrevocably purchased from Administrative Agent, a non-
recourse participation in the related Letter of Credit and Letter of Credit
Exposure equal to such Bank's Commitment Percentage of such Letter of Credit and
Letter of Credit Exposure. Upon request of any Bank, but not less often than
quarterly, Administrative Agent shall provide notice to each Bank by telephone,
teletransmission or telex setting forth each Letter of Credit issued and
outstanding pursuant to the terms hereof and specifying the beneficiary and
expiration date of each such Letter of Credit, each Bank's percentage of each
such Letter of Credit and the actual dollar amount of each Bank's participation
held by Administrative Agent thereof for such Bank's account and risk. At the
time of issuance of each Letter of Credit, Borrower shall pay to Administrative
Agent in respect of such Letter of Credit (a) the applicable Letter of Credit
Fee, and (b) the applicable Letter of Credit Fronting Fee. Administrative Agent
shall distribute the Letter of Credit Fee payable upon the issuance of each
Letter of Credit to Banks in accordance with their respective Commitment
Percentages, and Administrative Agent shall retain the Letter of Credit Fronting
Fee for its own account. Any (y) material amendment or modification, or (z)
renewal or extension of any Letter of Credit shall be deemed to be the issuance
of a new Letter of Credit for purposes of this Section 3.1(b). Notwithstanding
--------------
anything to the contrary contained herein, Borrower shall pay to Administrative
Agent in connection with any amendment or modification of any nature,
Administrative Agent's usual and customary fees for amendments or modifications
to, and processing of, Letters of Credit.
Immediately upon the occurrence of an Event of Default, Borrower shall
deposit with Administrative Agent cash in such amounts as Administrative Agent
may request, up to a maximum amount equal to the aggregate existing Letter of
Credit Exposure of all Banks. Any amounts so deposited shall be held by
Administrative Agent for the ratable benefit of all Banks as security for the
outstanding Letter of Credit Exposure and the other Obligations, and Borrower
will, in connection therewith, execute and deliver such security agreements in
form and substance satisfactory to Administrative Agent which Administrative
Agent may, in its discretion, require. As drafts or demands for payment are
presented under any Letter of Credit, Administrative Agent shall apply such cash
to satisfy such drafts or demands. When all Letters of Credit have expired and
the Obligations have been repaid in full (and no Bank has any obligation to lend
or issue Letters of Credit hereunder) or such Event of Default has been cured to
the satisfaction of Required Banks, Administrative Agent shall release to
Borrower any remaining cash deposited under this Section 3.1(b). Whenever
--------------
Borrower is required to make deposits under this Section 3.1(b) and fails to do
--------------
so on the day such deposit is due, Administrative Agent or any Bank may, without
notice to Borrower, make such deposit (whether by application of proceeds of any
collateral for the Obligations, by transfers from other accounts maintained with
any Bank or otherwise) using any funds then available to any Bank of any Credit
Party, any guarantor, or any other party liable for repayment of the
Obligations.
Notwithstanding anything to the contrary contained herein, Borrower hereby
agrees to reimburse Administrative Agent immediately upon demand by
Administrative Agent, and in immediately available funds, for any payment or
disbursement made by Administrative Agent under any Letter of Credit issued by
it. Payment shall be made by Borrower with interest on the amount so paid or
disbursed by Administrative Agent from and including the date payment is made
under any Letter of Credit to and including the date of payment, at the lesser
of (i) the Maximum Lawful Rate, or (ii) the Default Rate. The obligations of
Borrower under this paragraph will continue until all
25
<PAGE>
Letters of Credit have expired and all reimbursement obligations with respect
thereto have been paid in full by Borrower and until all other Obligations shall
have been paid in full.
Borrower shall be obligated to reimburse Administrative Agent upon demand
for all amounts paid under Letters of Credit as set forth in the immediately
preceding paragraph hereof; provided, however, if Borrower for any reason fails
-------- -------
to reimburse Administrative Agent in full upon demand, Banks shall reimburse
Administrative Agent in accordance with each Banks' Commitment Percentage for
amounts due and unpaid from Borrower as set forth hereinbelow; provided,
--------
however, that no such reimbursement made by Banks shall discharge Borrower's
- ------- ----
obligations to reimburse Administrative Agent. All reimbursement amounts
payable by any Bank under this Section 3.1(b) shall include interest thereon at
--------------
the Federal Funds Rate, from the date of the payment of such amounts by
Administrative Agent to the date of reimbursement by such Bank. No Bank shall
be liable for the performance or nonperformance of the obligations of any other
Bank under this paragraph. The reimbursement obligations of Banks under this
paragraph shall continue after the Termination Date and shall survive
termination of this Agreement and the other Loan Papers.
Borrower shall indemnify and hold Administrative Agent and each Bank, and
their respective officers, directors, representatives and employees harmless
from loss for any claim, demand or liability which may be asserted against any
or such indemnified party in connection with actions taken under Letters of
Credit or in connection therewith (including losses resulting from the
negligence of any or such indemnified party), and shall pay each indemnified
party for reasonable fees of attorneys and legal costs paid or incurred by each
indemnified party in connection with any matter related to Letters of Credit,
except for losses and liabilities incurred as a direct result of the gross
negligence or willful misconduct of such indemnified party, IT BEING THE EXPRESS
INTENTION OF THE PARTIES THAT EACH INDEMNIFIED PARTY SHALL BE INDEMNIFIED FOR
THE CONSEQUENCES OF ITS OWN ORDINARY NEGLIGENCE. If Borrower for any reason
fails to indemnify or pay such indemnified party as set forth herein in full,
Banks shall indemnify and pay such indemnified party upon demand, in accordance
with each Bank's Commitment Percentage of such amounts due and unpaid from
Borrower. The provisions of this paragraph shall survive the termination of
this Agreement.
Administrative Agent does not make any representation or warranty, and does
not assume any responsibility with respect to the validity, legality,
sufficiency or enforceability of any letter of credit application executed and
delivered in connection with any Letter of Credit issued hereunder or any
document relative thereto or to the collectibility thereunder. Administrative
Agent does not assume any responsibility for the financial condition of Borrower
or for the performance of any obligation of Borrower. Administrative Agent may
use its discretion with respect to exercising or refraining from exercising any
rights, or taking or refraining from taking any action which may be vested in it
or which it may be entitled to take or assert with respect to any Letter of
Credit or any letter of credit application. FURTHERMORE, EXCEPT AS SET FORTH
HEREIN, ADMINISTRATIVE AGENT SHALL BE UNDER NO LIABILITY TO ANY BANK, WITH
RESPECT TO ANYTHING ADMINISTRATIVE AGENT MAY DO OR REFRAIN FROM DOING IN THE
EXERCISE OF ITS JUDGMENT, THE SOLE LIABILITY AND RESPONSIBILITY OF
ADMINISTRATIVE AGENT BEING TO HANDLE EACH BANK'S SHARE ON AS FAVORABLE A BASIS
AS ADMINISTRATIVE AGENT HANDLES ITS OWN SHARE. ADMINISTRATIVE AGENT SHALL NOT
HAVE ANY DUTIES OR RESPONSIBILITIES
26
<PAGE>
EXCEPT THOSE EXPRESSLY SET FORTH HEREIN AND THOSE DUTIES AND LIABILITIES SHALL
BE SUBJECT TO THE LIMITATIONS AND QUALIFICATIONS SET FORTH HEREIN. FURTHERMORE,
NEITHER ADMINISTRATIVE AGENT, NOR ANY OF ITS DIRECTORS, OFFICERS, OR EMPLOYEES
SHALL BE LIABLE FOR ANY ACTION TAKEN OR OMITTED (WHETHER OR NOT SUCH ACTION
TAKEN OR OMITTED IS EXPRESSLY SET FORTH HEREIN) UNDER OR IN CONNECTION HEREWITH
OR UNDER ANY OTHER INSTRUMENT OR DOCUMENT IN CONNECTION HEREWITH, EXCEPT FOR
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Administrative Agent shall not incur any
liability to any Bank, Borrower, or any Affiliate of any Bank or Borrower, in
acting upon any notice, document, order, consent, certificate, warrant or other
instrument reasonably believed by Administrative Agent to be genuine or
authentic and to be signed by the proper party.
(c) No Bank will be obligated to lend to Borrower hereunder or incur
Letter of Credit Exposure, and Borrower shall not be entitled to borrow
hereunder or obtain Letters of Credit hereunder, in an amount which would cause
the Outstanding Credit to exceed the Borrowing Base then in effect. No Bank
shall be obligated to fund Borrowings hereunder and Borrower shall not be
entitled to Borrowings hereunder during the existence of a Borrowing Base
Deficiency. Nothing in this Section 3.1(c) shall be deemed to limit any Bank's
--------------
obligation to reimburse Administrative Agent with respect to its participation
in Letters of Credit as a result of the drawing under any Letter of Credit
pursuant to Section 3.1(b).
--------------
(d) In order to request any Borrowing under this Section 3.1, Borrower
-----------
shall hand deliver, telex or telecopy to Administrative Agent a duly completed
Request for Borrowing (herein so called) prior to 12:00 noon (Dallas, Texas
time), (i) at least one (1) Domestic Business Day before the Borrowing Date
specified for a proposed Base Rate Borrowing, and (ii) at least three (3)
Eurodollar Business Days before the Borrowing Date of a proposed Eurodollar
Borrowing. Each such Request for Borrowing shall be substantially in the form
of Exhibit D hereto, and shall specify:
---------
(i) the Borrowing Date of such Borrowing, which shall be a
Domestic Business Day in the case of a Base Rate Borrowing or a
Eurodollar Business Day in the case of a Eurodollar Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) whether such Borrowing is to be a Base Rate Borrowing or a
Eurodollar Borrowing; and
(iv) in the case of a Eurodollar Borrowing, the duration of the
Interest Period applicable thereto, subject to the provisions of
the definition of Interest Period.
Upon receipt of a Request for Borrowing, Administrative Agent shall promptly
notify each Bank of the contents thereof and the amount of the Borrowing to be
loaned by such Bank pursuant thereto, and such Request for Borrowing shall not
thereafter be revocable by Borrower. Not later than 12:00 noon (Dallas, Texas
time) on the date of each Borrowing, each Bank shall make available its
27
<PAGE>
Commitment Percentage of such Borrowing, in Federal or other funds immediately
available in Dallas, Texas to Administrative Agent at its address set forth on
Schedule 1 hereto. Notwithstanding the foregoing, if Borrower delivers to
- ----------
Administrative Agent a Request for Borrowing prior to 10:00 a.m. (Dallas, Texas
time) on a Domestic Business Day requesting a Base Rate Borrowing on such day,
each Bank shall use its best efforts to make available to Administrative Agent
its Commitment Percentage of such Borrowing by 1:00 p.m. (Dallas, Texas time) on
the same day. Unless Administrative Agent determines that any applicable
condition specified in Section 8.2 has not been satisfied, Administrative Agent
-----------
will make the funds so received from Banks available to Borrower at
Administrative Agent's aforesaid address.
(e) In order to request any Letter of Credit hereunder, Borrower
shall hand deliver, telex or telecopy to Administrative Agent a duly completed
Request for Letter of Credit (herein so called) prior to 12:00 noon (Dallas,
Texas time) at least three (3) Domestic Business Days before the date specified
for issuance of such Letter of Credit. Each Request for Letter of Credit shall
be substantially in the form of Exhibit E hereto, shall be accompanied by
---------
Administrative Agent's duly completed and executed letter of credit application
and agreement and shall specify:
(i) the requested date for issuance of such Letter of Credit;
(ii) the terms of such requested Letter of Credit, including the name
and address of the beneficiary, the stated amount, the expiration date
and the conditions under which drafts under such Letter of Credit are
to be available; and
(iii) the purpose of such Letter of Credit.
Upon receipt of a Request for Letter of Credit, Administrative Agent shall
promptly notify each Bank of the contents thereof, including the amount of the
requested Letter of Credit, and such Request for Letter of Credit shall not
thereafter be revocable by Borrower. No later than 12:00 noon (Dallas, Texas
time) on the date each Letter of Credit is requested, unless Administrative
Agent determines that any applicable condition precedent set forth in Section
-------
8.2 hereof has not been satisfied, Administrative Agent will issue and deliver
- ---
such Letter of Credit pursuant to the instructions of Borrower.
SECTION 3.2. Notes. Each Bank's Commitment Percentage of the Loan shall
-----
be evidenced by a single Note payable to the order of such Bank in an amount
equal to such Bank's Commitment.
SECTION 3.3. Interest Rates; Payments. (a) The principal amount of the
------------------------
Base Rate Loan outstanding from day to day shall bear interest at a rate per
annum equal to the Base Rate in effect from day to day; provided that in no
-------- ----
event shall the rate charged hereunder or under the Notes exceed the Maximum
Lawful Rate. Interest on the Base Rate Loan shall be payable as it accrues on
each Quarterly Date, and on the Termination Date.
(b) The principal amount of each Eurodollar Loan outstanding from day to
day shall bear interest for the Interest Period applicable thereto at a rate per
annum equal to the sum of (i) the Applicable Margin plus (ii) the applicable
Adjusted Eurodollar Rate; provided that in no event shall
-------- ----
28
<PAGE>
the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate.
Interest on any portion of the principal of each Eurodollar Loan subject to an
Interest Period of one (1), two (2) or three (3) months shall be payable on the
last day of the Interest Period applicable thereto. Interest on any portion of
the principal of each Eurodollar Loan having an Interest Period of six (6)
months shall be payable on the last day of the Interest Period applicable
thereto and on each Quarterly Date.
(c) So long as no Default or Event of Default shall be continuing, subject
to the provisions of this Section 3.3, Borrower shall have the option of having
-----------
all or any portion of the principal outstanding under the Loan be a Base Rate
Loan or one (1) or more Eurodollar Loans, which shall bear interest at rates
determined by reference to the Base Rate and the Adjusted Eurodollar Rate,
respectively; provided, that each Eurodollar Loan shall be in a minimum amount
-------- ----
of $1,000,000 and shall be in an amount which is an integral multiple of
$100,000. Prior to the termination of each Interest Period with respect to each
Eurodollar Loan, Borrower shall give written notice (a "Notice of Continuation
----------------------
or Conversion") in the form of Exhibit F attached hereto to Administrative Agent
- ------------- ---------
of the Type of Loan which shall be applicable to the principal of such
Eurodollar Loan upon the expiration of such Interest Period. Such Notice of
Continuation or Conversion shall be given to Administrative Agent at least one
(1) Domestic Business Day, in the case of a Base Rate Loan selection, and three
(3) Eurodollar Business Days, in the case of a Eurodollar Loan selection, prior
to the termination of the Interest Period then expiring. If Borrower shall
specify a Eurodollar Loan, such Notice of Continuation or Conversion shall also
specify the length of the succeeding Interest Period (subject to the provisions
of the definition of such term) selected by Borrower. Each Notice of
Continuation or Conversion shall be irrevocable and effective upon notification
thereof to Administrative Agent. If the required Notice of Continuation or
Conversion shall not have been timely received by Administrative Agent, Borrower
shall be deemed to have elected that the principal of the Eurodollar Loan
subject to the Interest Period then expiring be Converted to the Base Rate Loan
upon the expiration of such Interest Period and Borrower will be deemed to have
given Administrative Agent notice of such election. Subject to the limitations
set forth in this Section 3.3(c) on the amount and number of Eurodollar Loans,
--------------
Borrower shall have the right to Convert all or any part of the Base Rate Loan
to a Eurodollar Loan by giving Administrative Agent a Notice of Continuation or
Conversion of such election at least three (3) Eurodollar Business Days prior to
the date on which Borrower elects to make such Conversion (a "Conversion Date").
---------------
The Conversion Date selected by Borrower shall be a Eurodollar Business Day.
Notwithstanding anything in this Section 3.3 to the contrary, no portion of the
-----------
principal of the Base Rate Loan may be Converted to a Eurodollar Loan and no
Eurodollar Loan may be Continued as such when any Default or Event of Default
has occurred and is continuing, but each such Eurodollar Loan shall be
automatically Converted to the Base Rate Loan on the last day of each applicable
Interest Period. Borrower shall not be permitted to have more than five (5)
Eurodollar Loans in effect at any time.
(d) Notwithstanding anything to the contrary set forth in Section 3.3(a) or
--------------
(b) above, after the occurrence of an Event of Default, interest shall accrue on
- ---
the outstanding principal balance of the Loan, and to the extent permitted by
Law, on the accrued but unpaid interest on the Loan and all other Obligations
from the period from and including the occurrence of such Event of Default to
but excluding the date the same is remedied at a rate per annum equal to the
lesser of (a) the Default Rate, and (b) the Maximum Lawful Rate.
29
<PAGE>
(e) Administrative Agent shall determine each interest rate applicable to
the Loan in accordance with the terms hereof. Administrative Agent shall
promptly notify Borrower and Banks by telex, telecopy or cable of each rate of
interest so determined, and its determination thereof shall be conclusive in the
absence of manifest error.
(f) Notwithstanding the foregoing, if at any time the rate of interest
calculated with reference to the Base Rate or the Eurodollar Rate hereunder (the
"contract rate") is limited to the Maximum Lawful Rate, any subsequent
-------------
reductions in the contract rate shall not reduce the rate of interest on the
Loan below the Maximum Lawful Rate until the total amount of interest accrued
equals the amount of interest which would have accrued if the contract rate had
at all times been in effect. In the event that at maturity (stated or by
acceleration), or at final payment of any Note, the total amount of interest
paid or accrued on such Note is less than the amount of interest which would
have accrued if the contract rate had at all times been in effect with respect
thereto, then at such time, to the extent permitted by law, Borrower shall pay
to the holder of such Note an amount equal to the difference between (i) the
lesser of the amount of interest which would have accrued if the contract rate
had at all times been in effect and the amount of interest which would have
accrued if the Maximum Lawful Rate had at all times been in effect, and (ii) the
amount of interest actually paid on such Note.
(g) Interest payable hereunder on each Eurodollar Loan shall be computed
based on the number of actual days elapsed assuming that each calendar year
consisted of 360 days. Interest payable hereunder on the Base Rate Loan shall
be computed based on the actual number of days elapsed assuming that each
calendar year consisted of 365 days.
SECTION 3.4. Mandatory Prepayments Resulting From Borrowing Base
---------------------------------------------------
Deficiency. In the event a Borrowing Base Deficiency exists after giving effect
- ----------
to any Redetermination, Borrower shall, at its option, either (a) eliminate such
Borrowing Base Deficiency by making a single mandatory prepayment of principal
on the Loan in an amount equal to the entire amount of such Borrowing Base
Deficiency on the first Monthly Date following the date on which such Borrowing
Base Deficiency is determined to exist, or (b) eliminate such deficiency by
making six (6) consecutive mandatory prepayments of principal on the Loan each
of which shall be in the amount of one sixth (1/6th) of the amount of such
Borrowing Base Deficiency commencing on the first Monthly Date following the
date on which such Borrowing Base Deficiency is determined to exist and
continuing on each Monthly Date thereafter. If a Borrowing Base Deficiency
cannot be eliminated pursuant to this Section 3.4 by prepayment of the Loan in
-----------
full (as a result of outstanding Letter of Credit Exposure) on each Monthly
Date, Borrower shall also deposit cash with Administrative Agent, to be held by
Administrative Agent to secure outstanding Letter of Credit Exposure in the
manner contemplated by Section 3.1(b), in an amount at least equal to one sixth
--------------
(1/6th) of the balance of such Borrowing Base Deficiency (i.e., one-sixth
(1/6th) of the difference between the Borrowing Base Deficiency and the
remaining outstanding principal under the Loan on the date such Borrowing Base
Deficiency is first determined to occur).
SECTION 3.5. Voluntary Prepayments. Borrower may, subject to Section 5.5
--------------------- -----------
and the other provisions of this Agreement, upon three (3) Domestic Business
Days advance notice to Administrative Agent, prepay the principal of the Loan in
whole or in part. Any partial prepayment shall be in a minimum amount of
$1,000,000 and shall be in an integral multiple of $100,000.
30
<PAGE>
SECTION 3.6. Voluntary Reduction of Commitments. Borrower may, by notice
----------------------------------
to Administrative Agent five (5) Domestic Business Days prior to the effective
date of any such reduction, reduce the Total Commitment (and thereby reduce the
Commitment of each Bank ratably) in amounts not less than $5,000,000 and in an
amount which is an integral multiple of $1,000,000. On the effective date of any
such reduction, Borrower shall, to the extent required as a result of such
reduction, make a principal payment on the Loan in an amount sufficient to cause
the principal balance of the Loan then outstanding to be equal to or less than
the Total Commitment as thereby reduced. Notwithstanding the foregoing,
Borrower shall not be permitted to voluntarily reduce the Total Commitment to an
amount less than the aggregate Letter of Credit Exposure of all Banks.
SECTION 3.7. Termination of Commitments; Final Maturity of Loan. The
--------------------------------------------------
Total Commitment (and the Commitment of each Bank) shall terminate, and the
entire outstanding principal balance of the Loan, all interest accrued thereon,
all accrued but unpaid fees hereunder and all other outstanding Obligations
shall be due and payable in full on the Termination Date.
SECTION 3.8. Unused Commitment Fee. On the Termination Date, on each
---------------------
Quarterly Date prior to the Termination Date, and, in the event the Commitments
are terminated in their entirety prior to the Termination Date, on the date of
such termination, Borrower shall pay to Administrative Agent, for the ratable
benefit of each Bank based on each Bank's Commitment Percentage, a commitment
fee equal to the Unused Commitment Fee Percentage in effect from day to day
(applied on a per annum basis and computed on the basis of actual days elapsed
and as if each calendar year consisted of 365 days) of the average daily
Availability for the Fiscal Quarter (or portion thereof) ending on the date such
payment is due.
SECTION 3.9. Agency and other Fees. Borrower shall pay to Administrative
---------------------
Agent and its Affiliates such other fees and amounts as Borrower shall be
required to pay to Administrative Agent and its Affiliates from time to time
pursuant to any separate agreement between Borrower and Administrative Agent or
such Affiliates. Such fees and other amounts shall be retained by
Administrative Agent and its Affiliates, and no Bank (other than Administrative
Agent) shall have any interest therein. Administrative Agent may disburse any
fees paid to Administrative Agent and its Affiliates pursuant to this Section
-------
3.9 in any manner Administrative Agent desires in its sole discretion
- ---
ARTICLE IV
GENERAL PROVISIONS
SECTION 4.1. Delivery and Endorsement of Notes. On the Closing Date,
---------------------------------
Administrative Agent shall deliver to each Bank the Note payable to such Bank.
Each Bank may endorse (and prior to any transfer of its Note shall endorse) on
the schedules attached and forming a part thereof appropriate notations to
evidence the date and amount of its Commitment Percentage of each Borrowing, the
Interest Period applicable thereto, and the date and amount of each payment of
principal made by Borrower with respect thereto; provided that the failure by
-------- ----
any Bank to so endorse its Note shall not affect the liability of Borrower for
the repayment of all amounts outstanding under such Note together with interest
thereon. Each Bank is hereby irrevocably authorized by
31
<PAGE>
Borrower to endorse its Note and to attach to and make a part of any such Note a
continuation of any such schedule as required.
SECTION 4.2. General Provisions as to Payments. (a) Borrower shall make
---------------------------------
each payment of principal of, and interest on, the Loan, and all fees payable
hereunder shall be paid, not later than 12:00 noon (Dallas, Texas time) on the
date when due, in Federal or other funds immediately available in Dallas, Texas,
to Administrative Agent at its address set forth on Schedule 1 hereto.
----------
Administrative Agent will promptly (and if such payment is received by
Administrative Agent by 10:00 a.m., and otherwise if reasonably possible, on the
same Domestic Business Day) distribute to each Bank its Commitment Percentage of
each such payment received by Administrative Agent for the account of Banks.
Whenever any payment of principal of, or interest on, any portion of the Loan
subject to a Base Rate Tranche or of fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of, or
interest on, any portion of the Loan subject to a Eurodollar Tranche shall be
due on a day which is not a Eurodollar Business Day, the date for payment
thereof shall be extended to the next succeeding Eurodollar Business Day
(subject to the provisions of the definition of Interest Period). If the date
for any payment of principal is extended by operation of Law or otherwise,
interest thereon shall be payable for such extended time. Borrower hereby
authorizes Administrative Agent to charge from time to time against Borrower's
accounts with Administrative Agent any amount then due.
(b) Prior to the occurrence of an Event of Default, all principal
payments received by Banks with respect to the Loan shall be applied first to
Eurodollar Tranches outstanding with Interest Periods ending on the date of such
payment, then to Base Rate Tranches, and then to Eurodollar Tranches next
maturing until such principal payment is fully applied.
(c) After the occurrence of an Event of Default, all amounts collected
or received by Administrative Agent or any Bank shall be applied first to the
payment of all proper costs incurred by Administrative Agent in connection with
the collection thereof (including reasonable expenses and disbursements of
Administrative Agent), second to the payment of all proper costs incurred by
Banks in connection with the collection thereof (including reasonable expenses
and disbursements of Banks), third to the reimbursement of any advances made by
Banks to effect performance of any unperformed covenants of any Credit Party
under any of the Loan Papers, fourth to the payment of any unpaid fees required
pursuant to Section 3.9, fifth to the payment of any unpaid fees required
-----------
pursuant to Sections 3.1(b) and 3.8, sixth, to payment to each Bank of its
--------------- ---
Commitment Percentage of the outstanding principal of the Loan and accrued but
unpaid interest thereon, and seventh to establish the deposits required in
Section 3.1(b). All payments received by a Bank after the occurrence of an
- --------------
Event of Default for application to the principal of the Loan shall be applied
by such Bank in the manner provided in Section 4.2(b).
--------------
32
<PAGE>
ARTICLE V
CHANGE IN CIRCUMSTANCES
SECTION 5.1. Increased Cost and Reduced Return.
---------------------------------
(a) If, after the date hereof, the adoption of any applicable law, rule,
or regulation, or any change in any applicable law, rule, or regulation, or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such Governmental Authority, central bank, or comparable agency:
(i) shall subject such Bank (or its Applicable Lending Office) to
any tax, duty, or other charge with respect to any Eurodollar Loans,
its Note, or its obligation to make Eurodollar Loans, or change the
basis of taxation of any amounts payable to such Bank (or its
Applicable Lending Office) under this Agreement or its Note in respect
of any Eurodollar Loans (other than taxes imposed on the overall net
income of such Bank or such Applicable Lending Office);
(ii) shall impose, modify, or deem applicable any reserve, special
deposit, assessment, compulsory loan, or similar requirement (other
than the Reserve Requirement utilized in the determination of the
Adjusted Eurodollar Rate) relating to any extensions of credit or
other assets of, or any deposits with or other liabilities or
commitments of, such Bank (or its Applicable Lending Office),
including the Commitment of such Bank hereunder; or
(iii) shall impose on such Bank (or its Applicable Lending Office) or
on the London interbank market any other condition affecting this
Agreement or its Note or any of such extensions of credit or
liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such Bank (or
its Applicable Lending Office) of making, Converting into, Continuing, or
maintaining any Eurodollar Loans or to reduce any sum received or receivable by
such Bank (or its Applicable Lending Office) under this Agreement or its Note
with respect to any Eurodollar Loans, then Borrower shall pay to such Bank on
demand such amount or amounts as will compensate such Bank for such increased
cost or reduction. If any Bank requests compensation by Borrower under this
Section 5.1(a), Borrower may, by notice to such Bank (with a copy to
- --------------
Administrative Agent), suspend the obligation of such Bank to make or Continue
Eurodollar Loans or to Convert all or part of the Base Rate Loan owing to such
Bank into Eurodollar Loans, until the event or condition giving rise to such
request ceases to be in effect (in which case the provisions of Section 5.4
-----------
shall be applicable); provided that such suspension shall not affect the right
-------- ----
of such Bank to receive the compensation so requested.
(b) If, after the date hereof, any Bank shall have determined that the
adoption of any applicable law, rule, or regulation regarding capital adequacy
or any change therein or in the interpretation or administration thereof by any
Governmental Authority, central bank, or comparable
33
<PAGE>
agency charged with the interpretation or administration thereof, or any request
or directive regarding capital adequacy (whether or not having the force of law)
of any such Governmental Authority, central bank, or comparable agency, has or
would have the effect of reducing the rate of return on the capital of such Bank
or any corporation controlling such Bank as a consequence of such Bank's
obligations hereunder to a level below that which such Bank or such corporation
could have achieved but for such adoption, change, request, or directive (taking
into consideration its policies with respect to capital adequacy), then, from
time to time upon demand, Borrower shall pay to such Bank such additional amount
or amounts as will compensate such Bank for such reduction.
(c) Each Bank shall promptly notify Borrower and Administrative Agent of
any event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section 5.1 and will
-----------
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to it. Any Bank claiming
compensation under this Section 5.1 shall furnish to Borrower and Administrative
-----------
Agent a statement setting forth the additional amount or amounts to be paid to
it hereunder which shall be conclusive in the absence of manifest error. In
determining such amount, such Bank may use any reasonable averaging and
attribution methods.
SECTION 5.2. Limitation on Types of Loans. If on or prior to the first
----------------------------
day of any Interest Period for any Eurodollar Loan:
(a) Administrative Agent determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar Rate
for such Interest Period; or
(b) Required Banks determine (which determination shall be conclusive) and
notify Administrative Agent that the Adjusted Eurodollar Rate will not
adequately and fairly reflect the cost to Banks of funding Eurodollar Loans for
such Interest Period;
then Administrative Agent shall give Borrower prompt notice thereof specifying
the relevant Type of Loans and the relevant amounts or periods, and so long as
such condition remains in effect, Banks shall be under no obligation to make
additional Loans of such Type, Continue Loans of such Type, or to Convert Loans
of any other Type into Loans of such Type and Borrower shall, on the last day(s)
of the then current Interest Period(s) for the outstanding Loans of the affected
Type, either prepay such Loans or Convert such Loans into another Type of Loan
in accordance with the terms of this Agreement.
SECTION 5.3. Illegality. Notwithstanding any other provision of this
----------
Agreement, in the event that it becomes unlawful for any Bank or its Applicable
Lending Office to make, maintain, or fund Eurodollar Loans hereunder, then such
Bank shall promptly notify Borrower thereof and such Bank's obligation to make
or Continue Eurodollar Loans and to Convert other Types of Loans into Eurodollar
Loans shall be suspended until such time as such Bank may again make, maintain,
and fund Eurodollar Loans (in which case the provisions of Section 5.4 shall be
-----------
applicable).
34
<PAGE>
SECTION 5.4. Treatment of Affected Loans. If the obligation of any Bank
---------------------------
to make particular Eurodollar Loans or to Continue Loans, or to Convert Loans of
another Type into Loans of a particular Type shall be suspended pursuant to
Section 5.1 or 5.3 hereof (Loans of such Type being herein called "Affected
- ----------- --- --------
Loans" and such Type being herein called the "Affected Type"), such Bank's
- ----- -------------
Affected Loans shall be automatically Converted into the Base Rate Loan on the
last day(s) of the then current Interest Period(s) for Affected Loans (or, in
the case of a Conversion required by Section 5.3 hereof, on such earlier date as
-----------
such Bank may specify to Borrower with a copy to Administrative Agent) and,
unless and until such Bank gives notice as provided below that the circumstances
specified in Section 5.1 or 5.3 hereof that gave rise to such Conversion no
----------- ---
longer exist:
(a) to the extent that such Bank's Affected Loans have been so Converted,
all payments and prepayments of principal that would otherwise be applied to
such Bank's Affected Loans shall be applied instead to the Base Rate Loan; and
(b) all Loans that would otherwise be made or Continued by such Bank as
Loans of the Affected Type shall be made or Continued instead as part of the
Base Rate Loan, and all Loans of such Bank that would otherwise be Converted
into Loans of the Affected Type shall be Converted instead into (or shall
remain) as part of the Base Rate Loan.
If such Bank gives notice to Borrower (with a copy to Administrative Agent) that
the circumstances specified in Section 5.1 or 5.3 hereof that gave rise to the
----------- ---
Conversion of such Bank's Affected Loans pursuant to this Section 5.4 no longer
-----------
exist (which such Bank agrees to do promptly upon such circumstances ceasing to
exist) at a time when Loans of the Affected Type made by other Banks are
outstanding, such Bank's portion of the Base Rate Loan shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Loans of the Affected Type to the extent necessary so that,
after giving effect thereto, all Loans held by Banks holding Loans of the
Affected Type and by such Bank are held pro rata (as to principal amounts, Types
and Interest Periods) in accordance with their respective Commitments.
SECTION 5.5. Compensation. Upon the request of any Bank, Borrower shall
------------
pay to such Bank such amount or amounts as shall be sufficient (in the
reasonable opinion of such Bank) to compensate it for any loss, cost, or expense
(including loss of anticipated profits) incurred by it as a result of:
(a) any payment, prepayment, or Conversion of a Eurodollar Loan for any
reason (including, without limitation, the acceleration of the Loan) on a date
other than the last day of the Interest Period for such Loan; or
(b) any failure by Borrower for any reason (including, without limitation,
the failure of any condition precedent specified in Article VIII to be
------------
satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Loan on the date
for such Borrowing, Conversion, Continuation, or prepayment specified in the
relevant Request for Borrowing, Notice of Continuation or Conversion, or other
notice of Borrowing, prepayment, Continuation, or Conversion under this
Agreement.
SECTION 5.6. Taxes. (a) Any and all payments by Borrower to or for the
-----
account of any Bank or Administrative Agent hereunder or under any other Loan
Paper shall be made free and
35
<PAGE>
clear of and without deduction for any and all present or future taxes, duties,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Bank and Administrative Agent,
---------
taxes imposed on its income, and franchise taxes imposed on it, by any relevant
taxation authority (all such non-excluded taxes, duties, levies, imposts,
deductions, charges, withholdings, and liabilities being hereinafter referred to
in this Section 5.6 as "Non-Excluded Taxes"). If Borrower shall be required by
----------- ------------------
law to deduct any Non-Excluded Taxes from or in respect of any sum payable under
this Agreement or any other Loan Paper to any Bank or Administrative Agent, (i)
the sum payable shall be increased as necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 5.6) such Bank or Administrative Agent receives an amount
-----------
equal to the sum it would have received had no such deductions been made, (ii)
Borrower shall make such deductions, (iii) Borrower shall pay the full amount
deducted to the relevant taxation authority or other authority in accordance
with applicable law, and (iv) Borrower shall furnish to Administrative Agent, at
its address set forth in Schedule 1 hereto, the original or a certified copy of
----------
a receipt evidencing payment thereof.
(b) In addition, Borrower agrees to pay any and all present or future stamp
or documentary taxes and any other excise or property taxes or charges or
similar levies which arise from any payment made under this Agreement or any
other Loan Paper or from the execution or delivery of, or otherwise with respect
to, this Agreement or any other Loan Paper (hereinafter referred to as "Other
-----
Taxes").
- -----
(c) Borrower agrees to indemnify each Bank and Administrative Agent for the
full amount of Non-Excluded Taxes and Other Taxes (including, without
limitation, any Non-Excluded Taxes or Other Taxes imposed or asserted by any
jurisdiction on amounts payable under this Section 5.6) paid by such Bank or
-----------
Administrative Agent (as the case may be) and any liability (including
penalties, interest, and expenses) arising therefrom or with respect thereto.
(d) Each Bank organized under the laws of a jurisdiction outside the United
States, on or prior to the date of its execution and delivery of this Agreement
in the case of each Bank listed on Schedule 1 hereto and on or prior to the date
----------
on which it becomes a Bank in the case of each other Bank, and from time to time
thereafter if requested in writing by Borrower or Administrative Agent (but only
so long as such Bank remains lawfully able to do so), shall provide Borrower and
Administrative Agent with (i) Internal Revenue Service Form 1001 or 4224, as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that such Bank is entitled to benefits under an income tax treaty to
which the United States is a party which reduces the rate of withholding tax on
payments of interest or certifying that the income receivable pursuant to this
Agreement is effectively connected with the conduct of a trade or business in
the United States, (ii) Internal Revenue Service Form W-8 or W-9, as
appropriate, or any successor form prescribed by the Internal Revenue Service,
and (iii) any other form or certificate required by any taxing authority
(including any certificate required by Sections 871(h) and 881(c) of the
Internal Revenue Code), certifying that such Bank is entitled to an exemption
from or a reduced rate of tax on payments pursuant to this Agreement or any of
the other Loan Papers.
(e) For any period with respect to which a Bank has failed to provide
Borrower and Administrative Agent with the appropriate form pursuant to Section
-------
5.6(d) (unless such failure is due to a change in treaty, law, or regulation
- ------
occurring subsequent to the date on which a form originally
36
<PAGE>
was required to be provided), such Bank shall not be entitled to indemnification
under Section 5.6(a) or 5.6(b) with respect to Non-Excluded Taxes imposed by the
-------------- ------
United States; provided, however, that should a Bank, which is otherwise exempt
-------- ------- ----
from or subject to a reduced rate of withholding tax, become subject to Non-
Excluded Taxes because of its failure to deliver a form required hereunder,
Borrower shall take such steps as such Bank shall reasonably request to assist
such Bank to recover such Non-Excluded Taxes.
(f) If Borrower is required to pay additional amounts to or for the account
of any Bank pursuant to this Section 5.6, then such Bank will agree to use
-----------
reasonable efforts to change the jurisdiction of its Applicable Lending Office
so as to eliminate or reduce any such additional payment which may thereafter
accrue if such change, in the judgment of such Bank, is not otherwise
disadvantageous to such Bank.
(g) Within thirty (30) days after the date of any payment of Non-Excluded
Taxes, Borrower shall furnish to Administrative Agent the original or a
certified copy of a receipt evidencing such payment.
(h) Without prejudice to the survival of any other agreement of Borrower
hereunder, the agreements and obligations of Borrower contained in this Section
-------
5.6 shall survive the termination of the Commitments and the payment in full of
- ---
the Notes.
SECTION 5.7. Discretion of Banks as to Manner of Funding. Notwithstanding
-------------------------------------------
any provisions of this Agreement to the contrary, each Bank shall be entitled to
fund and maintain its funding of all or any part of its Commitment in any manner
it sees fit, it being understood, however, that for the purposes of this
Agreement all determinations hereunder shall be made as if such Bank had
actually funded and maintained each Eurodollar Loan during the Interest Period
for such Eurodollar Loan through the purchase of deposits having a maturity
corresponding to the last day of such Interest Period and bearing an interest
rate equal to the Adjusted Eurodollar Rate for such Interest Period.
ARTICLE VI
BORROWING BASE
SECTION 6.1. Reserve Report; Proposed Borrowing Base and Conforming
------------------------------------------------------
Borrowing Base. As soon as available and in any event by March 31 and September
- --------------
30 of each year commencing March 31, 1999, Borrower shall deliver to
Administrative Agent and each Bank a Reserve Report prepared as of the
immediately preceding December 31 and June 30 respectively. Simultaneously with
the delivery to Administrative Agent and each Bank of each Reserve Report,
Borrower shall notify Administrative Agent and each Bank of the amount of the
Borrowing Base which Borrower requests become effective on the next
Redetermination Date (or such date promptly following such Redetermination Date
as Required Banks shall elect). Banks may, in their sole discretion, establish
a Borrowing Base which is higher than the Borrowing Base would otherwise be if
Banks determined the Borrowing Base based on each Bank's application of the
credit standards and other criteria customarily applied by such Bank in the
determination of credit limitations for companies similar to Borrower
("Conforming Credit Criteria"). At the time of each Redetermination,
--------------------------
37
<PAGE>
Banks shall also determine what the Borrowing Base would be if they applied
Conforming Credit Criteria (the "Conforming Borrowing Base"). If Banks do not
-------------------------
determine a Conforming Borrowing Base, the Borrowing Base as redetermined shall
also be the Conforming Borrowing Base for purposes of this Agreement.
SECTION 6.2. Scheduled Redeterminations of the Borrowing Base and the
--------------------------------------------------------
Conforming Borrowing Base; Procedures and Standards. Based in part on the
- ---------------------------------------------------
Reserve Reports made available to Banks pursuant to Section 6.1, Banks shall
-----------
redetermine the Borrowing Base and the Conforming Borrowing Base on or prior to
the next Redetermination Date (or such date promptly thereafter as reasonably
possible based on the engineering and other information available to Banks). Any
Borrowing Base or Conforming Borrowing Base which becomes effective as a result
of any Redetermination of the Borrowing Base or Conforming Borrowing Base shall
be subject to the following restrictions: (a) such Borrowing Base or Conforming
Borrowing Base shall not exceed the Borrowing Base requested by Borrower
pursuant to Sections 6.1 or 6.3 (as applicable), (b) such Borrowing Base or
------------ ---
Conforming Borrowing Base shall not exceed the Total Commitment then in effect,
(c) to the extent such Borrowing Base or Conforming Borrowing Base represents an
increase from the Borrowing Base or the Conforming Borrowing Base (as
applicable) in effect prior to such Redetermination, such Borrowing Base or
Conforming Borrowing Base shall be approved by all Banks, and (d) to the extent
such Borrowing Base or Conforming Borrowing Base represents a decrease in the
Borrowing Base or the Conforming Borrowing Base (as applicable) in effect prior
to such Redetermination, or a reaffirmation of such prior Borrowing Base or
Conforming Borrowing Base, such Borrowing Base or Conforming Borrowing Base
shall be approved by Required Banks. Each Redetermination shall be made by Banks
in their sole discretion. Without limiting such discretion, Borrower
acknowledges and agrees that Banks (i) may make such assumptions regarding
appropriate existing and projected pricing for Hydrocarbons as they deem
appropriate in their sole discretion, (ii) may make such assumptions regarding
projected rates and quantities of future production of Hydrocarbons from the
Mineral Interests owned by Borrower as they deem appropriate in their sole
discretion, (iii) may consider the projected cash requirements of the Credit
Parties, (iv) except with respect to the Initial Borrowing Base and the Initial
Conforming Borrowing Base, are not required to consider any asset other than
Proved Mineral Interests owned by Borrower which are subject to first and prior
Liens in favor of Administrative Agent for the ratable benefit of Banks to the
extent required by Section 7.1 hereof, and (v) may make such other assumptions,
-----------
considerations and exclusions as Banks deem appropriate in the exercise of their
sole discretion. It is further acknowledged and agreed that each Bank may
consider such other credit factors as it deems appropriate in the exercise of
its sole discretion and shall have no obligation in connection with any
Redetermination to approve any increase from the Borrowing Base or the
Conforming Borrowing Base in effect prior to such Redetermination. The
Conforming Borrowing Base shall also be determined by Banks in their sole
discretion, and in determining the amount of the Conforming Borrowing Base, each
Bank may make the assumptions and consider the factors and criteria set forth in
subclauses (a) through (d) and (i) through (v) above; provided, that each Bank
-------- ----
shall apply Conforming Credit Criteria. Promptly following any Redetermination
of the Borrowing Base and the Conforming Borrowing Base, Administrative Agent
shall notify Borrower of the amount of the Borrowing Base and the Conforming
Borrowing Base as redetermined, which Borrowing Base and Conforming Borrowing
Base shall be effective as of the date specified in such notice, and shall
remain in effect for all purposes of this Agreement until the next
Redetermination.
38
<PAGE>
SECTION 6.3. Special Redetermination. (a) In addition to Scheduled
-----------------------
Redeterminations, Required Banks shall be permitted to make a Special
Redetermination of the Borrowing Base and the Conforming Borrowing Base once in
each period between Scheduled Redeterminations. Any request by Required Banks
pursuant to this Section 6.3(a) shall be submitted to Administrative Agent and
--------------
Borrower.
(b) In addition to Scheduled Redeterminations, Borrower shall be
permitted to request a Special Redetermination of the Borrowing Base and the
Conforming Borrowing Base once in each Fiscal Year. Such request shall be
submitted to Administrative Agent and Required Banks and at the time of such
request Borrower shall deliver to Administrative Agent and each Bank a Reserve
Report. Together with such request, Borrower shall also notify Administrative
Agent and each Bank of the Borrowing Base requested by Borrower in connection
with such Special Redetermination.
(c) Any Special Redetermination shall be made by Banks in accordance
with the procedures and standards set forth in Section 6.2; provided, that, no
----------- -------- ----
Reserve Report will be required to be delivered to Administrative Agent and
Banks in connection with any Special Redetermination requested by Required Banks
pursuant to clause (a) above.
SECTION 6.4. Borrowing Base Deficiency. If a Borrowing Base Deficiency
-------------------------
exists after giving effect to any Redetermination, Borrower shall be obligated
to eliminate such Borrowing Base Deficiency by making the mandatory prepayments
of the Loan required by Section 3.4.
-----------
SECTION 6.5. Initial Borrowing Base and Conforming Borrowing Base.
----------------------------------------------------
Notwithstanding anything to the contrary contained herein, the Borrowing Base
and the Conforming Borrowing Base in effect during the period commencing on the
Closing Date and ending on the effective date of the first Redetermination after
the Closing Date shall be the Initial Borrowing Base and the Initial Conforming
Borrowing Base, respectively.
ARTICLE VII
COLLATERAL AND GUARANTEES
SECTION 7.1. Security. (a) The Obligations shall be secured by first and
--------
prior Liens (subject only to Permitted Encumbrances) covering and encumbering
(i) one hundred percent (100%) of all Borrowing Base Properties, (ii) one
hundred percent (100%) of the issued and outstanding Equity of each existing and
future Subsidiary of Borrower, and (iii) all right, title and interest of
Borrower under the Management Agreement. On the Closing Date, Borrower shall
deliver to Administrative Agent for the ratable benefit of each Bank, the
Assignments of Notes and Liens, and Mortgages in form and substance acceptable
to Administrative Agent and duly executed by Borrower together with such other
assignments, conveyances, amendments, agreements and other writings, including,
without limitation, UCC-1 financing statements and UCC-3 assignments (each duly
authorized and executed) as Administrative Agent shall deem necessary or
appropriate to grant, evidence and perfect first and prior Liens in all
Borrowing Base Properties and other interests of Borrower required by this
Section 7.1(a).
- --------------
39
<PAGE>
(b) On or before each Redetermination Date after the Closing Date and
at such other times as Administrative Agent or Required Banks shall request,
Borrower shall execute and deliver to Administrative Agent, for the ratable
benefit of each Bank, Mortgages in form and substance acceptable to
Administrative Agent and duly executed by Borrower together with such other
assignments, conveyances, amendments, agreements and other writings, including,
without limitation, UCC-1 financing statements (each duly authorized and
executed) as Administrative Agent shall deem necessary or appropriate to grant,
evidence and perfect the Liens required by Section 7.1(a) preceding with respect
--------------
to Borrowing Base Properties acquired by Borrower subsequent to the last date on
which Borrower was required to execute and deliver Mortgages pursuant to this
Section 7.1(b), or which, for any other reason are not the subject of valid,
- --------------
enforceable, perfected first priority Liens (subject only to Permitted
Encumbrances) in favor of Administrative Agent for the ratable benefit of Banks.
(c) At any time Borrower or any of its Subsidiaries is required to
execute and deliver Mortgages to Administrative Agent pursuant to this Section
-------
7.1, Borrower shall also deliver to Administrative Agent such opinions of
- ---
counsel (including, if so requested, title opinions, and in each case addressed
to Administrative Agent) and other evidence of title as Administrative Agent
shall deem necessary or appropriate to verify (i) Borrower's title to the
Required Reserve Value of the Proved Mineral Interests which are subject to such
Mortgages, and (ii) the validity, perfection and priority of the Liens created
by such Mortgages and such other matters regarding such Mortgages as
Administrative Agent shall reasonably request.
(d) On the date of the creation or acquisition by Borrower of any
Subsidiary, or on the date of creation or acquisition by any First Tier
Subsidiary of any Subsidiary, Borrower or such First Tier Subsidiary (as
applicable) shall execute and deliver to Administrative Agent a Borrower Pledge
Agreement or a Subsidiary Pledge Agreement (as applicable) together with (i) all
certificates (or other evidence acceptable to Administrative Agent) evidencing
the issued and outstanding Equity of any such Subsidiary of every class which
shall be duly endorsed or accompanied by stock powers executed in blank (as
applicable), and (ii) such UCC-1 financing statements as Administrative Agent
shall deem necessary or appropriate to grant, evidence and perfect the Liens
required by Section 7.1(a)(ii) in the issued and outstanding Equity of each such
------------------
Subsidiary.
SECTION 7.2. Guarantees. Payment and performance of the Obligations
----------
shall be fully guaranteed by each existing or hereafter created or acquired
Subsidiary of Borrower pursuant to a Subsidiary Guaranty. On the date of
creation or acquisition by Borrower of any Subsidiary, Borrower shall cause such
Subsidiary to execute and deliver to Administrative Agent a Subsidiary Guaranty.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 8.1. Conditions to Amendment and Restatement and Initial
---------------------------------------------------
Borrowing and Participation in Letter of Credit Exposure. The obligation of
- --------------------------------------------------------
each Bank to amend and restate the Existing QRI/NationsBank Credit Agreement in
the form of this Agreement and the obligation of each Bank to loan its
Commitment Percentage of the initial Borrowing made hereunder, and the
40
<PAGE>
obligation of Administrative Agent to issue (or cause another Bank to issue) the
initial Letter of Credit issued hereunder is subject to the satisfaction of each
of the following conditions:
(a) Closing Deliveries. Administrative Agent shall have received
------------------
each of the following documents, instruments and agreements, each of which shall
be in form and substance and executed in such counterparts as shall be
acceptable to Administrative Agent and each Bank and each of which shall, unless
otherwise indicated, be dated the Closing Date:
(i) a Note payable to the order of each Bank, each in the amount of
such Bank's Commitment duly executed by Borrower;
(ii) Mortgages duly executed and delivered by Borrower creating
first and prior Liens in all Borrowing Base Properties;
(iii) Assignments of Notes and Liens duly executed and delivered by
Existing MSR Agent and Borrower;
(iv) the Collateral Assignments duly executed by Borrower;
(v) such financing statements in form and substance acceptable to
Administrative Agent and executed by each Credit Party as
Administrative Agent shall specify to fully evidence and perfect all
Liens contemplated by the Loan Papers, all of which shall be filed of
record in such jurisdictions as Administrative Agent shall require in
its sole direction;
(vi) a copy of the articles or certificate of incorporation,
certificate of limited partnership, articles of organization or
comparable charter documents, and all amendments thereto, of each
Credit Party accompanied by a certificate that such copy is true,
correct and complete, and dated within ten (10) days of the Closing
Date (or within such other period as acceptable to Administrative
Agent), issued by the appropriate Governmental Authority of the
jurisdiction of incorporation or organization of each Credit Party,
and accompanied by a certificate of the Secretary or comparable
Authorized Officer of each Credit Party that such copy is true,
correct and complete on the Closing Date;
(vii) a copy of the bylaws, partnership agreement, regulations,
operating agreement or comparable charter documents, and all
amendments thereto, of each Credit Party accompanied by a certificate
of the Secretary or comparable Authorized Officer of each Credit Party
that such copy is true, correct and complete as of the Closing Date;
(viii) certain certificates and other documents issued by the
appropriate Governmental Authorities of such jurisdictions as
Administrative Agent has requested relating to the existence of each
Credit Party and to the effect that each Credit Party is in good
standing with respect to the payment of franchise and similar Taxes
and is duly qualified to transact business in such jurisdictions;
41
<PAGE>
(ix) a certificate of incumbency of all officers of each Credit
Party who will be authorized to execute or attest to any Loan Paper,
dated the Closing Date, executed by the Secretary or comparable
Authorized Officer of each Credit Party;
(x) copies of resolutions or comparable authorizations approving
the Loan Papers and authorizing the transactions contemplated by this
Agreement and the other Loan Papers, duly adopted by the Board of
Directors or comparable authority of each Credit Party accompanied by
certificates of the Secretary or comparable officer of each Credit
Party that such copies are true and correct copies of resolutions duly
adopted at a meeting of or (if permitted by applicable Law and, if
required by such Law, by the bylaws or other charter documents of such
Credit Party) by the unanimous written consent of the Board of
Directors of each Credit Party, and that such resolutions constitute
all the resolutions adopted with respect to such transactions, have
not been amended, modified, or revoked in any respect, and are in full
force and effect as of the Closing Date;
(xi) an opinion of Cantey & Hanger, L.L.P., special counsel for
Borrower dated the Closing Date, favorably opining as to the
enforceability of each of the Loan Papers and otherwise in form and
substance satisfactory to Administrative Agent;
(xii) an opinion of Loomis, Ewert, Parsley, Davis & Gotting, special
Michigan counsel for Administrative Agent, dated the Closing Date,
favorably opinion as to the enforceability of the Mortgages in
Michigan and otherwise in form and substance satisfactory to
Administrative Agent;
(xiii) an opinion of Herschler, Freudenthal, Salzburg, Bonds & Zerga,
P.C., special Wyoming counsel for Administrative Agent, dated the
Closing Date, favorably opining as to the enforceability of the
Mortgages in Wyoming and otherwise in form and substance satisfactory
to Administrative Agent;
(xiv) an opinion of Crowley, Haughey, Hanson, Toole & Dietrich,
special Montana counsel for Administrative Agent, dated the Closing
Date, favorably opining as to the enforceability of the Mortgages and
the Assignments of Notes and Liens (as applicable) in Montana and
otherwise in form and substance satisfactory to Administrative Agent;
(xv) a certificate signed by an Authorized Officer of Borrower
stating that (a) the representations and warranties contained in this
Agreement and the other Loan Papers are true and correct in all
respects, and (b) no Default or Event of Default has occurred and is
continuing, and (c) all conditions set forth in this Section 8.1 and
-----------
Section 8.2 have been satisfied;
-----------
(xvi) a Certificate of Ownership Interests signed by an Authorized
Officer of Borrower in the form of Exhibit G attached hereto;
---------
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(xvii) certificates from Borrower's insurance broker setting forth
the insurance maintained by Borrower, stating that such insurance is
in full force and effect, that all premiums due have been paid and
stating that such insurance is adequate and complies with the
requirements of Section 10.6;
------------
(xviii) a copy of each of the Closing Documents accompanied by a
certificate executed by an Authorized Officer of Borrower certifying
that (A) such copies are accurate and complete and represent the
complete understanding and agreement of the parties thereto, (B) no
material right or obligation of any party thereto has been modified,
amended or waived, and (C) subject only to funding the initial
Borrowing to be made hereunder, the Closing Transactions have been
consummated on the terms set forth in such Closing Documents;
(xix) a report or reports in form, scope and detail acceptable to
Administrative Agent and Banks setting forth the results of a review
of Borrower's Mineral Interests (after giving effect to the Closing
Transactions) and other operations, which report(s) shall not reflect
the existence of facts or circumstances which would constitute a
material violation of any Applicable Environmental Law or which are
likely to result in a material liability to any Credit Party, and/or
otherwise reveal any condition or circumstance which would reflect
that the representations and warranties contained in Section 9.14
------------
hereof are inaccurate in any respect; and
(xx) copies of the Merger Certificate filed with the Secretary of
State of Delaware, together with such certificates, affidavits or
other instruments suitable for recording same in such jurisdictions as
Administrative Agent shall require, certifying or otherwise evidencing
that such copies are accurate and complete copies of the Merger
Certificate as so filed.
(b) Closing Transactions. Subject only to disbursement and
--------------------
application of the initial Borrowing, the Closing Transactions shall have
occurred (or Administrative Agent shall be satisfied that such transactions will
occur simultaneously therewith). Without limiting the foregoing, each of the
following shall have occurred (or Administrative Agent shall be satisfied that
each of the following shall occur simultaneously therewith):
(i) the Merger shall have been completed pursuant to the terms of
the Merger Documents, and pursuant thereto the Certificate of Merger
shall have been duly filed with the Secretary of State of Delaware;
(ii) the MSR/Paribas Credit Agreement shall have been terminated
and all obligations and Debt thereunder shall have been refinanced in
full with proceeds of the Loan and all Liens securing payment and
performance of such Debt and obligations shall have been assigned to
Administrative Agent pursuant to the Assignments of Notes and Liens;
and
(iii) all fees and expenses of Administrative Agent and its
Affiliates in connection with the credit facility provided herein
shall have been paid.
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(c) Title Review. Administrative Agent or its counsel shall have
------------
completed a review of title (including opinions of title) with respect to the
Required Reserve Value of all Borrowing Base Properties, and such review shall
not have revealed any condition or circumstance which would reflect that the
representations and warranties contained in Section 9.9 hereof are inaccurate in
-----------
any respect.
(d) No Material Adverse Change. In the sole discretion of each Bank,
--------------------------
no Material Adverse Change shall have occurred (i) since September 30, 1998 with
respect to Borrower or its Subsidiaries (including, without limitation, no
Material Adverse Change with respect to any facts or information regarding such
Persons as represented to any Agent or any Bank on or prior to the Closing Date)
or (ii since September 30, 1998 with respect to MSR or its Subsidiaries
(including, without limitation, no Material Adverse Change with respect to any
facts or information regarding such Persons as represented to any Agent or any
Bank on or prior to the Closing Date).
(e) No Legal Prohibition. The transactions contemplated by this
--------------------
Agreement shall be permitted by applicable Law and regulation and shall not
subject any Agent, any Bank, or any Credit Party to any Material Adverse Change.
(f) No Litigation. No litigation, arbitration or similar proceeding
-------------
shall be pending or threatened which calls into question the validity or
enforceability of this Agreement, the other Loan Papers or the transactions
contemplated hereby or thereby.
(g) Closing Fees. Borrower shall have paid to Administrative Agent
------------
for the ratable benefit of each Bank, and shall have paid to Administrative
Agent and its Affiliates (for its own account), the fees to be paid on the
Closing Date pursuant to Section 3.9.
-----------
(h) Other Matters. All matters related to this Agreement, the other
-------------
Loan Papers, the Closing Documents, the Closing Transactions and the Credit
Parties shall be acceptable to each Bank in its sole discretion, and each Credit
Party shall have delivered to Administrative Agent and each Bank such evidence
as they shall request to substantiate any matters related to this Agreement and
the other Loan Papers, as Administrative Agent or any Bank shall request.
Upon satisfaction of each of the conditions set forth in this Section 8.1,
-----------
Borrower and Administrative Agent shall execute the Certificate of
Effectiveness. Upon the execution and delivery of the Certificate of
Effectiveness, the Existing QRI/NationsBank Credit Agreement shall automatically
and completely be amended and restated on the terms set forth herein without
necessity of any other action on the part of any Bank, any Agent or Borrower.
Until execution and delivery of the Certificate of Effectiveness, the Existing
QRI/NationsBank Credit Agreement shall remain in full force and effect in
accordance with its terms. Each Bank hereby authorizes Administrative Agent to
execute the Certificate of Effectiveness on its behalf and acknowledges and
agrees that the execution of the Certificate of Effectiveness by Administrative
Agent shall be binding on each such Bank.
SECTION 8.2. Conditions to Each Borrowing and each Letter of Credit. The
------------------------------------------------------
obligation of each Bank to loan its Commitment Percentage of each Borrowing and
the obligation
44
<PAGE>
of Administrative Agent to issue a Letter of Credit on the date such Letter of
Credit is to be issued is subject to the further satisfaction of the following
conditions:
(a) timely receipt by Administrative Agent of a Request for Borrowing
or a Request for Letter of Credit (as applicable);
(b) immediately before and after giving effect to such Borrowing or
issuance of such Letter of Credit, no Default or Event of Default shall have
occurred and be continuing and the funding of such Borrowing or the issuance of
the requested Letter of Credit (as applicable) shall not cause a Default or
Event of Default;
(c) the representations and warranties of each Credit Party contained
in this Agreement and the other Loan Papers shall be true and correct on and as
of the date of such Borrowing or issuance of such Letter of Credit (as
applicable);
(d) the amount of the requested Borrowing or the amount of the
requested Letter of Credit (as applicable) shall not exceed the Availability;
(e) no Material Adverse Change shall have occurred; and
(f) the funding of such Borrowing or the issuance of such Letter of
Credit (as applicable) shall be permitted by applicable Law.
The funding of each Borrowing and the issuance of each Letter of Credit
hereunder shall be deemed to be a representation and warranty by Borrower on the
date of such Borrowing and the date of issuance of each Letter of Credit as to
the facts specified in Sections 8.2(b) through (f).
--------------- ---
SECTION 8.3. Materiality of Conditions. Each condition precedent herein is
-------------------------
material to the transactions contemplated herein, and time is of the essence in
respect of each thereof.
SECTION 8.4. Termination of Agreement. Notwithstanding anything to the
------------------------
contrary contained in this Agreement (including, without limitation, Section 3.1
-----------
hereof) or in any other Loan Paper, if all the conditions precedent set forth in
Section 8.1 hereof, including, without limitation, the execution and delivery of
- -----------
the Certificate of Effectiveness, have not been consummated on or prior to March
31, 1999, Required Banks may, by notice to Administrative Agent and Borrower,
terminate this Agreement and the Total Commitment (and the Commitment of each
Bank) as of any date specified in such notice (the "Early Termination Date"),
----------------------
whereupon this Agreement and the Total Commitment (and the Commitment of each
Bank) shall terminate, and all accrued but unpaid fees hereunder and all other
outstanding Obligations shall be due and payable in full on the Early
Termination Date.
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<PAGE>
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Administrative Agent and each Bank that
each of the following statements is true and correct on the date hereof, will be
true and correct on the Closing Date after giving effect to the Closing
Transactions, and will be true and correct on the occasion of each Borrowing and
the issuance of each Letter of Credit:
SECTION 9.1. Existence and Power. Each Credit Party (a) is a corporation,
-------------------
partnership or limited liability company duly incorporated or organized (as
applicable), validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, (b) has all corporate,
partnership or limited liability company power (as applicable) and all material
governmental licenses, authorizations, consents and approvals required to carry
on its businesses as now conducted and as proposed to be conducted, and (c) is
duly qualified to transact business as a foreign corporation, partnership or
limited liability company in each jurisdiction where a failure to be so
qualified could result in a Material Adverse Change.
SECTION 9.2. Credit Party and Governmental Authorization; Contravention.
----------------------------------------------------------
The execution, delivery and performance of this Agreement and the other Loan
Papers by each Credit Party (to the extent each Credit Party is a party to this
Agreement and such Loan Papers) are within such Credit Party's corporate,
partnership or limited liability company powers, when executed will be duly
authorized by all necessary corporate, partnership or limited liability company
action, require no action by or in respect of, or filing with, any Governmental
Authority and do not contravene, or constitute a default under, any provision of
applicable Law (including, without limitation, the Margin Regulations) or of the
articles or certificate of incorporation, bylaws, regulations, partnership
agreement or comparable charter documents of any Credit Party or of any
agreement, judgment, injunction, order, decree or other instrument binding upon
any Credit Party or result in the creation or imposition of any Lien on any
asset of any Credit Party other than the Liens securing the Obligations.
SECTION 9.3. Binding Effect. This Agreement constitutes a valid and
--------------
binding agreement of Borrower; the other Loan Papers when executed and delivered
in accordance with this Agreement, will constitute valid and binding obligations
of each Credit Party executing the same; and each Loan Paper is, or when
executed and delivered will be, enforceable against each Credit Party which
executes the same in accordance with its terms except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar Laws affecting
creditors rights generally, and (ii) the availability of equitable remedies may
be limited by equitable principles of general applicability.
SECTION 9.4. Financial Information. (a) The most recent annual audited
---------------------
consolidated balance sheet of Borrower and the related consolidated statements
of operations and cash flows for the Fiscal Year then ended, copies of which
have been delivered to each Bank, fairly present, in conformity with GAAP, the
consolidated financial position of Borrower as of the end of such Fiscal Year
and its consolidated results of operations and cash flows for such Fiscal Year.
46
<PAGE>
(b) The most recent quarterly unaudited consolidated balance sheet of
Borrower delivered to Banks, and the related unaudited consolidated statements
of operations and cash flows for the portion of Borrower's Fiscal Year then
ended, fairly present, in conformity with GAAP applied on a basis consistent
with the financial statements referred to in Section 9.4(a), the consolidated
--------------
financial position of Borrower as of such date and its consolidated results of
operations and cash flows for such portion of Borrower's Fiscal Year.
(c) The most recent annual audited consolidated balance sheet of MSR
and the related consolidated statements of operations and cash flows for the
Fiscal Year then ended, copies of which have been delivered to each Bank, fairly
present, in conformity with GAAP, the consolidated financial position of MSR as
of the end of such Fiscal Year and its consolidated results of operations and
cash flows for such Fiscal Year.
(d) The most recent quarterly unaudited consolidated balance sheet of
MSR delivered to Banks, and the related unaudited consolidated statements of
operations and cash flows for the portion of MSR's Fiscal Year then ended,
fairly present, in conformity with GAAP applied on a basis consistent with the
financial statements referred to in Section 9.4(c), the consolidated financial
--------------
position of MSR as of such date and its consolidated results of operations and
cash flows for such portion of MSR's Fiscal Year.
(e) Except as disclosed in writing to Banks prior to the execution and
delivery of this Agreement, since (i) September 30, 1998, no Material Adverse
Change has occurred with respect to Borrower or its Subsidiaries (including,
without limitation, no Material Adverse Change with respect to any facts or
information regarding such Persons as represented to any Agent or any Bank on or
prior to the Closing Date), and (ii September 30, 1998, no Material Adverse
Change has occurred with respect to MSR or its Subsidiaries (including, without
limitation, no Material Adverse Change with respect to any facts or information
regarding such Persons as represented to any Agent or any Bank on or prior to
the Closing Date).
(f) After giving effect to the transactions contemplated by this
Agreement (including the Closing Transactions), (i) the fair value of the
property of each Credit Party is greater than the total amount of liabilities,
including, without limitation, contingent liabilities, of such Credit Party,
(ii) the present fair saleable value of the assets of each Credit Party is not
less than the amount that will be required to pay the liability of each Credit
Party on its debts as they become absolute and matured, (iii) each Credit Party
is able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal course
of business, (iv) no Credit Party intends to, and no Credit Party believes that
it will, incur debts or liabilities beyond its ability to pay as such debts and
liabilities mature, and (v) no Credit Party is engaged in a business or
transaction, and no Credit Party is about to engage in a business or transaction
for which such Credit Party's property would constitute unreasonably small
capital after giving due consideration to the prevailing practice in the
industry in which such Credit Party is engaged.
SECTION 9.5. Litigation. Except for matters disclosed on Schedule 3
---------- ----------
attached hereto, there is no action, suit or proceeding pending against, or to
the knowledge of any Credit Party, threatened against or affecting any Credit
Party before any Governmental Authority in which there
47
<PAGE>
is a reasonable possibility of an adverse decision which could result in a
Material Adverse Change or which could in any manner draw into question the
validity of the Loan Papers.
SECTION 9.6. ERISA. No Credit Party nor any ERISA Affiliate of any
-----
Credit Party maintains or has ever maintained or been obligated to contribute to
any Plan covered by Title IV of ERISA or subject to the funding requirements of
Section 412 of the Code or Section 302 of ERISA. Each Plan maintained by any
Credit Party or any ERISA Affiliate of any Credit Party is in compliance in all
material respects with all applicable Laws. Except in such instances where an
omission or failure would not result in a Material Adverse Change, (a) all
returns, reports and notices required to be filed with any regulatory agency
with respect to any Plan have been filed timely, and (b) no Credit Party nor any
ERISA Affiliate of any Credit Party has failed to make any contribution or pay
any amount due or owing as required by the terms of any Plan. There are not
pending or, to the best of Borrower's knowledge, threatened claims, lawsuits,
investigations or actions (other than routine claims for benefits in the
ordinary course) asserted or instituted against, and no Credit Party nor any
ERISA Affiliate of any Credit Party has knowledge of any threatened litigation
or claims against, the assets of any Plan or its related trust or against any
fiduciary of a Plan with respect to the operation of such Plan that are likely
to result in liability of any Credit Party resulting in a Material Adverse
Change. Except in such instances where an omission or failure would not result
in a Material Adverse Change, each Plan that is intended to be "qualified"
within the meaning of section 401(a) of the Code is, and has been during the
period from its adoption to date, so qualified, both as to form and operation
and all necessary governmental approvals, including a favorable determination as
to the qualification under the Code of such Plan and each amendment thereto,
have been or will be timely obtained. No Credit Party nor any ERISA Affiliate
of any Credit Party has engaged in any prohibited transactions, within the
meaning of section 406 of ERISA or section 4975 of the Code, in connection with
any Plan which would result in liability of any Credit Party resulting in a
Material Adverse Change. No Credit Party nor any ERISA Affiliate of any Credit
Party maintains or contributes to any Plan that provides a post-employment
health benefit, other than a benefit required under Section 601 of ERISA, or
maintains or contributes to a Plan that provides health benefits that is not
fully funded except where the failure to fully fund such Plan would not result
in a Material Adverse Change. No Credit Party nor any ERISA Affiliate of any
Credit Party maintains, has established or has ever participated in a multiple
employer welfare benefit arrangement within the meaning of section 3(40)(A) of
ERISA.
SECTION 9.7. Taxes and Filing of Tax Returns. Each Credit Party has
-------------------------------
filed all tax returns required to have been filed and has paid all Taxes shown
to be due and payable on such returns, including interest and penalties, and all
other Taxes which are payable by such party, to the extent the same have become
due and payable. No Credit Party knows of any proposed material Tax assessment
against it and all Tax liabilities of each Credit Party are adequately provided
for. Except as disclosed in writing to Banks prior to the date hereof, no
income tax liability of any Credit Party has been asserted by the Internal
Revenue Service or other Governmental Authority for Taxes in excess of those
already paid.
SECTION 9.8. Ownership of Properties Generally. Each Credit Party has
---------------------------------
good and valid fee simple or leasehold title to all material properties and
assets purported to be owned by it, including, without limitation, all assets
reflected in the balance sheets referred to in Section 9.4 (a)
---------------
48
<PAGE>
and all assets which are used by the Credit Parties in the operation of their
respective businesses, and none of such properties or assets is subject to any
Lien other than Permitted Encumbrances.
SECTION 9.9. Mineral Interests. The Property Description is an accurate
-----------------
and complete description of all Borrowing Base Properties on the Closing Date.
Subject only to Immaterial Title Deficiencies (as herein defined), after giving
effect to the Closing Transactions, Borrower will have good and defensible title
to all Mineral Interests described in the Reserve Report, including, without
limitation, all Borrowing Base Properties, free and clear of all Liens except
for Permitted Encumbrances. Subject only to Immaterial Title Deficiencies, all
Mineral Interests described in the Reserve Report are valid, subsisting, and in
full force and effect, and all rentals, royalties, and other amounts due and
payable in respect thereof have been duly paid. Without regard to any consent
or non-consent provisions of any joint operating agreement covering any of
Borrower's Proved Mineral Interests, after giving effect to the Closing
Transactions, but subject to Immaterial Title Deficiencies, Borrower's share of
(a) the costs for each Proved Mineral Interest described in the Reserve Report
is not greater than the decimal fraction set forth in the Reserve Report, before
and after payout, as the case may be, and described therein by the respective
designations "working interests," "WI," "gross working interest," "GWI," or
similar terms, and (b) production from, allocated to, or attributed to each such
Proved Mineral Interest is not less than the decimal fraction set forth in the
Reserve Report, before and after payout, as the case may be, and described
therein by the designations "net revenue interest," "NRI," or similar terms. As
used herein, the term "Immaterial Title Deficiencies" means minor defects or
-----------------------------
deficiencies in title which do not effect, in the aggregate, more than two
percent (2%) (by value) of all Borrowing Base Properties. Each well drilled in
respect of each Proved Producing Mineral Interest described in the Reserve
Report (y) is capable of, and is presently, producing Hydrocarbons in
commercially profitable quantities, and after giving effect to the Closing
Transactions, Borrower will receive payments on a current basis for its share of
production, with no funds in respect of any thereof held in suspense, other than
any such funds held in suspense pending delivery of appropriate division orders,
and (z) has been drilled, bottomed, completed, and operated in compliance with
all applicable Laws and no such well which is currently producing Hydrocarbons
is subject to any penalty in production by reason of such well having produced
in excess of its allowable production.
SECTION 9.10. Licenses, Permits, Etc. Each Credit Party possesses such
----------------------
valid franchises, certificates of convenience and necessity, operating rights,
licenses, permits, consents, authorizations, exemptions and orders of
Governmental Authorities, as are necessary to carry on its business as now
conducted and as proposed to be conducted, except to the extent a failure to
obtain any such item would not result in a Material Adverse Change.
SECTION 9.11. Compliance with Law. The business and operations of the
-------------------
Credit Parties have been and are being conducted in accordance with all
applicable Laws other than violations of Laws which do not (either individually
or collectively) result in a Material Adverse Change.
SECTION 9.12. Full Disclosure. All information heretofore furnished by
---------------
each Credit Party to Administrative Agent or any Bank for purposes of or in
connection with this Agreement, any Loan Paper or any transaction contemplated
hereby or thereby is, and all such information hereafter furnished by or on
behalf of any Credit Party to Administrative Agent or any Bank will be, true,
49
<PAGE>
complete and accurate in every material respect. The Credit Parties have
disclosed or have caused to be disclosed to Banks in writing any and all facts
(other than facts of general public knowledge) which might reasonably be
expected to result in a Material Adverse Change.
SECTION 9.13. Organizational Structure; Nature of Business. The Credit
--------------------------------------------
Parties are engaged only in the business of acquiring, exploring, developing and
operating Mineral Interests and the production, marketing, processing and
transporting of Hydrocarbons therefrom. Schedule 4 hereto accurately reflects
----------
(i) the jurisdiction of incorporation or organization of each Credit Party, (ii)
each jurisdiction in which each Credit Party is qualified to transact business
as a foreign corporation, foreign partnership or foreign limited liability
company, (iii) the authorized, issued and outstanding Equity of each Credit
Party (and the legal and beneficial owners of such Equity) immediately prior to
giving effect to the Closing Transactions, (iv) the authorized, issued and
outstanding Equity of each Credit Party (and the number of shares owned by each
member of the Darden Group) immediately after giving effect to the Closing
Transactions, (v) all outstanding warrants, options, subscription rights,
convertible securities or other rights to purchase Equity of each Credit Party
immediately prior to giving effect to the Closing Transactions, and (vi) all
outstanding warrants, options, subscription rights, convertible securities or
other rights to purchase Equity of each Credit Party owned by, or otherwise in
favor of, each member of the Darden Group immediately after giving effect to the
Closing Transactions.
SECTION 9.14. Environmental Matters. Except for matters disclosed on
---------------------
Schedule 5 hereto, and after giving effect to the Closing Transactions, no
- ----------
operation conducted by any Credit Party and no real or personal property now or
previously owned or leased by any Credit Party (including, without limitation,
Mineral Interests) and no operations conducted thereon, and to any Credit
Parties' knowledge, no operations of any prior owner, lessee or operator of any
such properties, is or has been in violation of any Applicable Environmental Law
other than violations which neither individually nor in the aggregate could
result in a Material Adverse Change. Except for matters disclosed on Schedule 5
----------
hereto, and after giving effect to the Closing Transactions, no Credit Party,
nor any such property nor operation is the subject of any existing, pending or,
to any Credit Parties' knowledge, threatened Environmental Complaint which
could, individually or in the aggregate, result in a Material Adverse Change.
All notices, permits, licenses, and similar authorizations, required to be
obtained or filed (after giving effect to the Closing Transactions) in
connection with the ownership of each tract of real property or operations of
any Credit Party thereon and each item of personal property owned, leased or
operated by any Credit Party, including, without limitation, notices, licenses,
permits and authorizations required in connection with any past or present
treatment, storage, disposal, or release of Hazardous Substances into the
environment, have been duly obtained or filed except to the extent the failure
to obtain or file such notices, licenses, permits and authorizations would not
result in a Material Adverse Change. All Hazardous Substances, generated at
each tract of real property and by each item of personal property owned, leased
or operated by any Credit Party (after giving effect to the Closing
Transactions) have been transported, treated, and disposed of only by carriers
or facilities maintaining valid permits under RCRA (as hereinafter defined) and
all other Applicable Environmental Laws for the conduct of such activities
except in such cases where the failure to obtain such permits could not,
individually or in the aggregate, result in a Material Adverse Change. Except
for matters disclosed on Schedule 5 hereto, and after giving effect to the
----------
Closing Transactions, there have been no Hazardous Discharges which were not in
compliance with Applicable Environmental Laws other than Hazardous Discharges
50
<PAGE>
which would not, individually or in the aggregate, result in a Material Adverse
Change. Except for matters disclosed on Schedule 5 hereto, and after giving
----------
effect to the Closing Transactions, no Credit Party nor any Subsidiary of any
Credit Party has any contingent liability in connection with any Hazardous
Discharge which could reasonably be expected to result in a Material Adverse
Change. As used in this Section 9.14, the term "RCRA" shall mean the Resource
------------ ----
Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980, the Solid Waste Recovery Act of 1976, as amended by the Solid Waste
Disposal Act of 1980, and the Hazardous and Solid Waste Amendments of 1984, as
the same may be further amended and in effect from time to time.
SECTION 9.15. Burdensome Obligations. No Credit Party, nor any of the
----------------------
properties of any Credit Party is subject to any Law or any pending or
threatened change of Law or subject to any restriction under its articles (or
certificate) of incorporation, bylaws, regulations, partnership agreement or
comparable charter documents or under any agreement or instrument to which any
Credit Party or by which any Credit Party or any of their properties may be
subject or bound, which is so unusual or burdensome as to be likely in the
foreseeable future to result in a Material Adverse Change. Without limiting the
foregoing, no Credit Party is a party to or bound by any agreement or subject to
any order of any Governmental Authority which prohibits or restricts in any way
the right of such Credit Party to make Distributions.
SECTION 9.16. Fiscal Year. Borrower's Fiscal Year is January 1 through
-----------
December 31.
SECTION 9.17. No Default. Neither a Default nor an Event of Default has
----------
occurred or will exist after giving effect to the transactions contemplated by
this Agreement or the other Loan Papers.
SECTION 9.18. Government Regulation. No Credit Party is subject to
---------------------
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Interstate Commerce Act (as any of the preceding acts have been
amended), the Investment Company Act of 1940 or any other Law which regulates
the incurring by such Credit Party of Debt, including, but not limited to Laws
relating to common contract carriers or the sale of electricity, gas, stream,
water or other public utility services.
SECTION 9.19. Insider. No Credit Party is, and no Person having "control"
-------
(as that term is defined in 12 U.S.C. Section 375(b) or regulations promulgated
thereunder) of any Credit Party is an "executive officer," "director" or
"shareholder" of any Bank or any bank holding company of which any Bank is a
Subsidiary or of any Subsidiary of such bank holding company.
SECTION 9.20. Gas Balancing Agreements and Advance Payment Contracts. On
------------------------------------------------------
the date of this Agreement and on the Closing Date, (a) there is no Material Gas
Imbalance, and (b) the aggregate amount of all Advance Payments received by any
Credit Party under Advance Payment Contracts which have not been satisfied by
delivery of production does not exceed $250,000.
SECTION 9.21. Closing Documents; Management Agreement. Borrower has
---------------------------------------
provided (or on the Closing Date Borrower will provide) Administrative Agent
with a true and correct copy of each of the Closing Documents and the Management
Agreement including all amendments and
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modifications thereto. No material rights or obligations of any party to any of
such Closing Documents or the Management Agreement have been (or will be on the
Closing Date) waived, and no Credit Party, nor to the best knowledge of
Borrower, any other party to any of such Closing Documents or the Management
Agreement, is (or will be on the Closing Date) in default of its obligations
thereunder. Each of the Closing Documents and the Management Agreement is (or
will be on the Closing Date) a valid, binding and enforceable obligation of the
parties thereto in accordance with its terms and is (or will be on the Closing
Date) in full force and effect. Each representation and warranty made by each
Credit Party, and to the best knowledge of Borrower, by each other party to the
Closing Documents and the Management Agreement, in the Closing Documents and the
Management Agreement (a) was true and correct when made, and (b) will be true
and correct on the Closing Date.
SECTION 9.22. Year 2000 Matters. Any reprogramming required to permit the
-----------------
proper functioning (but only to the extent that such proper functioning would
otherwise be impaired by the occurrence of the year 2000) in and following the
year 2000 of computer systems and other equipment containing imbedded
microchips, in either case owned or operated by any Credit Party or used or
relied upon in the conduct of their business (including, to Borrower's
knowledge, any such systems and other equipment supplied by others or with which
the computer systems of any Credit Party interface) and the testing of all such
systems and other equipment as so reprogrammed, has been completed. The costs
to Borrower and any other Credit Party that have not been incurred as of the
date hereof for such reprogramming and testing and for other reasonably
foreseeable consequences to them of any improper functioning of other computer
systems and equipment containing imbedded microchips due to the occurrence of
the year 2000 could not reasonably be expected to result in a Default, Event of
Default or a Material Adverse Change. Except for any reprogramming referred to
above, the computer systems of each Credit Party are and, with ordinary course
upgrading and maintenance, will continue for the term of this Agreement to be,
sufficient for the conduct of their business as currently conducted.
ARTICLE X
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any Bank has any commitment
to lend or participate in Letter of Credit Exposure hereunder or any amount
payable under any Note remains unpaid or any Letter of Credit remains
outstanding:
SECTION 10.1. Information. Borrower will deliver, or cause to be
-----------
delivered, to each Bank:
(a) as soon as available and in any event within ninety (90) days
after the end of each Fiscal Year, a consolidated and consolidating balance
sheet of Borrower and each other Credit Party as of the end of such Fiscal Year
and the related consolidated and consolidating statements of income and
statements of cash flow for such Fiscal Year, setting forth in each case in
comparative form the figures for the previous Fiscal Year, all reported by such
Credit Party in accordance with GAAP and audited by a firm of independent public
accountants of nationally recognized standing and acceptable to Administrative
Agent;
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(b) (i) as soon as available and in any event within forty-five (45)
days after the end of each of the first three (3) Fiscal Quarters of each Fiscal
Year, consolidated and consolidating balance sheets of Borrower and each other
Credit Party as of the end of such Fiscal Quarter and the related consolidated
and consolidating statements of income and statements of cash flow for such
quarter and for the portion of such Credit Party's Fiscal Year ended at the end
of such Fiscal Quarter, setting forth in each case in comparative form the
figures for the corresponding quarter and the corresponding portion of such
Credit Party's previous Fiscal Year;
(c) simultaneously with the delivery of each set of financial
statements referred to in Sections 10.1(a) and (b), a certificate of a Financial
---------------- ---
Officer of Borrower in the form of Exhibit H attached hereto, (i) setting forth
---------
in reasonable detail the calculations required to establish whether Borrower was
in compliance with the requirements of Article XII on the date of such financial
-----------
statements, (ii) stating whether there exists on the date of such certificate
any Default and, if any Default then exists, setting forth the details thereof
and the action which Borrower is taking or proposes to take with respect
thereto, (iii) stating whether or not such financial statements fairly reflect
in all material respects the results of operations and financial condition of
Borrower and each other Credit Party as of the date of the delivery of such
financial statements and for the period covered thereby, (iv) setting forth (A)
whether as of such date there is a Material Gas Imbalance and, if so, setting
forth the amount of net gas imbalances under Gas Balancing Agreements to which
any Credit Party is a party or by which any Mineral Interests owned by Borrower
is bound, and (B) the aggregate amount of all Advance Payments received under
Advance Payment Contracts to which any Credit Party is a party or by which any
Mineral Interests owned by Borrower is bound which have not been satisfied by
delivery of production, if any, and (v) a summary of the Hedge Transactions to
which each Credit Party is a party on such date;
(d) promptly upon the mailing thereof to the stockholders of any
Credit Party generally, copies of all financial statements, reports and proxy
statements so mailed;
(e) promptly upon the filing thereof, copies of all final
registration statements post effective amendments thereto and annual, quarterly
or special reports which any Credit Party shall have filed with the Securities
and Exchange Commission; provided, that Borrower must deliver, or cause to be
-------- ----
delivered, any annual reports which any Credit Party shall have filed with the
Securities and Exchange Commission, within ninety (90) days after the end of
each Fiscal Year of such Credit Party, and any quarterly reports which any
Credit Party shall have filed with the Securities and Exchange Commission,
within forty-five (45) days after the end of each of the first three (3) Fiscal
Quarters of each Fiscal Year of such Credit Party;
(f) promptly upon receipt of same, any notice or other information
received by any Credit Party indicating (i) any potential, actual or alleged
non-compliance with or violation of the requirements of any Applicable
Environmental Law which could result in liability to any Credit Party for fines,
clean up or any other remediation obligations or any other liability in excess
of $100,000 in the aggregate; (ii) any threatened Hazardous Discharge which
Hazardous Discharge would impose on any Credit Party a duty to report to a
Governmental Authority or to pay cleanup costs or to take remedial action under
any Applicable Environmental Law which could result in liability to any Credit
Party for fines, clean up and other remediation obligations or any other
liability in excess of $100,000 in the aggregate; or (iii) the existence of any
Lien arising under any Applicable Environmental Law
53
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securing any obligation to pay fines, clean up or other remediation costs or any
other liability in excess of $100,000 in the aggregate. Without limiting the
foregoing, each Credit Party shall provide to Banks promptly upon receipt of
same by any Credit Party copies of all environmental consultants or engineers
reports received by any Credit Party which would render the representations and
warranties (or any of them) contained in Section 9.14 untrue or inaccurate in
------------
any respect;
(g) in the event any notification is provided to any Bank or
Administrative Agent pursuant to Section 10.1(f) hereof or Administrative Agent
---------------
or any Bank otherwise learns of any event or condition under which any such
notice would be required, then, upon request of Required Banks, Borrower shall
within thirty (30) days of such request, cause to be furnished to Administrative
Agent and each Bank a report by an environmental consulting firm acceptable to
Administrative Agent and Required Banks, stating that a review of such event,
condition or circumstance has been undertaken (the scope of which shall be
acceptable to Administrative Agent and Required Banks) and detailing the
findings, conclusions and recommendations of such consultant; Borrower shall
bear all expenses and costs associated with such review and updates thereof;
(h) immediately upon any Authorized Officer becoming aware of the
occurrence of any Default, a certificate of an Authorized Officer setting forth
the details thereof and the action which Borrower is taking or proposes to take
with respect thereto;
(i) no later than March 31 and September 30 of each year, reports of
production volumes, revenue, expenses and product prices for all Mineral
Interests owned by Borrower for the periods of six (6) months ending the
preceding December 31 and June 30, respectively. Such reports shall be prepared
on an accrual basis and shall be reported on a field by field basis;
(j) promptly notify Banks of any Material Adverse Change; and
(k) from time to time such additional information regarding the
financial position or business of any Credit Party as Administrative Agent, at
the request of any Bank, may reasonably request.
SECTION 10.2. Business of Borrower. The sole business of Borrower shall
--------------------
be the acquisition, exploration, development and operation of Mineral Interests
and the production, marketing, processing and transportation of Hydrocarbons
therefrom.
SECTION 10.3. Maintenance of Existence. Borrower shall, and shall cause
------------------------
each other Credit Party to, at all times (a) maintain its corporate, partnership
or limited liability company existence in its state of incorporation or
organization, and (b) maintain its good standing and qualification to transact
business in all jurisdictions where the failure to maintain good standing or
qualification to transact business could result in a Material Adverse Change.
SECTION 10.4. Title Data. Borrower shall, upon the request of Required
----------
Banks, cause to be delivered to Administrative Agent such title opinions and
other information regarding title to Mineral Interests owned by Borrower and the
perfection and priority of Administrative Agent's Liens therein as are
appropriate to determine the status thereof.
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SECTION 10.5. Right of Inspection. Borrower will permit, and will cause
-------------------
each other Credit Party to permit, any officer, employee or agent of
Administrative Agent or of any Bank to visit and inspect any of the assets of
any Credit Party, examine each Credit Party's books of record and accounts, take
copies and extracts therefrom, and discuss the affairs, finances and accounts of
each Credit Party with such Credit Party's officers, accountants and auditors,
all at such reasonable times and as often as Administrative Agent or any Bank
may desire, and upon and during the continuance of an Event of Default all at
the expense of Borrower.
SECTION 10.6. Maintenance of Insurance. Borrower will, and will cause
------------------------
each other Credit Party to, at all times maintain or cause to be maintained
insurance covering such risks as are customarily carried by businesses similarly
situated, including, without limitation, the following: (a) workmen's
compensation insurance; (b) employer's liability insurance; (c) comprehensive
general public liability and property damage insurance; (d) insurance against
losses customarily insured against as a result of damage by fire, lightning,
hail, tornado, explosion and other similar risk; and (e) comprehensive
automobile liability insurance. All loss payable clauses or provisions in all
policies of insurance maintained by Borrower pursuant to this Section 10.6 shall
------------
be endorsed in favor of and made payable to Administrative Agent for the ratable
benefit of Banks, as their interests may appear. Administrative Agent shall
have the right, for the ratable benefit of Banks, to collect, and Borrower
hereby assigns to Administrative Agent for the ratable benefit of Banks, any and
all monies that may become payable under any such policies of insurance by
reason of damage, loss or destruction of any property which stands as security
for the Obligations or any part thereof, and Administrative Agent may, at its
election, either apply for the ratable benefit of Banks all or any part of the
sums so collected toward payment of the Obligations, whether or not such
Obligations are then due and payable, in such manner as Administrative Agent may
elect, or release same to the applicable Credit Party.
SECTION 10.7. Payment of Taxes and Claims. Borrower will, and will cause
---------------------------
each other Credit Party to, pay (a) all Taxes imposed upon it or any of its
assets or with respect to any of its franchises, business, income or profits
before any material penalty or interest accrues thereon and (b) all material
claims (including, without limitation, claims for labor, services, materials and
supplies) for sums which have become due and payable and which by law have or
might become a Lien (other than a Permitted Encumbrance) on any of its assets;
provided, however, no payment of Taxes or claims shall be required if (i) the
- -------- -------
amount, applicability or validity thereof is currently being contested in good
faith by appropriate action promptly initiated and diligently conducted in
accordance with good business practices and no material part of the property or
assets of any Credit Party is subject to any pending levy or execution, (ii) the
Credit Parties, as and to the extent required in accordance with GAAP, shall
have set aside on their books reserves (segregated to the extent required by
GAAP) deemed by them to be adequate with respect thereto, and (iii) the Credit
Parties have notified Administrative Agent of such circumstances, in detail
satisfactory to Administrative Agent.
SECTION 10.8. Compliance with Laws and Documents. Borrower will, and will
----------------------------------
cause each other Credit Party to, comply with all Laws, their respective
certificates (or articles) of incorporation, bylaws, regulations and similar
organizational documents and all Material Agreements to which any Credit Party
is a party, if a violation, alone or when combined with all other such
violations, could result in a Material Adverse Change.
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SECTION 10.9. Operation of Properties and Equipment. (a) Borrower will,
-------------------------------------
and will cause each of its Subsidiaries to, maintain, develop and operate (or
use its best efforts to cause the operator to maintain and operate to the extent
Borrower is not the operator) its Mineral Interests in a good and workmanlike
manner, and observe and comply with all of the terms and provisions, express or
implied, of all oil and gas leases relating to such Mineral Interests so long as
such Mineral Interests are capable of producing Hydrocarbons and accompanying
elements in paying quantities.
(b) Borrower will, and will cause each of its Subsidiaries to, comply
in all respects with all contracts and agreements applicable to or relating to
its Mineral Interest or the production and sale of Hydrocarbons and accompanying
elements therefrom.
(c) Borrower will, and will cause each of its Subsidiaries to, at all
times maintain, preserve and keep all operating equipment used with respect to
its Mineral Interests in proper repair, working order and condition, and make
all necessary or appropriate repairs, renewals, replacements, additions and
improvements thereto so that the efficiency of such operating equipment shall at
all times be properly preserved and maintained; provided further that no item of
-------- ------- ----
operating equipment need be so repaired, renewed, replaced, added to or
improved, if Borrower shall in good faith determine that such action is not
necessary or desirable for the continued efficient and profitable operation of
the business of such Credit Party.
SECTION 10.10. Environmental Law Compliance. Borrower will, and will cause
----------------------------
each other Credit Party to, comply with all Applicable Environmental Laws,
including, without limitation, (a) all licensing, permitting, notification and
similar requirements of Applicable Environmental Laws, and (b) all provisions of
all Applicable Environmental Laws regarding storage, discharge, release,
transportation, treatment and disposal of Hazardous Substances. Borrower will,
and will cause each other Credit Party to, promptly pay and discharge when due
all legal debts, claims, liabilities and obligations with respect to any clean-
up or remediation measures necessary to comply with Applicable Environmental
Laws.
SECTION 10.11. ERISA Reporting Requirements. Borrower shall furnish, or
----------------------------
cause to be furnished, to Administrative Agent:
(a) promptly and in any event (i) within thirty (30) days after Borrower
or any ERISA Affiliate receives notice from any regulatory agency of the
commencement of an audit, investigation or similar proceeding with respect to a
Plan, and (ii) within ten (10) days after Borrower or any ERISA Affiliate
contacts the Internal Revenue Service for the purpose of participation in a
closing agreement or any voluntary resolution program with respect to a Plan or
knows or has reason to know that any event with respect to any Plan of Borrower
or any ERISA Affiliate has occurred, a written notice describing such event and
describing what action is being taken or is proposed to be taken with respect
thereto, together with a copy of any notice of event that is given to the PBGC;
(b) promptly and in any event within thirty (30) days after the receipt by
Borrower of a request therefor by a Bank, copies of any annual and other report
(including Schedule B thereto) with respect to a Plan filed by Borrower or any
ERISA Affiliate with the United States Department of Labor, the Internal Revenue
Service or the PBGC;
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(c) notification within thirty (30) days of the effective date thereof of
any material increases in the benefits, or material change in the funding
method, of any existing Plan which is not a multiemployer plan (as defined in
section 4001(a)(3) of ERISA), or the establishment of any material new Plans, or
the commencement of contributions to any Plan to which Borrower or any ERISA
Affiliate was not previously contributing; and
(d) promptly after receipt of written notice of commencement thereof,
notice of all (i) claims made by participants or beneficiaries with respect to
any Plan and (ii) actions, suits and proceedings before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, affecting Borrower or any ERISA Affiliate with respect to
any Plan, except those which, in the aggregate, if adversely determined could
not result in a Material Adverse Change.
SECTION 10.12. Additional Documents. Borrower will, and will cause each
--------------------
other Credit Party (to the extent each is party thereto) to, cure promptly any
defects in the creation and issuance of each Note, and the execution and
delivery of this Agreement and the other Loan Papers and, at Borrower's expense,
Borrower shall promptly and duly execute and deliver to each Bank, and cause
each other Credit Party to promptly and duly execute and deliver to each Bank,
upon reasonable request, all such other and further documents, agreements and
instruments in compliance with or accomplishment of the covenants and agreements
of the Credit Parties in this Agreement and the other Loan Papers as may be
reasonably necessary or appropriate in connection therewith.
SECTION 10.13. Environmental Review. Not later than thirty (30) days prior
--------------------
to the date of any acquisition by any Credit Party of Mineral Interests or
related assets, other than an acquisition of additional interests in Mineral
Interests in which a Credit Party previously held an interest, Borrower shall
deliver to Administrative Agent a report in form, scope and detail acceptable to
Administrative Agent from environmental engineering firms acceptable to
Administrative Agent, which report or reports shall set forth the results of a
Phase I environmental review of such Mineral Interests and related assets.
SECTION 10.14. Required Purchase Contracts. Borrower will at all times
---------------------------
during the period commencing on and including the Closing Date and continuing
through and including the Termination Date, maintain contracts for the sale of
at least seventy-five percent (75%) of its gas production to Consumers Power (or
other parties of equal or greater creditworthiness approved by Administrative
Agent and Required Banks) which provide for fixed prices on all gas production
sold that, when averaged in each calendar year, equal or exceed $2.40 per
thousand cubic feet. Such average shall be calculated for each calendar year by
dividing (i) all revenues under such fixed price contracts for such gas
production, by (ii) the total amount of such gas production, measured in
thousand cubic feet. For the purpose of determining compliance with the
foregoing, if Borrower enters into floating rate contracts for the sale of its
gas production to Consumers Power (or other parties of equal or greater
creditworthiness approved by Administrative Agent and Required Banks) and at the
same time puts into place Oil and Gas Hedge Transactions in equivalent volumes
with counterparties approved by Administrative Agent and Required Banks which,
when netted against such floating rate contracts, provide Borrower with a net
price equal to or in excess of $2.40 per thousand cubic feet, such net price
shall be deemed to be the fixed price to be used in making the foregoing
calculation.
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SECTION 10.15. Year 2000 Compatibility. Borrower will, and will cause each
-----------------------
other Credit Party to, take all actions reasonably necessary to assure that
Borrower's and each such other Credit Party's computer based systems are able to
operate and effectively process data which includes dates on and after January
1, 2000. At the request of Administrative Agent or any Bank, Borrower and each
other Credit Party shall provide reasonable assurances satisfactory to
Administrative Agent and any such Bank of Borrower's and each such other Credit
Party's year 2000 compatibility.
ARTICLE XI
NEGATIVE COVENANTS
Borrower agrees that, so long as any Bank has any commitment to lend or
participate in Letter of Credit Exposure hereunder or any amount payable under
any Note remains unpaid or any Letter of Credit remains outstanding:
SECTION 11.1. Incurrence of Debt. Borrower will not, nor will Borrower
------------------
permit any other Credit Party to, incur, become or remain liable for any Debt
other than the Obligations; provided, that, at any time when the Outstanding
-------- ----
Credit is less than the Conforming Borrowing Base and no Default or Event of
Default has occurred which is continuing, (a) Borrower may incur and remain
liable for Non-Recourse Debt to the extent such Non-Recourse Debt has been
specifically approved in writing by Required Banks, and (b) Borrower and its
Subsidiaries may incur and remain liable for other Debt in an aggregate amount
outstanding at any time not to exceed $1,000,000.
SECTION 11.2. Restricted Payments. Borrower will not, nor will Borrower
-------------------
permit any other Credit Party to, directly or indirectly, declare or pay, or
incur any liability to declare or pay, any Restricted Payment.
SECTION 11.3. Negative Pledge. Borrower will not, nor will Borrower
---------------
permit any other Credit Party to, create, assume or suffer to exist any Lien on
any of their respective assets other than Permitted Encumbrances. Borrower will
not, nor will Borrower permit any other Credit Party to, enter into or become
bound by any agreement (other than this Agreement) that prohibits or otherwise
restricts the right of Borrower or any other Credit Party to create, assume or
suffer to exist any Lien on any of their respective assets in favor of
Administrative Agent for the ratable benefit of Banks.
SECTION 11.4. Consolidations and Mergers. Borrower will not, nor will
--------------------------
Borrower permit any other Credit Party to, consolidate or merge with or into any
other Person.
SECTION 11.5. Asset Dispositions. Borrower will not, nor will Borrower
------------------
permit any other Credit Party to, sell, lease, transfer, abandon or otherwise
dispose of any asset other than the sale in the ordinary course of business of
Hydrocarbons produced from Borrower's and any other Credit Party's Mineral
Interests (and not pursuant to Advance Payment Contracts); provided, that, so
-------- ----
long as no Default or Event of Default has occurred which is continuing,
Borrower shall be permitted to sell or dispose of (a) machinery and equipment
which is obsolete or otherwise not necessary or useful in the operation of
Borrower's business, and (b) Mineral Interests during any period between
Scheduled Redeterminations with an aggregate Recognized Value (measured at the
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time of such sale or disposition) not in excess of three percent (3%) of the
Conforming Borrowing Base in effect during such period. Borrower will not sell,
transfer or dispose of, or permit any other Credit Party to sell, transfer or
dispose of, any capital stock or other equity interest in any Subsidiary of
Borrower.
SECTION 11.6. Amendments to Organizational Documents; Other Material
------------------------------------------------------
Agreements. Borrower will not, nor will Borrower permit any other Credit Party
- ----------
to, enter into or permit any modification or amendment of, or waive any material
right or obligation of any Person under, (a) its certificate or articles of
incorporation, bylaws, partnership agreement, regulations or other
organizational documents other than amendments, modifications and waivers which
could not, individually or in the aggregate, result in a Material Adverse
Change, (b) the Closing Documents, (c) the Section 29 Documents, (d) the
Management Agreement, or (e) the Consumers Power Contract.
SECTION 11.7. Use of Proceeds. The proceeds of Borrowings will not be
----------------
used for any purpose other than (a) working capital, (b) to finance the
acquisition, exploration and development of Mineral Interests and related
capital assets, and (c) to refinance the obligations outstanding under the
Existing Credit Agreements. None of such proceeds (including, without
limitation, proceeds of Letters of Credit issued hereunder) will be used,
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any Margin Stock, and none of such proceeds
will be used in violation of applicable Law (including, without limitation, the
Margin Regulations). Letters of Credit will be issued hereunder only for the
purpose of securing bids, tenders, bonds, contracts and other obligations
entered into in the ordinary course of Borrower's business. Without limiting
the foregoing, no Letters of Credit will be issued hereunder for the purpose of
providing credit enhancement with respect to any Debt or equity security of any
Credit Party or to secure any Credit Party's obligations with respect to Hedge
Transactions other than Hedge Transactions with a Bank.
SECTION 11.8. Investments. Borrower will not, nor will Borrower permit
-----------
any other Credit Party to, directly or indirectly, make or have outstanding any
Investment other than Permitted Investments.
SECTION 11.9. Transactions with Affiliates. Borrower will not, nor will
----------------------------
Borrower permit any other Credit Party to, engage in any transaction with an
Affiliate unless such transaction is as favorable to such party as could be
obtained in an arm's length transaction with an unaffiliated Person in
accordance with prevailing industry customs and practices.
SECTION 11.10. ERISA. Except in such instances where an omission or
-----
failure would not result in a Material Adverse Change, Borrower will not, nor
will Borrower permit any other Credit Party to (a) take any action or fail to
take any action which would result in a violation of ERISA, the Code or other
Laws applicable to the Plans maintained or contributed to by it or any ERISA
Affiliate, or (b) modify the term of, or the funding obligations or contribution
requirements under any existing Plan, establish a new Plan, or become obligated
or incur any liability under a Plan that is not maintained or contributed to by
Borrower or any ERISA Affiliate as of the Closing Date.
SECTION 11.11. Hedge Transactions. With the exception of Oil and Gas Hedge
------------------
Transactions entered into pursuant to Section 9.14, Borrower will not, nor will
------------
Borrower permit any
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other Credit Party to, enter into Oil and Gas Hedge Transactions which would
cause the volume of Hydrocarbons with respect to which a settlement payment is
calculated under such Oil and Gas Hedge Transactions to exceed seventy-five
percent (75%) of Borrower's anticipated production from Proved Producing Mineral
Interests during the period from the immediately preceding settlement date (or
the commencement of such Hedge Transaction if there is no prior settlement date)
to such settlement date. Borrower shall not enter into or consent to, or permit
Mercury to enter into or consent to, any amendment, modification, cancellation
or termination of the Consumers Power Contract and will at all times perform all
of its obligations thereunder and take all other actions necessary to cause such
contract to be maintained.
SECTION 11.12. Fiscal Year. Borrower will not, and Borrower will not
-----------
permit any other Credit Party to, change its Fiscal Year.
SECTION 11.13. Change in Business. Borrower will not, nor will Borrower
------------------
permit any other Credit Party to, engage in any business other than the
businesses engaged in by such parties on the date hereof as described in Section
-------
9.13 hereof.
- ----
ARTICLE XII
FINANCIAL COVENANTS
Borrower agrees that so long as any Bank has any commitment to lend or
participate in Letter of Credit Exposure hereunder or any amount payable under
any Note remains unpaid or any Letter of Credit remains outstanding, Borrower
will not permit its ratio of Consolidated Current Assets to its Consolidated
Current Liabilities to be less than 1.0 to 1.0 at any time.
ARTICLE XIII
DEFAULTS
SECTION 13.1. Events of Default. If one or more of the following events
-----------------
(collectively "Events of Default" and individually an "Event of Default") shall
----------------- ----------------
have occurred and be continuing:
(a) Borrower shall fail to pay when due any principal on any Note;
(b) Borrower shall fail to pay when due accrued interest on any Note
or any fees or any other amount payable hereunder and such failure shall
continue for a period of three (3) days following the due date;
(c) Borrower shall fail to observe or perform any covenant or
agreement contained in Article XI or Article XII of this Agreement;
---------- -----------
(d) any Credit Party shall fail to observe or perform any covenant or
agreement contained in this Agreement or any other Loan Paper (other than those
referenced in Sections 13.1(a),
-----------------
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(b) and (c)) and such failure continues for a period of twenty (20) days after
- --- ---
the earlier of (i) the date any Authorized Officer of any Credit Party acquires
knowledge of such failure, or (ii) written notice of such failure has been given
to any Credit Party by Administrative Agent or any Bank;
(e) any representation, warranty, certification or statement made or
deemed to have been made by any Credit Party in any certificate, financial
statement or other document delivered pursuant to this Agreement shall prove to
have been incorrect in any material respect when made;
(f) any Credit Party shall fail to make any payment when due on any
Debt of such Person in a principal amount equal to or greater than $250,000 or
any other event or condition shall occur which (i) results in the acceleration
of the maturity of any such Debt, or (ii) entitles the holder of such Debt to
accelerate the maturity thereof;
(g) any Credit Party shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar Law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate, partnership or limited liability company
action to authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced against
any Credit Party seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar Law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of sixty (60) days; or an order for relief
shall be entered against any Credit Party under the federal bankruptcy Laws as
now or hereafter in effect;
(i) one (1) or more final judgments or orders for the payment of money
aggregating in excess of $250,000 shall be rendered against any Credit Party and
such judgment or order shall continue unsatisfied or unstayed for thirty (30)
days;
(j) any event occurs with respect to any Plan or Plans pursuant to
which any Credit Party and/or any ERISA Affiliate incur a liability due and
owing at the time of such event, without existing funding therefor, for benefit
payments under such Plan or Plans in excess of $250,000; or (ii) any Credit
Party, any ERISA Affiliate, or any other "party-in-interest" or "disqualified
person," as such terms are defined in section 3(14) of ERISA and section
4975(e)(2) of the Code, shall engage in transactions which in the aggregate
would reasonably result in a direct or indirect liability to any Credit Party or
any ERISA Affiliate in excess of $250,000 under section 409 or 502 of ERISA or
section 4975 of the Code;
(k) this Agreement or any other Loan Paper shall cease to be in full
force and effect or shall be declared null and void or the validity or
enforceability thereof shall be contested or challenged by any Credit Party, or
any Credit Party shall deny that it has any further liability or
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obligation under any of the Loan Papers to which it is a party, or any Lien
created by the Loan Papers shall for any reason (other than the release thereof
in accordance with the Loan Papers) cease to be a valid, first priority,
perfected Lien upon any of the Proved Mineral Interests purported to be covered
thereby;
(l) a Material Adverse Change shall occur with respect to any Credit
Party; or
(m) a Change of Control shall occur;
then, and in every such event, Administrative Agent shall without presentment,
notice or demand (unless expressly provided for herein) of any kind (including,
without limitation, notice of intention to accelerate and acceleration), all of
which are hereby waived, (i) if requested by Required Banks, terminate the
Commitments and they shall thereupon terminate, and (ii) if requested by
Required Banks, take such other actions as may be permitted by the Loan Papers
including, declaring the Notes (together with accrued interest thereon) to be,
and the Notes shall thereupon become, immediately due and payable; provided
--------
that, in the case of any of the Events of Default specified in Sections 13.1(g)
- ---- ----------------
or (h), without any notice to any Credit Party or any other act by
---
Administrative Agent or Banks, the Commitments shall thereupon terminate and the
Notes (together with accrued interest thereon) shall become immediately due and
payable.
ARTICLE XIV
AGENTS
SECTION 14.1. Appointment, Powers, and Immunities. Each Bank hereby
-----------------------------------
irrevocably appoints and authorizes each Agent to act as its agent under this
Agreement and the other Loan Papers with such powers and discretion as are
specifically delegated to each such Agent by the terms of this Agreement and the
other Loan Papers, together with such other powers as are reasonably incidental
thereto. No Agent (which term as used in this sentence and in Section 14.5 and
------------
the first sentence of Section 14.6 hereof shall include their Affiliates and
------------
their own and their Affiliates' officers, directors, employees, and agents):
(a) shall have any duties or responsibilities except those expressly set forth
in this Agreement and the other Loan Papers and no Agent shall be a trustee or
fiduciary for any Bank; (b) shall be responsible to Banks for any recital,
statement, representation, or warranty (whether written or oral) made in or in
connection with any Loan Paper or any certificate or other document referred to
or provided for in, or received by any of them under, any Loan Paper, or for the
value, validity, effectiveness, genuineness, enforceability, or sufficiency of
any Loan Paper, or any other document referred to or provided for therein or for
any failure by any Credit Party or any other Person to perform any of its
obligations thereunder; (c) shall be responsible for or have any duty to
ascertain, inquire into, or verify the performance or observance of any
covenants or agreements by any Credit Party or the satisfaction of any condition
or to inspect the property (including the books and records) of any Credit Party
or any of their Subsidiaries or Affiliates; (d) shall be required to initiate or
conduct any litigation or collection proceedings under any Loan Paper; and (e)
shall be responsible for any action taken or omitted to be taken by it under or
in connection with any Loan Paper, except for its own gross negligence or
willful misconduct. Each Agent may
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employ agents and attorneys-in-fact and shall not be responsible for the
negligence or misconduct of any such agents or attorneys-in-fact selected by any
such Agent with reasonable care.
SECTION 14.2. Reliance by Agents. Each Agent shall be entitled to rely
------------------
upon any certification, notice, instrument, writing, or other communication
(including, without limitation, any thereof by telephone or telecopy) believed
by it to be genuine and correct and to have been signed, sent or made by or on
behalf of the proper Person or Persons, and upon advice and statements of legal
counsel (including counsel for any Credit Party), independent accountants, and
other experts selected by any such Agent. Each Agent may deem and treat the
payee of any Note as the holder thereof for all purposes hereof unless and until
Administrative Agent receives and accepts an Assignment and Acceptance Agreement
executed in accordance with Section 15.10 hereof. As to any matters not
-------------
expressly provided for by this Agreement, no Agent shall be required to exercise
any discretion or take any action, but shall be required to act or to refrain
from acting (and shall be fully protected in so acting or refraining from
acting) upon the instructions of Required Banks, and such instructions shall be
binding on Banks; provided, however, that no Agent shall be required to take any
-------- ------- ----
action that exposes such Agent to personal liability or that is contrary to any
Loan Paper or applicable Law unless it shall first be indemnified to its
satisfaction by Banks against any and all liability and expense which may be
incurred by it by reason of taking any such action.
SECTION 14.3. Defaults. No Agent shall be deemed to have knowledge or
--------
notice of the occurrence of a Default or Event of Default unless such Agent has
received written notice from a Bank or Borrower specifying such Default or Event
of Default and stating that such notice is a "Notice of Default". In the event
that Administrative Agent receives such a notice of the occurrence of a Default
or Event of Default, Administrative Agent shall give prompt notice thereof to
Banks. Administrative Agent shall (subject to Section 14.2 hereof) take such
------------
action with respect to such Default or Event of Default as shall reasonably be
directed by Required Banks; provided that, unless and until Administrative Agent
-------- ----
shall have received such directions, Administrative Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interest of Banks.
SECTION 14.4. Rights as Bank. With respect to its Commitment and the
--------------
Loans made by it, NationsBank (and any successor acting as Administrative Agent)
in its capacity as a Bank hereunder shall have the same rights and powers
hereunder as any other Bank and may exercise the same as though it were not
acting as Administrative Agent, and the term "Bank" or "Banks" shall, unless the
context otherwise indicates, include Administrative Agent in its individual
capacity. NationsBank (and any successor acting as Administrative Agent), each
other Agent and their Affiliates may (without having to account therefor to any
Bank) accept deposits from, lend money to, make investments in, provide services
to, and generally engage in any kind of lending, trust, or other business with
Borrower or any of its Subsidiaries or Affiliates as if it were not acting as
Agent, and NationsBank (and any successor acting as Administrative Agent), each
other Agent and their Affiliates may accept fees and other consideration from
Borrower or any of its Subsidiaries or Affiliates for services in connection
with this Agreement or otherwise without having to account for the same to
Banks.
SECTION 14.5. Indemnification. Banks agree to indemnify each Agent (to
---------------
the extent not reimbursed by Borrower or any Subsidiary of Borrower hereof, but
without limiting the
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obligations of any Credit Party to so reimburse) ratably in accordance with
their respective Commitments, for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including
attorneys' fees), or disbursements of any kind and nature whatsoever that may be
imposed on, incurred by or asserted against any such Agent (including by any
Bank) in any way relating to or arising out of any Loan Paper or the
transactions contemplated thereby or any action taken or omitted by any Agent
under any Loan Paper (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE
OF ANY AGENT); provided that no Bank shall be liable for any of the foregoing to
-------- ----
the extent they arise from the gross negligence or willful misconduct of the
Person to be indemnified. Without limitation of the foregoing, each Bank agrees
to reimburse each Agent promptly upon demand for its ratable share of any costs
or expenses payable by Borrower hereunder, to the extent that any such Agent is
not promptly reimbursed for such costs and expenses by Borrower. The agreements
contained in this Section 14.5 shall survive payment and performance in full of
------------
the Obligations and all other amounts payable under this Agreement.
SECTION 14.6. Non-Reliance on Agents and Other Banks. Each Bank agrees
--------------------------------------
that it has, independently and without reliance on any Agent or any other Bank,
and based on such documents and information as it has deemed appropriate, made
its own credit analysis of each Credit Party and decision to enter into this
Agreement and that it will, independently and without reliance upon any Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under the Loan Papers. Except for notices, reports,
and other documents and information expressly required to be furnished to Banks
by Administrative Agent hereunder, no Agent shall have any duty or
responsibility to provide any Bank with any credit or other information
concerning the affairs, financial condition, or business of any Credit Party or
their Affiliates that may come into the possession of any such Agent or any of
their Affiliates.
SECTION 14.7. Resignation of Agents. Any Agent may resign at any time by
---------------------
giving notice thereof to Banks and Borrower. Upon any such resignation,
Required Banks shall have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by Required Banks and shall have
accepted such appointment within thirty (30) days after the retiring Agent's
giving of notice of resignation, then the retiring Agent may, on behalf of
Banks, appoint a successor Agent which shall be a commercial bank organized
under the Laws of the United States of America having combined capital and
surplus of at least $100,000,000. Upon the acceptance of any appointment as
Agent hereunder by a successor, such successor shall thereupon succeed to and
become vested with all the rights, powers, discretion, privileges, and duties of
the retiring Agent, and the retiring Agent shall be discharged from its duties
and obligations hereunder. After any retiring Agent's resignation hereunder as
Agent, the provisions of this Article XIV shall continue in effect for its
-----------
benefit in respect of any actions taken or omitted to be taken by it while it
was acting as Agent.
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ARTICLE XV
MISCELLANEOUS
SECTION 15.1. Notices. All notices, requests and other communications to
-------
any party hereunder shall be in writing (including bank wire, telecopy or
similar writing) and shall be given, if to Administrative Agent or any Bank, at
its address or telecopier number set forth on Schedule 1 hereto, and if given to
----------
Borrower, at its address or telecopy number set forth on the signature pages
hereof (or in either case, at such other address or telecopy number as such
party may hereafter specify for the purpose by notice to the other parties
hereto). Each such notice, request or other communication shall be effective
(a) if given by telecopy, when such telecopy is transmitted to the telecopy
number specified in this Section 15.1 and the appropriate answerback is received
------------
or receipt is otherwise confirmed, (b) if given by mail, three (3) Domestic
Business Days after deposit in the mails with first class postage prepaid,
addressed as aforesaid or (c) if given by any other means, when delivered at the
address specified in this Section 15.1; provided that notices to Administrative
------------ -------- ----
Agent under Article III or IV shall not be effective until received.
----------- --
SECTION 15.2. No Waivers. No failure or delay by Administrative Agent or
----------
any Bank in exercising any right, power or privilege hereunder or under any Note
or other Loan Paper shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by Law or in any of the other Loan Papers.
SECTION 15.3. Expenses; Indemnification. (a) Borrower agrees to pay on
-------------------------
demand all reasonable costs and expenses of each Agent in connection with the
syndication, preparation, execution, delivery, modification, and amendment of
this Agreement, the other Loan Papers, and the other documents to be delivered
hereunder, including, without limitation, the reasonable fees and expenses of
counsel for Administrative Agent (including the cost of internal counsel) with
respect thereto and with respect to advising Administrative Agent as to its
rights and responsibilities under the Loan Papers. Borrower further agrees to
pay on demand all reasonable costs and expenses of Administrative Agent and
Banks, if any (including, without limitation, reasonable attorneys' fees and
expenses and the cost of internal counsel), in connection with the enforcement
(whether through negotiations, legal proceedings, or otherwise) of the Loan
Papers and the other documents to be delivered hereunder.
(b) Borrower agrees to indemnify and hold harmless each Agent and each Bank
and each of their Affiliates and their respective officers, directors,
employees, agents, and advisors (each, an "Indemnified Party") from and against
-----------------
any and all claims, damages, losses, liabilities, costs, and expenses
(including, without limitation, reasonable attorneys' fees) that may be incurred
by or asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of (including, without limitation, in
connection with any investigation, litigation, or proceeding or preparation of
defense in connection therewith) the Loan Papers, any of the transactions
contemplated herein or the actual or proposed use of the proceeds of the Loan
(INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF THE INDEMNIFIED
PARTY), except to the extent such claim, damage, loss, liability, cost, or
expense
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is found in a final, non-appealable judgment by a court of competent
jurisdiction to have resulted from such Indemnified Party's gross negligence or
willful misconduct. In the case of an investigation, litigation or other
proceeding to which the indemnity in this Section 15.3 applies, such indemnity
------------
shall be effective whether or not such investigation, litigation or proceeding
is brought by Borrower, its directors, shareholders or creditors or an
Indemnified Party or any other Person or any Indemnified Party is otherwise a
party thereto and whether or not the transactions contemplated hereby are
consummated. Borrower agrees not to assert any claim against any Agent, any
Bank, any of their Affiliates, or any of their respective directors, officers,
employees, attorneys, agents, and advisers, on any theory of liability, for
special, indirect, consequential, or punitive damages arising out of or
otherwise relating to the Loan Papers, any of the transactions contemplated
herein or the actual or proposed use of the proceeds of the Loan.
(c) Without prejudice to the survival of any other agreement of Borrower
hereunder, the agreements and obligations of Borrower contained in this Section
-------
15.3 shall survive the payment in full of the Loans and all other amounts
- ----
payable under this Agreement.
SECTION 15.4. Right of Set-off; Adjustments. (a) Upon the occurrence and
-----------------------------
during the continuance of any Event of Default, each Bank (and each of its
Affiliates) is hereby authorized at any time and from time to time, to the
fullest extent permitted by Law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Bank (or any of its Affiliates) to
or for the credit or the account of Borrower against any and all of the
Obligations, irrespective of whether such Bank shall have made any demand under
this Agreement or Note held by such and although such obligations may be
unmatured. Each Bank agrees promptly to notify Borrower after any such set-off
and application made by such Bank; provided, however, that the failure to give
-------- ------- ----
such notice shall not affect the validity of such set-off and application. The
rights of each Bank under this Section 15.4 are in addition to other rights and
------------
remedies (including, without limitation, other rights of set-off) that such Bank
may have.
(b) If any Bank (a "benefitted Bank") shall at any time receive any payment
---------------
of all or part of the Loans owing to it, or interest thereon, or receive any
collateral in respect thereof (whether voluntarily or involuntarily, by set-off,
or otherwise), in a greater proportion than any such payment to or collateral
received by any other Bank, if any, in respect of such other Bank's Loans owing
to it, or interest thereon, such benefitted Bank shall purchase for cash from
the other Banks a participating interest in such portion of each such other
Bank's Loans owing to it, or shall provide such other Banks with the benefits of
any such collateral, or the proceeds thereof, as shall be necessary to cause
such benefitted Bank to share the excess payment or benefits of such collateral
or proceeds ratably with each other Bank; provided, however, that if all or any
-------- ------- ----
portion of such excess payment or benefits is thereafter recovered from such
benefitted Bank, such purchase shall be rescinded, and the purchase price and
benefits returned, to the extent of such recovery, but without interest.
Borrower agrees that any Bank so purchasing a participation from a Bank pursuant
to this Section 15.4 may, to the fullest extent permitted by Law, exercise all
------------
of its rights of payment (including the right of set-off) with respect to such
participation as fully as if such Person were the direct creditor of Borrower in
the amount of such participation.
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SECTION 15.5. Amendments and Waivers. Any provision of this Agreement or
----------------------
any other Loan Paper may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by Borrower and Required Banks (and, if
Article XIV or the rights or duties of any Agent are affected thereby, by such
- -----------
Agent); provided that no such amendment or waiver shall, unless signed by each
-------- ----
Bank directly affected thereby, (i) increase the Commitments of Banks, (ii)
reduce the principal of or rate of interest on any Loan or any fees or other
amounts payable hereunder, (iii) postpone any date fixed for the payment of any
scheduled installment of principal of or interest on any Loan or any fees or
other amounts payable hereunder or for termination of any Commitment, (iv)
change the percentage of the Commitments or of the unpaid principal amount of
the Notes, or the number of Banks, which shall be required for Banks or any of
them to take any action under this Section 15.5 or any other provision of this
------------
Agreement, or (v) release any guarantor of the Obligations or all or
substantially all of the collateral securing the Obligations.
SECTION 15.6. Survival. All representations, warranties and covenants
--------
made by any Credit Party herein or in any certificate or other instrument
delivered by it or in its behalf under the Loan Papers shall be considered to
have been relied upon by Banks and shall survive the delivery to Banks of such
Loan Papers or the extension of the Loan (or any part thereof), regardless of
any investigation made by or on behalf of Banks. The indemnity provided in
Section 15.3(b) herein shall survive the repayment of all credit advances
- ---------------
hereunder and/or the discharge or release of any Lien granted hereunder or in
any other Loan Paper, contract or agreement between Borrower or any other Credit
Party and any Agent or any Bank.
SECTION 15.7. Limitation on Interest. Regardless of any provision
----------------------
contained in the Loan Papers, Banks shall never be entitled to receive, collect,
or apply, as interest on the Loan, any amount in excess of the Maximum Lawful
Rate, and in the event any Bank ever receives, collects or applies as interest
any such excess, such amount which would be deemed excessive interest shall be
deemed a partial prepayment of principal and treated hereunder as such; and if
the Loan is paid in full, any remaining excess shall promptly be paid to
Borrower. In determining whether or not the interest paid or payable under any
specific contingency exceeds the Maximum Lawful Rate, Borrower and Banks shall,
to the extent permitted under applicable Law, (a) characterize any nonprincipal
payment as an expense, fee or premium rather than as interest, (b) exclude
voluntary prepayments and the effects thereof and (c) amortize, prorate,
allocate and spread, in equal parts, the total amount of the interest throughout
the entire contemplated term of the Notes, so that the interest rate is the
Maximum Lawful Rate throughout the entire term of the Notes; provided, however,
-------- -------
that if the unpaid principal balance thereof is paid and performed in full prior
- ----
to the end of the full contemplated term thereof, and if the interest received
for the actual period of existence thereof exceeds the Maximum Lawful Rate,
Banks shall refund to Borrower the amount of such excess and, in such event,
Banks shall not be subject to any penalties provided by any Laws for contracting
for, charging, taking, reserving or receiving interest in excess of the Maximum
Lawful Rate.
SECTION 15.8. Invalid Provisions. If any provision of the Loan Papers is
------------------
held to be illegal, invalid, or unenforceable under present or future Laws
effective during the term thereof, such provision shall be fully severable, the
Loan Papers shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part thereof, and the remaining
provisions thereof shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its severance
therefrom. Furthermore, in lieu of such illegal, invalid,
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or unenforceable provision there shall be added automatically as a part of the
Loan Papers a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid and enforceable.
SECTION 15.9. Waiver of Consumer Credit Laws. Pursuant to Chapter 346 of
------------------------------
the Texas Finance Code, as amended, Borrower agrees that such Chapter 346 shall
not govern or in any manner apply to the Loan.
SECTION 15.10. Assignments and Participations. (a) Each Bank may assign
------------------------------
to one or more Eligible Assignees all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
interest in the Loan, its Note, and its Commitment); provided, however, that,
-------- ------- -----
(i) each such assignment shall be to an Eligible Assignee;
(ii) except in the case of an assignment to another Bank or an
assignment of all of a Bank's rights and obligations under this Agreement, any
such partial assignment shall be in an amount at least equal to $5,000,000 or an
integral multiple of $100,000 in excess thereof;
(iii) each such assignment by a Bank shall be of a constant, and not
varying, percentage of all of its rights and obligations under this Agreement
and its Note; and
(iv) the parties to such assignment shall execute and deliver to
Administrative Agent for its acceptance an Assignment and Acceptance Agreement
(herein so called) in the form of Exhibit I hereto, together with any Notes
---------
subject to such assignment and a processing fee to be paid by the assigning Bank
of $3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance
Agreement, the assignee thereunder shall be a party hereto and, to the extent of
such assignment, have the obligations, rights, and benefits of a Bank hereunder
and the assigning Bank shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this Section 15.10(a), the assignor,
----------------
Administrative Agent and Borrower shall make appropriate arrangements so that,
if required, new Notes are issued to the assignor and the assignee. If the
assignee is not incorporated under the Laws of the United States of America or a
state thereof, it shall deliver to Borrower and Administrative Agent
certification as to exemption from deduction or withholding of Taxes in
accordance with Section 5.6.
-----------
(b) Administrative Agent shall maintain at its address set forth on
Schedule 1 hereto, a copy of each Assignment and Acceptance Agreement delivered
- ----------
to and accepted by it and a register for the recordation of the names and
addresses of Banks and the Commitment of, and principal amount of the Loan owing
to, each Bank and the Commitment Percentage of each Bank from time to time (the
"Register"). The entries in the Register shall be conclusive and binding for
--------
all purposes, absent manifest error, and Borrower, Administrative Agent and
Banks may treat each Person whose name is recorded in the Register as a Bank
hereunder for all purposes of this Agreement. The Register shall be available
for inspection by Borrower or any Bank at any reasonable time and from time to
time upon reasonable prior notice.
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(c) Upon its receipt of an Assignment and Acceptance Agreement executed by
the parties thereto, together with any Notes subject to such assignment and
payment of the processing fee, Administrative Agent shall, if such Assignment
and Acceptance Agreement has been completed and is in substantially the form of
Exhibit I hereto, (i) accept such Assignment and Acceptance Agreement, (ii)
- ---------
record the information contained therein in the Register, and (iii) give prompt
notice thereof to the parties thereto.
(d) Each Bank may sell participations to one or more Persons in all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and its interest in the Loan); provided, however, that
-------- ------- ----
(i) such Bank's obligations under this Agreement shall remain unchanged, (ii)
such Bank shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) the participant shall be entitled to the
benefit of the yield protection provisions contained in Article V and the right
---------
of set-off contained in Section 15.4, and (iv) Borrower shall continue to deal
------------
solely and directly with such Bank in connection with such Bank's rights and
obligations under this Agreement, and such Bank shall retain the sole right to
enforce the obligations of Borrower relating to its interest in the Loan and its
Note and to approve any amendment, modification, or waiver of any provision of
this Agreement (other than amendments, modifications, or waivers decreasing the
amount of principal of or the rate at which interest is payable on the Loan or
the Notes, extending any scheduled principal payment date or date fixed for the
payment of interest on the Loan or the Notes, or extending its Commitment).
(e) Notwithstanding any other provision set forth in this Agreement, any
Bank may at any time assign and pledge all or any portion of its interest in the
Loan and its Note to any Federal Reserve Bank as collateral security pursuant to
Regulation A and any Operating Circular issued by such Federal Reserve Bank. No
such assignment shall release the assigning Bank from its obligations hereunder.
(f) Any Bank may furnish any information concerning Borrower or any of its
Subsidiaries in the possession of such Bank from time to time to assignees and
participants (including prospective assignees and participants).
(g) Borrower shall not assign or transfer any rights or obligations under
any Loan Paper or permit any Credit Party to assign or transfer any rights or
obligations under any Loan Paper without first obtaining all Banks' consent, and
any purported assignment or transfer without all Banks' consent is void.
SECTION 15.11. TEXAS LAW. THIS AGREEMENT, EACH NOTE AND THE OTHER LOAN
---------
PAPERS HAVE BEEN EXECUTED AND DELIVERED IN THE STATE OF TEXAS AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND
THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT THE LAWS OF
ANY STATE IN WHICH ANY PROPERTY INTENDED AS SECURITY FOR THE OBLIGATIONS IS
LOCATED NECESSARILY GOVERN (A) THE PERFECTION AND PRIORITY OF THE LIENS IN FAVOR
OF ADMINISTRATIVE AGENT AND BANKS WITH RESPECT TO SUCH PROPERTY, AND (B) THE
EXERCISE OF ANY REMEDIES (INCLUDING FORECLOSURE) WITH RESPECT TO SUCH PROPERTY.
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SECTION 15.12. Consent to Jurisdiction; Waiver of Immunities. (a)
----------------------------------------------
Borrower hereby irrevocably submits to the jurisdiction of any Texas State or
Federal court sitting in the Northern District of Texas over any action or
proceeding arising out of or relating to this Agreement or any other Loan
Papers, and Borrower hereby irrevocably agrees that all claims in respect of
such action or proceeding may be heard and determined in such Texas State or
Federal court. As an alternative, Borrower irrevocably consents to the service
of any and all process in any such action or proceeding by the mailing of copies
of such process to such Person at its address specified in Section 15.1.
------------
Borrower agrees that a final judgment on any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by Law.
(b) Nothing in this Section 15.12 shall affect any right of Banks to
-------------
serve legal process in any other manner permitted by Law or affect the right of
any Bank to bring any action or proceeding against any Credit Party or their
properties in the courts of any other jurisdictions.
(c) To the extent that Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property, such
Person hereby irrevocably waives such immunity in respect of its obligations
under this Agreement and the other Loan Papers.
SECTION 15.13. Counterparts; Effectiveness. This Agreement may be signed
---------------------------
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
Subject to the terms and conditions herein set forth, this Agreement shall
become effective when Administrative Agent shall have received counterparts
hereof signed by all of the parties hereto or, in the case of any Bank as to
which an executed counterpart shall not have been received, Administrative Agent
shall have received telegraphic or other written confirmation from such Bank of
execution of a counterpart hereof by such Bank.
SECTION 15.14. No Third Party Beneficiaries. Except for the provisions
----------------------------
hereof inuring to the benefit of Agents not a party to this Agreement, it is
expressly intended that there shall be no third party beneficiaries of the
covenants, agreements, representations or warranties herein contained other than
third party beneficiaries permitted pursuant to Section 15.10.
-------------
SECTION 15.15. COMPLETE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN
------------------
PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BY AND AMONG BANKS,
ADMINISTRATIVE AGENT, AND THE CREDIT PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF BANKS,
ADMINISTRATIVE AGENT, AND THE CREDIT PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG BANKS, ADMINISTRATIVE AGENT, AND THE CREDIT PARTIES.
SECTION 15.16. WAIVER OF JURY TRIAL. BORROWER, ADMINISTRATIVE AGENT, AND
--------------------
BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN PAPERS
AND FOR ANY COUNTERCLAIM THEREIN.
70
<PAGE>
SECTION 15.17. Confidentiality. Administrative Agent and each Bank (each,
---------------
a "Lending Party") agrees to keep confidential any information furnished or made
-------------
available to it by Borrower pursuant to this Agreement that is marked
confidential; provided that nothing herein shall prevent any Lending Party from
-------- ----
disclosing such information (a) to any other Lending Party or any Affiliate of
any Lending Party, or any officer, director, employee, agent, or advisor of any
Lending Party or Affiliate of any Lending Party, (b) to any other Person if
reasonably incidental to the administration of the credit facility provided
herein, (c) as required by any Law, rule, or regulation, (d) upon the order of
any court or administrative agency, (e) upon the request or demand of any
regulatory agency or authority, (f) that is or becomes available to the public
or that is or becomes available to any Lending Party other than as a result of a
disclosure by any Lending Party prohibited by this Agreement, (g) in connection
with any litigation to which such Lending Party or any of its Affiliates may be
a party, (h) to the extent necessary in connection with the exercise of any
remedy under this Agreement or any other Loan Paper, and (i) subject to
provisions substantially similar to those contained in this Section 15.17, to
-------------
any actual or proposed participant or assignee.
[Signature pages follow]
71
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective Authorized Officers on the day and year first
above written.
BORROWER:
- --------
QUICKSILVER RESOURCES INC.,
a Delaware corporation
/s/ GLENN DARDEN
By: ____________________________________
Glenn Darden,
Vice President
Address for Notice:
1619 Pennsylvania Avenue
Fort Worth, Texas 76104
Attn: Glenn Darden
Fax No. (817) 877-3829
BANKS:
- -----
NATIONSBANK, N.A.
/s/ J. SCOTT FOWLER
By: ____________________________________
J. Scott Fowler, Vice President
BANK ONE, TEXAS, N.A.
/s/ WM. MARK CRANMER
By: ____________________________________
Wm. Mark Cranmer,
Vice President
72
<PAGE>
PARIBAS
/s/ MICHAEL FIUZAT /s/ BRIAN M. MALONE
By: ____________________________________
Michael Fiuzat Brian M. Malone
Name: ____________________________________
Vice President Director
Title: ____________________________________
FROST NATIONAL BANK
/s/ W.H. ADAMS, III
By: ____________________________________
W.H. Adams, III
Name: ____________________________________
Senior Vice President
Title: ____________________________________
ADMINISTRATIVE AGENT:
- --------------------
NATIONSBANK, N.A.
/s/ J. SCOTT FOWLER
By: ______________________________________
J. Scott Fowler, Vice President
73
<PAGE>
EXHIBIT A
---------
PLEDGE AGREEMENT
----------------
THIS PLEDGE AGREEMENT (this "Agreement") is made as of __________, _____ by
---------
[Quicksilver Resources Inc., a Delaware corporation] [First Tier Subsidiary]
(herein called "Pledgor"), in favor of NationsBank, N.A., as Administrative
-------
Agent for the ratable benefit of Banks (as defined below) (herein called
"Pledgee").
-------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, [Pledgor] [Quicksilver Resources Inc., a Delaware corporation
("Borrower")], Pledgee and Banks are parties to a Second Amended and Restated
--------
Credit Agreement dated as of March 1, 1999, pursuant to which Banks have made a
revolving credit loan to [Pledgor] [Borrower] and agreed to issue and
participate in letters of credit issued on behalf of [Pledgor] [Borrower] (as
amended or modified from time to time, the "Credit Agreement"); and
----------------
WHEREAS, it is a condition to the agreement of Banks to continue to extend
credit under the Credit Agreement that Pledgor execute and deliver this
Agreement in favor of Pledgee for the benefit of Banks.
NOW, THEREFORE, in consideration of the premises and in order to induce
Banks to continue to extend credit under the Credit Agreement, Pledgor hereby
agrees with Pledgee as follows:
ARTICLE I
Definitions and References
--------------------------
Section 1.1. General Definitions. As used herein, the terms "Agreement,"
------------------- ---------
"Credit Agreement," ["Borrower,"] "Pledgee," and "Pledgor," shall have the
---------------- -------- ------- -------
meanings indicated above, and the following terms shall have the following
meanings:
"Bank" means any financial institution reflected on Schedule 1 to the
----
Credit Agreement and its successors and assigns, and "Banks" shall mean all
-----
Banks.
"Code" means the Uniform Commercial Code in effect in the State of Texas on
----
the date hereof.
"Collateral" means all property of whatever type, in which Pledgee at any
----------
time has a security interest pursuant to Section 2.1.
-----------
"Commitment" means the agreement or commitment by Banks to make loans or
----------
otherwise extend credit to [Pledgor] [Borrower] under the Credit Agreement, and
any other agreement, commitment, statement of terms or other document
contemplating the making of loans or advances
A-1
<PAGE>
or other extension of credit by Banks to or for the account of [Pledgor]
[Borrower] which is now or at any time hereafter intended to be secured by the
Collateral under this Agreement.
"Obligation Documents" means the Credit Agreement, the Notes, the other
--------------------
Loan Papers, and all other documents and instruments under, by reason of which,
or pursuant to which, any or all of the Obligations are evidenced, governed,
secured, or otherwise dealt with, and all other agreements, certificates, and
other documents, instruments and writings heretofore or hereafter delivered in
connection herewith or therewith.
"Obligations" means all present and future indebtedness, obligations and
-----------
liabilities of whatever type which are or shall be secured pursuant to Section
-------
2.2.
- ---
"Other Liable Party" means any Person, other than [Pledgor] [Borrower], who
------------------
may now or may at any time hereafter be primarily or secondarily liable for any
of the Obligations or who may now or may at any time hereafter have granted to
Pledgee or Banks a Lien upon any property as security for the Obligations.
"Pledged Equity" has the meaning given it in Section 2.1.
-------------- -----------
Section 1.2. Other Definitions. Reference is hereby made to the Credit
-----------------
Agreement for a statement of the terms thereof. All capitalized terms used in
this Agreement which are defined in the Credit Agreement and not otherwise
defined herein shall have the same meanings herein as set forth therein. All
terms used in this Agreement which are defined in the Code and not otherwise
defined herein or in the Credit Agreement shall have the same meanings herein as
set forth therein, except where the context otherwise requires.
Section 1.3. Exhibits. All exhibits attached to this Agreement are a
--------
part hereof for all purposes.
Section 1.4. Amendment of Defined Instruments. Unless the context
--------------------------------
otherwise requires or unless otherwise provided herein, references in this
Agreement to a particular agreement, instrument or document also refer to and
include all renewals, extensions, amendments, modifications, supplements or
restatements of any such agreement, instrument or document; provided that
-------- ----
nothing contained in this Section 1.4 shall be construed to authorize any Person
-----------
to execute or enter into any such renewal, extension, amendment, modification,
supplement or restatement.
Section 1.5. References and Titles. All references in this Agreement to
---------------------
Exhibits, Articles, Sections, subsections, and other subdivisions refer to the
Exhibits, Articles, Sections, subsections and other subdivisions of this
Agreement unless expressly provided otherwise. Titles appearing at the
beginning of any subdivision are for convenience only and do not constitute any
part of any such subdivision and shall be disregarded in construing the language
contained in this Agreement. The words "this Agreement," "herein," "hereof,"
"hereby," "hereunder" and words of similar import refer to this Agreement as a
whole and not to any particular subdivision unless expressly so limited. The
phrases "this Section" and "this subsection" and similar phrases refer only to
the Sections or subsections hereof in which the phrase occurs. The word "or" is
not exclusive, and the word "including" (in all of its forms) means "including
without limitation". Pronouns in masculine, feminine
A-2
<PAGE>
and neuter gender 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.
ARTICLE II
Security Interest
-----------------
Section 2.1. Grant of Security Interest. As collateral security for all
--------------------------
of the Obligations, Pledgor hereby pledges and assigns to Pledgee and grants to
Pledgee a continuing first priority security interest for the benefit of Banks
in and to all of the following rights, interests and property:
(a) all of the issued and outstanding shares of capital stock, membership
interests or partnership interests of each Subsidiary of Pledgor now owned or
hereafter acquired by Pledgor including, without limitation, the shares,
membership interests or partnership interests of each Subsidiary of Pledgor
owned by Pledgor on the date hereof (all of the foregoing being herein sometimes
called the "Pledged Equity");
--------------
(b) any and all proceeds or other sums arising from or by virtue of, and
all dividends and distributions (cash or otherwise) payable and/or distributable
with respect to, all or any of the Pledged Equity described in clause (a)
preceding; and
(c) all cash, securities, dividends and other property at any time and
from time to time receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Equity described in clause (a) hereof and
any other property substituted or exchanged therefor.
Section 2.2. Obligations Secured. The security interest created hereby
-------------------
in the Collateral constitutes continuing collateral security for all of the
following obligations, indebtedness and liabilities, whether now existing or
hereafter incurred:
(a) Credit Agreement Indebtedness. The payment by [Pledgor] [Borrower], as
-----------------------------
and when due and payable, of all amounts from time to time owing by [Pledgor]
[Borrower] under or in respect of the Credit Agreement, the Notes or any of the
other Obligation Documents.
(b) Renewals. All renewals, extensions, amendments, modifications,
--------
supplements, or restatements of, or substitutions for, any of the foregoing.
(c) Performance. The due performance and observance by [Pledgor]
-----------
[Borrower] of all of its other obligations from time to time existing under or
in respect of any of the Obligation Documents.
(d) Hedge Transactions. The payment and performance of any and all present
------------------
or future obligations of [Pledgor] [Borrower] according to the terms of any
present or future Hedge Transaction, including, without limitation, any present
or future swap agreements, cap, floor, collar, exchange, transaction, forward
agreement or other exchange or protection agreements relating to crude oil,
natural gas or other Hydrocarbons, or any option with respect to any such
transaction now
A-3
<PAGE>
existing or hereafter entered into between and/or among [Pledgor,] [Borrower,]
Pledgee, any Bank or any affiliate of any of the foregoing.
ARTICLE III
Representations Warranties and Covenants
----------------------------------------
Section 3.1. Representations and Warranties. Pledgor represents and
------------------------------
warrants as follows:
(a) Ownership and Liens. Pledgor has good and marketable title to the
-------------------
Collateral free and clear of all Liens, encumbrances or adverse claims, except
for the security interest created by this Agreement. No effective financing
statement or other instrument similar in effect covering all or any part of the
Collateral is on file in any recording office except such as have been filed in
favor of Pledgee relating to this Agreement.
(b) No Conflicts or Consents. Neither the ownership or the intended use of
------------------------
the Collateral by Pledgor, nor the grant of the security interest by Pledgor to
Pledgee herein, nor the exercise by Pledgee of its rights or remedies hereunder,
will (i) conflict with any provision of (a) any domestic or foreign law,
statute, rule or regulation, (b) the articles or certificate of incorporation,
certificate of limited partnership, partnership agreement, regulations, charter
or bylaws of Pledgor, or (c) any agreement, judgment, license, order or permit
applicable to or binding upon Pledgor, or (ii) result in or require the creation
of any Lien, charge or encumbrance upon any assets or properties of Pledgor
except as expressly contemplated in the Obligation Documents. Except as
expressly contemplated in the Obligation Documents, no consent, approval,
authorization or order of, and no notice to or filing with, any court,
Governmental Authority or third party is required in connection with the grant
by Pledgor of the security interest herein, or the exercise by Pledgee of its
rights and remedies hereunder.
(c) Security Interest. Pledgor has and will have at all times full right,
-----------------
power and authority to grant a security interest in the Collateral to Pledgee in
the manner provided herein, free and clear of any Lien, adverse claim, or
encumbrance. This Agreement creates a valid and binding security interest in
favor of Pledgee in the Collateral securing the Obligations. The taking
possession by Pledgee (for the ratable benefit of Banks) of all certificates,
instruments and cash constituting Collateral from time to time and the filing of
the financing statements delivered concurrently herewith by Pledgor to Pledgee
will perfect, and establish the first priority of, Pledgee's security interest
hereunder in the Collateral securing the Obligations. No further or subsequent
filing, recording, registration, other public notice or other action is
necessary or desirable to perfect or otherwise continue, preserve or protect
such security interest except for continuation statements or filings as
contemplated in Section 3.3(b).
--------------
(d) Pledged Equity. (i) Pledgor is the legal and beneficial owner of the
--------------
Pledged Equity issued by each Subsidiary of Pledgor, (ii) the Pledged Equity is
duly authorized and issued, fully paid and non-assessable, and all documentary,
stamp or other Taxes or fees owing in connection with the issuance, transfer
and/or pledge thereof hereunder have been paid, (iii) no dispute, right of
setoff, counterclaim or defense exists with respect to all or any part of the
Pledged Equity, (iv) the Pledged
A-4
<PAGE>
Equity is free and clear of all Liens, options, warrants, puts, calls or other
rights of third Persons, and restrictions, other than (a) those Liens arising
under this Agreement or any other of the Loan Papers and Liens for Taxes not yet
due and payable, and (b) restrictions on transferability imposed by applicable
state and federal securities Laws, (v) Pledgor has full right and authority to
pledge the Pledged Equity for the purposes and upon the terms set out herein,
(vi) certificates (or other evidence acceptable to Pledgee) representing the
Pledged Equity have been delivered to Pledgee, together with a duly executed
blank stock power (as applicable) with signatures guaranteed, for each
certificate, (vii) the Pledged Equity constitutes all of the issued and
outstanding capital stock, membership interests or partnership interests of each
Subsidiary of Pledgor of every class, and (viii) no Subsidiary of Pledgor has
issued, and there are not outstanding, any options, warrants or other rights to
acquire capital stock, membership interests or partnership interests of any
Subsidiary of Pledgor.
Section 3.2. Affirmative Covenants. Unless Pledgee shall otherwise
---------------------
consent in writing, Pledgor will at all times comply with the covenants
contained in this Section 3.2 from the date hereof and so long as any part of
-----------
the Obligations or Commitments is outstanding.
(a) Ownership and Liens. Pledgor will maintain good and marketable title
-------------------
to all Collateral free and clear of all Liens encumbrances or adverse claims,
except for the security interest created by this Agreement and the security
interests and other encumbrances expressly permitted by the Credit Agreement.
Pledgor will cause to be terminated any financing statement or other
registration with respect to the Collateral, except such as may exist or as may
have been filed in favor of Pledgee. Pledgor will defend Pledgee's right, title
and special property and security interest in and to the Collateral against the
claims of any Person.
(b) Further Assurances. Pledgor will, at its expense and at any time and
------------------
from time to time, promptly execute and deliver all further instruments and
documents and take all further action that may be necessary or desirable or that
Pledgee may request in order (i) to perfect and protect the security interest
created or purported to be created hereby and the first priority of such
security interest; (ii) to enable Pledgee to exercise and enforce its rights and
remedies hereunder in respect of the Collateral; or (iii) to otherwise effect
the purposes of this Agreement, including, without limitation: (A) executing and
filing such financing or continuation statements, or amendments thereto, as may
be necessary or desirable or that Pledgee may request in order to perfect and
preserve the security interest created or purported to be created hereby; and
(B) furnishing to Pledgee from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as Pledgee may reasonably request, all in reasonable detail.
(c) Delivery of Pledged Equity. All certificates, instruments and writings
--------------------------
evidencing the Pledged Equity shall be delivered to Pledgee on or prior to the
execution and delivery of this Agreement. All other certificates, instruments
and writings hereafter evidencing or constituting Pledged Equity shall be
delivered to Pledgee promptly upon the receipt thereof by or on behalf of
Pledgor. All such Pledged Equity shall be held by or on behalf of Pledgee
pursuant hereto and shall be delivered in the same manner and with the same
effect as described in Section 2.1 and Section 3.1 hereof. Upon delivery, such
----------- -----------
equity interests shall thereupon constitute "Pledged Equity" and shall be
subject to the Liens herein created, for the purposes and upon the terms and
conditions set forth in this Agreement and the other Loan Papers.
A-5
<PAGE>
(d) Proceeds of Pledged Equity. If Pledgor shall receive, by virtue of its
--------------------------
being or having been an owner of any Pledged Equity, any (i) shares of capital
stock, membership interests and/or partnership interests (including any
certificate representing any shares of capital stock, membership interests
and/or partnership interests or distribution in connection with any increase or
reduction of capital, reorganization, reclassification, merger, consolidation,
sale of assets, or spinoff or split-off), promissory note or other instrument or
writing; (ii) option or right, whether as an addition to, substitution for, or
in exchange for, any Pledged Equity or otherwise; (iii) dividends payable in
cash (except such dividends permitted to be retained by Pledgor pursuant to
Section 4.7 hereof) or in securities or other property; or (iv) dividends or
- -----------
other distributions in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus or
paid-in surplus, Pledgor shall receive the same in trust for the benefit of
Pledgee, shall segregate it from Pledgor's other property, and shall promptly
deliver it to Pledgee in the exact form received, with any necessary endorsement
or appropriate stock powers duly executed in blank, to be held by Pledgee as
Collateral.
(e) Status of Pledged Equity. The certificates (or other instruments and
------------------------
writings) evidencing the Pledged Equity shall at all times be valid and genuine
and shall not be altered. The Pledged Equity at all times shall be duly
authorized, validly issued, fully paid, and non-assessable, shall not be issued
in violation of the pre-emptive rights of any Person or of any agreement by
which Pledgor or any of its Subsidiaries is bound, and, except for the bylaws,
partnership agreement or regulations of Pledgor, shall not be subject to any
restrictions or conditions with respect to the transfer, voting or capital of
any Pledged Equity.
Section 3.3. Negative Covenants. Unless Pledgee shall otherwise consent
------------------
in writing, Pledgor will at all times comply with the covenants contained in
this Section 3.3 from the date hereof and so long as any part of the Obligations
-----------
or the Commitments is outstanding.
(a) Transfer or Encumbrance. Pledgor will not sell, assign (by operation
-----------------------
of law or otherwise), transfer, exchange, lease or otherwise dispose of any of
the Collateral, nor will Pledgor grant a Lien upon or execute, file or record
any financing statement or other registration with respect to the Collateral,
nor will Pledgor allow any such Lien, financing statement, or other registration
to exist or deliver actual or constructive possession of the Collateral to any
other Person other than Liens in favor of Pledgee.
(b) Financing Statement Filings. Pledgor recognizes that financing
---------------------------
statements pertaining to the Collateral have been or may be filed where Pledgor
maintains any Collateral, has its records concerning any Collateral or has its
chief executive office or chief place of business. Without limitation of any
other covenant herein, Pledgor will not cause or permit any change to be made in
its name, identity or corporate, partnership or limited liability company
structure, or any change to be made to a jurisdiction other than as represented
in Section 3.1 hereof in (i) the location of any records concerning any
-----------
Collateral, or (ii) in the location of its chief executive office or chief place
of business, unless Pledgor shall have notified Pledgee of such change at least
thirty (30) days prior to the effective date of such change, and shall have
first taken all action required by Pledgee for the purpose of further perfecting
or protecting the security interest in favor of Pledgee in the Collateral. In
any notice furnished pursuant to this subsection, Pledgor will expressly state
that the notice is required by this Agreement and contains facts that may
require additional filings of financing
A-6
<PAGE>
statements or other notices for the purposes of continuing perfection of
Pledgee's security interest in the Collateral.
(c) Impairment of Security Interest. Pledgor will not take or fail to take
-------------------------------
any action which would in any manner impair the enforceability of Pledgee's
security interest in any Collateral.
(d) Dilution of Pledged Equity. Pledgor will not permit the issuance of
--------------------------
(i) any additional shares of capital stock, membership interests or partnership
interests of any class of any of its Subsidiaries (unless immediately upon
issuance the same are pledged and delivered to Pledgee pursuant to the terms
hereof), (ii) any securities convertible voluntarily by the holder thereof or
automatically upon the occurrence or non-occurrence of any event or condition
into, or exchangeable for, any such capital stock, membership interests or
partnership interests, or (iii) any warrants, options, contracts or other
commitments entitling any Person to purchase or otherwise acquire any such
capital stock, membership interests or partnership interests of any Subsidiary
of Pledgor.
(e) Restrictions on Pledged Equity. Except for the bylaws, partnership
------------------------------
agreement or regulations of each Subsidiary of Pledgor, Pledgor will not enter
into any agreement creating, or otherwise permit to exist, any restriction or
condition upon the transfer, voting or control of any Pledged Equity.
ARTICLE IV
Remedies, Powers and Authorizations
-----------------------------------
Section 4.1. Provisions Concerning the Collateral.
------------------------------------
(a) Additional Financing Statement Filings. Pledgor hereby authorizes
--------------------------------------
Pledgee to file, without the signature of Pledgor where permitted by law, one
(1) or more financing or continuation statements, and amendments thereto,
relating to the Collateral. Pledgor further agrees that a carbon, photographic
or other reproduction of this Agreement or any financing statement describing
any Collateral is sufficient as a financing statement and may be filed in any
jurisdiction Pledgee may deem appropriate.
(b) Power of Attorney. Pledgor hereby irrevocably appoints Pledgee as
-----------------
Pledgor's attorney-in-fact and proxy, with full authority in the place and stead
of Pledgor and in the name of Pledgor or otherwise, from time to time in
Pledgee's discretion, to take any action (except for the exercise of any voting
rights pertaining to the Pledged Equity or any part thereof) and to execute any
instrument, certificate or notice which Pledgee may deem necessary or advisable
to accomplish the purposes of this Agreement including, without limitation: (i)
to request or instruct Pledgor (and each registrar, transfer agent, or similar
Person acting on behalf of Pledgor) to register the pledge or transfer of the
Collateral to Pledgee; (ii) to otherwise give notification to Pledgor,
registrar, transfer agent, financial intermediary, or other Person of Pledgee's
security interests hereunder; (iii) to ask, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for moneys due and to become
due under or in respect of any of the Collateral; (iv) to receive, indorse and
collect any drafts or other instruments, documents and chattel paper; and (v) to
file any claims or take any action or institute any proceedings which Pledgee
may deem necessary or desirable for the collection
A-7
<PAGE>
of any of the Collateral or otherwise to enforce the rights of Pledgee with
respect to any of the Collateral.
(c) Performance by Pledgee. If Pledgor fails to perform any agreement or
----------------------
obligation contained herein, Pledgee may itself perform, or cause performance
of, such agreement or obligation, and the expenses of Pledgee incurred in
connection therewith shall be payable by Pledgor [(but not Borrower)] under
Section 4.4.
- -----------
(d) Collection Rights. Pledgee shall have the right at any time, upon the
-----------------
occurrence and during the continuance of a Default or an Event of Default, to
notify any or all obligors (including without limitation Pledgor) under any
accounts or general intangibles included among the Collateral of the assignment
thereof to Pledgee and to direct such obligors to make payment of all amounts
due or to become due to Pledgor thereunder directly to Pledgee and, upon such
notification and at the expense of Pledgor [(but not Borrower)] and to the
extent permitted by law, to enforce collection thereof and to adjust, settle or
compromise the amount or payment thereof, in the same manner and to the same
extent as Pledgor could have done. After Pledgor receives notice that Pledgee
has given any notice referred to above in this subsection, (i) all amounts and
proceeds (including instruments and writings) received by Pledgor in respect of
such accounts or general intangibles shall be received in trust for the benefit
of Pledgee hereunder, shall be segregated from other funds of Pledgor and shall
be forthwith paid over to Pledgee in the same form as so received (with any
necessary indorsement) to be held as cash collateral and (A) released to Pledgor
upon the remedy of all Defaults or Events of Default, or (B) if any Event of
Default shall have occurred and be continuing, applied as specified in Section
-------
4.3, and (ii) Pledgor will not adjust, settle or compromise the amount or
- ---
payment of any such account or general intangible or release wholly or partly
any account debtor or obligor thereof (including without limitation Pledgor) or
allow any credit or discount thereon.
Section 4.2. Event of Default Remedies. If an Event of Default shall
-------------------------
have occurred and be continuing, Pledgee may from time to time in its
discretion, without limitation and without notice except as expressly provided
below:
(a) exercise in respect of the Collateral, in addition to other rights and
remedies provided for herein, under the other Obligation Documents or otherwise
available to it, all the rights and remedies of a secured party on default under
the Code (whether or not the Code applies to the affected Collateral);
(b) require Pledgor to, and Pledgor hereby agrees that it will at its
expense and upon request of Pledgee forthwith, assemble all or part of the
Collateral as directed by Pledgee and make it available to Pledgee at a place to
be designated by Pledgee which is reasonably convenient to both parties;
(c) reduce its claim to judgment against Pledgor or foreclose or otherwise
enforce, in whole or in part, the security interest created hereby by any
available judicial procedure;
(d) dispose of, at its office, on the premises of Pledgor or elsewhere,
all or any part of the Collateral, as a unit or in parcels, by public or private
proceedings, and by way of one or more contracts (it being agreed that the sale
of any part of the Collateral shall not exhaust Pledgee's power
A-8
<PAGE>
of sale, but sales may be made from time to time, and at any time, until all of
the Collateral has been sold or until the Obligations have been paid and
performed in full), and at any such sale it shall not be necessary to exhibit
any of the Collateral;
(e) buy (or allow any Bank to buy) the Collateral, or any part thereof, at
any public sale;
(f) buy (or allow any Bank to buy) the Collateral, or any part thereof, at
any private sale if the Collateral is of a type customarily sold in a recognized
market or is of a type which is the subject of widely distributed standard price
quotations;
(g) apply by appropriate judicial proceedings for appointment of a receiver
for the Collateral, or any part thereof, and Pledgor hereby consents to any such
appointment; and
(h) at its discretion, retain the Collateral in satisfaction of the
Obligations whenever the circumstances are such that Pledgee is entitled to do
so under the Code or otherwise (provided that Pledgee shall in no circumstances
-------- ----
be deemed to have retained the Collateral in satisfaction of the Obligations in
the absence of an express notice by Pledgee to Pledgor that Pledgee has either
done so or intends to do so).
Pledgor agrees that, to the extent notice of sale shall be required by law, at
least five (5) days' notice to Pledgor of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. Pledgee shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. Pledgee may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned.
Section 4.3. Application of Proceeds. If any Event of Default shall have
-----------------------
occurred and be continuing, Pledgee may in its discretion apply any cash held by
Pledgee as Collateral, and any cash proceeds received by Pledgee in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral, to any or all of the following in such order as Pledgee may elect:
(a) to the repayment of the reasonable costs and expenses, including
reasonable attorneys' fees and legal expenses, incurred by Pledgee in connection
with (i) the administration of this Agreement, (ii) the custody, preservation,
use or operation of, or the sale of, collection from, or other realization upon,
any Collateral, (iii) the exercise or enforcement of any of the rights of
Pledgee hereunder, or (iv) the failure of Pledgor to perform or observe any of
the provisions hereof;
(b) to the payment or other satisfaction of any Liens, encumbrances, or
adverse claims upon or against any of the Collateral;
(c) to the reimbursement of Pledgee for the amount of any obligations of
Pledgor or any Other Liable Party paid or discharged by Pledgee pursuant to the
provisions of this Agreement or the other Obligation Documents, and of any
expenses of Pledgee payable by Pledgor hereunder or under the other Obligation
Documents;
A-9
<PAGE>
(d) to the satisfaction of any other Obligations or any other indebtedness
of [Pledgor] [and/or Borrower] to Banks or Pledgee;
(e) by holding the same as Collateral;
(f) to the payment of any other amounts required by applicable law
(including, without limitation, Section 9.504(a)(3) of the Code or any successor
or similar, applicable statutory provision); and
(g) by delivery to Pledgor or to whomsoever shall be lawfully entitled to
receive the same or as a court of competent jurisdiction shall direct.
Section 4.4. Release and Expenses. In addition to, and not in
--------------------
qualification of, any similar obligations under other Obligation Documents:
(a) Pledgor agrees to release and forever discharge Pledgee and each Bank
from and against any and all claims, losses and liabilities growing out of or
resulting from this Agreement (including, without limitation, enforcement of
this Agreement). The foregoing release and discharge shall apply whether or not
such claims, losses and liabilities are in any way or to any extent owed, in
whole or in part, under any claim or theory of strict liability or are, to any
extent caused, in whole or in part, by any negligent act or omission of any kind
by Pledgee or any Bank.
(b) Pledgor will upon demand pay to Pledgee the amount of any and all costs
and expenses, including the fees and disbursements of Pledgee's counsel and of
any experts and agents, which Pledgee may incur in connection with (i) the
transactions which give rise to this Agreement; (ii) the preparation of this
Agreement and the perfection and preservation of the security interest created
under this Agreement; (iii) the administration of this Agreement; (iv) the
custody, preservation, use or operation of, or the sale of, collection from, or
other realization upon, any Collateral; (v) the exercise or enforcement of any
of the rights of Pledgee hereunder; or (vi) the failure by Pledgor to perform or
observe any of the provisions hereof, except expenses resulting from Pledgee's
gross negligence or willful misconduct.
Section 4.5. Non-Judicial Remedies. In granting to Pledgee the power to
---------------------
enforce its rights hereunder without prior judicial process or judicial hearing,
Pledgor expressly waives, renounces and knowingly relinquishes any legal right
which might otherwise require Pledgee to enforce its rights by judicial process.
In so providing for non-judicial remedies, Pledgor recognizes and concedes that
such remedies are consistent with the usage of trade, are responsive to
commercial necessity, and are the result of a bargain at arm's length. Nothing
herein is intended to prevent Pledgee or Pledgor from resorting to judicial
process at either party's option.
Section 4.6. Other Recourse. Pledgor waives any right to require Pledgee
--------------
or Banks to proceed against any other Person, exhaust any Collateral or other
security for the Obligations, or to have any Other Liable Party joined with
Pledgor in any suit arising out of the Obligations or this Agreement, or pursue
any other remedy in Pledgee's power. Pledgor further waives any and all notice
of acceptance of this Agreement and of the creation, modification,
rearrangement, renewal or extension for any period of any of the Obligations of
any Other Liable Party from time to time.
A-10
<PAGE>
Pledgor further waives any defense arising by reason of any disability or other
defense of any Other Liable Party or by reason of the cessation from any cause
whatsoever of the liability of any Other Liable Party. Until all of the
Obligations shall have been paid in full, Pledgor shall have no right to
subrogation and Pledgor waives the right to enforce any remedy which Pledgee or
any Bank has or may hereafter have against any Other Liable Party, and waives
any benefit of and any right to participate in any other security whatsoever now
or hereafter held by Pledgee. Pledgor authorizes Pledgee and each Bank, without
notice or demand and without any reservation of rights against Pledgor and
without affecting [Pledgor's] [or Borrower's] liability hereunder or on the
Obligations, from time to time to (a) take or hold any other property of any
type from any other Person as security for the Obligations, and exchange,
enforce, waive and release any or all of such other property, (b) apply the
Collateral or such other property and direct the order or manner of sale thereof
as Pledgee may in its discretion determine, (c) renew, extend for any period,
accelerate, modify, compromise, settle or release any of the obligations of any
Other Liable Party in respect to any or all of the Obligations or other security
for the Obligations, (d) waive, enforce, modify, amend or supplement any of the
provisions of any Obligation Document with any Person other than Pledgor, and
(e) release or substitute any Other Liable Party.
Section 4.7. Voting Rights, Dividends Etc. in Respect of Pledged Equity.
----------------------------------------------------------
(a) So long as no Default or Event of Default shall have occurred and be
continuing Pledgor may receive and retain any and all dividends or interest paid
in respect of the Pledged Equity; provided, however, that any and all
--------- ------- ----
(i) dividends and interest paid or payable other than in cash in
respect of, and instruments and other property received, receivable or
otherwise distributed in respect of or in exchange for, any Pledged Equity,
(ii) dividends and other distributions paid or payable in cash in
respect of any Pledged Equity in connection with a partial or total
liquidation or dissolution or in connection with a reduction of capital,
capital surplus or paid-in surplus, and
(iii) cash paid, payable or otherwise distributed in redemption of,
or in exchange for, any Pledged Equity,
shall be, and shall forthwith be delivered to Pledgee to hold as, Pledged Equity
and shall, if received by Pledgor, be received in trust for the benefit of
Pledgee, be segregated from the other property or funds of Pledgor, and be
forthwith delivered to Pledgee in the exact form received with any necessary
indorsement or appropriate stock powers duly executed in blank, to be held by
Pledgee as Collateral.
(b) Upon the occurrence and during the continuance of a Default or an
Event of Default:
(i) all rights of Pledgor to receive and retain the dividends and
interest payments which Pledgor would otherwise be authorized to receive
and retain pursuant to subsection (a) of this section shall automatically
cease, and all such rights shall thereupon become vested in Pledgee which
shall thereupon have the right to receive and hold as Pledged Equity such
dividends and interest payments;
A-11
<PAGE>
(ii) without limiting the generality of the foregoing, Pledgee may at
its option exercise any and all rights of conversion, exchange,
subscription or any other rights, privileges or options pertaining to any
of the Pledged Equity (except voting rights) as if it were the absolute
owner thereof, including, without limitation, the right to exchange, in its
discretion, any and all of the Pledged Equity upon the merger,
consolidation, reorganization, recapitalization or other adjustment of
Pledgor or any of its Subsidiaries, or upon the exercise by Pledgor or any
of its Subsidiaries of any right, privilege or option pertaining to any
Pledged Equity, and, in connection therewith, to deposit and deliver any
and all of the Pledged Equity with any committee, depository, transfer
agent, registrar or other designated agent upon such terms and conditions
as it may determine; and
(iii) all dividends and interest payments which are received by
Pledgor contrary to the provisions of subsection (b) (i) of this section
shall be received in trust for the benefit of Pledgee, shall be segregated
from other funds of Pledgor, and shall be forthwith paid over to Pledgee as
Pledged Equity in the exact form received, to be held by Pledgee as
Collateral.
Anything herein to the contrary notwithstanding, Pledgee may not exercise any
voting rights pertaining to the Pledged Equity and Pledgor may at all times
exercise any and all voting rights pertaining to the Pledged Equity or any part
thereof for any purpose not inconsistent with the terms of this Agreement or any
other Obligation Document; provided, however, upon the occurrence and during the
-------- -------
continuance of a Default or an Event of Default, Pledgor will not exercise or
refrain from exercising any such right, as the case may be, if Pledgee gives
notice that, in Pledgee's judgment, such action would result in a Material
Adverse Change with respect to the value of the Pledged Equity or the benefits
to Pledgee of its security interest hereunder.
Section 4.8. Private Sale of Pledged Equity. Pledgor recognizes that
------------------------------
Pledgee may deem it impracticable to effect a public sale of all or any part of
the Pledged Equity and that Pledgee may, therefore, determine to make one or
more private sales of any such securities to a restricted group of purchasers
who will be obligated to agree, among other things, to acquire such securities
for their own account, for investment and not with a view to the distribution or
resale thereof. Pledgor acknowledges that any such private sale may be at
prices and on terms less favorable to the seller than the prices and other terms
which might have been obtained at a public sale and, notwithstanding the
foregoing, agrees that such private sales shall be deemed to have been made in a
commercially reasonable manner and that Pledgee shall have no obligation to
delay the sale of any such securities for the period of time necessary to permit
Pledgor to register such securities (with no obligation of Pledgor to accomplish
such registration) for public sale under the Securities Act of 1933, as amended.
Pledgor further acknowledges and agrees that any offer to sell such securities
which has been (a) publicly advertised on a bona fide basis in a newspaper or
---- ----
other publication of general circulation in the financial community of Dallas,
Texas (to the extent that such an offer may be so advertised without prior
registration under the Securities Act), or (b) made privately in the manner
described above to not less than fifteen (15) bona fide offerees shall be deemed
---- ----
to involve a "public sale" for the purposes of Section 9.504(c) of the Code (or
any successor or similar, applicable statutory provision) as then in effect in
the State of Texas, notwithstanding that such sale may not constitute a "public
offering" under the Securities Act of 1933, as amended, and that Pledgee may, in
such event, bid for the purchase of such securities.
A-12
<PAGE>
ARTICLE V
Miscellaneous
-------------
Section 5.1. Notices. Any notice or communication required or permitted
-------
hereunder shall be given in writing, sent by personal delivery, by telecopy, by
delivery service with proof of delivery, or by registered or certified United
States mail, postage prepaid, addressed to the appropriate party as follows:
To Pledgor:
----------
______________________________
______________________________
______________________________
Fax No.: (___) _______________
To Pledgee: NationsBank, N.A.,
----------
as Administrative Agent for Banks
901 Main Street, 64/th/ Floor
Dallas, Texas 75202
Fax No. (214) 508-1285
or to such other address or to the attention of such other individual as
hereafter shall be designated in writing by the applicable party sent in
accordance herewith. Any such notice or communication shall be deemed to have
been given (a) in the case of personal delivery or delivery service, as of the
date of first attempted delivery at the address or in the manner provided
herein, (b) in the case of telecopy, upon receipt, or (c) in the case of
registered or certified United States mail, three (3) days after deposit in the
mail.
Section 5.2. Amendments. No amendment of any provision of this Agreement
----------
shall be effective unless it is in writing and signed by Pledgor, Pledgee and
Banks, and no waiver of any provision of this Agreement, and no consent to any
departure by Pledgor therefrom, shall be effective unless it is in writing and
signed by Pledgee and Banks, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given and
to the extent specified in such writing.
Section 5.3. Preservation of Rights. No failure on the part of Pledgee
----------------------
or any Bank to exercise, and no delay in exercising, any right hereunder or
under any other Obligation Document shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. Neither the execution nor
the delivery of this Agreement shall in any manner impair or affect any other
security for the Obligations. The rights and remedies of Pledgee and Banks
provided herein and in the other Obligation Documents are cumulative of and are
in addition to, and not exclusive of, any rights or remedies provided by law.
The rights of Pledgee and Banks under any Obligation Document against any party
thereto are not conditional or contingent on any attempt by Pledgee or Banks to
exercise any of its rights under any other Obligation Document against such
party or against any other Person.
A-13
<PAGE>
Section 5.4. Unenforceability. Any provision of this Agreement which is
----------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or invalidity without
invalidating the remaining portions hereof or thereof or affecting the validity
or enforceability of such provision in any other jurisdiction.
Section 5.5. Survival of Agreements. All representations and warranties
----------------------
of Pledgor herein, and all covenants and agreements herein shall survive the
execution and delivery of this Agreement, the execution and delivery of any
other Obligation Documents and the creation of the Obligations.
Section 5.6. Other Liable Party. Neither this Agreement nor the exercise
------------------
by Pledgee or any Bank or the failure of Pledgee or any Bank to exercise any
right, power or remedy conferred herein or by law shall be construed as
relieving any Other Liable Party from liability on the Obligations or any
deficiency thereon. This Agreement shall continue irrespective of the fact that
the liability of any Other Liable Party may have ceased or irrespective of the
validity or enforceability of any other Obligation Document to which Pledgor or
any Other Liable Party may be a party, and notwithstanding the reorganization,
death, incapacity or bankruptcy of any Other Liable Party, and notwithstanding
the reorganization or bankruptcy or other event or proceeding affecting any
Other Liable Party.
Section 5.7. Binding Effect and Assignment. This Agreement creates a
-----------------------------
continuing security interest in the Collateral and (a) shall be binding on
Pledgor and its successors and permitted assigns, and (b) shall inure, together
with all rights and remedies of Pledgee hereunder, to the benefit of Pledgee and
Banks and their respective successors, transferees and assigns. Without
limiting the generality of the foregoing, Pledgee and Banks may pledge, assign
or otherwise transfer any or all of their respective rights under any or all of
the Obligation Documents to any other Person, and such other Person shall
thereupon become vested with all of the benefits in respect thereof granted
herein or otherwise. None of the rights or duties of Pledgor hereunder may be
assigned or otherwise transferred without the prior written consent of Pledgee
and Banks.
Section 5.8. Termination. It is contemplated by the parties hereto that
-----------
there may be times when no Obligations are outstanding, but notwithstanding such
occurrences, this Agreement shall remain valid and shall be in full force and
effect as to subsequent outstanding Obligations. Upon the satisfaction in full
of the Obligations, upon the termination or expiration of the Credit Agreement
and any other Commitment of Banks to extend credit to Borrower, and upon written
request for the termination hereof delivered by Pledgor to Pledgee and Banks,
this Agreement and the security interest created hereby shall terminate and all
rights to the Collateral shall revert to Pledgor. Pledgee will, upon Pledgor's
request and at Pledgor's expense, (a) return to Pledgor such of the Collateral
as shall not have been sold or otherwise disposed of or applied pursuant to the
terms hereof, and (b) execute and deliver to Pledgor such documents as Pledgor
shall reasonably request to evidence such termination.
SECTION 5.9. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
-------------
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF
THE UNITED STATES OF AMERICA.
A-14
<PAGE>
Section 5.10. Counterparts. This Agreement may be separately executed in
------------
any number of counterparts, all of which when so executed shall be deemed to
constitute one and the same Agreement.
Section 5.11. Loan Paper. This Agreement is a "Loan Paper", as defined in
----------
the Credit Agreement, and, except as expressly provided herein to the contrary,
this Agreement is subject to all provisions of the Credit Agreement governing
such Loan Paper.
A-15
<PAGE>
IN WITNESS WHEREOF, Pledgor has caused this Agreement to be executed and
delivered by its officer thereunto duly authorized, as of the date first above
written.
[QUICKSILVER RESOURCES INC.,
a Delaware corporation]
[FIRST TIER SUBSIDIARY]
By: _____________________________________
Name: _____________________________________
Title: _____________________________________
A-16
<PAGE>
EXHIBIT B
---------
Note
----
$_____________________ Dallas, Texas ________, 1999
FOR VALUE RECEIVED, the undersigned, Quicksilver Resources Inc., a Delaware
corporation ("Maker"), promises to pay to the order of [Name of Bank] ("Payee"),
----- -----
at the offices of NationsBank, N.A., as Administrative Agent (herein so called),
at 901 Main Street, 64th Floor, Dallas, Texas 75202, for Payee, the principal
sum of _________________ and No/100 Dollars ($_______________), or so much
thereof as may be advanced and outstanding, together with interest, as
hereinafter described.
This Note has been executed and delivered pursuant to, and is subject to
and governed by, the terms of that certain Second Amended and Restated Credit
Agreement dated as of March 1, 1999 (as hereafter renewed, extended, amended, or
supplemented, the "Agreement") among Maker, Payee, Administrative Agent and the
---------
other Banks named therein, and is one of the "Notes" referred to therein.
-----
Unless otherwise defined herein or unless the context hereof otherwise requires,
each term used herein with its initial letter capitalized has the meaning given
to such term in the Agreement.
Maker also promises to pay interest on the unpaid principal amount hereof
in like money at the offices of Administrative Agent above referenced from the
date hereof at the rates applicable to amounts outstanding under the Loan
provided in the Agreement and on the dates specified in the Agreement.
The principal balance of this Note shall be paid at the times and in the
amounts required by the Agreement. The entire outstanding principal balance
hereof and all accrued but unpaid interest thereon shall be due and payable in
full on the Termination Date.
Upon and subject to the terms and conditions of the Agreement, Maker shall
be entitled to prepay the principal of or interest on this Note from time to
time and at any time, in whole or in part.
Upon the occurrence and continuance of an Event of Default, and upon the
conditions stated in the Agreement, Administrative Agent may, at its option, and
shall, to the extent required in accordance with the terms of the Agreement,
declare the entire unpaid principal of and accrued interest on this Note
immediately due and payable (provided that, upon the occurrence of certain
-------- ----
Events of Default, and upon the conditions stated in the Agreement, such
acceleration shall be automatic), without notice (except as otherwise required
by the Agreement), demand, or presentment, all of which are hereby waived, and
the holder hereof shall have the right to offset against this Note any sum or
sums owed by the holder hereof to Maker. All past-due principal of and, to the
extent permitted by law, accrued interest on this Note shall, at the option of
the holder hereof, bear interest at the lesser of (a) the Maximum Lawful Rate or
(b) the Default Rate until paid from the due date.
B-1
<PAGE>
Notwithstanding the foregoing, if at any time, any rate of interest
calculated under Section 3.3 of the Agreement (the "Contract Rate") exceeds the
----------- -------------
Maximum Lawful Rate, the rate of interest hereunder shall be limited to the
Maximum Lawful Rate, but any subsequent reductions in the Contract Rate shall
not reduce the rate of interest on this Note below the Maximum Lawful Rate until
the total amount of interest accrued equals the amount of interest which would
have accrued (including the amount of interest which would have accrued prior to
the payment or prepayment of any portion of this Note) if the Contract Rate had
at all times been in effect. In the event that at maturity (stated or by
acceleration), or at final payment of this Note, the total amount of interest
paid or accrued on this Note is less than the amount of interest which would
have accrued if the Contract Rate had at all times been in effect with respect
thereto, then at such time the Maker shall pay to the holder of this Note an
amount equal to the difference between (a) the lesser of the amount of interest
which would have accrued if the Contract Rate had at all times been in effect
and the amount of interest which would have accrued if the Maximum Lawful Rate
had at all times been in effect, and (b) the amount of interest actually paid or
accrued on this Note.
QUICKSILVER RESOURCES INC.,
a Delaware corporation
By:______________________________________
Name:____________________________________
Title:___________________________________
B-2
<PAGE>
ADVANCES, MATURITIES, AND
PAYMENTS OF PRINCIPAL AND INTEREST
<TABLE>
<CAPTION>
==========================================================================================================================
Payee's
Commitment Expiration Rate of Interest Amount of Unpaid
Borrowing Percentage of Interest Applicable to Principal Amount of Principal Notation
Date of Borrowing Period Tranche Paid Interest Paid Balance Made By
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________
==========================================================================================================================
</TABLE>
B-3
<PAGE>
EXHIBIT C
---------
GUARANTY
--------
THIS GUARANTY (this "Guaranty") is dated as of the ____ day of __________,
--------
_____, by [Subsidiary of Borrower], a ___________________ ("Guarantor"), in
---------
favor of NATIONSBANK, N.A., PARIBAS, FROST NATIONAL BANK, BANK ONE, TEXAS, N.A.
and each of the other financial institutions listed on Schedule 1 to the Credit
Agreement (as hereinafter defined) as Banks, and each of their successors and
assigns as permitted pursuant to the Credit Agreement (NationsBank, N.A. acting
as a Bank but not as Administrative Agent, Paribas, Frost National Bank, Bank
One, Texas, N.A., each of the other Banks listed on Schedule 1 of the Credit
Agreement, and each of their successors and assigns are collectively referred to
herein as "Noteholders").
-----------
W I T N E S S E T H:
-------------------
WHEREAS, Quicksilver Resources Inc., a Delaware corporation ("Borrower"),
--------
Noteholders and NationsBank, N.A., as Administrative Agent ("Administrative
--------------
Agent") are parties to that certain Second Amended and Restated Credit Agreement
- -----
(as amended, the "Credit Agreement") dated as of March 1, 1999, pursuant to
----------------
which Noteholders have made a revolving credit loan to Borrower and agreed to
issue and participate in letters of credit issued on behalf of Borrower (unless
otherwise defined herein, all terms used herein with their initial letter
capitalized shall have the meaning given such terms in the Credit Agreement);
and
WHEREAS, Noteholders have required, as a condition to the continued
extension of credit under the Credit Agreement, that Guarantor execute and
deliver this Guaranty; and
WHEREAS, Guarantor has determined that valuable benefits will be derived by
it as a result of the Credit Agreement and the extension of credit made (and to
be made) by Noteholders thereunder; and
WHEREAS, Guarantor has further determined that the benefits accruing to it
from the Credit Agreement exceed Guarantor's anticipated liability under this
Guaranty.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged and confessed, Guarantor hereby covenants and
agrees as follows:
1. Guarantor hereby absolutely and unconditionally guarantees the prompt,
complete and full payment when due, no matter how such shall become due, of the
Obligations, and further guarantees that Borrower will properly and timely
perform the Obligations. Notwithstanding any contrary provision in this
Guaranty, however, Guarantor's maximum liability under this Guaranty is limited,
to the extent, if any, required so that its liability is not subject to
avoidance under applicable Debtor Relief Laws (as such term is defined in
Paragraph 8 hereof).
- -----------
2. If Guarantor is or becomes liable for any indebtedness owing by
Borrower to any Noteholder by endorsement or otherwise than under this Guaranty,
such liability shall not be in any manner impaired or affected hereby, and the
rights of Noteholders hereunder shall be cumulative of
C-1
<PAGE>
any and all other rights that Noteholders may ever have against Guarantor. The
exercise by any Noteholder of any right or remedy hereunder or under any other
instrument, at law or in equity, shall not preclude the concurrent or subsequent
exercise of any other right or remedy.
3. In the event of default by Borrower in payment of the Obligations, or
any part thereof, when such Obligations become due, either by their terms or as
the result of the exercise of any power to accelerate, Guarantor shall, on
demand, and without further notice of dishonor and without any notice having
been given to Guarantor previous to such demand of the acceptance by Noteholders
of this Guaranty, and without any notice having been given to such Guarantor
previous to such demand of the creating or incurring of such Obligations, pay
the amount due thereon to Noteholders at Administrative Agent's office as set
forth in the Credit Agreement, and it shall not be necessary for any Noteholder,
in order to enforce such payment by Guarantor, first, to institute suit or
exhaust its remedies against Borrower or others liable on such Obligations, to
have Borrower joined with Guarantor in any suit brought under this Guaranty or
to enforce their rights against any security which shall ever have been given to
secure such indebtedness; provided, however, that in the event any Noteholder
-------- ------- ----
elects to enforce and/or exercise any remedies they may possess with respect to
any security for the Obligations prior to demanding payment from Guarantor,
Guarantor shall nevertheless be obligated hereunder for any and all sums still
owing to Noteholders on the Obligations and not repaid or recovered incident to
the exercise of such remedies.
4. Notice to Guarantor of the acceptance of this Guaranty and of the
making, renewing or assignment of the Obligations and each item thereof, are
hereby expressly waived by Guarantor.
5. Each payment on the Obligations shall be deemed to have been made by
Borrower unless express written notice is given to Noteholders at the time of
such payment that such payment is made by Guarantor as specified in such notice.
6. If all or any part of the Obligations at any time are secured,
Guarantor agrees that Administrative Agent and/or Noteholders may at any time
and from time to time, at their discretion and with or without valuable
consideration, allow substitution or withdrawal of collateral or other security
and release collateral or other security or compromise or settle any amount due
or owing under the Credit Agreement or amend or modify in whole or in part the
Credit Agreement or any Loan Paper executed in connection with same without
impairing or diminishing the obligations of Guarantor hereunder. Guarantor
further agrees that if Borrower executes in favor of any Noteholder any
collateral agreement, mortgage or other security instrument, the exercise by any
Noteholder of any right or remedy thereby conferred on such Noteholder shall be
wholly discretionary with such Noteholder, and that the exercise or failure to
exercise any such right or remedy shall in no way impair or diminish the
obligation of Guarantor hereunder. Guarantor further agrees that Noteholders
and Administrative Agent shall not be liable for their failure to use diligence
in the collection of the Obligations or in preserving the liability of any
person liable for the Obligations, and Guarantor hereby waives presentment for
payment, notice of nonpayment, protest and notice thereof (including, notice of
acceleration), and diligence in bringing suits against any Person liable on the
Obligations, or any part thereof.
7. Guarantor agrees that Noteholders, in their discretion, may (i) bring
suit against all guarantors (including, without limitation, Guarantor hereunder)
of the Obligations jointly and
C-2
<PAGE>
severally or against any one or more of them, (ii) compound or settle with any
one or more of such guarantors for such consideration as Noteholders may deem
proper, and (iii) release one or more of such guarantors from liability
hereunder, and that no such action shall impair the rights of Noteholders to
collect the Obligations (or the unpaid balance thereof) from other such
guarantors of the Obligations, or any of them, not so sued, settled with or
released. Guarantor agrees, however, that nothing contained in this paragraph,
and no action by Noteholders permitted under this paragraph, shall in any way
affect or impair the rights or obligations of such guarantors among themselves.
8. Guarantor represents and warrants to each Noteholder that (i)
Guarantor is a corporation, limited liability company or partnership duly
organized and validly existing under the laws of the jurisdiction of its
incorporation or formation; and (ii) Guarantor possesses all requisite authority
and power to authorize, execute, deliver and comply with the terms of this
Guaranty; this Guaranty has been duly authorized and approved by all necessary
action on the part of Guarantor and constitutes a valid and binding obligation
of Guarantor enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable Debtor Relief Laws; and no approval or
consent of any court or governmental entity is required for the authorization,
execution, delivery or compliance with this Guaranty which has not been obtained
(and copies thereof delivered to Noteholders). As used in this Guaranty, the
term, "Debtor Relief Laws" means the Bankruptcy Code of the United States of
------------------
America and all other applicable liquidation, conservatorship, bankruptcy,
moratorium, rearrangement, receivership, insolvency, reorganization, suspension
of payments or similar debtor relief laws from time to time in effect affecting
the rights of creditors generally.
9. Guarantor covenants and agrees that until the Obligations are paid and
performed in full, except as otherwise provided in the Credit Agreement or
unless Noteholders give their prior written consent to any deviation therefrom,
it will (i) at all times maintain its existence and authority to transact
business in any State or jurisdiction where Guarantor has assets and operations,
(ii) promptly deliver to Noteholders and to Administrative Agent such
information respecting its business affairs, assets and liabilities as
Noteholders may reasonably request, and (iii) duly and punctually observe and
perform all covenants applicable to Guarantor under the Credit Agreement and the
other Loan Papers. The failure of Guarantor to comply with the terms of this
paragraph shall be an Event of Default under the Credit Agreement.
10. This Guaranty is for the benefit of Noteholders, their successors and
assigns, and in the event of an assignment by Noteholders (or their successors
or assigns) of the Obligations, or any part thereof, the rights and benefits
hereunder, to the extent applicable to the Obligations so assigned, may be
transferred with such Obligations. This Guaranty is binding upon Guarantor and
its successors and assigns.
11. No modification, consent, amendment or waiver of any provision of this
Guaranty, nor consent to any departure by Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by each Noteholder, and
then shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on Guarantor in any case shall, of itself,
entitle Guarantor to any other or further notice or demand in similar or other
circumstances. No delay or omission by Noteholders in exercising any power or
right hereunder shall impair any such right or power or be construed as a waiver
thereof or any acquiescence therein, nor shall any single
C-3
<PAGE>
or partial exercise of any such power preclude other or further exercise
thereof, or the exercise of any other right or power hereunder. All rights and
remedies of Noteholders hereunder are cumulative of each other and of every
other right or remedy which Noteholders may otherwise have at law or in equity
or under any other contract or document, and the exercise of one or more rights
or remedies shall not prejudice or impair the concurrent or subsequent exercise
of other rights or remedies.
12. No provision herein or in any promissory note, instrument or any other
Loan Paper executed by Borrower or Guarantor evidencing the Obligations shall
require the payment or permit the collection of interest in excess of the
Maximum Lawful Rate. If any excess of interest in such respect is provided for
herein or in any such promissory note, instrument, or any other Loan Paper, the
provisions of this paragraph shall govern, and neither Borrower nor Guarantor
shall be obligated to pay the amount of such interest to the extent that it is
in excess of the amount permitted by law. The intention of the parties being to
conform strictly to any applicable federal or state usury laws now in force, all
promissory notes, instruments and other Loan Papers executed by Borrower or
Guarantor evidencing the Obligations shall be held subject to reduction to the
amount allowed under said usury laws as now or hereafter construed by the courts
having jurisdiction.
13. If Guarantor should breach or fail to perform any provision of this
Guaranty, Guarantor agrees to pay Noteholders all costs and expenses (including
court costs and reasonable attorneys fees) incurred by Noteholders in the
enforcement hereof.
14. (a) The liability of Guarantor under this Guaranty shall in no manner
be impaired, affected or released by the insolvency, bankruptcy, making of an
assignment for the benefit of creditors, arrangement, compensation, composition
or readjustment of Borrower, or any proceedings affecting the status, existence
or assets of Borrower or other similar proceedings instituted by or against
Borrower and affecting the assets of Borrower.
(b) Guarantor acknowledges and agrees that any interest on any
portion of the Obligations which accrues after the commencement of any
proceeding referred to in clause (a) above (or, if interest on any portion of
the Obligations ceases to accrue by operation of law by reason of the
commencement of said proceeding, such interest as would have accrued on such
portion of the Obligations if said proceedings had not been commenced) shall be
included in the Obligations because it is the intention of Guarantor,
Administrative Agent and Noteholders that the Obligations which are guaranteed
by Guarantor pursuant to this Guaranty should be determined without regard to
any rule of law or order which may relieve Borrower of any portion of such
Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor
in possession, assignee for the benefit of creditors or similar person to pay
Noteholders or Administrative Agent, or allow the claim of Noteholders or
Administrative Agent in respect of, any such interest accruing after the date on
which such proceeding is commenced.
(c) In the event that all or any portion of the Obligations are paid
by Borrower, the obligations of Guarantor hereunder shall continue and remain in
full force and effect or be reinstated, as the case may be, in the event that
all or any part of such payment(s) are rescinded or recovered directly or
indirectly from Administrative Agent or any Noteholder as a preference,
fraudulent transfer or otherwise, and any such payments which are so rescinded
or recovered shall constitute Obligations for all purposes under this Guaranty.
C-4
<PAGE>
15. Guarantor understands and agrees that any amounts of Guarantor on
account with any Noteholder may be offset to satisfy the obligations of
Guarantor hereunder.
16. Guarantor hereby subordinates and makes inferior any and all
indebtedness now or at any time hereafter owed by Borrower to Guarantor to the
Obligations evidenced by the Credit Agreement and agrees after the occurrence of
a Default under the Credit Agreement, or any event which with notice, lapse of
time, or both, would constitute a Default under the Credit Agreement, not to
permit Borrower to repay, or to accept payment from Borrower of, such
indebtedness or any part thereof without the prior written consent of
Noteholders.
17. During the period that Banks have any commitment to lend or
participate in Letter of Credit Exposure under the Loan Papers, or any amount
payable under any Note remains unpaid or any Letter of Credit remains
outstanding, and throughout any additional preferential period subsequent
thereto, Guarantor hereby waives any and all rights of subrogation to which
Guarantor may otherwise be entitled against Borrower, or any other guarantor of
the Obligations, as a result of any payment made by Guarantor pursuant to this
Guaranty.
18. As of the date hereof, the fair saleable value of the property of
Guarantor is greater than the total amount of liabilities (including contingent
and unliquidated liabilities) of Guarantor, and Guarantor is able to pay all of
its liabilities as such liabilities mature and Guarantor does not have
unreasonably small capital within the meaning of Section 548, Title 11, United
States Code, as amended. In computing the amount of contingent or liquidated
liabilities, such liabilities have been computed at the amount which, in light
of all the facts and circumstances existing as of the date hereof, represents
the amount that can reasonably be expected to become an actual or matured
liability.
19. If any provision of this Guaranty is held to be illegal, invalid, or
unenforceable, such provision shall be fully severable; this Guaranty shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof; and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Guaranty a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid and enforceable.
20. (a) Except to the extent required for the exercise of the remedies
provided in the other security instruments, Guarantor hereby irrevocably submits
to the nonexclusive jurisdiction of any Texas state or federal court over any
action or proceeding arising out of or relating to this Guaranty or any other
Loan Paper, and Guarantor hereby irrevocably agrees that all claims in respect
of such action or proceeding may be heard and determined in such Texas state or
federal court. Guarantor hereby irrevocably waives, to the fullest extent
permitted by Law, any objection which it may now or hereafter have to the laying
of venue of any Litigation arising out of or in connection with this Guaranty or
any of the Loan Papers brought in district courts of Dallas County, Texas, or in
the United States District Court for the Northern District of Texas, Dallas
Division. Guarantor hereby irrevocably waives any claim that any Litigation
brought in any such court has been brought in an inconvenient forum. Guarantor
hereby irrevocably consents to the service of process out of any
C-5
<PAGE>
of the aforementioned courts in any such Litigation by the mailing of copies
thereof by certified mail, return receipt requested, postage prepaid, to
Guarantor's office at ____________________________________________. Guarantor
irrevocably agrees that any legal proceeding against Noteholders 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 Noteholder to commence legal proceedings or
otherwise proceed against Guarantor in any jurisdiction or to serve process in
any manner permitted by applicable law. As used herein, the term "Litigation"
----------
means any proceeding, claim, lawsuit or investigation (i) conducted or
threatened by or before any court or governmental department, commission, board,
bureau, agency or instrumentality of the United States or of any state,
commonwealth, nation, territory, possession, county, parish, or municipality,
whether now or hereafter constituted or existing, or (ii) pending before any
public or private arbitration board or panel.
(b) Nothing in this Paragraph 20 shall affect any right of any
------------
Noteholder to serve legal process in any other manner permitted by law or affect
the right of any Noteholder to bring any action or proceeding against Guarantor
in the courts of any other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property,
Guarantor hereby irrevocably waives such immunity in respect of its obligations
under this Guaranty and the other Loan Papers.
21. THIS GUARANTY AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE
FINAL AGREEMENT BY AND AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT AND GUARANTOR AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF NOTEHOLDERS, AGENT AND GUARANTOR. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT AND GUARANTOR.
22. GUARANTOR, FOR ITSELF, ITS SUCCESSORS AND ASSIGNS, HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RIGHT TO A JURY TRIAL, IN
ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY OR ANY OF THE
OTHER LOAN PAPERS.
23. THIS GUARANTY AND THE OTHER LOAN PAPERS SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
[Signature page to follow]
C-6
<PAGE>
EXECUTED and effective as of the date first above written.
GUARANTOR:
[SUBSIDIARY OF BORROWER]
By:_______________________________
Name:_____________________________
Title:____________________________
C-7
<PAGE>
EXHIBIT D
---------
REQUEST FOR BORROWING
---------------------
Reference is made to that certain Second Amended and Restated Credit
Agreement dated as of March 1, 1999 (as from time to time amended, the
"Agreement") by and among Quicksilver Resources Inc. ("Borrower"), NationsBank,
--------- --------
N.A., as Administrative Agent, and certain Banks as named and defined therein.
Terms which are defined in the Agreement and which are used but not defined
herein are used herein with the meanings given them in the Agreement. Pursuant
to the terms of the Agreement, Borrower hereby requests a Borrowing in the
amount of $_____________ to be advanced on ________________________, _______.
Borrower requests that the Borrowing to be made hereunder shall be [a Base
Rate Borrowing] [a Eurodollar Borrowing], shall be in the aggregate amount set
forth below, and shall have the Interest Period(s) set forth below:
Type of Borrowing Aggregate Amount Interest Period
----------------- ---------------- ---------------
________________________ ______________________ _______________
________________________ ______________________ _______________
________________________ ______________________ _______________
Borrower and the Authorized Officer of Borrower signing this instrument
hereby certify that:
(a) Such officer is the duly elected, qualified and acting officer of
Borrower as indicated below such officers signature hereto.
(b) The representations and warranties of Borrower and each other
Credit Party set forth in the Agreement and the Loan Papers delivered to
Administrative Agent and Banks are true and correct on and as of the date
hereof, with the same effect as though such representations and warranties
had been made on and as of the date hereof or, if such representations and
warranties are expressly limited to particular dates, as of such particular
dates. No Material Adverse Change has occurred with respect to any Credit
Party since the date of the last financial reports delivered to Banks
pursuant to Section 10.1 of the Agreement.
------------
(c) There does not exist on the date hereof, any condition or event
which constitutes a Default or Event of Default, nor will any such Default
or Event of Default exist upon Borrower's receipt and application of the
proceeds requested hereby. Borrower will use the proceeds hereby requested
in compliance with the applicable provisions of the Agreement.
D-1
<PAGE>
(d) After giving effect to the Borrowing requested hereby, the
Outstanding Credit will not be in excess of the Borrowing Base.
IN WITNESS WHEREOF, this instrument is executed as of _________________,
__________.
QUICKSILVER RESOURCES INC.,
a Delaware corporation
By:___________________________________
Name:_________________________________
Title:________________________________
D-2
<PAGE>
EXHIBIT E
---------
REQUEST FOR LETTER OF CREDIT
----------------------------
Reference is made to that certain Second Amended and Restated Credit
Agreement dated as of March 1, 1999 (as from time to time amended, the
"Agreement"), by and among Quicksilver Resources Inc. ("Borrower"), NationsBank,
--------- --------
N.A., as Administrative Agent, and certain Banks as named and defined therein.
Terms which are defined in the Agreement and which are used but not defined
herein are used herein with the meanings given them in the Agreement.
Pursuant to the terms of the Agreement, Borrower hereby requests
NationsBank, N.A., as Administrative Agent ("Issuer") to issue a Letter of
------
Credit for the account of Borrower, as follows:
Type of Commitment:
------------------
Requested Amount $__________________________
Requested Date of Issuance ___________________________
Requested Expiration Date ___________________________
Summary of Terms ___________________________
(provide a brief description
of conditions under which the
drafts under such Letter of
Credit are to be available) ___________________________
Beneficiary (Name/Address) ___________________________
___________________________
___________________________
___________________________
Such Letter of Credit is more particularly described in the Letter of
Credit Application and Agreement of Issuer which is attached hereto.
Borrower and the Authorized Officer of Borrower signing this instrument
hereby certify that:
(a) Such officer is the duly elected, qualified and acting officer of
Borrower as indicated below such officer's signature hereto.
(b) The representations and warranties of Borrower and each Credit
Party set forth in the Agreement and the other Loan Papers delivered to
Administrative Agent and Banks are true and correct on and as of the date
hereof, with the same effect as though such representations and warranties
had been made on and as of the date hereof, or if such representations and
warranties are expressly limited to particular dates, as of such particular
dates. No Material Adverse Change has occurred with respect to a Credit
Party since the date of the last financial reports delivered to Banks
pursuant to Section 10.1 of the Agreement.
------------
E-1
<PAGE>
(c) There does not exist on the date hereof any condition or event
which constitutes a Default or Event of Default, nor will any such Default
or Event of Default exist upon the issuance of the Letter of Credit
requested hereby. Borrower will use the Letter of Credit solely for
purposes permitted by the Agreement.
(d) After the issuance of the Letter of Credit requested hereby, the
Outstanding Credit will not be in excess of the Borrowing Base.
IN WITNESS WHEREOF, this instrument is executed as of ________________,
___.
QUICKSILVER RESOURCES INC.,
a Delaware corporation
By:__________________________________
Name:________________________________
Title:_______________________________
E-2
<PAGE>
EXHIBIT F
---------
NOTICE OF CONTINUATION OR CONVERSION
------------------------------------
Reference is made to that certain Second Amended and Restated Credit
Agreement dated as of March 1, 1999 (as from time to time amended, the
"Agreement"), by and among Quicksilver Resources Inc. ("Borrower"), NationsBank,
--------- --------
N.A., as Administrative Agent, and certain Banks as named and defined therein.
Terms which are defined in the Agreement and which are used but not defined
herein are used herein with the meanings given them in the Agreement.
[_] Reference is hereby made to the existing Eurodollar Loan outstanding
under the Agreement in the amount of $________ which is subject to an
Interest Period expiring on _________________, ____. Borrower hereby
requests that on the expiration of such Interest Period the portion of
the principal of such Eurodollar Loan which is subject to such
Interest Period be made the subject of [_] a Base Rate Loan or [_] a
Eurodollar Loan having an Interest Period of ____________ (___)
months.
[_] Borrower hereby requests that on _______________, ____, a portion of
the principal of the Base Rate Loan in the amount of $_________ be
made the subject of a Eurodollar Loan having an Interest Period of
____________ (___) months.
Borrower and the Authorized Officer of Borrower signing this instrument
hereby certify that:
(a) Such officer is the duly elected, qualified and acting officer of
Borrower as indicated below such officer's signature hereto;
(b) There does not exist on the date hereof any condition or event
which constitutes a Default or Event of Default; and
(c) The representations and warranties of Borrower and each Credit
Party set forth in the Agreement and the Loan Papers delivered to
Administrative Agent and each Bank are true and correct on and as of the
date hereof, with the same effect as though such representations and
warranties had been made on and as of the date hereof or, if such
representations and warranties are expressly limited to particular dates,
as of such particular dates.
IN WITNESS WHEREOF, this instrument is executed as of ________, ____.
QUICKSILVER RESOURCES INC.,
a Delaware corporation
By:_______________________________
Name:_____________________________
Title:____________________________
F-1
<PAGE>
EXHIBIT G
---------
CERTIFICATE OF OWNERSHIP INTERESTS
----------------------------------
This Certificate of Ownership Interests (this "Certificate") is executed
-----------
and delivered pursuant to that certain Second Amended and Restated Credit
Agreement dated as of March 1, 1999 (as amended from time to time, the
"Agreement"), by and among Quicksilver Resources Inc. ("Borrower"), NationsBank,
--------- --------
N.A., as Administrative Agent, and certain Banks as named and defined therein.
Unless otherwise defined herein, all capitalized terms shall have the meanings
given such terms in the Agreement.
In order to induce Banks to extend credit to Borrower under the Agreement,
Borrower hereby represents and warrants to Administrative Agent and each Bank
that (a) Exhibit A attached hereto (the "Property Description") is a complete
--------- --------------------
and accurate description of all Mineral Interests described in the Initial
Reserve Reports (the "Initial Borrowing Base Properties"), (b) after giving
---------------------------------
effect to the Closing Transactions, Borrower holds good and defensible title,
subject only to Permitted Encumbrances and Immaterial Title Deficiencies, to the
Initial Borrowing Base Properties described in the Property Description, (c)
after giving effect to the Closing Transactions, Borrower's share of (i) the
costs for each of the Initial Borrowing Base Properties is not greater than the
decimal fraction set forth in the Initial Reserve Reports, before and after
payout, as the case may be, and described therein by the respective designations
"working interests," "WI," "gross working interest," "GWI," or similar terms
(except in such cases where there is a corresponding increase in the net revenue
interest), and (ii) production from, allocated to, or attributed to each of such
Initial Borrowing Base Properties is not less than the decimal fraction set
forth in the Initial Reserve Reports, before and after payout, as the case may
be, and described therein by the designations "net revenue interest," "NRI," or
similar terms, and (d) after giving effect to the Closing Transactions, each
well drilled in respect of each of the Initial Borrowing Base Properties
described in the Initial Reserve Reports (A) is capable of, and is presently,
producing Hydrocarbons in commercially profitable quantities, Borrower is
receiving payments for its share of production, with no funds in respect of any
thereof being presently held in suspense, other than any such funds being held
in suspense pending delivery of appropriate division orders, and (B) has been
drilled, bottomed, completed and operated in compliance with all applicable Laws
and no such well which is currently producing Hydrocarbons is subject to any
penalty in production by reason of such well having produced in excess of its
allowable production.
Borrower acknowledges and agrees that each Bank is relying on this
Certificate and the representations and warranties herein contained in extending
credit under the Agreement, and but for Borrower's execution and delivery of
this Certificate, Banks would not extend credit under the Agreement.
G-1
<PAGE>
Executed as of the 4/th/ day of March, 1999.
QUICKSILVER RESOURCES INC.,
a Delaware corporation
By:____________________________________
Glenn Darden,
President
G-2
<PAGE>
EXHIBIT A
---------
Initial Borrowing Base Properties
(to be attached)
G-3
<PAGE>
EXHIBIT H
---------
CERTIFICATE OF FINANCIAL OFFICER
--------------------------------
The undersigned, the ____________ of Quicksilver Resources Inc., a Delaware
corporation ("Borrower") hereby (a) delivers this Certificate pursuant to
--------
Section 10.1(c) of that certain Second Amended and Restated Credit Agreement
- ---------------
("Credit Agreement") dated as of March 1, 1999, by and among Borrower,
----------------
NationsBank, N.A., as Administrative Agent, and the financial institutions
listed on Schedule 1 thereto, as Banks ("Banks"), and (b) certifies to Banks,
-----
with the knowledge and intent that Banks may, without any independent
investigation, rely fully on the matters herein in connection with the Credit
Agreement, as follows:
1. Attached hereto as Schedule I are the financial statements of Borrower
----------
as of and for the Fiscal [_] Year [_] Quarter (check one) ended ____________,
____.
2. Such financial statements are true and correct, have been prepared on
a consistent basis in accordance with GAAP (except as otherwise noted therein)
and fairly present the financial condition of Borrower as of the date indicated
therein and the results of operations for the respective periods indicated
therein.
3. Attached hereto as Schedule II are detailed calculations used by
-----------
Borrower to establish that Borrower was in compliance with the requirements of
Article XII of the Credit Agreement on the date of the financial statements
attached as Schedule I hereto.
----------
4. Unless otherwise disclosed on Schedule III attached hereto and
------------
incorporated herein by reference for all purposes, neither a Default nor an
Event of Default has occurred which is in existence on the date hereof;
provided, that, for any Default or Event of Default disclosed on Schedule III
- -------- ---- ------------
attached hereto, Borrower is taking or proposes to take the action to cure such
Default or Event of Default set forth on Schedule III.
------------
5. On the date hereof (a) (check one) [_] there is no Material Gas
Imbalance or [_] the amount of the net gas imbalances under Gas Balancing
Agreements to which Borrower is a party or by which any Mineral Interests owned
by Borrower or any of its Subsidiaries is bound is ____________________, and (b)
the aggregate amount of all Advance Payments received under Advance Payment
Contracts to which any Credit Party is a party or by which any Mineral Interests
owned by Borrower or any other Credit Party is bound which have not been
satisfied by delivery of production, if any, is _______________________________.
6. Attached hereto as Schedule IV is a summary of the Hedge Transactions
-----------
to which Borrower or any other Credit Party is a party on the date hereof.
7. Unless otherwise described on Schedule V attached hereto and
----------
incorporated herein by reference for all purposes, the representations and
warranties of Borrower and each other Credit Party set forth in the Credit
Agreement and the other Loan Papers are true and correct on and as of the date
hereof, with the same effect as though such representations and warranties had
been made
H-1
<PAGE>
on and as of the date hereof, or if such representations and warranties are
expressly limited to particular dates, as of such particular dates.
Unless otherwise defined herein, all capitalized terms used herein shall
have the meaning given such terms in the Credit Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate of
Financial Officer as of ___________, ____.
QUICKSILVER RESOURCES INC.,
a Delaware corporation
By: ______________________________
Name: ______________________________
Title: ______________________________
H-2
<PAGE>
Schedule I
----------
Financial Statements
(to be attached)
H-3
<PAGE>
Schedule II
-----------
Compliance Calculations
(to be attached)
H-4
<PAGE>
Schedule III
------------
Defaults/Remedial Action
(to be attached)
H-5
<PAGE>
Schedule IV
-----------
Summary of Hedge Transactions
(to be attached)
H-6
<PAGE>
Schedule V
----------
Qualifications to Representations and Warranties
(to be attached)
H-7
<PAGE>
EXHIBIT I
---------
ASSIGNMENT AND ACCEPTANCE
-------------------------
Reference is made to that certain Second Amended and Restated Credit
Agreement dated as of March 1, 1999 (the "Credit Agreement") among Quicksilver
----------------
Resources Inc., ("Borrower"), NationsBank, N.A., as Administrative Agent
--------
("Administrative Agent"), and the financial institutions listed on Schedule 1
--------------------
thereto, as Banks ("Banks"). Terms defined in the Credit Agreement are used
-----
herein with the same meaning.
The "Assignor" and the "Assignee" referred to on Schedule 1 agree as
follows:
1. Assignor hereby sells and assigns to Assignee, without recourse and
without representation or warranty except as expressly set forth herein, and
Assignee hereby purchases and assumes from Assignor, an interest in and to
Assignor's rights and obligations under the Credit Agreement and the other Loan
Papers as of the date hereof equal to the percentage interest specified on
Schedule 1 of all outstanding rights and obligations under the Credit Agreement
- ----------
and the other Loan Papers. After giving effect to such sale and assignment,
Assignee's Commitment, Assignee's Commitment Percentage and the principal amount
of the Loan owing to Assignee will be as set forth on Schedule 1.
----------
2. Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Loan Papers or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of the Loan Papers or any other instrument or document furnished pursuant
thereto; (iii) makes no representation or warranty and assumes no responsibility
with respect to the financial condition of Borrower or the performance or
observance by Borrower of any of its obligations under the Loan Papers or any
other instrument or document furnished pursuant thereto; and (iv) attaches the
Note held by Assignor and requests that Administrative Agent exchange such Note
for new Notes payable to the order of Assignee in an amount equal to the
Commitment assumed by Assignee pursuant hereto and to Assignor in an amount
equal to the Commitment retained by Assignor, if any, as specified on
Schedule 1.
- ----------
3. Assignee (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the financial statements referred to in
Section 10.1 thereof and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Acceptance; (ii) agrees that it will, independently and without
reliance upon any Agent, Assignor or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Credit Agreement;
(iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes
each Agent to take such action as agent on its behalf and to exercise such
powers and discretion under the Credit Agreement as are delegated to each such
Agent by the terms thereof, together with such powers and discretion as are
reasonably incidental thereto; (v) agrees that it will perform in accordance
with their terms all of the obligations that by the terms of the Credit
Agreement are
I-1
<PAGE>
required to be performed by it as a Bank; and (vi) attaches any U.S. Internal
Revenue Service or other forms required under Section 5.6.
4. Following the execution of this Assignment and Acceptance, it will be
delivered to Administrative Agent for acceptance and recording by Administrative
Agent. The effective date for this Assignment and Acceptance (the "Effective
---------
Date") shall be the date of acceptance hereof by Administrative Agent, unless
- ----
otherwise specified on Schedule 1.
----------
5. Upon such acceptance and recording by Administrative Agent, as of the
Effective Date, (i) Assignee shall be a party to the Credit Agreement and, to
the extent provided in this Assignment and Acceptance, have the rights and
obligations of a Bank thereunder, and (ii) Assignor shall, to the extent
provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by Administrative Agent, from and
after the Effective Date, Administrative Agent shall make all payments under
the Credit Agreement and the Notes in respect of the interest assigned hereby
(including, without limitation, all payments of principal, interest and
commitment fees with respect thereto) to Assignee. Assignor and Assignee shall
make all appropriate adjustments in payments under the Credit Agreement and the
Notes for periods prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of Texas.
8. This Assignment and Acceptance may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall
----------
be effective as delivery of a manually executed counterpart of this Assignment
and Acceptance.
IN WITNESS WHEREOF, Assignor and Assignee have caused Schedule 1 to this
----------
Assignment and Acceptance to be executed by their officers thereunto duly
authorized as of the date specified thereon.
I-2
<PAGE>
SCHEDULE 1
to
ASSIGNMENT AND ACCEPTANCE
Percentage interest assigned: ________%
Assignee's Commitment: $_______
Assignee's Commitment Percentage: ________%
Aggregate outstanding principal amount
of Loan assigned: $_______
Principal amount of Note payable to Assignee: $_______
Principal amount of Note payable to Assignor: $_______
Effective Date (if other than date
of acceptance by Administrative Agent): *_______, _____
[NAME OF ASSIGNOR], as Assignor
By:_________________________
Title:___________________
Dated: ______________, _____
[NAME OF ASSIGNEE], as Assignee
By:_________________________
Title:___________________
Domestic Lending Office:
Eurodollar Lending Office:
* This date should be no earlier than five Domestic Business Days after the
delivery of this Assignment and Acceptance to Administrative Agent unless
an earlier date is agreed to by Assignor, Assignee, Administrative Agent
and Borrower.
I-3
<PAGE>
Accepted and Approved
this ___ day of ___________, _____
NATIONSBANK, N.A., as Administrative Agent
By:_________________________
Name:_______________________
Title:______________________
Approved this ____ day
of ____________, ______
QUICKSILVER RESOURCES INC.
By:_______________________
Name:_____________________
Title:____________________
I-4
<PAGE>
EXHIBIT J
---------
CERTIFICATE OF EFFECTIVENESS
----------------------------
This Certificate of Effectiveness (this "Certificate") is executed the
-----------
4/th/ day of March, 1999 by and between Quicksilver Resources Inc. ("Borrower")
--------
and NationsBank, N.A., as Administrative Agent ("Administrative Agent") for the
--------------------
Banks under and as defined in that certain Second Amended and Restated Credit
Agreement (the "Agreement") dated as of March 1, 1999 by and among Borrower,
---------
Administrative Agent, and the Banks named therein. This Certificate is executed
pursuant to Section 8.1 of the Agreement and is the "Certificate of
-----------
Effectiveness" therein referenced. Unless otherwise defined herein, all terms
used herein with their initial letter capitalized shall have the meaning given
such terms in the Agreement. Borrower and Administrative Agent on behalf of
itself and the Banks hereby acknowledge and agree as follows:
1. Borrower has satisfied each condition precedent to the effectiveness
of the Agreement contained in Section 8.1 of the Agreement.
-----------
2. The Agreement is effective as of the date hereof.
NATIONSBANK, N.A.,
as Administrative Agent for the Banks
By:________________________________________
J. Scott Fowler,
Vice President
QUICKSILVER RESOURCES INC.
By:________________________________________
Glenn Darden,
President
J-1
<PAGE>
SCHEDULE 1
FINANCIAL INSTITUTIONS
<TABLE>
<CAPTION>
===============================================================
Commitment Commitment
Banks Amount Percentage
----- ---------- ----------
---------------------------------------------------------------
<S> <C> <C>
NationsBank, N.A. $40,588,235.29 20.2941176%
===============================================================
Paribas $58,823,529.41 29.4117647%
===============================================================
Bank One, Texas, N.A. $47,058,823.53 23.5294118%
===============================================================
Frost National Bank $23,529,411.76 11.7647059%
===============================================================
CIBC, Inc. $ 15,000,000 7.5000000%
===============================================================
Christiania Bank $ 15,000,000 7.5000000%
===============================================================
Totals $ 200,000,000 100%
===============================================================
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================================
Domestic Lending Eurodollar Lending
Banks Office Office Address for Notice
----- ------ ------ ------------------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NationsBank, N.A. 901 Main Street 901 Main Street 901 Main Street
64th Floor 64th Floor 64th Floor
Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202
Fax No. (214) 508-1285 Fax No. (214) 508-1285 Fax No. (214) 508-1285
========================================================================================================================
Bank One, Texas, N.A. 1717 Main Street 1717 Main Street 1717 Main Street
4/th/ Floor 4/th/ Floor 4/th/ Floor
Dallas, Texas 75201 Dallas, Texas 75201 Dallas, Texas 75201
Fax No. (214) 290-2332 Fax No. (214) 290-2332 Fax No. (214) 290-2332
========================================================================================================================
Paribas 1200 Smith Street 1200 Smith Street 1200 Smith Street
Suite 3100 Suite 3100 Suite 3100
Houston, Texas 77002 Houston, Texas 77002 Houston, Texas 77002
Fax No. (713) 659-6915 Fax No. (713) 659-6915 Fax No. (713) 659-6915
========================================================================================================================
Frost National Bank Continental Plaza Continental Plaza Continental Plaza
777 Main Street 777 Main Street 777 Main Street
Fort Worth, Texas 76102-5304 Fort Worth, Texas 76102-5304 Fort Worth, Texas 76102-5304
Fax No. (817) 336-5615 Fax No. (817) 336-5615 Fax No. (817) 336-5615
========================================================================================================================
CIBC, Inc. 2 Paces West 2 Paces West 2 Paces West
Suite 1200 Suite 1200 Suite 1200
2727 Paces Ferry Road 2727 Paces Ferry Road 2727 Paces Ferry Road
Atlanta, Georgia 30339 Atlanta, Georgia 30339 Atlanta, Georgia 30339
Fax No. (770) 319-4950 Fax No. (770) 319-4950 Fax No. (770) 319-4950
========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
========================================================================================================================
<S> <C> <C> <C>
Christiania Bank OG 11 West 42nd Street 11 West 42nd Street 11 West 42nd Street
Kreditkasse ASA 7th Floor 7th Floor 7th Floor
New York, New York 10036 New York, New York 10036 New York, New York 10036
Fax No. (212) 827-4888 Fax No. (212) 827-4888 Fax No. (212) 827-4888
========================================================================================================================
</TABLE>
Administrative Agent - Address
NationsBank, N.A.
901 Main Street, 64/th/ Floor
Dallas, Texas 75202
Attn: Scott Fowler
Fax No. (214) 508-1285
<PAGE>
SCHEDULE 2
INVESTMENTS
NONE
<PAGE>
SCHEDULE 3
LITIGATION
NONE
<PAGE>
SCHEDULE 4
CAPITALIZATION
(to be attached)
<PAGE>
SCHEDULE 5
ENVIRONMENTAL DISCLOSURE
NONE
<PAGE>
EXHIBIT 10.9
FIRST AMENDMENT TO
------------------
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
This First Amendment to Second Amended and Restated Credit Agreement (this
"First Amendment") is entered into as of May 17, 1999 by and among QUICKSILVER
---------------
RESOURCES INC., a Delaware corporation ("Borrower"), NATIONSBANK, N.A., a
--------
national banking association, as Administrative Agent ("Administrative Agent")
--------------------
and each of the financial institutions set forth on the signature pages hereto
as Banks.
W I T N E S S E T H:
-------------------
WHEREAS, Borrower, Administrative Agent, NationsBank, N.A. in its
individual capacity ("NationsBank"), Bank One, Texas, N.A. ("Bank One"), Paribas
----------- --------
and Frost National Bank ("Frost," and together with NationsBank and Paribas
-----
collectively referred to herein as "Banks") are parties to that certain Second
-----
Amended and Restated Credit Agreement dated as of March 1, 1999 (as amended, the
"Credit Agreement") (unless otherwise defined herein, all terms used herein with
----------------
their initial letter capitalized shall have the meaning given such terms in the
Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement, NationsBank, Bank One, Paribas
and Frost have made a Loan to Borrower and provided certain other credit
accommodations to Borrower; and
WHEREAS, (a) prior to the execution of this First Amendment, Bank One has
entered into an Assignment and Acceptance Agreement with NationsBank, pursuant
to which Bank One has assigned to NationsBank, and NationsBank (i) acquired from
Bank One one hundred percent (100%) of Bank One's Commitment and one hundred
percent (100%) of the Loan and Letter of Credit Exposure held by Bank One under
the Credit Agreement and each of the other Loan Papers, and (ii) assumed and
agreed to perform all of Bank One's obligations under the Credit Agreement and
each of the other Loan Papers, and (b) immediately prior to the execution of
this First Amendment, Frost has entered into Assignment and Acceptance Agreement
with NationsBank, pursuant to which Frost has assigned to NationsBank, and
NationsBank (i) acquired from Frost a portion of Frost's Commitment and a
portion of the Loan and Letter of Credit Exposure held by Frost under the Credit
Agreement and each of the other Loan Papers, and (ii) assumed and agreed to
perform a portion of Frost's obligations under the Credit Agreement and the
other Loan Papers; and
WHEREAS, Schedule 1 hereto reflects the Commitments of each Bank after
----------
giving effect to the Assignment and Acceptance Agreements referenced above, and
Schedule 1 to the Credit Agreement is deemed amended and restated in the form of
Schedule 1 hereto; and
- ----------
WHEREAS, Borrower has entered into that certain Purchase and Sale Agreement
dated as of March 31, 1999 (the "Unocal Acquisition Agreement"), executed by and
----------------------------
between Borrower, as buyer thereunder, and Union Oil Company of California, a
California corporation ("Unocal"), as seller thereunder, pursuant to which
------
Borrower has agreed to purchase, and Unocal has agreed to sell, certain
properties and assets (the "Unocal Properties") more particularly described
-----------------
therein (the "Unocal Acquisition"); and
------------------
<PAGE>
WHEREAS, in connection with the consummation of the Unocal Acquisition,
Borrower has requested that, among other things, Banks (a) amend certain terms
of the Credit Agreement in certain respects, and (b) establish (i) a Borrowing
Base in the amount of $115,000,000, and (ii) a Conforming Borrowing Base in the
amount of $95,000,000, to be effective May 17, 1999 and continuing until the
next Redetermination Date; and
WHEREAS, subject to the terms and conditions herein contained, Banks have
agreed to Borrower's requests.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrower, Administrative Agent and Banks hereby agree as follows:
SECTION 1. Amendments. Subject to the satisfaction of each condition
--------- ----------
precedent set forth in Section 4 hereof, and in reliance on the representations,
---------
warranties, covenants and agreements contained in this First Amendment, the
Credit Agreement shall be amended effective May 17, 1999 (the "Effective Date")
--------------
in the manner provided in this Section 1.
---------
1.1 Additional Definitions. Section 2.1 of the Credit Agreement shall be
----------------------
amended to add thereto in alphabetical order the definitions of "Asset
-----
Disposition," "Equity Contribution," "Existing Mineral Interests," "First
- ----------- ------------------- -------------------------- -----
Amendment," "Mandatory Redetermination," "Net Cash Proceeds," "Permitted
- --------- ------------------------- ----------------- ---------
Unsecured Loan," "Unocal," "Unocal Acquisition," "Unocal Acquisition Agreement,"
- -------------- ------ ------------------ ----------------------------
"Unocal Acquisition Documents," "Unocal Properties," "Unocal Redetermination,"
---------------------------- ----------------- ----------------------
"Unocal Redetermination Date" and "Unocal Reserve Report" which shall read in
- ---------------------------- ---------------------
full as follows:
"Asset Disposition" means any sale, assignment, lease, license,
-----------------
exchange or other disposition by Borrower of any of its assets, but
excluding any of the foregoing expressly permitted pursuant to Section 11.5
------------
hereof.
"Equity Contribution" means any cash contribution to the equity
-------------------
capital of Borrower occurring in connection with the issuance or sale of
equity securities by Borrower.
"Existing Mineral Interests" means the Mineral Interests owned by
--------------------------
Borrower on the effective date of the First Amendment prior to giving
effect to the Unocal Acquisition, which Mineral Interests are described in
the Initial Reserve Reports.
"First Amendment" means that certain First Amendment to Second Amended
---------------
and Restated Credit Agreement dated as of May 17, 1999 among Borrower,
Administrative Agent and the financial institutions a party thereto as
Banks.
"Mandatory Redetermination" means any reduction of the Borrowing Base
-------------------------
pursuant to Section 6.7. Notwithstanding anything to the contrary
-----------
contained herein, no Mandatory Redetermination shall be deemed or construed
to be a Special Redetermination hereunder.
2
<PAGE>
"Net Cash Proceeds" means the remainder of (a) the gross proceeds
-----------------
received by Borrower from an Equity Contribution or Asset Disposition, less
(b) underwriter discounts and commissions, investment banking fees, legal,
accounting and other professional fees and expenses and other usual and
customary transaction costs, in each case only to the extent paid or
payable by Borrower in cash and related to such Equity Contribution or
Asset Disposition.
"Permitted Unsecured Loan" means that certain unsecured revolving loan
------------------------
from Mercury to Borrower in an amount up to $2,000,000.
"Unocal" means Union Oil Company of California, a California
------
corporation.
"Unocal Acquisition" means the purchase by Borrower of the Unocal
------------------
Properties pursuant to the Unocal Acquisition Agreement.
"Unocal Acquisition Agreement" means that certain Purchase and Sale
----------------------------
Agreement dated as of March 31, 1999, by and between Borrower and Unocal.
"Unocal Acquisition Documents" means the Unocal Acquisition Agreement
----------------------------
and all agreements, assignments, deeds, conveyances, certificates and other
documents and instruments now or hereafter executed and delivered by or
between Borrower and Unocal pursuant to the Unocal Acquisition Agreement or
in connection with the Unocal Acquisition.
"Unocal Properties" means the "Assets" as defined in the Unocal
-----------------
Acquisition Agreement.
"Unocal Redetermination" means any Redetermination of the Borrowing
----------------------
Base pursuant to Section 6.6. Notwithstanding anything to the contrary
-----------
contained herein, no Unocal Redetermination shall be deemed or construed to
be a Special Redetermination hereunder.
"Unocal Redetermination Date" means any date on which either (a) any
---------------------------
Borrowing Base Property (or any interest therein) is excluded from the
Unocal Acquisition pursuant to the terms of Sections 10.3.1 and 19.6.1(c)
of the Unocal Acquisition Agreement, or (b) the Purchase Price (as defined
in the Unocal Acquisition Agreement) is adjusted downward (i) pursuant to
Sections 10.3.1, 10.3.2, 19.6.1(b), and 19.6.1(c) of the Unocal Acquisition
Agreement, or (ii) after final determination thereof pursuant to Section
3.2 of the Unocal Acquisition Agreement and in accordance with the
procedures set forth in Section 13 of the Unocal Acquisition Agreement.
"Unocal Reserve Report" means an engineering and economic analysis of
---------------------
the Unocal Properties prepared as of January 1, 1999 by S.A. Holditch &
Associates, Inc.
1.2 Amendment to Definitions. The definitions of "Applicable Margin,"
------------------------ -----------------
"Borrowing Base Properties," "Letter of Credit Fee," "Loan Papers,"
- -------------------------- -------------------- -----------
"Redetermination," "Redetermination Date,"
- ---------------- --------------------
3
<PAGE>
"Reserve Report" and "Restricted Payment" set forth in Section 2.1 of the
-------------- ------------------
Credit Agreement are amended to read in full as follows:
"Applicable Margin" means, on any date, with respect to each
-----------------
Eurodollar Loan, an amount determined by reference to the ratio of
Outstanding Credit to the Conforming Borrowing Base on such date in
accordance with the table below:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Ratio of Outstanding Applicable Margin for
Credit to Conforming Eurodollar Loans
Borrowing Base
-------------------------------------------------------------
<S> <C>
* .50 to 1 1.125%
-------------------------------------------------------------
** .50 to 1 * .75 to 1 1.375%
-------------------------------------------------------------
** .75 to 1 * .90 to 1 1.625%
-------------------------------------------------------------
** .90 to 1 * 1.00 to 1 1.875%
-------------------------------------------------------------
** 1.00 * to 1 2.375%
-------------------------------------------------------------
</TABLE>
* less than or equal to
** greater than
"Borrowing Base Properties" means all Mineral Interests evaluated by
-------------------------
Banks for purposes of establishing the Borrowing Base. The Borrowing Base
Properties on the effective date of the First Amendment consist of the
Existing Mineral Interests and the Unocal Properties described in the
Unocal Reserve Report.
"Letter of Credit Fee" means, with respect to any Letter of Credit
--------------------
issued hereunder, a fee in an amount equal to a percentage of the stated
amount of such Letter of Credit (calculated on a per annum basis based on
the stated term of such Letter of Credit) determined by reference to the
ratio of Outstanding Credit to the Conforming Borrowing Base in effect on
the date such Letter of Credit is issued in accordance with the table
below:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Ratio of Outstanding Per Annum Letter of
Credit to Conforming Credit Fee
Borrowing Base
-------------------------------------------------------------
<S> <C>
* .50 to 1 1.125%
-------------------------------------------------------------
** .50 to 1 * .75 to 1 1.375%
-------------------------------------------------------------
** .75 to 1 * .90 to 1 1.625%
-------------------------------------------------------------
** .90 to 1 * 1.00 to 1 1.875%
-------------------------------------------------------------
** 1.00 * to 1 2.375%
-------------------------------------------------------------
</TABLE>
* less than or equal to
** greater than
"Loan Papers" means this Agreement, the First Amendment, the Notes,
-----------
any Subsidiary Guaranty (which may hereafter be executed), all Mortgages
now or at any time hereafter delivered pursuant to Section 7.1, the
-----------
Collateral Assignments, any Borrower Pledge Agreement (which may hereafter
be executed), any Subsidiary Pledge Agreement (which may hereafter be
executed), the Assignment of Notes and Liens, and all other certificates,
documents or instruments delivered in connection with this Agreement, as
the foregoing may be amended from time to time.
4
<PAGE>
"Redetermination" means (i) any Scheduled Redetermination, (ii) any
---------------
Special Redetermination, (iii) any Unocal Redetermination and (iv) any
Mandatory Redetermination.
"Redetermination Date" means (a) with respect to any Scheduled
--------------------
Redetermination, each June 1 and December 1, commencing December 1, 1999,
(b) with respect to any Special Redetermination, the first day of the first
month which is not less than twenty (20) Domestic Business Days following
the date of a request for a Special Redetermination, (c) with respect to
each Unocal Redetermination, the Unocal Redetermination Date, and (d) with
respect to each Mandatory Redetermination (i) the date upon which Borrower
consummates any Equity Contribution or Asset Disposition in accordance with
the terms of Section 6.7(a) or (b), and (ii) December 1, 1999.
-------------- ---
"Reserve Report" means an unsuperseded engineering analysis of the
--------------
Mineral Interests owned by Borrower, in form and substance reasonably
acceptable to Required Banks, prepared in accordance with customary and
prudent practices in the petroleum engineering industry and Financial
Accounting Standards Board Statement 69. Each Reserve Report required to
be delivered by March 31 of each year pursuant to Section 6.1 shall be
-----------
prepared by the Approved Petroleum Engineer. Each other Reserve Report
shall be prepared by Borrower's in-house staff. Notwithstanding the
foregoing, in connection with any Special Redetermination requested by
Borrower, the Reserve Report shall be in form and scope mutually acceptable
to Borrower and Required Banks. Until superseded, each of the Initial
Reserve Reports and the Unocal Reserve Report shall be considered a Reserve
Report.
"Restricted Payment" means, with respect to any Person, (a) any
------------------
Distribution by such Person, or (b) the retirement, redemption or
prepayment prior to scheduled maturity by such Person or any Affiliate of
such Person of any Debt of such Person (other than payments of the
indebtedness evidenced by the Permitted Unsecured Loan).
1.3 Amendment to Borrowing Base Deficiency Provisions. Section 3.4 of the
-------------------------------------------------
Credit Agreement is amended to read in full as follows:
"SECTION 3.4. Mandatory Prepayments Resulting From Borrowing Base
---------------------------------------------------
Deficiency. Except with respect to a Unocal Redetermination pursuant to
----------
Section 6.6 hereof, or a Mandatory Redetermination pursuant to Section 6.7
----------- -----------
hereof, in the event a Borrowing Base Deficiency exists after giving effect
to any Redetermination, Borrower shall, at its option, either (a) eliminate
such Borrowing Base Deficiency by making a single mandatory prepayment of
principal on the Loan in an amount equal to the entire amount of such
Borrowing Base Deficiency on the first Monthly Date following the date on
which such Borrowing Base Deficiency is determined to exist, or (b)
eliminate such deficiency by making six (6) consecutive mandatory
prepayments of principal on the Loan each of which shall be in the amount
5
<PAGE>
of one sixth (1/6th) of the amount of such Borrowing Base Deficiency
commencing on the first Monthly Date following the date on which such
Borrowing Base Deficiency is determined to exist and continuing on each
Monthly Date thereafter. If a Borrowing Base Deficiency cannot be
eliminated pursuant to this Section 3.4 by prepayment of the Loan in full
-----------
(as a result of outstanding Letter of Credit Exposure) on each Monthly
Date, Borrower shall also deposit cash with Administrative Agent, to be
held by Administrative Agent to secure outstanding Letter of Credit
Exposure in the manner contemplated by Section 3.1(b), in an amount at
--------------
least equal to one sixth (1/6th) of the balance of such Borrowing Base
Deficiency (i.e., one-sixth (1/6th) of the difference between the Borrowing
Base Deficiency and the remaining outstanding principal under the Loan on
the date such Borrowing Base Deficiency is first determined to occur). In
the event a Borrowing Base Deficiency shall occur (or an increase in any
pre-existing Borrowing Base Deficiency shall occur) as a result of a Unocal
Redetermination pursuant to Section 6.6 or a Mandatory Redetermination
-----------
pursuant to Section 6.7, Borrower shall immediately make a single mandatory
-----------
prepayment of principal on the Loan in an amount equal to the entire amount
of such Borrowing Base Deficiency; provided, that in the event the
-------- ----
Conforming Borrowing Base is reduced to an amount less than $95,000,000
pursuant to any Scheduled or Special Redetermination completed on or prior
to December 1, 1999, the mandatory prepayment of the Loan required by the
foregoing provisions and attributable to the reduction in the Borrowing
Base in accordance with Section 6.7(c), will be limited to the amount
--------------
necessary to immediately reduce the Outstanding Credit to $95,000,000, and
any remaining Borrowing Base Deficiency will be eliminated, at Borrower's
option, in accordance with clauses (a) or (b) of this Section 3.4."
-----------
1.4 Mandatory Prepayment Following Certain Events. Article III of the
---------------------------------------------
Credit Agreement shall be amended by inserting a new Section 3.10 thereto which
shall read in full as follows:
"SECTION 3.10. Mandatory Prepayments Following Certain Events.
----------------------------------------------
Immediately upon the consummation by Borrower of an Equity Contribution,
and at any time when the Borrowing Base exceeds the Conforming Borrowing,
immediately upon the consummation of an Asset Disposition, Borrower shall
make a mandatory prepayment of principal on the Loan in the amount of the
Net Cash Proceeds received by Borrower from such transaction."
1.5 Amendments to Article VI. Article VI of the Credit Agreement shall be
------------------------
amended by inserting new Sections 6.6 and 6.7 thereto which shall read in full
as follows:
"SECTION 6.6. Unocal Redetermination. In addition to Scheduled
----------------------
Redeterminations, Special Redeterminations and Mandatory Redeterminations,
Required Banks shall be permitted to make an additional Redetermination of
the Borrowing Base and the Conforming Borrowing Base on each Unocal
Redetermination Date (or as of a date shortly thereafter to be designated
by Administrative Agent in a notice to Borrower), pursuant to which
Required Banks may reduce the Borrowing Base and the Conforming Borrowing
Base by such amount as Required Banks shall determine in their sole
discretion as a result of (a) the
6
<PAGE>
existence of any uncured Title Defect or Material Environmental Deficiency
(as each such term is defined in the Unocal Acquisition Agreement), and (b)
the exclusion from the Unocal Acquisition of any Borrowing Base Properties
(or any interest therein) pursuant to Sections 3.6, 3.8 or 4.9 of the
Unocal Acquisition Agreement.
SECTION 6.7. Mandatory Redetermination; Mandatory Reduction of
-------------------------------------------------
Borrowing Base. Notwithstanding anything to the contrary contained herein,
--------------
the Borrowing Base shall reduce (a) immediately upon the consummation by
Borrower of any Equity Contribution by the amount of the Net Cash Proceeds
received by Borrower from such transaction (but in no event to an amount
less than the Conforming Borrowing Base then in effect), (b) immediately
upon the consummation by Borrower of any Asset Disposition by an amount
equal to the loan value of such assets sold or disposed of pursuant to such
transaction as determined by NationsBank for purposes of determining the
portion of the Borrowing Base which it attributes to such assets in
accordance with Article VI hereof (but in no event to an amount less than
----------
the Conforming Borrowing Base then in effect and after giving effect to any
Redetermination of the Conforming Borrowing Base as a result of such Asset
Disposition), and (c) on December 1, 1999 to the Conforming Borrowing Base
(unless the Borrowing Base has previously been reduced to an amount less
than $95,000,000 pursuant to any Scheduled or Special Redetermination)."
1.6 Amendment to Debt Covenant. Section 11.1 of the Credit Agreement
--------------------------
shall be amended to read in full as follows:
"SECTION 11.1. Incurrence of Debt. Borrower will not, nor will
------------------
Borrower permit any other Credit Party to, incur, become or remain liable
for any Debt other than the Obligations and Debt evidenced by the Permitted
Unsecured Loan; provided, that, at any time when the Outstanding Credit is
-------- ----
less than the Conforming Borrowing Base and no Default or Event of Default
has occurred which is continuing, (a) Borrower may incur and remain liable
for Non-Recourse Debt to the extent such Non-Recourse Debt has been
specifically approved in writing by Required Banks, and (b) Borrower and
its Subsidiaries may incur and remain liable for other Debt in an aggregate
amount outstanding at any time not to exceed $1,000,000."
1.7 Amendment to Transactions with Affiliates Covenant. Section 11.9 of
--------------------------------------------------
the Credit Agreement shall be amended to read in full as follows:
"SECTION 11.9. Transactions with Affiliates. Except for the
----------------------------
Permitted Unsecured Loan and the transactions contemplated thereby,
Borrower will not, nor will Borrower permit any other Credit Party to,
engage in any transaction with an Affiliate unless such transaction is as
favorable to such party as could be obtained in an arm's length transaction
with an unaffiliated Person in accordance with prevailing industry customs
and practices."
7
<PAGE>
1.8 Schedule 1. Schedule 1 to the Credit Agreement shall be amended to
----------
read in full as set forth in Schedule 1 attached to this First Amendment which
----------
Schedule 1 is incorporated into the Credit Agreement in its entirety.
- ----------
SECTION 2. Certain Agreements Regarding the Borrowing Base and the
--------- -------------------------------------------------------
Conforming Borrowing Base. Borrower, Administrative Agent and each Bank agree,
- -------------------------
subject to the satisfaction of each condition precedent set forth in Section 4
---------
of this First Amendment, that the Borrowing Base and the Conforming Borrowing
Base in effect during the period commencing on May 17, 1999 and ending on the
next Redetermination thereafter (taking into account the waiver described in
Section 3 hereof) shall be $115,000,000 and $95,000,000, respectively.
- ---------
Borrower, Administrative Agent and each Bank agree that the Redetermination
provided for in this Section 2 shall not be deemed, or construed to be, a
---------
Special Redetermination for purposes of Section 6.3 of the Credit Agreement.
SECTION 3. Waiver of June 1, 1999 Scheduled Redetermination. Borrower,
--------- ------------------------------------------------
each Bank and Administrative Agent hereby agree to waive the Scheduled
Redetermination of the Borrowing Base and the Conforming Borrowing Base
scheduled to occur on or promptly following June 1, 1999 (the "June 1, 1999
------------
Redetermination"). The waiver of the June 1, 1999 Redetermination herein
- ---------------
contained is expressly limited as follows: (a) such waiver is limited solely to
Section 6.2 of the Credit Agreement, and solely with respect to the June 1, 1999
Redetermination, and (b) such waiver is a limited, one-time waiver, and nothing
contained herein shall obligate any Bank to grant any additional or future
waiver of (i) any Redetermination, (ii) Section 6.2 of the Credit Agreement, or
(iii) any other provision of any Loan Paper.
SECTION 4. Conditions Precedent to Effectiveness of Amendments. The
--------- ---------------------------------------------------
amendments to the Credit Agreement contained in Section 1 of this First
---------
Amendment, the agreements of Administrative Agent and Banks contained in
Section 2 of this First Amendment, and the waiver of the Scheduled
- ---------
Redetermination contained in Section 3 of this First Amendment shall be
---------
effective only upon the satisfaction of each of the following conditions
precedent:
4.1 Closing Deliveries. Administrative Agent shall have received each of
------------------
the following documents, instruments and agreements, each of which shall be in
form and substance and executed in such counterparts as shall be acceptable to
Administrative Agent and each Bank and each of which shall, unless otherwise
indicated, be dated the Effective Date:
(a) a Note payable to the order of each Bank (as applicable), each in
the amount of such Bank's Commitment after giving effect to the Assignment and
Acceptance Agreements referenced in the recitals hereto;
(b) Mortgages duly executed and delivered by Borrower, together with
such other assignments, conveyances, amendments, agreements and other writings,
including, without limitation, UCC-1 financing statements, in form and substance
satisfactory to Administrative Agent, pursuant to which Borrower shall grant to
Administrative Agent a first and prior Lien, subject only to Permitted
Encumbrances, in and to the Unocal Properties;
(c) a copy of the Restated Certificate of Incorporation and all
amendments thereto, of Borrower accompanied by a certificate that such copy is
true, correct and complete, and dated
8
<PAGE>
within ten (10) days of the Effective Date, issued by the appropriate
Governmental Authority of the jurisdiction of incorporation of Borrower, and
accompanied by a certificate of the Secretary or comparable Authorized Officer
of Borrower that such copy is true, correct and complete on the Effective Date;
(d) a copy of the bylaws of Borrower, and all amendments thereto,
accompanied by a certificate of the Secretary or comparable Authorized Officer
of Borrower that such copy is true, correct and complete as of the date hereof;
(e) certain certificates and other documents issued by the appropriate
Governmental Authorities of such jurisdictions as Administrative Agent has
requested relating to the existence of Borrower and to the effect that Borrower
is in good standing with respect to the payment of franchise and similar Taxes
and is duly qualified to transact business in such jurisdictions;
(f) a certificate of incumbency of all officers of Borrower (to the
extent a party to any Loan Paper) who will be authorized to execute or attest to
any Loan Paper, dated the date hereof, executed by the Secretary or comparable
Authorized Officer of Borrower;
(g) copies of resolutions or comparable authorizations approving the
First Amendment, the Mortgages and the other Loan Papers executed in connection
with the First Amendment and authorizing the transactions contemplated by this
First Amendment and the other Loan Papers, duly adopted by the Board of
Directors or comparable governing authority of Borrower accompanied by
certificates of the Secretary or comparable officer of Borrower that such copies
are true and correct copies of resolutions duly adopted at a meeting of or (if
permitted by applicable Law and, if required by such Law, by the Bylaws or other
charter documents of Borrower) by the unanimous written consent of the Board of
Directors or comparable governing authority of Borrower, and that such
resolutions constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified, or revoked in any respect, and
are in full force and effect as of the date hereof;
(h) an opinion of Cantey & Hanger, L.L.P., special counsel for
Borrower, dated the date hereof, favorably opining as to the enforceability of
this First Amendment and each of the other Loan Papers and otherwise in form and
substance satisfactory to Administrative Agent and Banks;
(i) an opinion of Loomis, Ewert, Parsley, Davis & Gotting, special
Michigan counsel to Administrative Agent, favorably opining as to such matters
as Administrative Agent or Banks may request;
(j) such UCC-11 search reports as Administrative Agent shall require,
prepared as of a date not more than twenty (20) days prior to the Effective
Date, conducted in such jurisdictions and reflecting such names as
Administrative Agent shall request;
(k) a Certificate of Ownership Interests signed by an Authorized
Officer of Borrower in the form of Exhibit G attached to the Credit Agreement
---------
(with applicable conforming changes relevant to the Unocal Properties and the
Unocal Acquisition);
9
<PAGE>
(l) a copy of each Unocal Acquisition Document and all other material
documents, instruments and agreements executed and/or delivered by Borrower in
connection with the Unocal Acquisition Agreement and the closing of the Unocal
Acquisition, together with a certificate from an Authorized Officer of Borrower
certifying that (A) such copies are accurate and complete and represent the
complete understanding and agreement of the parties with respect to the subject
matter thereof, and (B) subject only to the increase in the Borrowing Base and
funding in connection therewith and herewith, the Unocal Acquisition has been
consummated on the terms set forth in such Unocal Acquisition Documents;
(n) a report or reports in form, scope and detail acceptable to
Administrative Agent and Banks setting forth the results of a review of the
Unocal Properties and other operations, which report(s) shall not reflect the
existence of facts or circumstances which would constitute a material violation
of any Applicable Environmental Law or which are likely to result in a material
liability to any Credit Party, and/or otherwise reveal any conditions or
circumstances which would reflect that the representations and warranties
contained in Section 9.14 of the Credit Agreement (after giving effect to the
Unocal Acquisition) are inaccurate in any respect; and
(o) such other documents, instruments, agreements and actions as may
reasonably be required by Administrative Agent and each Bank.
4.2 Title Review. Administrative Agent or its counsel shall have
------------
completed a review of title (including opinions of title) with respect to the
Required Reserve Value of all Unocal Properties, and such review shall not have
revealed any condition or circumstance which would reflect that the
representations and warranties contained in Section 9.9 of the Credit Agreement
(after giving effect to the Unocal Acquisition) are inaccurate in any respect.
4.3 No Material Adverse Change. In the sole discretion of each Bank, no
--------------------------
Material Adverse Change shall have occurred since December 31, 1998.
4.4 No Legal Prohibition. The transactions contemplated by this First
--------------------
Amendment shall be permitted by applicable Law and regulation and shall not
subject Administrative Agent, any Bank, Borrower or any Credit Party to any
Material Adverse Change.
4.5 No Litigation. No litigation, arbitration or similar proceeding shall
-------------
be pending or threatened which calls into question the validity or
enforceability of this First Amendment, the other Loan Papers or the
transactions contemplated hereby or thereby.
4.6 Closing Fees. All fees and expenses of each Agent and their
------------
Affiliates in connection with the execution of this First Amendment and the
consummation of the transactions contemplated hereby shall have been paid,
including, without limitation, any fees payable to each such Agent or any
Affiliate of each such Agent to be paid on the Effective Date pursuant to any
separate agreement between or among Borrower and each such Agent or such
Affiliates.
4.7 Unocal Acquisition. Subject only to the increase in the Borrowing
------------------
Base and the disbursement and application of the Borrowing in connection with
this First Amendment, the Unocal
10
<PAGE>
Acquisition shall have been completed pursuant to the terms of the Unocal
Acquisition Documents as in effect on the date hereof, and as a result thereof,
Borrower shall have acquired good and defensible title to all Unocal Properties,
free and clear of all Liens except Permitted Encumbrances.
4.8 Other Matters. All matters related to this First Amendment, the
-------------
Mortgages, the other Loan Papers, Borrower and the other Credit Parties shall be
acceptable to each Bank in its sole discretion, and Borrower shall have
delivered to Administrative Agent and each Bank such evidence as they shall
request to substantiate any matters related to this First Amendment, the
Mortgages, and the other Loan Papers, as Administrative Agent or any Bank shall
request.
SECTION 5. Representations and Warranties of Borrower. To induce Banks
------------------------------------------
and Administrative Agent to enter into this First Amendment, Borrower hereby
represents and warrants to Administrative Agent and Banks as follows:
5.1 Unocal Acquisition Documents. Borrower has provided each Bank with a
----------------------------
true and correct copy of each of the Unocal Acquisition Documents including all
amendments and modifications thereto. No material rights or obligations of any
party to any of such Unocal Acquisition Documents have been waived and neither
Borrower nor any of its Subsidiaries, nor to the best knowledge of Borrower, any
other party to any of such Unocal Acquisition Documents, is in default of its
obligations thereunder. Each of the Unocal Acquisition Documents is a valid,
binding and enforceable obligation of the parties thereto in accordance with its
terms and is in full force and effect. Each representation and warranty made by
Borrower, and to the best knowledge of Borrower, by Unocal in the Unocal
Acquisition Agreement and the other Unocal Acquisition Documents (a) was true
and correct in all material respects when made, and (b) will be true and correct
in all material respects on the date of closing of the Unocal Acquisition.
5.2 Credit Agreement. Each representation and warranty of Borrower
----------------
contained in the Credit Agreement and the other Loan Papers was true and correct
on the date thereof and will be true and correct in all material respects after
giving effect to the Unocal Acquisition and each of the other transactions
contemplated hereby.
5.3 Authorization. The execution, delivery and performance by Borrower of
-------------
this First Amendment, the Mortgages and each of the other documents, instruments
and agreements contemplated hereby are within Borrower's corporate powers, have
been duly authorized by all necessary corporate action, require no action by or
filing with, any governmental body, agency or official and do not violate or
constitute a default under any provision of applicable Law or Material Agreement
binding upon Borrower or result in the creation or imposition of any Lien upon
any of the assets of Borrower other than the Liens securing the Obligations.
5.4 Binding Effect. This First Amendment, the Mortgages and the other
--------------
Loan Papers executed in connection herewith constitute the valid and binding
obligation of Borrower enforceable in accordance with their terms, except as (a)
the enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting creditors rights generally, and (b) the availability of equitable
remedies may be limited by equitable principles of general application.
11
<PAGE>
5.5 No Defenses. Borrower has no defenses to payment, counterclaim or
-----------
rights of set-off with respect to the Obligations existing on the date hereof.
SECTION 6. Miscellaneous.
-------------
6.1 Reaffirmation of Loan Papers; Extension of Liens. Any and all of the
------------------------------------------------
terms and provisions of the Credit Agreement and the Loan Papers shall, except
as amended and modified hereby, remain in full force and effect. Borrower
hereby extends the Liens securing the Obligations until the Obligations have
been paid in full or are specifically released by Administrative Agent and Banks
prior thereto, and agrees that the amendments and modifications herein contained
shall in no manner adversely affect or impair the Obligations or the Liens
securing payment and performance thereof.
6.2 Parties in Interest. All of the terms and provisions of this First
-------------------
Amendment shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
6.3 Legal Expenses. Borrower hereby agrees to pay on demand all
--------------
reasonable fees and expenses of counsel to Administrative Agent incurred by
Administrative Agent, in connection with the preparation, negotiation and
execution of this First Amendment and all related documents.
6.4 Counterparts. This First Amendment may be executed in counterparts,
------------
and all parties need not execute the same counterpart. Facsimiles shall be
effective as originals.
6.5 Complete Agreement. THIS FIRST AMENDMENT, THE CREDIT AGREEMENT AND
------------------
THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF
THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE
PARTIES.
6.6 Headings. The headings, captions and arrangements used in this First
--------
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this First Amendment, nor affect
the meaning thereof.
[Signature Pages Follow]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed by their respective Authorized Officers effective as of the
date and year first above written.
BORROWER:
--------
QUICKSILVER RESOURCES, INC., a Delaware
corporation
/s/ GLENN DARDEN
By: _________________________________________
Glenn Darden, President
ADMINISTRATIVE AGENT:
--------------------
NATIONSBANK, N.A.
/s/ J. SCOTT FOWLER
By: _________________________________________
J. Scott Fowler,
Vice President
BANKS:
-----
NATIONSBANK, N.A.
/s/ J. SCOTT FOWLER
By: _________________________________________
J. Scott Fowler,
Vice President
PARIBAS
/s/ A. DAVID DODD
By: _________________________________________
A. David Dodd
Name: _________________________________________
Vice President
Title: _________________________________________
/s/ MARIAN LIVINGSTON
By: _________________________________________
Marian Livingston
Name: _________________________________________
Vice President
Title: _________________________________________
13
<PAGE>
FROST NATIONAL BANK
/s/ W.H. ADAMS, III
By: _________________________________________
W.H. Adams, III
Name: _________________________________________
Senior Vice President
Title: _________________________________________
14
<PAGE>
SCHEDULE 1
FINANCIAL INSTITUTIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------
Banks Commitment Amount Commitment Percentage
----- ----------------- ---------------------
----------------------------------------------------------------
<S> <C> <C>
NationsBank, N.A. $123,785,166.24 61.892583120%
----------------------------------------------------------------
Paribas $ 58,823,529.41 29.411764706%
----------------------------------------------------------------
Frost National Bank $ 17,391,304.35 8.695652174%
----------------------------------------------------------------
Totals $ 200,000,000 100%
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Banks Domestic Lending Office Eurodollar Lending Office Address for Notice
----- ----------------------- ------------------------- ------------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NationsBank, N.A. 901 Main Street 901 Main Street 901 Main Street
64/th/ Floor 64/th/ Floor 64/th/ Floor
Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202
Fax No. (214) 508-1285 Fax No. (214) 508-1285 Fax No. (214) 508-1285
- ---------------------------------------------------------------------------------------------------------------------
Paribas 1200 Smith Street 1200 Smith Street 1200 Smith Street
Suite 3100 Suite 3100 Suite 3100
Houston, Texas 77002 Houston, Texas 77002 Houston, Texas 77002
Fax No. (713) 659-6915 Fax No. (713) 659-6915 Fax No. (713) 659-6915
- ---------------------------------------------------------------------------------------------------------------------
Frost National Bank Continental Plaza Continental Plaza Continental Plaza
777 Main Street 777 Main Street 777 Main Street
Fort Worth, Fort Worth, Fort Worth,
Texas 76102-5304 Texas 76102-5304 Texas 76102-5304
Fax No. (817) 336-5615 Fax No. (817) 336-5615 Fax No. (817) 336-5615
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
EXHIBIT 10.10
MASTER GAS PURCHASE AND SALE AGREEMENT
between
RELIANT ENERGY SERVICES, INC.
and
QUICKSILVER RESOURCES INC.
dated as of March 1, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 - DEFINITIONS................................... 1
ARTICLE 2 - SCOPE OF AGREEMENT............................ 6
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES................ 7
ARTICLE 4 - OBLIGATIONS AND DELIVERIES.................... 7
ARTICLE 5 - FINANCIAL RESPONSIBILITY...................... 12
ARTICLE 6 - DEFAULTS AND REMEDIES......................... 13
ARTICLE 7 - LIMITATIONS; DUTY TO MITIGATE................. 16
ARTICLE 8 - BILLING; PAYMENT.............................. 17
ARTICLE 9 - TAXES......................................... 18
ARTICLE 10 - MISCELLANEOUS................................ 20
SPECIAL PROVISIONS - EFP and ADP Transactions............. Special Provisions-1
EXHIBIT A - Notice and Payment Addresses.................. Exhibit A-1
EXHIBIT B - Transaction Confirmation...................... Exhibit B-1
EXHIBIT C - Form of Guarantee Agreement................... Exhibit C-1
</TABLE>
<PAGE>
MASTER GAS PURCHASE AND SALE AGREEMENT
General Terms and Conditions
This Master Gas Purchase and Sale Agreement consists of these General Terms
and Conditions and all other Exhibits and Transaction Confirmations
(collectively, this "Agreement") and is entered into as of this 1st day of
March, 1999 (the "Effective Date") by and between Reliant Energy Services, Inc.,
a Delaware corporation ("RES"), and Quicksilver Resources Inc., a Delaware
Corporation ("Quicksilver"). RES and Quicksilver may also be referred to
individually as "Party" or collectively as "Parties."
ARTICLE 1
DEFINITIONS
All references to Articles and Sections are to those set forth in this
Agreement. Reference to any document means such document as amended from time to
time and reference to any Party includes any permitted successor or assignee
thereof. The following definitions and any terms defined internally in this
Agreement shall apply for all purposes of this Agreement and all notices and
communications made pursuant to this Agreement.
1.1 "Alternative Delivery Procedure" or "ADP" means that the Parties have
---------------------------------------
agreed to make and accept deliveries of Gas under a NYMEX Gas Futures Contract
under terms that are different from the delivery terms specified in the Futures
Contract and have notified NYMEX that the transaction will be completed under
the Alternative Delivery Procedure as provided in the NYMEX Rules. ADP shall
incorporate the meaning and remedies of Priority Firm as described herein.
1.2 "Affiliate" means, with respect to any Person, any other Person that,
---------
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such person. For this purpose,
"control" means the direct or indirect power, whether by contract or through the
ownership of capital stock or equity interests or otherwise, to elect a majority
of such other Person's board of directors or similar governing body or to direct
or cause the direction of the management and policies of such Person.
1.3 "Bankruptcy Proceeding" means, with respect to a Person, any of the
---------------------
following: (i) the making of an assignment or any general arrangement for the
benefit of creditors; (ii) the filing by such Person of a petition or otherwise
commencing, authorizing or acquiescing in the commencement of a proceeding or
cause of action under any bankruptcy or similar law for the protection of
creditors, or the filing of such a petition against such Person if such petition
is not withdrawn or dismissed for 30 Days after such filing; (iii) such Person
otherwise becomes bankrupt or insolvent (however evidenced); or (iv) such Person
is unable to pay its debts as they fall due.
1.4 "Business Day" means any day other than a Saturday, Sunday or a
------------
Federal Reserve Bank holiday.
1
<PAGE>
1.5 "Buyer" means the Party to a Transaction who is obligated to purchase
-----
and receive, or cause to be received, Gas during a Delivery Period.
1.6 "Collateral Requirement" means the sum of (a) the maximum of (i) the
----------------------
net amount owed by one Party to the other Party for performance provided
pursuant to any and all Transactions performed in the immediately preceding
month and (ii) the net amount owed by one Party to the other Party for
performance to be provided pursuant to any and all Transactions to be performed
in the immediately following month, plus (b) the net amount owed by one Party to
----
the other Party for performance provided (or to be provided) pursuant to any and
all Transactions performed in the current month, plus (c) the sum of Gains,
----
Losses and Costs, as defined in Section 6.3.
1.7 "Claims" means all actions, suits or proceedings, whether threatened
------
or filed and whether groundless, false or fraudulent, that directly or
indirectly relate to the subject matter of an indemnity, and the resulting
losses, damages, expenses, attorneys' fees and court costs, whether incurred by
settlement or otherwise, and whether such actions, suits or proceedings are
threatened or filed prior to or after the termination of this Agreement.
1.8 "Confirm Deadline" means 5:00 p.m. on the second Business Day
----------------
following the date of receipt of the Transaction Confirmation.
1.9 "Contract Price" means the price in $U.S. (unless otherwise provided
--------------
for) per MMBtu to be paid by Buyer to Seller for the Gas pursuant to a
Transaction.
1.10 "Contract Quantity" means that quantity of Gas that Seller agrees to
-----------------
sell and deliver, or cause to be delivered, to Buyer, and that Buyer agrees to
purchase and receive, or cause to be received, from Seller pursuant to the terms
of a Transaction.
1.11 "Day", "day" or "daily" means a period of twenty-tour (24) consecutive
--- --- -----
hours coextensive with a "day" as defined by the Receiving Transporter; or as
otherwise stated in the Transaction Confirmation.
1.12 "Daily Contract Quantity" means the agreed upon quantity of Gas to be
-----------------------
delivered and received, pursuant to a Transaction, each Day during the Delivery
Period.
1.13 "Delivery Period" means the period during which deliveries are to be
---------------
made.
1.14 "Delivery Point(s)" means the point(s) agreed upon by Seller and Buyer
-----------------
where Seller will deliver and Buyer will receive Gas.
1.15 "Demand Charges" means the amount of reservation charge, if any,
--------------
specified for a Transaction.
1.16 "Eligible Collateral" shall mean (i) cash or (ii) a Letter of Credit
-------------------
from a financial institution acceptable to the beneficiary Party.
2
<PAGE>
1.17 "Equitable Defenses" means any bankruptcy, insolvency, reorganization
------------------
and other laws affecting creditor's rights generally, and with regard to
equitable remedies, the discretion of the court before which proceedings to
obtain same may be pending.
1.18 "Exchange for Physical" or "EFP" means the purchase, sale or exchange
------------------------------
of natural Gas as the "physical" side of an exchange for physical transaction
involving gas future contracts. EFP shall incorporate the meaning and remedies
of Priority Firm as defined herein.
1.19 "Firm" means, with respect to a Transaction, that the only excuse for
----
the failure to deliver Gas by Seller or the failure to receive Gas by the Buyer
pursuant to a Transaction is the existence of Force Majeure.
1.20 "Force Majeure" means an event or circumstance not within the
-------------
reasonable control of the Party (or in the case of third party obligations or
facilities, the third party) seeking to have its performance obligation excused
thereby (the "Claiming Party"). Force Majeure includes, but is not limited to:
acts of God; landslide; lightning; earthquake; fire; storm; hurricane; flood;
explosion; accident or breakage or necessity of repairs to machinery, equipment,
or pipelines; weather related events affecting an entire geographic region such
as low temperatures which cause freezing or failure of wells, lines of pipe, or
other facilities; interruption of firm transportation or storage; riot; civil
disturbance; insurrection; war; strike, lockout or labor dispute; labor or
material shortage; sabotage; and action, inaction or restraint by court order or
public or governmental authority (so long as the Claiming Party has not applied
for or assisted in the application for, and has opposed where and to the extent
reasonable, such government action). Force Majeure specifically excludes (i) the
loss of Buyer's markets or Buyer's inability economically to use or resell Gas
purchased hereunder; (ii) Seller's ability to sell Gas to a market at a more
advantageous price; and (iii) the curtailment of interruptible transportation.
1.21 "GAAP" means United States generally accepted accounting principles,
----
consistently applied.
1.22 "Gas" means any mixture of hydrocarbons and non-combustible gases as a
---
gaseous state consisting primarily of methane.
1.23 "Guarantor" for RES means Reliant Energy Resources Corp.
---------
1.24 "Imbalance Charges" means any scheduling penalties, imbalance
-----------------
penalties, overpull or unauthorized overrun penalties, operational flow order
penalties, cash out charges, banking charges or similar penalties, fees or
charges (in cash or in kind) assessed by a Transporter for failure to satisfy
the Transporter's balance, scheduling and/or nomination requirements.
1.25 "Interest Rate" means, for any day, 20% per annum plus the per annum
-------------
rate of interest equal to the prime lending rate as may from time to time be
published in The Wall
--------
3
<PAGE>
Street Journal under "Money Rates" on such day, or if such day is not a Business
- --------------
Day, the immediately preceding Business Day; provided, however, that the
Interest Rate shall never exceed the maximum rate permitted by applicable law.
1.26 "Interruptible" means that either Party may interrupt its performance
-------------
at any time for any reason, with no liability, except such interrupting Party
may be responsible for any Imbalance Charges related to its interruption after
the nomination is made to the Transporter and until the change in deliveries
and/or receipts is confirmed by Transporter.
1.27 "Law" means any law, rule, regulation, order, writ, judgment, decree
---
or other legal or regulatory determination by a court, regulatory agency or
governmental authority of competent jurisdiction.
1.28 "Legal Proceedings" means any suits, proceedings, judgments, rulings
-----------------
or orders by or before any court, arbitration panel or governmental authority.
1.29 "Letter of Credit" means one or more irrevocable, standby letters of
----------------
credit from a U.S. commercial bank or a U.S. branch office of a foreign bank,
with such bank having a credit rating of at least "A-" from S&P or "A3" from
Moody's, in a form, for an amount required under the Agreement and for a term
acceptable to the beneficiary party.
1.30 "Material Adverse Change" is defined as (i) with respect to RES,
-----------------------
Reliant Energy Resources Corp. shall have an unsecured, long-term, senior debt
rating S&P below "BBB-" or its equivalent or by Moody's Investor Services, Inc.
below "Baa3" or its equivalent; and (ii) with respect to Quicksilver,
Quicksilver shall have either (a)(1) indebtedness to third parties at any one
time which exceeds three hundred percent (300%) of Stockholders' Equity or (2)
Stockholders' Equity below twenty million dollars ($20,000,000.00), or (b) as of
each fiscal year-end occurring during the term of this Agreement, Quicksilver's
Proved Gas Reserves (as defined in SECURITIES and EXCHANGE ACCOUNTING SERIES
RELEASE No. 257) shall be less than 135% of the total volume of natural gas that
Quicksilver is required to deliver to RES under the remaining term of the
Agreement.
1.31 "MMBtu" or "dekatherm" means one million British thermal units (each
-----
Btu representing the amount of heat required to raise the temperature of one
avoirdupois pound of pure water from fifty-eight and five tenths degrees (58.5E)
Fahrenheit to fifty-nine and five-tenths degrees (59.5E) Fahrenheit at a
constant pressure of fourteen and seventy-three hundredths (14.73) pounds per
square inch absolute).
1.32 "Moody's" means Moody's Investor Services, Inc. or its successor.
-------
1.33 "New Taxes" means (i) any Taxes enacted and effective after the
---------
earlier of the Effective Date of the Agreement or the beginning date of the
first Delivery Period under the Agreement, or (ii) any law, order, rule or
regulation, or interpretation thereof, enacted and effective after the earlier
of the Effective Date of the Agreement or the beginning date of the
4
<PAGE>
first Delivery Period under the Agreement resulting in application of any Tax to
a new or different class of Persons.
1.34 "Person" means any individual, partnership, limited partnership,
------
limited liability partnership, corporation, limited liability company, trust,
association or other entity.
1.35 "Priority Firm" means Firm service that is subject to the more
-------------
restrictive Force Majeure provision set out in Section 4.8(b) of this Agreement.
1.36 "Receiving Transporter" means the Transporter receiving Gas at the
---------------------
Delivery Point, or absent such Receiving Transporter, the Transporter delivering
Gas at the Delivery Point.
1.37 "Regulatory Approvals" means all current and future approvals of or
--------------------
filings with courts or governmental, administrative or regulatory bodies (state
or federal) having jurisdiction over a Party or any Transaction, as required by
applicable Law.
1.38 "S&P" means the Standard & Poor's Rating Group (a division of McGraw-
---
Hill, Inc.) or its successor.
1.39 "Scheduling" or "Scheduled" means the acts of Seller, Buyer and/or
---------- ---------
their designated representatives, including each Party's Transporters, if
applicable, of notifying, requesting and confirming to each other the quantity
of Gas (and specific requirements therefor) to be delivered on a daily basis
during the Delivery Period at a specified Delivery Point.
1.40 "Seller" means the Party to a Transaction who is obligated to sell and
------
deliver, or cause to be delivered, Gas during a Delivery Period.
1.41 "Stockholders' Equity" means, at any time, the amount of paid-in
--------------------
capital in respect of all issued and fully-paid and non-assessable shares of the
share capital of the relevant entity, together with the contributed surplus, the
cumulative translation adjustment (if any) and the retained earnings calculated
in accordance with generally accepted accounting principles, in the country in
which such entity is organized, consistently applied.
1.42 "Taxes" means any or all ad valorem, property, occupation, severance,
-----
generation, first use, conversion, Btu or Gas, transport, transmission, utility,
gross receipts, privilege, sales, use, consumption, excise, lease, transaction,
and other taxes, governmental charges, regulatory assessments by federal, state
or local agencies or commissions (including, but not limited to, FERC
assessments), license fees, permits or assessments or increases therein, other
than taxes based on net income or net worth.
1.43 "Transaction" means a particular transaction agreed to by the Parties
-----------
relating to the purchase and sale of Gas for a particular Delivery Period
pursuant to this Agreement.
5
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1.44 "Transaction Confirmation" means a written document, similar in form
------------------------
to Exhibit B, which sets forth certain terms of a Transaction which have been
agreed to by the Parties.
1.45 "Transportation Charges" means the amount, if any, to be paid by Buyer
----------------------
to Seller for Gas transportation services as agreed by the Parties in a
Transaction.
1.46 "Transporter" means any gathering company, pipeline or local
-----------
distribution company on which Gas is transported under this Agreement on behalf
of Seller or Buyer to or from the Delivery Point in a particular Transaction.
1.47 "Year 2000 Problems" means potential costs, problems and uncertainties
------------------
associated with the inability of certain computer applications to effectively
handle data including dates on and after January 1, 2000, as such inability
affects the business, operations and financial condition of the Parties and the
Parties' material customers, suppliers and vendors.
ARTICLE 2
SCOPE OF AGREEMENT
2.1 Scope of Agreement. From time to time the Parties may, but shall not
------------------
be obligated to, enter into Transactions for, or related to, the purchase or
sale of Gas hereunder. Each Transaction shall be effectuated and evidenced in
accordance with this Agreement and shall constitute a part of this Agreement.
The Parties are relying upon the fact that all Transactions, together with this
Agreement, shall constitute a single integrated agreement, and that the Parties
would not otherwise enter into any Transaction. Any conflict between this
Agreement and a Transaction Confirmation shall be resolved in favor of the
Transaction Confirmation. This Agreement shall govern all outstanding
Transactions between the Parties which are not governed by a separate executed
contractual agreement between the Parties and Transactions between the Parties
which are effectuated from and after the Effective Date unless expressly stated
otherwise.
2.2 Transaction Procedures.
----------------------
(a) During the term of this Agreement, the Parties may notify each
other that Gas is available for purchase or sale. Transactions may be
effectuated and evidenced by exchange and acceptance of a Transaction
Confirmation (Written Transaction Procedure) signed by both Parties. No
Party shall be deemed to have accepted any Transaction Confirmation unless
and until it has been signed by such party.
(b) The specific terms to be established by the Parties for each
Transaction shall include the Buyer and Seller, the Gas, the Delivery
Period, the Contract Price, the Delivery Point, the Contract Quantity,
whether the Service
6
<PAGE>
Level is Firm, Priority Firm, EFP, ADP or Interruptible, and such other
terms as the Parties shall agree upon.
(c) Each Party consents to the recording of its representatives'
telephone conversations without any further notice.
2.3 Term of Agreement. The term of this Agreement shall commence on the
-----------------
Effective Date and shall remain in effect until terminated (a) by either Party
upon 30 Days' prior written notice, or (b) as otherwise provided herein;
provided, however, that this Agreement shall remain in effect with respect to
any Transaction(s) entered into prior to the effective date of its termination
until both Parties have fulfilled all their obligations with respect to such
Transaction(s).
2.4 Electronic Signatures. If a Party has the capability to affix a
---------------------
signature to an electronically transmitted document, the terms "signature,"
"signed," "executed," "execution," or similar terms shall include the same in
electronic forms.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
On the Effective Date and the date of entering into each Transaction, each
Party represents and warrants to the other Party that (i) it is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation and is qualified to conduct its business in each jurisdiction in which
a Transaction will be performed by it, (ii) it has all Regulatory Approvals
necessary for it to perform legally its obligations under this Agreement and
each Transaction, (iii) the execution, delivery and performance of this
Agreement and each Transaction are within its power, have been duly authorized
by all necessary action and do not violate any of the terms and conditions in
its governing documents, any contracts to which it is a Party or any Law
applicable to it, (iv) this Agreement and each Transaction when entered into in
accordance with this Agreement constitutes its legally valid and binding
obligation enforceable against it in accordance with its terms, subject to any
Equitable Defenses, (v) there are no Bankruptcy Proceedings pending or being
contemplated by it or, to its knowledge, threatened against it, (vi) there are
no Legal Proceedings that materially adversely affect its ability to perform its
obligations under this Agreement and each Transaction, (vii) it understands and
agrees that the other Party is not acting as its fiduciary, advisor or agent
with respect to this Agreement or any Transaction, (viii) it is not relying upon
the advice, assurance or representations of the other Party, except for those
representations set forth in this Agreement, (ix) it has knowledge and
experience in financial matters and its industry that enable it to evaluate the
merits and risks of entering into this Agreement and each Transaction, (x) it is
a "Merchant" as that term is defined in the Uniform Commercial Code, and (xi) it
is a producer, processor or commercial user of, or merchant handling, the Gas
subject to this Agreement or the products or byproducts thereof, and it has
entered into this Agreement, and will enter into each Transaction, solely for
the purposes related to its business as such.
7
<PAGE>
During the term of this Agreement, Quicksilver agrees not to commit to
future fixed-price natural gas sales in excess of its Proved Gas Reserves, as
defined in Section 1.30 hereof.
Each Party covenants that it will cause these representations and
warranties to be true and correct throughout the term of the Agreement.
ARTICLE 4
OBLIGATIONS AND DELIVERIES
4.1 Purchase and Sale of Gas. With respect to each Transaction and subject
------------------------
to the terms of this Agreement, Seller shall sell and deliver, or cause to be
delivered, and Buyer shall purchase and receive, or cause to be received, at the
Delivery Point the Contract Quantity, and Buyer shall pay Seller the Contract
Price in accordance with Article 8. The price shall be the complete
consideration to Seller and Seller shall be responsible for the cost of
compressing, gathering, processing, treating, liquefying, and transporting the
Gas, together with royalties and taxes on the Gas, and all other costs and
charges which are incurred prior to the Delivery Point. If Buyer is required to
remit or pay such royalties and/or such taxes, then Buyer may deduct or withhold
such amounts from payments made to Seller. Buyer shall be responsible for the
costs of transporting the Gas and any other costs related to the Gas or its
sale, use or possession, at and from the Delivery Point.
4.2 Service Levels. A Transaction may specify any of the following service
--------------
levels.
(a) Firm. Buyer shall be required to purchase and receive, and Seller
----
shall be required to sell and deliver on a Firm basis during the term
hereof the Contract Quantity agreed upon in a Transaction. Failure to
receive or deliver the Contract Quantity agreed upon in a Transaction may,
at the option of the performing Party, constitute a breach of this
Agreement for which damages shall be recoverable pursuant to the terms of
this Agreement, unless such failure is caused by an event of Force Majeure
as provided herein.
(b) Priority Firm. Firm service that is subject to the more
-------------
restrictive Force Majeure provision set out in Section 4.8(b) of this
Agreement. Failure to receive or deliver the Contract Quantity agreed upon
in a Transaction may, at the option of the performing Party, constitute a
breach of this Agreement for which damages shall be recoverable pursuant to
the terms of this Agreement, unless such failure is caused by an event of
Force Majeure as provided herein and as specifically restricted in Section
4.8(b).
(c) Exchange For Physical (EFP). Exchange For Physical (EFP) shall
---------------------------
mean that the Parties have agreed to make and accept deliveries of Gas,
subject to the additional terms under the Special Provisions for EFP and
ADP, and the Parties have also assumed, or caused to be assumed, equal and
opposite positions in NYMEX Gas Futures contracts and have closed out such
positions
8
<PAGE>
to effectuate the EFP transaction in compliance with the NYMEX Rules. The
EFP Transaction will be subject to the additional terms under the Special
Provisions for EFP and ADP Transactions. The performance obligation on EFP
Transactions will be Priority Firm. Failure to receive or deliver the
Contract Quantity agreed upon in a Transaction may, at the option of the
performing Party, constitute a breach of this Agreement, for which damages
shall be recoverable pursuant to the terms of this Agreement, unless such
failure is caused by an event of Force Majeure as provided herein and
specifically restricted in Section 4.8(b).
(d) Alternative Delivery Procedure (ADP). Alternative Delivery
------------------------------------
Procedure (ADP) shall mean that the Parties have agreed to make and accept
deliveries of Gas under a NYMEX Gas Futures contract under different terms
than the standard delivery terms in the NYMEX Gas Futures contract. In
addition, the Parties have notified NYMEX, in compliance with the NYMEX
rules, that the transaction will be completed under the Alternative
Delivery Procedure. The Alternative Delivery Procedure Transaction will be
subject to the additional terms under the Special Provisions for EFP and
ADP Transactions. The performance obligation on ADP Transactions will be
Priority Firm. Failure to receive or deliver the Contract Quantity agreed
upon in a Transaction may, at the option of the performing Party,
constitute a breach of this Agreement, for which damages shall be
recoverable pursuant to the terms of this Agreement, unless such failure is
caused by an event of Force Majeure as provided herein and specifically
restricted in Section 4.8(b).
(e) Interruptible. Buyer shall be required to purchase and receive,
-------------
and Seller shall be required to sell and deliver on an interruptible basis
during the term hereof, the Contract Quantity specified in a Transaction,
with the understanding that such volumes may be reduced, interrupted or
terminated by receipt of proper scheduling notice as provided in Sections
4.3 and 4.4 of this Agreement.
4.3 Transportation. Seller shall have the sole responsibility for
--------------
transporting the Gas, or ensuring that the Gas is transported, to the Delivery
Point. Buyer shall have the sole responsibility for transporting the Gas, or
ensuring that the Gas is transported at and after the Delivery Point. If the
supply or transportation necessary to deliver or receive the Contract Quantity
is unavailable for any reason, the Party responsible for or having notice of
such interruption shall promptly notify the other Party by telecopy.
4.4 Nominations; Scheduling. The Parties shall coordinate their
-----------------------
nomination activities, giving sufficient time to meet the deadlines of the
affected Transporters. Each Party shall give the other Party timely prior
notice, sufficient to meet the requirements of all Transporters involved in the
Transaction, of the quantities of Gas to be delivered and received each Day.
Should either Party become aware that actual deliveries at the Delivery Point
are greater or lesser than the Scheduled Gas, such Party shall promptly notify
the other Party.
9
<PAGE>
Unless otherwise agreed, Seller is obligated to Schedule, or cause to be
Scheduled, with the appropriate Transporters and to deliver, or cause to be
delivered, Gas to the Delivery Point and Buyer is obligated to Schedule, or
cause to be Scheduled, with the appropriate Transporters and to receive, or
cause to be received, Gas at and from the Delivery Point, in accordance with the
Transporters' notice requirements. If the Parties have agreed to allow
variations in the daily quantities of Gas to be delivered, Buyer, or if so
agreed, Seller, shall notify the other Party, in accordance with the applicable
Transporters' Scheduling deadlines, of the Daily Contract Quantities of Gas to
be delivered and received during a Delivery Period.
4.5 Rate of Flow; Imbalance Charges. The Scheduled Gas to be received by
-------------------------------
Buyer hereunder shall be delivered by Seller at uniform hourly and daily rates
of flow as nearly as practicable, but it is recognized that due to operating
conditions the quantities of Gas received and delivered may not be in balance on
any one particular Day. The Parties shall use commercially reasonable efforts to
avoid imposition of any Imbalance Charges. If Buyer or Seller receives an
invoice from a Transporter that includes Imbalance Charges, the Parties shall
determine the validity as well as the cause of such Imbalance Charges. If the
Imbalance Charges were incurred as a result of Buyer's actions or inactions
(which shall include, but not be limited to, Buyer's failure to accept
quantities of Gas equal to the Scheduled Gas), then Buyer shall pay for such
Imbalance Charges, or reimburse Seller for such Imbalance Charges paid by the
Seller to the Transporter. If the Imbalance Charges were incurred as a result of
Seller's actions or inactions (which shall include, but shall not be limited to,
Seller's failure to deliver quantities of Gas equal to the Scheduled Gas), then
Seller shall pay for such Imbalance Charges, or reimburse Buyer for such
Imbalance Charges paid by the Buyer to the Transporter. During Force Majeure
interruptions, the Party invoking Force Majeure may be responsible for any
Imbalance Charges related to its interruption after the nomination is made to
the Transporter and until the change in deliveries and/or receipts is confirmed
by the Transporter.
4.6 Quality; Measurement; Pressure. There is no warranty by Seller,
------------------------------
express or implied, concerning the quality of Gas delivered other than a
warranty that all Gas delivered by Seller shall be of the quality maintained in
the pipeline of the first Transporter upstream of the Delivery Point.
Measurement of Gas quantities hereunder shall be in accordance with the tariff
of the first Transporter immediately downstream of the Delivery Point. The unit
of quantity measurement for purposes of this Agreement shall be one (1) MMBtu.
Gas Delivered hereunder shall be at commercial operating pressures sufficient to
deliver such quantities at the Delivery Point; however, in no event shall such
operating pressure exceed the maximum operating pressure of the system receiving
the Gas hereunder. Each of Buyer and Seller are completely and solely
responsible for the installation and maintenance of overpressure protection
equipment on each Party's respective pipelines, valves, and/or other
interconnection equipment.
4.7 Title, Risk of Loss and Indemnity. As between the Parties, Seller
---------------------------------
shall be deemed to be in exclusive possession and control (and responsible for
any damages or injury resulting therefrom or caused thereby) of the Contract
Quantity prior to the Delivery Point and Buyer shall be deemed to be in
exclusive control (and responsible for any damages or injury
10
<PAGE>
resulting therefrom or caused thereby) of the Contract Quantity at and from the
Delivery Point. Seller represents that it will have paid or caused to have been
paid all royalties, taxes and other sums due on production and delivery of the
Gas to the Delivery Point. Seller warrants that it will deliver to Buyer at the
Delivery Point the Contract Quantity free and clear of all liens, claims and
encumbrances arising prior to the Delivery Point. ALL OTHER WARRANTIES, EXPRESS
OR IMPLIED, INCLUDING ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, ARE
DISCLAIMED. Title to and risk of loss related to the Contract Quantity shall
transfer from Seller to Buyer at the Delivery Point. Seller shall indemnify,
defend and hold harmless Buyer from and against any Claims arising out of or in
any way relating to Seller's ownership, possession or control of the Contract
Quantity up to the Delivery Point, and Buyer shall indemnify, defend and hold
harmless Seller from and against any Claims arising out of or in any way
relating to Buyers ownership, possession or control of the Contract Quantity at
and from the Delivery Point.
4.8 Force Majeure.
-------------
(a) If either Party is rendered unable by Force Majeure to carry out,
in whole or part, its obligations under a Transaction and such Party gives
notice and full details of the event to the other Party as soon as
practicable after the occurrence of the event, then during, but for no
longer than, the period such Party shall be unable to perform its
obligations in whole or in part, the obligations of the Party affected by
the event (other than the obligation to make payments then due or becoming
due with respect to performance prior to the event) shall be suspended to
the extent required; provided, however, Buyer shall be obligated to pay (i)
Demand Charges with respect to a Transaction notwithstanding the Force
Majeure and (ii) any Imbalance Charges related to its interruption after
the nomination is made to the Transporter and until the change in
deliveries and/or receipts is confirmed by the Transporter. The Party
claiming the Force Maj cure shall remedy the Force Maj cure with all
reasonable dispatch; provided, however, that this provision shall not
require Seller to deliver, or Buyer to receive, the Contract Quantity at
points other than the Delivery Point.
(b) For Priority Firm Transactions, Force Majeure will not apply to
excuse performance under the Transaction if an alternative gas supply is
available at a hub, a pooling point, multiple pipeline interconnect, or
other aggregation point where alternate sources of gas supply and
transportation are available for purchase, regardless of the source and
price of the gas supply initially scheduled for delivery.
(c) Neither Party shall be entitled to the benefit of this Section 4.8
under any or all of the following circumstances: (i) to the extent that the
inability was caused by the negligence or fault of the Party claiming
relief; (ii) to the extent the event constituting Force Majeure was
intentionally initiated or intentionally acquiesced in by the Party
claiming relief for the purpose of allowing that Party to claim Force
Majeure; or (iii) if the inability was caused by a Party's lack of funds.
11
<PAGE>
(d) It is understood and agreed that the settlement of strikes or
lockouts shall be entirely within the discretion of the Party having the
difficulty, and that the above requirement of the use of commercially
reasonable efforts in restoring normal operating conditions shall not
require the settlement of strikes or lockouts by acceding to the terms of
the opposing Party when such is inadvisable in the discretion of the Party
having the difficulty.
4.9 Failure to Deliver/Receive in Firm, Priority Firm, EFP and ADP
--------------------------------------------------------------
Transactions.
------------
(a) Unless excused by Force Majeure or Buyer's failure to perform, if
Seller fails to deliver all or part of the Contract Quantity that the
Parties agreed to Schedule pursuant to a Firm, Priority Firm,, EFP or ADP
Transaction, Seller shall pay Buyer, on the date payment would otherwise be
due to Seller an amount for each MMBtu of such deficiency equal to the
positive difference, if any, obtained by subtracting the Contract Price
from the Replacement Price. "Replacement Price" means the price at which
Buyer, acting in a commercially reasonable manner, purchases a substitute
for the Contract Quantity not delivered by Seller (plus any additional
transportation costs, if any, incurred by Buyer for transportation of Gas
to the Delivery Point). Buyer, at its sole option, may elect not to replace
Gas, in which case Buyer shall recover the positive difference, if any,
obtained by subtracting the Contract price from the market price for such
quantity as determined by Buyer in a commercially reasonable manner.
(b) Unless excused by Force Majeure or Seller's failure to perform, if
Buyer fails to receive all or part of the Contract Quantity that the
Parties Scheduled pursuant to a Finn, Priority Firm, EFP or ADP
Transaction, Buyer shall pay Seller, on the date payment would otherwise be
due, an amount for each MMBtu of such deficiency equal to the positive
difference, if any, obtained by subtracting the Sales Price from the
Contract Price. "Sales Price" means the price at which Seller, acting in a
commercially reasonable manner, resells the Gas not received by Buyer
(including additional transportation costs, if any, incurred by Seller for
transportation of Gas to the Delivery Point). Seller, at its sole option,
may elect not to resell Gas, in which case Seller shall recover the
positive difference, if any, obtained by subtracting the market price for
such quantity as determined by Seller in a commercially reasonable manner
from the Contract Price.
4.10 Failure to Deliver/Receive in Interruptible Transactions. A Party
--------------------------------------------------------
shall be excused from delivering or receiving the Contract Quantity, in whole or
in part, in an Interruptible Transaction for any reason without liability,
unless otherwise provided in a Transaction Confirmation, except such
interrupting Party may be responsible for any Imbalance Charges related to its
interruption after the nomination is made to the Transporter and until the
change in deliveries and/or receipts is confirmed by Transporter.
12
<PAGE>
ARTICLE 5
FINANCIAL RESPONSIBILITY
5.1 Security/Guarantee Agreement. In order to secure all payment
----------------------------
obligations of RES to Quicksilver, RES shall cause its Guarantor to execute and
deliver to Quicksilver the Guaranty Agreement substantially in the form attached
hereto as Exhibit C.
---------
5.2 Collateral Requirement. Upon the occurrence and during the
----------------------
continuance of a Material Adverse Change or Event of Default with respect to one
Party, the other Party (the "Beneficiary Party"), on any Business Day, may
request the first Party ("the "Posting Party") to provide Eligible Collateral
(in such form as selected by the Posting Party) in an amount equal to the
Collateral Requirement. Eligible Collateral shall be delivered within two (2)
Business Days of the date of such request.
ARTICLE 6
DEFAULTS AND REMEDIES
6.1 An "Event of Default". An "Event of Default" shall mean with respect
---------------------
to a Party ("Defaulting Party"): (i) the failure by the Defaulting Party to make
any payment required pursuant to this Agreement, provided the payment is not the
subject of a good faith dispute as described in Section 8.1, within five (5)
Business Days after the payment due date, (ii) the failure by the Defaulting
Party to perform any obligation to the other Party (the "Non-Defaulting Party")
set forth in this Agreement including the failure to deliver or receive
described in Section 4.9, and such failure is not excused by Force Majeure or
cured within two (2) Business Days after written notice thereof to the
Defaulting Party, (iii) the occurrence of a Material Adverse Change with respect
to the Defaulting Party; provided, however, that such Material Adverse Change
shall not constitute an Event of Default if the Defaulting Party establishes
within two (2) Business Days after written notice and maintains for so long as
the Material Adverse Change is continuing, Eligible Collateral in an amount
equal to the Collateral Requirement for the Defaulting Party, (iv) the
--
Defaulting Party shall fail to establish, maintain, extend or increase Eligible
Collateral, if required; (v) the Guarantor of the Defaulting Party shall fail to
perform any covenant set forth in the guaranty agreement it delivered in respect
of this Agreement, or any representation or warranty made by such Guarantor in
said guaranty agreement shall be false or misleading when made or when deemed to
be repeated, the guaranty agreement shall expire or be terminated or shall in
any way cease to guaranty the obligations of the Defaulting Party under this
Agreement, and the same shall not be cured within two (2) Business Days after
written notice to the Defaulting Party, or (vi) with respect to RES, at any
time, Reliant Energy Resources Corp. defaults on its indebtedness to third
parties, resulting in obligations of Reliant Energy Resources Corp. in excess of
$30,000,000 being accelerated or capable of becoming accelerated, or with
respect to Quicksilver, at any time, Quicksilver defaults on its indebtedness to
third parties, resulting in obligations of Quicksilver in excess of three,
percent (3%) of Stockholders' Equity being accelerated or capable of becoming
accelerated, and the same shall not be cured within two (2) Business Days after
written notice to the Defaulting Party, (vii) any false or misleading
representation or warranty herein made by the Defaulting Party or its Guarantor,
and the same
13
<PAGE>
shall not be cured within two (2) Business Days after written notice to the
Defaulting Party, or (viii) the Defaulting Party or the Guarantor shall be the
subject of a Bankruptcy Proceeding.
6.2 Other Events. In the event Buyer is regulated by a federal, state or
------------
local regulatory body, and such body shall disallow all or any portion of any
costs incurred or yet to be incurred by Buyer under any provision of this
Agreement, such action shall not operate to excuse Buyer from performance of any
obligation nor shall such action give rise to any right of Buyer to any refund
or retroactive adjustment of the Contract Price provided in any Transaction.
Notwithstanding the foregoing, if a Party's activities hereunder become subject
to regulation of any kind whatsoever under any law to a greater or different
extent than that existing on the earlier of the Effective Date or the beginning
date of the first Delivery Period under the Agreement and such regulation either
(i) renders this Agreement illegal of performance by, or unenforceable against,
a Party, or (ii) materially adversely affects the business of a Party, with
respect to its financial position or otherwise, then in the case of (i) above,
either Party, and in the case of (ii) above, only the affected Party, shall at
such time have the right to declare an Early Termination Date with respect to
all Transactions in accordance with the provisions of Section 6.3(a) in which
case the Parties shall determine their Gains, Losses and Costs and make payment
to each other in the manner set forth in Sections 8.1 and 8.2.
6.3 Early Termination.
-----------------
(a) If an Event of Default occurs with respect to a Defaulting Party
at any time during the term of this Agreement and the Defaulting Party
fails to cure prior to expiration of the cure period, the Non-Defaulting
Party may, for so long as the Event of Default is continuing, (i) establish
a date (which date shall be between the first (1st) Day following the last
day of the cure period or the Day of the Event of Default in the case where
there is no cure period and ten (10) Business Days after the Non-Defaulting
Party notifies the Defaulting Party )("Early Termination Date") on which
any or all Transactions selected by it shall terminate (individually a
"Terminated Transaction" and collectively the "Terminated Transactions")
and (ii) withhold any payments due in respect of the Terminated
Transactions; provided, however, upon the occurrence of any Event of
Default listed in item (viii) of Section 6.1, all Transactions and this
Agreement in respect thereof shall automatically terminate, without notice,
and without any other action by either Party as if a payment due date had
been declared immediately prior to such event. The notice of the Early
Termination Date may be by telephone if such notice is confirmed in writing
within two (2) Business Days. If an Early Termination Date has been
designated, the Non-Defaulting Party shall in good faith calculate its
Gains, Losses and Costs resulting from the termination of the Terminated
Transactions pursuant to Section 6.3(b) and (c). The Non-Defaulting Party
shall aggregate such Gains, Losses and Costs with respect to all
Transactions into a single net amount ("Termination Payment") and notify
the Defaulting Party, including detailed support for the Termination
Payment calculation. It is expressly agreed that a Party shall not be
required to enter into replacement transactions in order to determine the
Termination Payment. If the Non-Defaulting Party's aggregate Losses and
Costs
14
<PAGE>
exceed its aggregate Gains, the Defaulting Party shall, within five (5)
Business Days of receipt of such notice, pay the Termination Payment to the
Non-Defaulting Party, which amount shall bear interest at the Interest Rate
from the payment due date until paid. If the Non-Defaulting Party's
aggregate Gains exceed its aggregate Losses and Costs, if any, resulting
from termination of the Terminated Transactions, the Non-Defaulting Party
shall pay such excess to the Defaulting Party on or before the later of:
(1) ten (10) Days after the end of the month ending on or after the Early
Termination Date; or (2) the date five (5) Business Days after receipt by
the Defaulting Party of the Non-Defaulting Party's notice given above,
which amount shall bear interest at the Interest Rate from the payment due
date until paid.
(b) Gains, Losses and Costs shall be determined by comparing the value
of the remaining Delivery Period, Contract Quantities and Contract Prices
under each Terminated Transaction had it not been terminated to the
equivalent quantities and relevant market prices for the remaining Delivery
Period either quoted by a bona fide third party offer or which are
reasonably expected to be available in the market under a replacement
contract for each Terminated Transaction. To ascertain the market prices of
a replacement contract, the NonDefaulting Party may consider, among other
valuations, any or all of the settlement prices of the KCBT or NYMEX gas
future contracts, quotations from leading dealers or brokers in Gas
contracts and other bona fide third party offers, all adjusted for the
length of the remaining Delivery Period and differences in transportation
costs.
(c) As used herein with respect to the Non-Defaulting Party: (i)
"Costs" shall mean brokerage fees, commissions and other similar
-----
transaction costs and expenses reasonably incurred by such Party either in
terminating any arrangement pursuant to which it has hedged its obligations
or entering into new arrangements which replace a Terminated Transaction,
and attorneys' fees, if any, incurred in connection with enforcing its
rights under this Agreement; (ii) "Gain" shall mean an amount equal to the
----
present value of the economic benefit (determined (A) using the "Asked
Yield" interest rate for the appropriate United States Treasury Bond or
Note, whose maturity coincides with the month of the future delivery
obligation, as quoted in the Government Bonds and Notes section of The Wall
--------
Street Journal plus one percent (1%) and (B) exclusive of Costs), if any,
--------------
to it resulting from the termination of its obligations with respect to a
Terminated Transaction, determined in a commercially reasonable manner; and
(iii) "Losses" shall mean an amount equal to the present value of the
------
economic loss (determined (A) using the "Asked Yield" interest rate for the
appropriate United States Treasury Bond or Note, whose maturity coincides
with the month of the future delivery obligation, as quoted in the
Government Bonds and Notes section of The Wall Street Journal plus one
-----------------------
percent (1%) and (B) exclusive of Costs), if any, to it resulting from the
termination of its obligations with respect to a Terminated Transaction,
determined in a commercially reasonable manner. At the time for payment of
any amount due under this Section 6.3, each Party shall pay to the other
Party all additional amounts payable by it pursuant to this Agreement.
15
<PAGE>
(d) The Defaulting Party must provide written notice of any objection
to the Termination Payment calculation within two (2) Business Days after
receipt of notice from the Non-Defaulting Party. If written objections are
provided, the Parties will negotiate in good faith to agree on the
Termination Payment prior to the payment due date. If good faith
negotiations between the Parties do not result in a mutually agreeable
resolution, the Parties agree to consider the use of alternative dispute
resolutions prior to submitting such dispute to litigation proceedings.
6.4 Setoff. Without affecting or prejudicing the provisions of this
------
Agreement requiring the calculation and payment of certain net payment amounts
for monthly payments as provided under Section 8.2 and Termination Payments as
provided under Section 6.3, all payments will be made without setoff or
counterclaim; provided, however, if an Event of Default occurs, in addition to
and not in limitation of any other right or remedy (including any right to
setoff, counterclaim, or otherwise right to withhold payment) under applicable
law, the Non-Defaulting Party may, at its option and in its discretion, setoff
against any amounts owed to the Defaulting Party (whether under this Agreement
or otherwise and whether or not then due) any amounts due from the Defaulting
Party (whether under this Agreement or otherwise and whether or not then due).
The obligations of the Parties under this Agreement in respect of such amounts
shall be deemed satisfied and discharged to the extent of any such setoff. If
the amount of an obligation has not been ascertained, the Non-Defaulting Party
may, in good faith, estimate that obligation and setoff in respect of the
estimate, subject to the Non-Defaulting Party or the Defaulting Party, as the
case may be, accounting to the other Party when the obligation is ascertained.
The Non-Defaulting Party shall give the Defaulting Party notice of any setoff
effected hereunder provided that failure to give such notice shall not affect
the validity of the setoff. Nothing in this Section shall be deemed to create a
charge or other security interest.
6.5 Other Remedies for Nonpayment. Notwithstanding any other provision of
-----------------------------
this Agreement, if Buyer or Seller fails to pay to the other Party any amounts
due within two (2) Business Days after the due date, the Non-Defaulting Party
shall have the right to (i) suspend performance under any or all Transactions
until such amounts, plus interest at the Interest Rate, have been paid and/or
(ii) exercise any remedy available at law or in equity to enforce payment of
such amount plus interest at the Interest Rate; provided, however, that if the
Defaulting Party, in good faith, shall dispute the amount of any such billing or
part thereof and shall pay such amount as it concedes to be correct, no
suspension shall be permitted.
ARTICLE 7
LIMITATIONS; DUTY TO MITIGATE
7.1 Limitation of Remedies, Liability and Damages. THE PARTIES CONFIRM
---------------------------------------------
THAT THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT
SATISFY THE ESSENTIAL PURPOSES HEREOF. FOR BREACH OF ANY PROVISION FOR WHICH AN
EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED, UNLESS OTHERWISE STATED
HEREIN, SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL BE THE SOLE AND
EXCLUSIVE
16
<PAGE>
REMEDY, THE OBLIGOR'S LIABILITY SHALL BE LIMITED AS' SET FORTH IN SUCH PROVISION
AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. IF NO REMEDY
OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN PROVIDED, THE OBLIGOR'S LIABILITY
SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY WHICH SHALL INCLUDE ANY COURT
COSTS AND ATTORNEY FEES INCURRED TO ENFORCE OBLIGATIONS UNDER THE AGREEMENT,
SUCH DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND ALL OTHER
REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. UNLESS EXPRESSLY HEREIN
PROVIDED, NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE,
EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION
DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY PROVISION OR
OTHERWISE. IT IS THE INTENT OF THE PARTIES THAT THE LIMITATIONS HEREIN IMPOSED
ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE CAUSE OR CAUSES
RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE
BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES
REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE
DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN
ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A
REASONABLE APPROXIMATION OF THE HARM OR LOSS.
7.2 Duty to Mitigate. Each Party agrees that it has a duty to mitigate
----------------
damages and covenants that it will use commercially reasonable efforts to
minimize any damages it may incur as a result of the other Party's performance
or non-performance of this Agreement.
7.3 UCC. Except as otherwise provided for herein, the provisions of the
---
Uniform Commercial Code ("UCC") of the state the law of which shall govern this
Agreement shall be deemed to apply to all Transactions and the Commodities shall
be deemed to be "goods" for purposes of the UCC. EXCEPT AS EXPRESSLY SET FORTH
HEREIN, SELLER EXPRESSLY DISCLAIMS ANY, AND MARES NO OTHER, REPRESENTATION OR
WARRANTY, WRITTEN OR ORAL, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION,
ANY REPRESENTATION OR WARRANTY WITH RESPECT TO CONFORMITY TO MODELS OR SAMPLES,
MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSES.
ARTICLE 8
BILLING; PAYMENT
8.1 Billing and Payment. Seller shall invoice Buyer for Gas delivered and
-------------------
received in the preceding Month and for any other applicable charges, providing
supporting documentation acceptable in industry practice to support the amount
charged. If the actual quantity delivered is not known by the billing date,
billing will be prepared based on the Scheduled Contract Quantities. The invoice
quantity will then be adjusted to the actual quantity
17
<PAGE>
on the following Month's billing or as soon thereafter as actual delivery
information is available. Buyer shall pay, by wire transfer, the amount set
forth on the invoice on or before the later of the twenty-fifth (25th) Day of
the calendar month in which the invoice is received, or ten (10) Days after
receipt of the invoice by Buyer; provided that if the due date is not a Business
Day, payment is due on the next Business Day following the due date. If Buyer
fails to remit the full amount payable by it when due, interest on the unpaid
portion shall accrue at the Interest Rate from the due date until the date of
payment. If Buyer, in good faith, disputes the amount of any such statement,
Buyer will pay to Seller such amount as it concedes to be correct no later than
the due date and shall provide a written explanation of the basis for the
disputed amount. If any amount disputed by Buyer is determined to be due to
Seller, it shall be paid within ten (10) Days of such determination, along with
interest accrued at the Interest Rate from the due date of the original invoice
until the date paid. In the event payments are due to Buyer hereunder, payment
to Buyer shall be made in accordance with this Section 8.1.
8.2 Payment Netting Arrangement. Notwithstanding the provisions of
---------------------------
Section 8.1, the Parties agree to the automatic netting of all amounts due to or
from each other arising out of all Transactions under this Agreement. Such
netting to be effected by a net payment arrangement whereby each month each
Party shall calculate the excess of all unpaid amounts due the other Party over
all unpaid amounts due it under the Agreement and remit payment of such excess,
if any.
8.3 Audit. Each Party has the right, at its sole expense and during
-----
normal working hours and after providing written notice at least five (5)
Business Days prior to the audit, to examine the records of the other Party
(including recorded telephone conversations) to the extent reasonably necessary
to verify the content of any telephone conversation, the accuracy of any
statement, charge or computation made pursuant to this Agreement. If requested,
a Party shall provide to the other Party statements evidencing the quantities of
Gas delivered at the Delivery Point. If any such examination reveals any
inaccuracy in any statement, the necessary adjustments in such statement and the
payments thereof will be made promptly and interest calculated at the Interest
Rate from the date the overpayment or underpayment was due until paid; provided,
however, that no adjustment for any statement or payment will be made unless
objection to the accuracy thereof was made prior to the lapse of two (2) years
from the rendition thereof; and provided further that this provision will
survive any termination of the Agreement for a period of two (2) years from the
date of such termination for the purpose of such statement and payment
objections.
ARTICLE 9
TAXES
9.1 Taxes. Seller is liable for and shall pay, or cause to be paid, or
-----
reimburse Buyer if Buyer has paid, all Taxes applicable to a Transaction or upon
the Gas that is the subject thereof arising prior to the Delivery Point. If
Buyer is required to remit such Tax, the amount shall be deducted from any sums
due to Seller. Seller shall indemnify, defend and hold harmless Buyer from any
Claims for such Taxes. The Contract Price does not include reimbursement for,
and Buyer is liable for and shall pay, cause to be paid, or reimburse Seller
18
<PAGE>
if Seller has paid, all Taxes applicable to a Transaction or upon the Gas that
is the subject thereof arising at and from the Delivery Point, including any
Taxes imposed or collected by a taxing authority with jurisdiction over Buyer.
Buyer shall indemnify, defend and hold harmless Seller from any Claims for such
Taxes. Either Party, upon written request of the other, shall provide a
certificate of exemption or other reasonably satisfactory evidence of exemption
if either Party is exempt from Taxes, and shall use reasonable efforts to obtain
and cooperate with obtaining any exemption from any Tax.
9.2 GST. For Gas delivered and received in Canada, Buyer is liable for
---
the Canadian goods and services tax ("GST") provided for in the Excise Tax Act
(Canada) or a similar tax enacted under successor legislation. Buyer will pay
Seller the amount of GST payable for purchase of the Gas in addition to all
other amounts payable under the Agreement. Seller will hold the GST paid by
Buyer and will remit such GST as required by law. Each Party will provide the
other Party with any information required to satisfy GST payment or remittance
requirements, including GST registration numbers. Buyer will provide valid
certificate(s) of exemption for any Transaction for which Buyer is claiming
exception from the GST. Until an exemption from the GST is properly claimed and
documented, Buyer's obligation to pay the GST to Seller, and Seller's obligation
to collect, hold and remit the GST, remain as enumerated above.
9.3 New Taxes.
---------
(a) Notwithstanding any other provision of this Agreement to the contrary,
if (i) a New Tax is imposed and (ii) Buyer or Seller would be responsible for
such New Tax and (iii) such New Tax is (as a result of laws, regulations and
applicable contracts of Buyer in effect as of the effective date of the New Tax)
of the type that Buyer can pass directly through to, or be reimbursed by,
another person or entity, Buyer shall pay or cause to be paid, or reimburse
Seller if Seller has paid, all such New Taxes and Buyer shall indemnify, defend
and hold harmless Seller from any Claims for such New Taxes.
(b) If (i) a New Tax is imposed and (ii) Buyer or Seller would be
responsible for paying such New Tax and (iii) paragraph (a) does not apply, the
Party responsible for the New Tax ("Affected Party") shall be entitled to
declare an Early Termination Date with respect to those Transactions affected by
the New Tax ("Affected Transactions") in accordance with the provisions of this
Agreement subject to the following conditions: (a) the Affected Party must give
the other Party ("Non-Affected Party") at least 30 Days prior written notice
(the "Agreement Period") of its intent to declare an Early Termination Date
(which notice shall be given no later than 90 Days after the later of the
enactment or effective date of the relevant New Tax), and prior to the proposed
Early Termination Date, Buyer and Seller shall attempt to reach a mutual
agreement as to the sharing of the New Tax, (b) if a mutual sharing agreement is
not reached, the Non-Affected Party shall have the right, but not the
obligation, upon written notice to the Affected Party within the Agreement
Period, to pay the New Tax for any continuous period it so elects on a month to
month basis, and in such case the Affected Party shall not have the right during
such continuous period to declare the Early Termination Date on the basis of the
New Tax, (c) should the Non-Affected Party at its election agree to
19
<PAGE>
pay the New Tax on a month to month basis, then upon 30 Days prior written
notice to the Affected Party of its election to cease payment of such New Tax,
the Affected Party shall then be liable for the payment of the New Tax and the
Parties shall again be subject to this Section 9.3 as if the New Tax had an
effective date as of the date the Non-Affected Party ceases payment of such New
Tax, (d) if a mutual sharing agreement is not reached and the Non-Affected Party
does not elect to pay the New Tax for any period of time within the Agreement
Period, the Early Termination Date shall take effect and all Affected
Transactions must be terminated and be subject to the same Early Termination
Date, (e) the Early Termination Date shall be effected as if an Event of Default
had occurred; provided, however, that both Seller and Buyer shall calculate in a
commercially reasonable manner their net Gain (amount of Gain after netting
Losses and Costs) or net Loss (amount of Losses and Costs after netting Gains)
resulting from the termination of all Affected Transactions as if they each were
a Notifying Party; and provided further, however, that each Party's Gains and
Losses shall be determined without taking into effect the impact of the New
Taxes, (f) (i) if both Parties have a net Gain, the Party with the greater net
Gain shall pay to the other Party fifty percent (50%) of the difference between
the two (2) net Gains; (ii) if both Parties have a net Loss, the Party with the
lesser net Loss shall pay to the other Party fifty percent (50%) of the absolute
value of the difference between the two (2) net Losses; and (iii) if one Party
shall have a net Gain and the other Party shall have a net Loss, the Party with
the net Gain shall pay to the other Party fifty percent (50%) of the sum of the
absolute value of the net Gain and the absolute value of the net Loss and (g)
such payment shall be payable as provided in Section 8.1. Prior to and including
the initial Agreement Period invoked under this Section 9.3, New Taxes shall be
allocated as if they were Taxes as provided in Section 9.1. The intent of this
Section 9.3 is to leave neither Party with an unfair burden as a result of New
Taxes.
ARTICLE 10
MISCELLANEOUS
10.1 Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and permitted assigns of the respective Parties. No
assignment of this Agreement, in whole or in part, will be made without the
prior written consent of the non-assigning Party, which consent shall not be
unreasonably withheld as long as the assignee has a credit status which is at
least equivalent to the credit status of the assignor including any guarantor;
provided, however, that this Agreement may be assigned to any affiliate of
either Party without the prior written consent of the non-assigning Party, as
long as the entity has a credit status which is at least equivalent to the
credit status of the assignor including any guarantor. Any person which shall
succeed by purchase, merger or consolidation to the properties, substantially as
an entirety, of either Party hereto, shall be entitled to the rights and shall
be subject to the obligations of its predecessor in title under this Agreement;
and either Party may assign or pledge this Agreement under the provisions of any
mortgage, deed of trust, indenture, bank credit agreement, assignment or similar
instrument which it has executed or may execute hereafter.
20
<PAGE>
10.2 Financial Information. If requested by the other Party, each Party
---------------------
shall deliver (i) within 120 Days following the end of each fiscal year, a copy
of its annual report or the annual report of its Guarantor, in either case
containing audited consolidated financial statements for such fiscal year
certified by independent certified public accountants, and (ii) within 60 Days
after the end of each of its first three fiscal quarters of each fiscal year, a
copy of its quarterly report or the quarterly report of its Guarantor, in either
case containing unaudited consolidated financial statements for such fiscal
quarter. In all cases the statements required to be provided hereunder shall be
provided only to the extent generally made available to the public and shall be
for the most recent accounting period and prepared in accordance with GAAP or
such other principles then in effect; provided, however, that should any such
statements not be available timely due to a delay in preparation or
certification, such delay shall not be considered a default so long as such
Party diligently pursues the preparation, certification and delivery of the
statements.
10.3 Notices. All notices, requests, statements or payments shall be made
-------
or given as specified in Exhibit A. Notices required to be in writing shall be
---------
delivered by letter, facsimile or other documentary form. Notice by facsimile or
hand delivery shall be effective at the close of business on the Day on which it
is received, and if actually received after the close of the Business Day on
which it was transmitted or hand delivered (or if not transmitted or hand
delivered on a Business Day) it shall be deemed received at the close of the
next Business Day. Notice by overnight mail or courier shall be effective at the
close of business two Business Days after it was sent. A Party may change its
addresses by providing notice of same in accordance herewith.
10.4 Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT
-------------
OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCLUDING
ANY LAWS OF THE STATE OF TEXAS APPLYING THE LAWS OF ANOTHER JURISDICTION.
10.5 Survival. All indemnity and audit rights shall survive the termination
--------
of this Agreement. All obligations provided in this Agreement shall remain in
effect for the purpose of complying herewith.
10.6 Confidentiality. Unless otherwise agreed by both Parties, the terms of
---------------
this Agreement and of any Transaction hereunder, including but not limited to
the Contract Price, the Contract Quantity, the Delivery Period, the identified
Transporter(s), and all other material terms thereof shall be kept confidential
by the Parties hereto for one (1) year from the expiration of the applicable
Transaction, except (i) information shall not be considered confidential if at
the time of disclosure such information is fully within the public domain
through no breach of this Agreement by the other Party; is shown by evidence to
have been, and in fact has been known or independently developed by and is
currently in the possession of either Party prior to disclosure hereunder; or
was or is acquired from a third party who did not breach an obligation of
confidentiality by disclosing it to either Party; and (ii) each Party shall be
permitted to disclose Transaction information to its officers, directors,
employees, agents and professional advisors who have a need to know information
related to this Agreement
21
<PAGE>
and/or a Transaction entered into under this Agreement and agrees to notify such
persons of the confidential nature of the information disclosed, and to be
responsible for any breaches of this Agreement by such persons; and (ii) to the
extent that any information must be disclosed to a third party for the purpose
of effectuating transportation of Gas subject to the Agreement or to meet
reliability council, regulatory, administrative, judicial, governmental or
regulated commodity exchange requirements where necessary. If disclosure is
required, the disclosing Party will immediately notify the other Party.
10.7 YEAR 2000 READINESS DISCLOSURE STATEMENT. The Parties each have made
----------------------------------------
an assessment of the Year 2000 Problem and developed a program for remediating
the Year 2000 Problem on a timely basis. Based on such assessments, neither
Party reasonably anticipates that the Year 2000 Problem will have a material
adverse effect on such Party's performance under this Agreement. The Parties
will use reasonable commercial efforts to cooperate and share information to
minimize the impact of any Year 2000 Problem on performance of this Agreement,
and it will inform the other Party of any circumstance indicating a possible
obstacle to such compliance and the steps being taken to avoid or overcome the
obstacle. PROVIDED A PARTY COMPLIES WITH THE FOREGOING YEAR 2000 REQUIREMENTS,
IT WILL NOT BE LIABLE TO THE OTHER PARTY FOR ANY FAILURE TO PERFORM' ANY OF ITS
OBLIGATIONS UNDER THIS AGREEMENT TO THE EXTENT SUCH FAILURE ARISES FROM A YEAR
2000 PROBLEM (I) AFFECTING ONE OF ITS SUPPLIERS, OR (II) BEYOND ITS REASONABLE
CONTROL. IN PARTICULAR, SUCH NONPERFORMING PARTY SHALL HAVE NO LIABILITY FOR ANY
DAMAGES RESULTING FROM YEAR 2000 PROBLEMS, INCLUDING DIRECT, INDIRECT,
INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES.
10.8 General. This Agreement constitutes the entire agreement between the
-------
Parties relating to the subject matter contemplated by this Agreement. No
amendment or modification to this Agreement shall be enforceable unless reduced
to writing and executed by both Parties. This Agreement shall not impart any
rights enforceable by any third party (other than a permitted successor or
assignee bound to this Agreement). No waiver by a Party of any default by the
other Party shall be construed as a waiver of any other default. Nothing in this
Agreement shall be construed to create a partnership or joint venture between
the Parties. Any provision declared or rendered unlawful by any applicable court
of law or regulatory agency or deemed unlawful because of a statutory change
will not otherwise affect the remaining lawful obligations that arise under this
Agreement. The term "including" when used in this Agreement shall be by way of
example only and shall not be considered in any way to be in limitation. The
headings used herein are for convenience and reference purposes only.
The Parties have executed this Agreement in multiple counterparts to be
construed as one agreement effective as of the Effective Date.
22
<PAGE>
RELIANT ENERGY SERVICES, INC.
/s/ PATRICK J. STRANGE
By:_____________________________________________
Patrick J. Strange
Name:___________________________________________
Vice President Gas Trading and Marketing
Title:__________________________________________
QUICKSILVER RESOURCES, INC.
/s/ GLENN DARDEN
By:_____________________________________________
Glenn Darden
Name:___________________________________________
President
Title:__________________________________________
23
<PAGE>
SPECIAL PROVISIONS
EFP and ADP Transactions
- --------------------------------------------------------------------------------
Special Provisions ("Special Provisions") attached to and forming a part of that
certain Master Gas Purchase and Sale Agreement dated April 1, 1999 by and
between Reliant Energy Services, Inc. and Quicksilver Resources Inc. (the
"Agreement"). These Special Provisions shall apply to any Transaction identified
as an EFP or ADP Transaction on the relevant Transaction Confirmation or in a
recorded telephone conversation provided for in Section 2.2 of the Agreement.
Capitalized terms used in these Special Provisions shall have the meanings
ascribed to them in the Agreement.
- --------------------------------------------------------------------------------
1. In the event of any conflict between the terms of (i) these Special
Provisions and (ii) the other terms of the Agreement, the terms of these Special
Provisions shall govern.
2. The following terms shall have the meanings indicated:
1.49 "NYMEX" shall mean the New York Mercantile Exchange, a corporation
organized and existing under the Not-For-Profit Corporation Laws of the
State of New York.
1.50 "NYMEX Business Day" shall mean a day, other than Saturday or Sunday,
a NYMEX holiday or a Federal Reserve Bank holiday.
1.51 "NYMEX Gas Futures Contract" shall mean Natural Gas Futures Contract
entered into pursuant to the NYMEX Rules.
1.52 "NYMEX Rules" shall mean the rules of the NYMEX applicable to the
terms of the NYMEX Gas Futures Contract, including without limitation Rule
220.17 regarding EFP and Rule 220.17A regarding the adoption of ADP
delivery procedures by the Parties and any successor to any such rule.
1.53 "NYMEX Payment Date" shall mean (i) twentieth day of the Month
following the Delivery Period unless such date is not a NYMEX Business Day;
(ii) the preceding day which is a NYMEX Business Day if such day occurs
other than on a Monday; or (iii) the following day which is a NYMEX
Business Day if such day is a Monday.
3. NYMEX Rules shall apply to all EFP and ADP Transactions between the Parties
under the Agreement.
24
<PAGE>
4. The following provision shall be incorporated into the Agreement:
Seller and Buyer agree to deliver and receive the Gas at an approximately
constant rate of delivery throughout the Delivery Period. To that end the
Transaction Confirmation shall set forth the average quantities to be
scheduled.
5. Buyer shall remit payment on the NYMEX Payment Date.
25
<PAGE>
EXHIBIT A
Notice and Payment Addresses
RES:
- ---
Notices & Correspondence: Federal Express:
- ------------------------ ---------------
RELIANT ENERGY SERVICES, INC. RELIANT ENERGY SERVICES, INC.
Attn: Contract Administration Attn: Contract Administration
P.O. Box 4455 1111 Louisiana Street
Houston, Texas 77210-4455 Houston, Texas 77002-5231
Telephone: (713) 207-1300 Telephone: (713) 207-1300
Fax: (713) 207-9562 Fax: (713) 207-9562
Invoices: Payments:
- -------- --------
RELIANT ENERGY SERVICES, INC. Chase Bank of Texas, Houston, Texas
Attn: Accounting ABA Routing No.: 113000609
P.O. Box 4455 Account No.: 0010-2612158
Houston, Texas 77210-4455 Beneficiary: Reliant Energy Services, Inc.
Telephone: (713)207-1300
Fax: (713)207-9663
QUICKSILVER RESOURCES INC.:
- --------------------------
Notices & Correspondence: Federal Express:
- ------------------------ ---------------
Quicksilver Resources Inc. Quicksilver Resources Inc.
Attn: Gas Marketing Attn: Gas Marketing
7205. Otsego 720 S. Otsego
Gaylord, MI 49735 Gaylord, MI 49735
Telephone: (517) 732-0020
Fax: (517) 731-0341
Invoices: Payment:
- -------- -------
Quicksilver Resources Inc. Nations Bank Dallas
Attn: Accounting ABA Routing No.: 111000012
1619 Pennsylvania Ave. Account No.: 375-079-8782
Ft. Worth, Texas 76104 Account Title: _______________________
Telephone: (817) 877-3151
Fax: (817) 332-1883
or to such other address as RES or Quicksilver shall from time to time designate
by written notice in accordance with Section 10.3.
Exhibit A-1
26
<PAGE>
EXHIBIT B
Transaction Confirmation for Immediate Delivery
Reliant Energy Services, Inc.
Phone (713) 207-5067 Fax (713) 207-9562
Date:_________________________, 199_
Reliant Energy Services, Inc. Transaction Confirmation #:_________
Version:____________________________
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
This Transaction Confirmation is subject to the Agreement between Seller and Buyer dated ________________. The terms of
this Transaction Confirmation are binding unless disputed in writing within 2 Business Days of receipt unless otherwise
specified in the Agreement.
- --------------------------------------------------------------------------------------------------------------------------
SELLER: BUYER:
___________________________________________________ ____________________________________________________________
___________________________________________________ ____________________________________________________________
___________________________________________________ ____________________________________________________________
Attn: _____________________________________________ Attn: ______________________________________________________
Phone: ____________________________________________ Phone: _____________________________________________________
Fax: ______________________________________________ Fax: _______________________________________________________
Agreement No. _____________________________________ Agreement No. ______________________________________________
Transportation Provider: __________________________ Transportation Provider: ___________________________________
Transportation Provider Contract Number:___________ Transportation Provider Contract Number:____________________
- --------------------------------------------------------------------------------------------------------------------------
Contract Price $__________________/MMBtu or __________________________________________________
Delivery Period: Begin: ______________________, 199_ End: ________________________, 199_
- --------------------------------------------------------------------------------------------------------------------------
Service Level; Contract Quantity; Daily or Hourly Contract Quantities: (Select One)
[_] Firm [_] Priority Firm [_] EFP [_] ADP Interruptible:
___________ MMBtu Up to ________________ MMBtu
___________ MMBtu/Day Up to ________________ MMBtu/day
- --------------------------------------------------------------------------------------------------------------------------
Delivery Point(s): Scheduling:
- --------------------------------------------------------------------------------------------------------------------------
Special Provisions: This Transaction Confirmation is being provided pursuant to and in accordance with the Master Gas
Purchase and Sale Agreement dated ___________, 199_ (the "Agreement") between Quicksilver and RES, and constitutes
part of and is subject to all of the terms and provisions of such Agreement. Terms used but not defined herein shall
have the meanings ascribed to them in the Agreement. If the Parties to this Transaction Confirmation have not reached
agreement on and executed a valid Agreement, the Parties agree, by their signatures below, that the terms and conditions
applicable to the particular Transaction described in this Transaction Confirmation shall be the terms and conditions of
the latest version of the Gas Industry Standards Board, Inc. (GlSB) Base Contract for Short-Term Sale and Purchase of
Natural Gas in place as of the Transaction Date, including RES's standard form of Special Provisions. If, prior to the
end of the Delivery Period, the Parties reach agreement on and execute a valid Agreement, then the terms and conditions
thereof shall be applicable to the particular transaction described in this Transaction Confirmation.
[_] Other Special Provisions attached. ________________ pages.
- --------------------------------------------------------------------------------------------------------------------------
Seller: ___________________________________________ Buyer: _____________________________________________________
By: _______________________________________________ By: ________________________________________________________
Title: ____________________________________________ Title: _____________________________________________________
Date: _____________________________________________ Date: ______________________________________________________
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit B-1
27
<PAGE>
TRANSACTION CONFIRMATION
MASTER GAS PURCHASE AND SALE AGREEMENT
DATED AS OF MARCH 1, 1999
This Confirmation Notice is executed pursuant to and becomes a part of the
Master Gas Purchase and Sale Agreement between Reliant Energy Services, Inc.
("RES") and Quicksilver Resources Inc. and provides the following:
Reliant Energy Services, Inc. (RES) agrees to purchase and Quicksilver Resources
Inc. agrees to sell baseload Gas volumes as follows:
Service Level: Firm
Delivery Period: April 1, 1999 - March 31, 2009
Daily Contract
Quantity: 20,000 MMBtu/day Firm Baseload
Delivery Point(s): Consumers Pool - Meter: Pool-CONSU Pool
Contract Price: $2.49/MMBtu
Special Provisions:
From time to time, RES or Quicksilver may encounter opportunities for optimizing
the value of this Gas supply. In those events, either party may propose a 50-50
profit sharing arrangement with the other party. Pursuant to such transactions,
the parties may obtain incremental transportation to capture these
opportunities, in which event the profits to be shared would take into account
all costs and expenses associated with each transaction.
If the above accurately reflects your understanding of our agreement, please
indicate your approval by signing in the space below and returning it via fax to
Reliant Energy Services, Inc. at (713) 207-9562.
SELLER BUYER
QUICKSILVER RESOURCES INC. RELIANT ENERGY SERVICES, INC.
By: _____________________ By: ________________________
Title: __________________ Title: _____________________
Date: ___________________ Date: ______________________
28
<PAGE>
TRANSACTION CONFIRMATION
MASTER GAS PURCHASE AND SALE AGREEMENT
DATED AS OF MARCH 1, 1999
This Confirmation Notice is executed pursuant to and becomes a part of the
Master Gas Purchase and Sale Agreement between Reliant Energy Services, Inc.
("RES") and Quicksilver Resources Inc. and provides the following:
Reliant Energy Services, Inc. (RES) agrees to purchase and Quicksilver Resources
Inc. agrees to sell baseload Gas volumes as follows:
Service Level: Firm
Delivery Period: April 1, 1999 - March 31, 2009
Daily Contract
Quantity: 5,000 MMBtu/day Firm Baseload
Delivery Point(s): Into Michigan Consolidated (MICHCON)
Contract Price: $2.49/MMBtu
Special Provisions:
From time to time, RES or Quicksilver may encounter opportunities for optimizing
the value of this Gas supply. In those events, either party may propose a 50-50
profit sharing arrangement with the other party. Pursuant to such transactions,
the parties may obtain incremental transportation to capture these
opportunities, in which event the profits to be shared would take into account
all costs and expenses associated with each transaction.
If the above accurately reflects your understanding of our agreement, please
indicate your approval by signing in the space below and returning it via fax to
Reliant Energy Services, Inc. at (713) 207-9562.
SELLER BUYER
QUICKSILVER RESOURCES INC. RELIANT ENERGY SERVICES, INC.
/s/ GLENN DARDEN /s/ PATRICK J. STRANGE
By: _____________________ By: ________________________
Vice President, Gas
President Trading and Marketing
Title: __________________ Title: _____________________
May 11, 1999 May 11, 1999
Date: ___________________ Date: ______________________
29
<PAGE>
EXHIBIT 10.27
QUICKSILVER RESOURCES
MANAGEMENT INCENTIVE PLAN (3 YEAR PLAN)
---------------------------------------
Officers Salaries
-------- --------
Thomas F. Darden $150,000
Chairman and Chief Executive Officer
Glenn M. Darden $150,000
President and Chief Operating Officer
Bill Lamkin $135,000
Executive Vice President and
Chief Financial Officer
Houston J. Kauffman $105,000
Vice President
Acquisitions, Divestments and Trades
Robert N. Wagner $100,000
Vice President of Engineering
Fred Van Naerssen $120,000
Vice President of Finance
and Controller
Bonus Structure: A bonus of up to 100% of salary can be earned in each of
- ---------------
the first 3 years in cash and stock (maximum 75% in cash) based on achieving
certain growth targets:
Growth Bonus
------ -----
[ 20% - Discretionary
20% - 25%
30% - 50%
40% - 75%
50% - 100%
Definition of Growth = A combination of all four of the following parameters:
1) Assets = Sec PV10 Minus Debt
2) Available Cash Flow
3) Net Income Per Share
4) Stock Price Per share
*each parameter "weighted" 25%
The Bonus will be taken over 3 years:
50% of Bonus paid in year one
25% of Bonus paid in year two
25% of Bonus paid in year three
Employee must be employed at the time of vesting to receive bonus.
<PAGE>
EXHIBIT 10.28
QUICKSILVER RESOURCES INC.
1999 STOCK OPTION AND RETENTION STOCK PLAN
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1. PURPOSE
This 1999 Stock Option and Retention Stock Plan of Quicksilver Resources Inc. is
to promote and closely align the interests of officers and employees with those
of the shareholders of Quicksilver Resources Inc. by providing stock based
compensation. The Plan is intended to strengthen Quicksilver Resources Inc.'s
ability to reward performance which enhances long term shareholder value; to
increase employee stock ownership through performance based compensation plans;
and to strengthen the company's ability to attract and retain an outstanding
employee and executive team.
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2. DEFINITIONS
The following terms shall have the following meanings:
"Act" means the Securities Exchange Act of 1934, as amended
"Approved Leave of Absence" means a leave of absence of definite length
approved by any executive officer of the Company to whom the Committee
delegates such authority.
"Award" means an award of Retention Shares pursuant to the Plan.
"Beneficiary" means any person or persons designated in writing by a
Participant to the Committee on a form prescribed by it for that purpose,
which designation shall be revocable at any time by the Participant prior
to his or her death, provided that, in the absence of such a designation or
the failure of the person or persons so designated to survive the
Participant, "Beneficiary" shall mean such Participant's estate; and
further provided that no designation of Beneficiary shall be effective
unless it is received by the Company before the Participant's death.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, or the
corresponding provisions of any successor statute.
"Committee" means the Committee designated by the Board to administer the
Plan pursuant to Section 3.
"Common Stock" means the Common Stock of the Company.
1
<PAGE>
"Company" means Quicksilver Resources Inc., a Delaware corporation, or any
successor corporation.
"Executive Officer" means the Chairman of the Board, President, Executive
Vice President or Vice President of the Company.
"Grant" means a grant of an Option pursuant to the Plan.
"Option" means each non-qualified stock option, incentive stock option and
stock appreciation right granted under the Plan.
"Optionee" means any employee of the Company or a Subsidiary (including
directors who are also such employees) who is granted an Option under the
Plan.
"Participant" means any employee of the Company or a Subsidiary (including
directors who are also such employees) who is granted an Award under the
Plan.
"Plan" means this 1999 Stock Option and Retention Stock Plan of Quicksilver
Resources Inc., as amended from time to time.
"Retention Shares" means shares of Common Stock subject to an Award granted
under the Plan.
"Restriction Period" means the period defined in Section 9(a).
"Subsidiary" means any corporation, partnership, or limited liability
company of which the Company owns directly or indirectly at least a
majority of the outstanding shares of voting stock or other voting
interest.
"Vesting Condition" means any condition to the vesting of Retention Shares
established by the Committee pursuant to Section 9.
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3. ADMINISTRATION
The Plan shall be administered by the Committee which shall comprise not less
than three persons, who shall be members of the Board, none of whom shall be
employees of the Company or any Subsidiary. Any actions taken with respect to a
"covered employee" within the meaning of Code section 162(m) shall be taken by
two or more "outside directors" as required by Code section 162(m). The
Committee shall (i) grant Options to Optionees and make Awards of Retention
Shares to Participants, and (ii) determine the terms and conditions of such
Options and Awards of Retention Shares, all in accordance
2
<PAGE>
with the provisions of the Plan. The Committee shall have full authority to
construe and interpret the Plan, to establish, amend and rescind rules and
regulations relating to the Plan, to administer the Plan, and to take all such
steps and make all such determinations in connection with the Plan and Options
and Awards granted thereunder as it may deem necessary or advisable. The
Committee may delegate its authority under the Plan to one or more Executive
Officers or employees of the Company or a Subsidiary, provided, however, that no
delegation shall be made of authority to take an action which is required by
Rule 16b-3 promulgated under the Act to be taken by "non-employee directors" in
order that the Plan and transactions thereunder meet the requirements of such
Rule. Each Option and grant of Retention Shares shall be evidenced by an
agreement to be executed by the Company and the Optionee or Participant,
respectively, and contain provisions not inconsistent with the Plan. All
determinations of the Committee shall be by a majority of its members and shall
be evidenced by resolution, written consent or other appropriate action, and the
Committee's determinations shall be final. Each member of the Committee, while
serving as such, shall be considered to be acting in his or her capacity as a
director of the Company.
- --------------------------------------------------------------------------------
4. ELIGIBILITY
To be eligible for selection by the Committee to participate in the Plan an
individual must be an employee of the Company or a Subsidiary. Directors, who
are not full-time salaried employees, shall not be eligible. In granting Options
or Awards of Retention Shares to eligible persons, the Committee shall take into
account their duties, their present and potential contributions to the success
of the Company or a Subsidiary, and such other factors as the Committee shall
deem relevant in connection with accomplishing the purpose of the Plan.
- --------------------------------------------------------------------------------
5. STOCK SUBJECT TO THE PLAN
Subject to the provisions of Section 11 hereof, the maximum number and kind of
shares as to which Options or Retention Shares may at any time be granted under
the Plan are 1.3 million shares of Common Stock. No Participant may receive
Options or Awards aggregating more than 20% of the shares of Common Stock
available under the Plan. Shares of Common Stock subject to Options or Awards
under the Plan may be either authorized but unissued shares, issued and held for
use in employee compensation plans or shares previously issued and reacquired
by the Company. Upon the expiration, termination or cancellation (in whole or in
part) of unexercised Options, shares of Common Stock subject thereto shall again
be available for option or grant as Retention Shares under the Plan. Shares of
Common Stock covered by an Option, or portion thereof, which is surrendered upon
the exercise of a stock appreciation right, shall thereafter be unavailable for
option or grant as Retention Shares under the Plan. Upon the forfeiture (in
whole or in part) of a grant of Retention Shares, the shares of Common Stock
subject to such forfeiture shall again be available for option or grant as
Retention Shares under the Plan.
3
<PAGE>
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6. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS
All non-qualified options under the Plan shall be granted subject to the
following terms and conditions:
(a) Option Price. The option price per share with respect to each option
------------
shall be determined by the Committee but shall not be less than 100% of the fair
market value of the Common Stock on the date the option is granted, such fair
market value to be determined in accordance with the procedures to be
established by the Committee.
(b) Duration of Options. Options shall be exercisable at such time or times
-------------------
and under such conditions as set forth in the written agreement evidencing such
option but in no event shall any option be exercisable subsequent to the tenth
anniversary of the date on which the option is granted.
(c) Exercise of Option. Except as provided in Section 6(f) and 6(g), the
------------------
shares of Common Stock covered by an option may not be purchased prior to the
first anniversary of the date on which the option is granted or such longer
period or periods, and subject to such conditions, as the Committee may
determine, but thereafter may be purchased at one time or in such installments
over the balance of the option period as may be provided in the option. Any
shares not purchased on the applicable installment date may be purchased
thereafter at any time prior to the final expiration of the option. To the
extent that the right to purchase shares has accrued thereunder, options may be
exercised from time to time by written notice to the Company stating the number
of shares with respect to which the option is being exercised.
(d) Payment. Shares of Common Stock purchased under options shall, at the
-------
time of purchase, be paid for in full. All, or any portion, of the option
exercise price may be paid by the surrender to the Company, at the time of
exercise, of shares of previously acquired Common Stock owned by the Optionee,
to the extent that such payment does not require the surrender of a fractional
share of such previously acquired Common Stock. In addition, the option exercise
price may be paid by authorizing the Company to withhold Common Stock otherwise
issuable on exercise of the option. Such shares previously acquired or shares
withheld to pay the option exercise price shall be valued at fair market value
on the date the option is exercised in accordance with the procedures to be
established by the Committee. A holder of an option shall have none of the
rights of a stockholder until the shares of Common Stock are issued to him or
her. If an amount is payable by an Optionee to the Company or a Subsidiary
under applicable withholding tax laws in connection with the exercise of non-
qualified options the Optionee may make such payment, in whole or in part, by
electing to authorize the Company to withhold or accept shares of Common Stock
having a fair market value equal to the amount to be paid under such withholding
tax laws.
4
<PAGE>
(e) Non-Transferability of Options. During an Optionee's lifetime, the
------------------------------
option may be exercised only by the Optionee. Options shall not be transferable,
except for exercise by the Optionee's legal representatives or heirs. An officer
of the Company may, with prior approval from the Committee (or its designee) as
to form, transfer an exercisable non-qualified Option to (a) a member or members
of the officer's immediate family (spouse, children and grandchildren, including
step and adopted children and grandchildren), (b) a trust, the beneficiaries of
which consist exclusively of members of the officer's immediate family, (c) a
partnership, the partners of which consist exclusively of members of the
officer's immediate family, or (d) any similar entity created for the exclusive
benefit of members of the officer's immediate family. The Committee or its
designee must approve the form of any transfer of a Grant to or for the benefit
of any immediate family member or members before such transfer shall be
recognized as valid hereunder. For purposes of the preceding sentence, any
remote, contingent interest of persons other than a member of the officer's
immediate family shall be disregarded. For purposes of this Section 6(e), the
term "officer" shall have the same meaning as that term is defined in Rule 16a-
I (f) of the Act. A person's status as an officer shall be determined at the
time of the intended transfer.
(f) Termination of Employment. Upon the termination of an Optionee's
-------------------------
employment, for any reason other than death, the option shall be exercisable
only as to those shares of Common Stock which were then subject to the exercise
of such option, provided that (I) in the case of retirement, at or after age 55
and with at least five (5) years of credited Company service, or disability, as
described below, any holding period required by Section 6(c) shall automatically
be deemed to be satisfied and (II) the Committee may determine that particular
limitations and restrictions under the Plan shall not apply, and such option
shall expire according to the following schedule:
(i) Retirement. Option shall expire, unless exercised, five (5) years
----------
after the Optionee's retirement, at or after age 55 with at least five
(5) years of credited Company service, from the Company.
(ii) Disability. Option shall expire, unless exercised, five (5) years
----------
after the date the Optionee is terminated due to the determination by
the Company that the Optionee is disabled as defined in section
22(e)(3) of the Code.
(iii) Gross Misconduct. Option shall expire upon receipt by the
----------------
Optionee of the notice of termination if he or she is terminated for
deliberate, willful or gross misconduct as determined by the Company.
(iv) All Other Terminations. Option shall expire, unless exercised,
----------------------
three (3) months after the date of such termination.
5
<PAGE>
In no event, however, shall any option be exercisable pursuant to this Section
6(f) subsequent to the tenth anniversary of the date on which it is granted.
(g) Death of Optionee. Upon the death of an Optionee during his or her
-----------------
period of employment, the option shall be exercisable only as to those shares of
Common Stock which were subject to the exercise of such option at the time of
his or her death, provided that (I) any holding period required by Section 6(c)
shall automatically be deemed to be satisfied and (II) the Committee may
determine that particular limitations and restrictions under the Plan shall not
apply, and such option shall expire, unless exercised by the Optionee's legal
representatives or heirs, five (5) years after the date of death.
In no event, however, shall any option be exercisable pursuant to this Section
6(g) subsequent to the tenth anniversary of the date on which it is granted.
- --------------------------------------------------------------------------------
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
(a) General. The Committee may also grant a stock appreciation right in
-------
connection with a non-qualified option, either at the time of grant or by
amendment. Such stock appreciation right shall cover the same shares covered by
such option (or such lesser number of shares of Common Stock as the Committee
may determine) and shall, except for the provisions of Section 6(d) hereof, be
subject to the same terms and conditions as the related non-qualified option.
(b) Exercise and Payment. Each stock appreciation right shall entitle the
--------------------
Optionee to surrender to the Company unexercised the related option, or any
portion thereof, and to receive from the Company in exchange therefor an amount
equal to the excess of the fair market value of one share of Common Stock over
the option price per share times the number of shares covered by the option, or
portion thereof, which is surrendered. Payment shall be made in shares of Common
Stock valued at fair market value, or in cash, or partly in shares and partly in
cash, all as shall be determined by the Committee. The fair market value shall
be the value determined in accordance with procedures established by the
Committee. Stock appreciation rights may be exercised from time to time upon
actual receipt by the Company of written notice stating the number of shares of
Common Stock with respect to which the stock appreciation right is being
exercised, provided that if a stock appreciation right expires unexercised, it
shall be deemed exercised on the expiration date if any amount would be payable
with respect thereto. No fractional shares shall be issued but instead cash
shall be paid for a fraction. If an amount is payable by an Optionee to the
Company or a Subsidiary under applicable withholding tax laws in connection with
the exercise of stock appreciation rights the Optionee may make such payment, in
whole or in part, by electing to authorize the Company to withhold or accept
shares of Common Stock having a fair market value equal to the amount to be paid
under such withholding tax laws.
6
<PAGE>
(c) Restrictions. The obligation of the Company to satisfy any stock
------------
appreciation right exercised by an Optionee subject to Section 16 of the Act
shall be conditioned upon the prior receipt by the Company of an opinion of
counsel to the Company that any such satisfaction will not create an obligation
on the part of such Optionee pursuant to Section 16(b) of the Act to reimburse
the Company for any statutory profit which might be held to result from such
satisfaction.
- --------------------------------------------------------------------------------
8. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
(a) General. The Committee may also grant incentive stock options as
-------
defined under section 422 of the Code. All incentive stock options issued under
the Plan shall, except for the provisions of Sections 6(e) (to the extent it
allows the Committee to permit options to be transferred to, or for the benefit
of, the Optionee's immediate family members), 6(f) and (g) and Section 7 hereof,
be subject to the same terms and conditions as the non-qualified options granted
under the Plan. In addition, incentive stock options shall be subject to the
conditions of Sections 8(b), (c) and (d).
(b) Limitation of Exercise. The aggregate fair market value (determined as
----------------------
of the date the incentive stock option is granted) of the shares of stock with
respect to which incentive stock options are exercisable for the first time by
such Optionee during any calendar year shall not exceed $100,000. If any
incentive stock options become exercisable in any year in excess of a $100,000
limitation, options representing such excess shall become non-qualified options
exercisable pursuant to the terms of Section 6 hereof and shall not be
exercisable as incentive stock options.
(c) Termination of Employment. Upon the termination of an Optionee's
-------------------------
employment, for any reason other than death, his or her incentive stock option
shall be exercisable only as to those shares of Common Stock which were then
subject to the exercise of such option provided that (I) in the case of
retirement, at or after age 55 and with at least five (5) years of credited
Company service, or disability, as described below, any holding period required
by Section 6(c) shall automatically be deemed to be satisfied and (II) the
Committee may determine that particular limitations and restrictions under the
Plan shall not apply. Such option shall expire as an incentive stock option
(but shall become a non-qualified option exercisable pursuant to the terms of
Section 6 hereof less the period already elapsed under such Section) according
to the following schedule:
(i) Retirement. The incentive stock option shall expire, unless
----------
exercised, one (1) year after the Optionee's retirement, at or after
age 55 with at least five (5) years of credited Company service, from
the Company.
(ii) Disability. The incentive stock option shall expire, unless
----------
exercised, one (1) year after the date the Optionee is terminated due
to the determination by the Company that the Optionee is disabled as
defined in section 22(e)(3) of the Code.
7
<PAGE>
(iii) Gross Misconduct. The incentive stock option shall expire upon
----------------
receipt by the Optionee of the notice of termination if he or she is
terminated for deliberate, willful or gross misconduct as determined by
the Company.
(iv) All Other Terminations. The incentive stock option shall expire,
----------------------
unless exercised, three (3) months after the date of such termination.
In no event, however, shall any incentive stock option be exercisable pursuant
to this Section 8(c) subsequent to the tenth anniversary of the date on which it
was granted.
(d) Death of Optionee. Upon the death of an Optionee during his or
-----------------
her period of employment, the incentive stock option shall be exercisable as an
incentive stock option only as to those shares of Common Stock which were
subject to the exercise of such option at the time of death, provided that (I)
any holding period required by Section 6(c) shall automatically be deemed to be
satisfied, and (II) the Committee may determine that particular limitations and
restrictions under the Plan shall not apply, and such option shall expire as
incentive stock options, but shall become a non-qualified option exercisable
pursuant to the terms of Section 6, less the period already elapsed under such
Section 6.
In no event, however, shall any incentive stock option be exercisable pursuant
to this Section 8(d) subsequent to the tenth anniversary of the date on which it
was granted.
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9. TERMS AND CONDITIONS OF AWARDS OF RETENTION STOCK
(a) General. Retention Shares may be granted to reward the attainment of
-------
individual, Company or Subsidiary goals, or to attract or retain officers or
other employees of the Company or any Subsidiary. With respect to each grant of
Retention Shares under the Plan, the Committee shall determine the period or
periods, including any conditions for determining such period or periods, during
which the restrictions set forth in Section 9(b) shall apply, provided that in
no event, other than as provided in Section 9(c), shall such restrictions
terminate prior to one (1) year after the date of grant and further provided
that the Committee may also specify any other terms or conditions to the right
of the Participant to receive such Retention Shares ("Vesting Conditions").
Subject to Section 9(c) and any such Vesting Conditions, a grant of Retention
Shares shall be effective for the Restriction Period and may not be revoked.
(b) Restrictions. At the time of grant of Retention Shares to a
------------
Participant, a certificate representing the number of shares of Common Stock
granted shall be registered in the Participant's name but shall be held by the
Company for his or her account. The Participant shall have the entire beneficial
ownership interest in, and all
8
<PAGE>
rights and privileges of a stockholder as to, such Retention Shares, including
the right to vote such Retention Shares and, unless the Committee shall
determine otherwise, the right to receive dividends thereon, subject to the
following: (i) subject to Section 9(c), the Participant shall not be entitled to
delivery of the stock certificate until the expiration of the Restriction Period
and the satisfaction of any Vesting Conditions; (ii) none of the Retention
Shares may be sold, transferred, assigned, pledged, or otherwise encumbered or
disposed of during the Restriction Period or prior to the satisfaction of any
Vesting Conditions; and (iii) all of the Retention Shares shall be forfeited and
all rights of the Participant to such Retention Shares shall terminate without
further obligation on the part of the Company unless the Participant remains in
the continuous employment of the Company or a Subsidiary for the entire
Restriction Period, except as provided by Sections 9(a) and 9(c), and any
applicable Vesting Conditions have been satisfied. Any shares of Common Stock or
other securities or property received as a result of a transaction listed in
Section 11 shall be subject to the same restrictions as such Retention Shares.
(c) Termination of Employment.
-------------------------
(i) Disability and Retirement. If (A) a Participant ceases to be an
-------------------------
employee of the Company or a Subsidiary prior to the end of a
Restriction Period, by reason of disability due to the determination
by the Company that the Optionee is disabled, as defined in section
22(e)(3) of the Code, or retirement, at or after age 55 and with at
least five (5) years of credited Company service, and (B) all Vesting
Conditions have been satisfied, the Retention Shares granted to such
Participant shall immediately vest and all restrictions applicable to
such shares shall lapse. A certificate for such shares shall be
delivered to the Participant in accordance with the provisions of
Section 9(d).
(ii) Death. If (A) a Participant ceases to be an employee of the
-----
Company or a Subsidiary prior to the end of a Restriction Period by
reason of death, and (B) all Vesting Conditions have been satisfied,
the Retention Shares granted to such Participant shall immediately
vest in his or her Beneficiary, and all restrictions applicable to
such shares shall lapse. A certificate for such shares shall be
delivered to the Participant's Beneficiary in accordance with the
provisions of Section 9(d).
(iii) All Other Terminations. If a Participant ceases to be an
----------------------
employee of the Company or a Subsidiary prior to the end of a
Restriction Period for any reason other than death, disability or
retirement as provided in Section 9(c)(i) and (ii), the Participant
shall immediately forfeit all Retention Shares then subject to the
restrictions of Section 9(b) in accordance with the provisions
thereof, except that the Committee may, if it finds that the
circumstances in the particular case so warrant, allow a Participant
whose employment so terminated to retain any or all of the Retention
Shares then subject to the restrictions of Section 9(b) and all
restrictions applicable to
9
<PAGE>
such retained shares shall lapse. In such latter event, a certificate
for such retained shares shall be delivered to the Participant in
accordance with the provisions of Section 9(d).
(iv) Vesting Conditions. If a Participant ceases to be an employee of
------------------
the Company or a Subsidiary for any reason prior to the satisfaction
of any Vesting Conditions, the Participant shall immediately forfeit
all Retention Shares then subject to the restrictions of Section 9(b)
in accordance with the provisions thereof, except that the Committee
may, if it finds that the circumstances in the particular case so
warrant, allow a Participant whose employment has so terminated to
retain any or all of the Retention Shares then subject to the
restrictions of Section 9(b) and all restrictions applicable to such
retained shares shall lapse. In such latter event, a certificate for
such retained shares shall be delivered to the Participant in
accordance with the provisions of Section 9(d).
(d) Payment of Retention Shares. At the end of the Restriction Period and
---------------------------
after all Vesting Conditions have been satisfied, or at such earlier time as
provided for in Section 9(c) or as the Committee, in its sole discretion, may
otherwise determine, all restrictions applicable to the Retention Shares shall
lapse, and a stock certificate for a number of shares of Common Stock equal to
the number of Retention Shares, free of all restrictions, shall be delivered to
the Participant or his or her Beneficiary, as the case may be. If an amount is
payable by a Participant to the Company or a Subsidiary under applicable
withholding tax laws in connection with the lapse of such restrictions the
Participant may make such payment, in whole or in part, by authorizing the
Company to transfer to the Company Retention Shares otherwise deliverable to the
Participant having a fair market value equal to the amount to be paid under such
withholding tax laws.
- --------------------------------------------------------------------------------
10. REGULATORY APPROVALS AND LISTING
The Company shall not be required to issue to an Optionee, Participant or a
Beneficiary, as the case may be, any certificate for any shares of Common Stock
upon exercise of an option or for any Retention Shares granted under the Plan
prior to (i) the obtaining of any approval from any governmental agency which
the Company, in its sole discretion, shall determine to be necessary or
advisable, (ii) the admission of such shares to listing on any stock exchange on
which the Common Stock may then be listed, and (iii) the completion of any
registration or other qualification of such shares under any state or Federal
law or rulings or regulations of any governmental body which the Company, in its
sole discretion, shall determine to be necessary or advisable.
- --------------------------------------------------------------------------------
11. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
10
<PAGE>
In the event of a recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation, rights offering, separation, spin-
off, reorganization or liquidation, or any other change in the corporate
structure or shares of the Company, the Board, upon recommendation of the
Committee, may make such equitable adjustments as it may deem appropriate in the
number and kind of shares authorized by the Plan, in the option price of
outstanding Options, and in the number and kind of shares or other securities or
property subject to Options or covered by outstanding Awards.
- --------------------------------------------------------------------------------
12. TERM OF THE PLAN
No Options or Retention Shares shall be granted pursuant to the Plan after
August 18, 2009 but grants of Options and Retention Shares theretofore granted
may extend beyond that date and the terms and conditions of the Plan shall
continue to apply thereto.
- --------------------------------------------------------------------------------
13. TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time terminate the Plan with respect to any shares of
Common Stock not at that time subject to outstanding Options or Awards, and may
from time to time alter or amend the Plan or any part thereof (including, but
without limiting the generality of the foregoing, any amendment deemed necessary
to ensure that the Company may obtain any approval referred to in Section 10 or
to ensure that the grant of Options or Awards, the exercise of Options or
payment of Retention Shares or any other provision or the Plan complies with
Section 16(b) of the Act), provided that no change with respect to any Options
or Retention Shares theretofore granted may be made which would impair the
rights of an Optionee or Participant without the consent of such Optionee or
Participant and, further, that without the approval of stockholders, no
alteration or amendment may be made which would (i) increase the maximum number
of shares of Common Stock subject to the Plan as set forth in Section 5 (except
by operation of Section 11), (ii) extend the term of the Plan, (iii) change the
class of eligible persons who may receive Options or Awards of Retention Shares
under the Plan or (iv) increase the limitation set forth in Section 5 on the
maximum number of shares that any Participant may receive under the Plan.
- --------------------------------------------------------------------------------
14. LEAVE OF ABSENCE
A leave of absence other than an Approved Leave of Absence shall be deemed a
termination of employment for purposes of the Plan. An Approved Leave of Absence
shall not be deemed a termination of employment for purposes of the Plan (except
for purposes of Section 8), but the period of such Leave of Absence shall not be
counted toward satisfaction of any Restriction Period or any holding period
described in Section 6(c).
- --------------------------------------------------------------------------------
11
<PAGE>
15. GENERAL PROVISIONS
(a) Neither the Plan nor the grant of any Option or Award nor any action by
the Company, any Subsidiary or the Committee shall be held or construed to
confer upon any person any right to be continued in the employ of the Company or
a Subsidiary. The Company and each Subsidiary expressly reserve the right to
discharge, without liability but subject to his or her rights under the Plan,
any Optionee or Participant whenever in the sole discretion of the Company or a
Subsidiary, as the case may be, its interest may so require.
(b) All questions pertaining to the construction, regulation, validity and
effect of the Plan shall be determined in accordance with the laws of the State
of Delaware, without regard to conflict of laws doctrine.
(c) Notwithstanding any provision herein to the contrary, the Committee,
under terms and conditions as it may prescribe, may permit certain Optionees
(with respect to non-qualified options and stock appreciation rights) and
certain Participants (with respect to Awards of Retention Shares) to make
elections, engage in transactions or take any other action intended to defer the
receipt of compensation for federal income tax purposes with respect to such
Non-Qualified Options, Stock Appreciation Rights or Retention Shares.
- --------------------------------------------------------------------------------
16. EFFECTIVE DATE
The Plan was adopted by the Board effective as of October 4, 1999. It shall be
submitted to the stockholders of the Company for their approval within twelve
(12) months after such date.
If such approval is not obtained, any Award or grant of an Option under the Plan
shall be void and all Awards and grants under the Plan shall be contingent upon
stockholder approval.
QUICKSILVER RESOURCES INC.
/s/ GLENN DARDEN
By: ____________________________
Glenn Darden, President
12
<PAGE>
EXHIBIT 10.29
SECOND AMENDMENT TO
-------------------
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
This Second Amendment to Second Amended and Restated Credit Agreement (this
"Second Amendment") is entered into as of October 6, 1999 by and among
----------------
QUICKSILVER RESOURCES INC., a Delaware corporation ("Borrower"), BANK OF
--------
AMERICA, N.A., successor by merger to NationsBank, N.A., a national banking
association, as Administrative Agent ("Administrative Agent") and each of the
--------------------
financial institutions set forth on the signature pages hereto as Banks.
W I T N E S S E T H:
-------------------
WHEREAS, Borrower, Administrative Agent, Bank of America, N.A., successor
by merger to NationsBank, N.A. (in its individual capacity), Paribas, Frost
National Bank, CIBC, Inc. and Christiania Bank (collectively, the "Banks") are
-----
parties to that certain Second Amended and Restated Credit Agreement dated as of
March 1, 1999 (as amended, the "Credit Agreement") (unless otherwise defined
----------------
herein, all terms used herein with their initial letter capitalized shall have
the meaning given such terms in the Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement, the Banks have made a Revolving
Loan to Borrower and provided certain other credit accommodations to Borrower;
and
WHEREAS, Borrower intends to effect a secondary offering of up to 8,050,000
shares of its common stock $.01 par value per share; and
WHEREAS, as a result of such secondary offering, the Darden Group's
percentage ownership of Borrower's outstanding common stock will decrease; and
WHEREAS, Borrower desires to amend the definition of "Change in Control"
contained in the Credit Agreement to accommodate such decrease; and
WHEREAS, subject to the terms and conditions herein contained, Banks have
agreed to Borrower's request.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrower, Administrative Agent and Banks hereby agree as follows:
SECTION 1. Amendments. In reliance on the representations, warranties,
---------- ----------
covenants and agreements contained in this Second Amendment, the Credit
Agreement is hereby amended in the manner provided in this Section 1.
---------
1.1 Additional Definitions. Section 2.1 of the Credit Agreement is
----------------------
amended to add thereto in alphabetical order the definitions of "Second
------
Amendment," "Secondary Offering" and "Secondary Offering Registration Statement"
- --------- ------------------ -----------------------------------------
which shall read in full as follows:
<PAGE>
"Second Amendment" means that certain Second Amendment to Second
----------------
Amended and Restated Credit Agreement dated as of October 6, 1999 among
Borrower, Administrative Agent and the financial institutions a party
thereto as Banks.
"Secondary Offering" means the offering of up to 8,050,000 shares of
------------------
Borrower's common stock, par value $.01 per share, contemplated by the
Secondary Offering Registration Statement.
"Secondary Offering Registration Statement" means a Registration
-----------------------------------------
Statement to be filed with the Securities Exchange Commission on Form S-1
pertaining to a secondary public offering of up to 8,050,000 shares of
Borrower's common stock, par value $.01 per share, a draft of which has
been provided by Borrower to Administrative Agent.
1.2 Amendment to Definitions. The definitions of "Change of Control" and
------------------------ -----------------
"Loan Papers" set forth in Section 2.1 of the Credit Agreement are amended to
-----------
read in full as follows:
"Change of Control" means that, for any reason, the Darden Group fails
-----------------
to own and control, directly or indirectly, at least the following
percentage of the outstanding voting power of the issued and outstanding
capital stock of every class of Borrower: (a) prior to the Secondary
Offering, 51% , and (b) from and after the Secondary Offering, 35%.
"Loan Papers" means this Agreement, the First Amendment, the Second
-----------
Amendment, the Notes, any Subsidiary Guaranty (which may hereafter be
executed), all Mortgages now or at any time hereafter delivered pursuant to
Section 7.1, the Collateral Assignments, any Borrower Pledge Agreement
-----------
(which may hereafter be executed), any Subsidiary Pledge Agreement (which
may hereafter be executed), the Assignment of Notes and Liens, and all
other certificates, documents or instruments delivered in connection with
this Agreement, as the foregoing may be amended from time to time.
SECTION 2. Representations and Warranties of Borrower. To induce Banks
------------------------------------------
and Administrative Agent to enter into this Second Amendment, Borrower hereby
represents and warrants to Administrative Agent and Banks as follows:
2.1 Credit Agreement. Each representation and warranty of Borrower
----------------
contained in the Credit Agreement and the other Loan Papers is true and correct
on the date thereof.
2.2 Authorization. The execution, delivery and performance by Borrower of
-------------
this Second Amendment are within Borrower's corporate powers, have been duly
authorized by all necessary corporate action, require no action by or filing
with, any governmental body, agency or official and do not violate or constitute
a default under any provision of applicable Law or Material Agreement binding
upon Borrower or result in the creation or imposition of any Lien upon any of
the assets of Borrower other than the Liens securing the Obligations.
2
<PAGE>
2.3 Binding Effect. This Second Amendment constitutes the valid and
--------------
binding obligation of Borrower enforceable in accordance with its terms, except
as (a) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors rights generally, and (b) the availability of
equitable remedies may be limited by equitable principles of general
application.
2.4 No Defenses. Borrower has no defenses to payment, counterclaim or
-----------
rights of set-off with respect to the Obligations existing on the date hereof.
SECTION 3. Miscellaneous.
-------------
3.1 Reaffirmation of Loan Papers; Extension of Liens. Any and all of the
------------------------------------------------
terms and provisions of the Credit Agreement and the Loan Papers shall, except
as amended and modified hereby, remain in full force and effect. Borrower
hereby extends the Liens securing the Obligations until the Obligations have
been paid in full or are specifically released by Administrative Agent and Banks
prior thereto, and agrees that the amendments and modifications herein contained
shall in no manner adversely affect or impair the Obligations or the Liens
securing payment and performance thereof.
3.2 Parties in Interest. All of the terms and provisions of this Second
-------------------
Amendment shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
3.3 Legal Expenses. Borrower hereby agrees to pay on demand all
--------------
reasonable fees and expenses of counsel to Administrative Agent incurred by
Administrative Agent, in connection with the preparation, negotiation and
execution of this Second Amendment and all related documents.
3.4 Counterparts. This Second Amendment may be executed in counterparts,
------------
and all parties need not execute the same counterpart. Facsimiles shall be
effective as originals.
3.5 Complete Agreement. THIS SECOND AMENDMENT, THE CREDIT AGREEMENT AND
------------------
THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF
THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE
PARTIES.
3.6 Headings. The headings, captions and arrangements used in this Second
--------
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Second Amendment, nor
affect the meaning thereof.
[Signature Pages Follow]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed by their respective Authorized Officers effective as of the
date and year first above written.
BORROWER:
--------
QUICKSILVER RESOURCES, INC., a Delaware
corporation
By: /s/ GLENN DARDEN
-------------------------------------
Glenn Darden, President
ADMINISTRATIVE AGENT:
--------------------
BANK OF AMERICA, N.A., successor by merger
to NationsBank, N.A.
By: /s/ J. SCOTT FOWLER
-------------------------------------
J. Scott Fowler,
Managing Director
BANKS:
-----
BANK OF AMERICA, N.A., successor by merger
to NationsBank, N.A.
By: /s/ J. SCOTT FOWLER
-------------------------------------
J. Scott Fowler,
Managing Director
4
<PAGE>
PARIBAS
By: /s/ MICHAEL H. FIUZAT
-------------------------------------
Name: Michael H. Fiuzat
-----------------------------------
Title: Vice President
----------------------------------
By: /s/ BRIAN M. MALONE
-------------------------------------
Name: Brian M. Malone
-----------------------------------
Title: Director
----------------------------------
FROST NATIONAL BANK
By: /s/ WILLIAM A. ADAMS
-------------------------------------
Name: William A. Adams
-----------------------------------
Title: Senior Vice President
----------------------------------
CIBC, INC.
By: /s/ ROGER COLDEN
-------------------------------------
Name: Roger Colden
-----------------------------------
Title: Authorized Signatory
----------------------------------
CHRISTIANIA BANK
By: /s/ WILLIAM S. PHILLIPS
/s/ PETER M. DODGE
-------------------------------------
Name: William S. Phillips
Peter M. Dodge
-----------------------------------
Title: First Vice President
Senior Vice President
----------------------------------
5
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF QUICKSILVER
RESOURCES INC.
Name Under
Jurisdiction of Which Business
Name of Subsidiary Organization is Conducted
--------------------------- ------------------- ------------------
Beaver Creek Pipeline, L.L.C. Michigan Same
MGV Energy, Inc. Alberta, Canada Same
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Quicksilver
Resources Inc. on Form S-1 of our report dated March 29, 1999, on the combined
consolidated balance sheets of Quicksilver Resources Inc. as of December 31,
1998 and 1997, and the related combined consolidated statement of income,
stockholders' equity and cash flows for the year ended December 31, 1998; our
report dated March 25, 1998 (December 18, 1998 as to Note 12) on the
consolidated balance sheet of MSR Exploration Ltd. and subsidiaries as of
December 31, 1997, and the related consolidated statement of operations,
stockholders' equity and cash flows for the period from inception March 7, 1997
to December 31, 1997; and our report dated July 22, 1999, on the statement of
revenues and direct operating expenses of the Unocal Corporation's Spirit
Energy 76 unit interests for the year ended December 31, 1998, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "'Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Deloite & Touche LLP
Fort Worth, Texas
October 18, 1999
<PAGE>
[LETTERHEAD OF WEAVER AND TIDWELL APPEARS HERE]
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITOR
As independent auditors, we hereby consent to the incorporation by reference in
this Form S-1 Registration Statement of our report dated October 26, 1998, on
the consolidated balance sheets of Mercury Exploration Company as of September
30, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997; our report dated November 30, 1998 on the
consolidated balance sheet of Mercury Exploration Company as of December 31,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for the three months then ended; and our report dated October
26, 1998 on the balance sheets of Michigan Gas Partners Limited Partnership as
of December 31, 1997 and 1996, and the related statements of operations,
partners' capital and cash flows for each of the three years in the period
ended December 31, 1997. We also consent to the reference to this firm under
the heading "Experts" in this Registration Statement.
/s/ WEAVER AND TIDWELL, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
October 18, 1999
<PAGE>
Exhibit 23.3
As independent oil and gas consultants, Holditch-Reservoir Technologies
Consulting Services hereby consents to the inclusion of our letter regarding
estimated net reserves and income of certain oil and gas interests audited for
Quicksilver Resources Inc. as of September 1, 1999 and the references to our
firm in the Registration Statement of Quicksilver Resources Inc. on Form S-1
(Registration No. ) to be filed with the Securities and Exchange
Commission.
/s/ Holditch-Reservoir Technologies
Consulting Services
Holditch-Reservoir Technologies Consulting
Services
Pittsburgh, Pennsylvania
October 15, 1999
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
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0 0
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<INTEREST-EXPENSE> 6,698 3,738
<INCOME-PRETAX> 8,171 (396)
<INCOME-TAX> 3,286 (135)
<INCOME-CONTINUING> 4,885 (261)
<DISCONTINUED> 0 0
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<CHANGES> 0 0
<NET-INCOME> 4,885 (261)
<EPS-BASIC> 0.42 (0.02)
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