<PAGE>
________________________________________________________________________________
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
--------------------------------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 001-15899
PURE RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 74-2952918
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
500 W. Texas, Suite 200
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 498-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _______
-----
As of August 3, 2000, 50,026,672 shares of common stock, par value
$.01 per share of Pure Resources, Inc. were outstanding.
________________________________________________________________________________
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<TABLE>
<CAPTION>
<S> <C> <C>
TABLE OF CONTENTS
-----------------
Forward Looking Information and Risk Factors........................................................ 1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and
December 31, 1999.................................................................... 3
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2000 and 1999............................................................... 5
Unaudited Consolidated Statements of Cash Flows for the Three and Six Months Ended
June 30, 2000 and 1999............................................................... 6
Notes to Consolidated Financial Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 17
-------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 27
----------------------------------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 29
-----------------
Item 2. Changes in Securities and Use of Proceeds................................................ 29
-----------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders...................................... 29
---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K......................................................... 30
--------------------------------
Signatures............................................................................... 31
</TABLE>
<PAGE>
PURE RESOURCES, INC.
(formerly "Union Oil Company of California's Permian Basin business unit")
FORWARD LOOKING INFORMATION AND RISK FACTORS
Pure Resources, Inc. ("Pure") or its representatives may make forward
looking statements, oral or written, including statements in this report's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, press releases and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and gas production, the number
of exploratory and development wells Pure anticipates drilling through 2000,
potential reserves and Pure's financial position, business strategy and other
plans and objectives for future operations. Although Pure believes that the
expectations reflected in these forward looking statements are reasonable, there
can be no assurance that the actual results or developments anticipated by Pure
will be realized or, even if substantially realized, that they will have the
expected effects on its business or operations. Among the factors that could
cause actual results to differ materially from Pure's expectations are general
economic conditions, inherent uncertainties in interpreting engineering data,
operating hazards, delays or cancellations of drilling operations for a variety
of reasons, competition, fluctuations in oil and gas prices, government
regulations, Year 2000 issues and other factors set forth in Pure's Registration
Statement filed on Form S-4 dated April 18, 2000. All subsequent oral and
written forward looking statements attributable to Pure or persons acting on its
behalf are expressly qualified in their entirety by these factors. Pure assumes
no obligation to update any of these statements.
1
<PAGE>
Item 1. Financial Statements
Pure Resources, Inc. ("Pure"), a Delaware corporation, was, until May 25,
2000, a wholly-owned subsidiary of Union Oil Company of California ("Union
Oil"). Pure was formed in December 1999 in connection with the Agreement and
Plan of Merger (the "Merger Agreement") dated December 13, 1999, as amended,
among Union Oil, Pure, TRH, Inc. and Titan Exploration, Inc. ("Titan").
On May 25, 2000, pursuant to the Merger Agreement, Union Oil contributed
its Permian Basin business unit to a subsidiary of Pure in exchange for
32,708,067 shares of Pure common stock and the assumption by Pure of the
associated liabilities of the Permian Basin business unit. These transactions
are referred to as the "Contribution." Simultaneously with the Contribution, a
subsidiary of Pure was merged with and into Titan. (See Note 2 for additional
information related to the Merger Agreement and the merger.) The amounts and
results of operations of Pure included in these financial statements reflect the
historical amounts and results of operations of the Permian Basin business unit
operations of Union Oil. The effect of the merger is reflected in the
consolidated balance sheet at June 30, 2000 and in the results of operations and
cash flows since May 31, 2000. The acquisition of Titan, by Pure, was accounted
for on the purchase method.
2
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PURE RESOURCES, INC.
(formerly "Union Oil Company of California's Permian Basin business unit")
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,290 $ -
Accounts receivable:
Oil and gas 38,647 -
Other 657 -
Prepaid expenses and other current assets 1,371 -
------------- -------------
Total current assets 42,965 -
------------- -------------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties 1,089,938 825,144
Unproved properties 16,899 3,367
Accumulated depletion, depreciation and amortization (554,081) (536,982)
------------- -------------
552,756 291,529
------------- -------------
Other property and equipment, net 5,180 281
Deferred compensation (Note 5) 26,754 -
Receivables for under-delivered gas 4,657 2,880
------------- -------------
$ 632,312 $ 294,690
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Pure Resources, Inc.
(formerly "Union Oil Company of California's Permian Basin business unit")
Consolidated Balance Sheets
(dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY AND OWNER'S NET INVESTMENT
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 18,336 $ -
Mark-to-market obligation 17,288 -
Other (Note 8) 20,056 -
-------------- --------------
Total current liabilities 55,680 -
-------------- --------------
Long-term debt 96,000 -
Liabilities for over-delivered gas 10,504 6,742
Accrued abandonment, restoration and environmental liabilities 13,270 11,613
Deferred income taxes 49,951 73,711
Common stock subject to repurchase 76,744 -
Stockholders' equity and owner's net investment:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none
issued and outstanding - -
Common stock, $.01 par value, 200,000,000 shares authorized; 50,023,856 shares
issued and outstanding at June 30, 2000 500 -
Additional paid-in capital 331,609 -
Notes receivable - affiliates (6,738) -
Deferred compensation (Note 7) (2,751) -
Retained earnings 7,543
Owner's net investment - 202,624
-------------- --------------
Total stockholders' equity and owner's net investment 330,163 202,624
-------------- --------------
Commitments and contingencies (Note 5)
$632,312 $294,690
============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Pure Resources, Inc.
(formerly Union Oil Company of California's Permian Basin business unit")
Unaudited Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Oil sales $ 30,648 $ 14,174 $ 56,746 $ 25,195
Gas sales 25,075 12,781 41,375 20,239
Gas processing 62 249 180 489
------------ ------------ ------------ ------------
Total revenues 55,785 27,204 98,301 45,923
------------ ------------ ------------ ------------
Expenses:
Oil and gas production 10,552 7,315 17,471 14,825
Production and other taxes 5,147 2,049 8,202 3,930
General and administrative 2,277 2,030 3,122 3,566
Amortization of deferred compensation 1,027 - 1,027 -
Exploration and abandonment (Note 9) 1,348 879 3,078 2,360
Depletion, depreciation and amortization 9,454 8,254 17,350 16,842
------------ ------------ ------------ ------------
Total expenses 29,805 20,527 50,250 41,523
------------ ------------ ------------ ------------
Operating income 25,980 6,677 48,051 4,400
------------ ------------ ------------ ------------
Other income (expense):
Interest income 32 - 32 -
Interest expense (661) - (661) -
Gain (loss) on sale of assets 1,250 (42) 1,250 (63)
Other (350) - (1,446) -
------------ ------------ ------------ ------------
Income before income taxes 26,251 6,635 47,226 4,337
Income tax expense (9,229) (2,177) (16,530) (1,423)
------------ ------------ ------------ ------------
Net income $17,022 $ 4,458 $ 30,696 $ 2,914
============ ============ ============ ============
Net income per share $0.44 $0.14 $0.86 $0.09
============ ============ ============ ============
Net income per share - assuming dilution $0.44 $0.14 $0.86 $0.09
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Pure Resources, Inc.
(formerly Union Oil Company of California's Permian Basin business unit")
Unaudited Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,022 $ 4,458 $ 30,696 $ 2,914
Adjustment to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization 9,454 8,254 17,350 16,842
Amortization of deferred compensation 1,027 - 1,027 -
Amortization mark-to-market obligation (1,991) - (1,991) -
Exploration and abandonments 625 70 2,088 234
Gain (loss) on sale of assets (1,250) 42 (1,250) 63
Deferred income taxes 1,942 520 3,307 340
Other items (300) - - -
Changes in assets and liabilities, excluding acquisition:
Accounts receivable (14,483) - (26,748) -
Prepaid expenses and other current assets 56 - (62) -
Receivable for under-delivered gas (875) 476 (1,697) 534
Other assets 213 - - -
Accounts payable and accrued liabilities 3,435 - 19,478 -
Income taxes payable 3,000 - 3,000 -
Liabilities for over-delivered gas 1,233 (217) 1,597 (503)
Other non-current liabilities 89 (221) (50) (236)
---------- ---------- ---------- ----------
Total adjustments 2,175 8,924 16,049 17,274
---------- ---------- ---------- ----------
Net cash provided by operating activities 19,197 13,382 46,745 20,188
---------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash acquired (659) - (659) -
Investment in oil and gas properties (13,150) (3,871) (35,883) (5,194)
Additions to other property and equipment (101) - (101) -
Proceeds from sale of assets 1,189 77 1,250 181
Notes receivable - affiliates 2,815 - 2,815 -
---------- ---------- ---------- ----------
Net cash used in investing activities (9,906) (3,794) (32,578) (5,013)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Payments of revolving debt, net (10,863) - (10,863) -
Exercise of stock options 302 - 302 -
Cash contribution from stockholder 14,528 - 14,528 -
Net settlements with owner (10,968) (9,588) (15,844) (15,175)
---------- ---------- ---------- ----------
Net cash used in financing activities (7,001) (9,588) (11,877) (15,175)
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents 2,290 - 2,290 -
Cash and cash equivalents, beginning of period - - - -
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 2,290 $ - $ 2,290 $ -
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PURE RESOURCES, INC.
(formerly "Union Oil Company of California's Permian Basin business unit")
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(Unaudited)
(1) Organization, Nature of Operations and Basis of Presentation
Organization
Pure Resources, Inc. ("Pure"), a Delaware corporation, was, until May 25,
2000, a wholly-owned subsidiary of Union Oil Company of California ("Union
Oil"). Pure was formed in December 1999 in connection with the Agreement and
Plan of Merger (the "Merger Agreement") dated December 13, 1999, as amended,
among Union Oil, Pure, TRH, Inc. and Titan Exploration, Inc. ("Titan").
The combination of Pure and the Permian Basin business unit is treated as a
combination of entities under common control, since Union Oil owned 100% of the
Permian Basin business unit prior to the Contribution and also owned 100% of the
capital stock of Pure immediately subsequent to the Contribution (without giving
effect to the merger). Consequently, the accompanying financial statements have
given effect to the Contribution as if it were a pooling of interests.
On May 25, 2000, pursuant to the Merger Agreement, Union Oil contributed
its Permian Basin business unit to a subsidiary of Pure in exchange for
32,708,067 shares of Pure common stock and the assumption by Pure of the
associated liabilities of the Permian Basin business unit. These transactions
are referred to as the "Contribution." Simultaneously with the Contribution, a
subsidiary of Pure was merged with and into Titan. (See Note 2 for additional
information related to the Merger Agreement and the merger.) The amounts and
results of operations of Pure included in these financial statements reflect the
historical amounts and results of operations of the Permian Basin business unit
operations of Union Oil. The effect of the merger is reflected in the
consolidated balance sheet at June 30, 2000 and in the results of operations and
cash flows since May 31, 2000. The acquisition of Titan, by Pure, was accounted
for on the purchase method.
Nature of Operations
As a result of the Contribution and the merger discussed in Note 2, Pure is
an independent energy company. Pure, formerly the Permian Basin business unit,
has historically been engaged in the exploration, development and production of
oil and natural gas in the Permian Basin of the western portion of the state of
Texas and San Juan Basin areas of New Mexico and Colorado. As a result of the
merger with Titan, Pure now engages in activities in the additional areas of the
Permian Basin of southeastern New Mexico, Brenham Dome area of south central
Texas and the Central Gulf Coast region of Texas.
Basis of Presentation
The accompanying consolidated financial statements, prior to the merger,
are presented as a carve-out from the financial statements of Union Oil and
reflect the activity related to its Permian Basin business unit during the
periods presented. The functions listed below were managed centrally and support
several business units. The costs were allocated based on each business unit's
share of total revenues, prior to December 31, 1999, and were considered
reasonable by Union Oil's management. Effective January 1, 2000, Union Oil
established procedures by which to accumulate actual costs associated only with
the Permian Basin business unit. Subsequent to December 31, 1999, results of
operations for Pure include only actual costs that are attributable to Pure.
Support costs decreased in the first and second quarter of 2000, as compared to
past quarters, as a result of a reduction of support being provided from Union
Oil's Sugar Land, Texas and Lafayette, Louisiana offices due to the then pending
merger of the Permian Basin business unit with Titan.
General and Administrative Costs
General and administrative costs include charges related to activities such
as accounting, legal, human resources, marketing, planning and public relations.
General and administrative costs allocated from Union Oil to the Permian Basin
business unit were $2.0 million and $3.5 million for the three and six months
ended June 30, 1999, respectively. General and administrative costs charged to
the Permian Basin business unit were $600,000 and $1.4 million for the three and
six months ended June 30, 2000, respectively.
7
<PAGE>
Indirect Production Costs
Indirect production costs include charges for procurement and logistics,
reservoir engineering, production engineering, workover, drilling, loss control,
and health, environment and safety. Indirect production costs allocated from
Union Oil to the Permian Basin business unit were $700,000 and $1.5 million for
the three and six months ended June 30, 1999, respectively. Indirect production
costs charged to the Permian Basin business unit were $300,000 and $600,000 for
the three and six months ended June 30, 2000, respectively.
Indirect Exploration Costs
Indirect exploration costs include charges for the chief geologist's
department, the chief geophysicist's department, and the land department.
Exploration costs allocated from Union Oil were $400,000 and $900,000 for the
three and six months ended June 30, 1999, respectively. Indirect exploration
costs charged to the Permian Basin business unit were $100,000 and $200,000 for
the three and six months ended June 30, 2000, respectively.
Cash Management Services
Historically, Union Oil provided cash management services to Pure through a
centralized treasury system with the associated transactions recorded via
intercompany accounts. Pure historically had not maintained cash balances, and
no interest had been charged or received. Pure's net cash settlement with Union
Oil and amounts for allocated costs from Union Oil were included in the owner's
net investment on the consolidated balance sheet. Subsequent to the merger,
Union Oil has not provided any cash management services to Pure.
Prior to January 1, 2000 as a result of cash management services referred
to in the paragraph above, Union Oil did not allocate specific working capital
components to Pure. Cash flow from operating activities, prior to January 1,
2000, did not include the effect of changes in certain working capital accounts.
The amounts were included in net settlements with owners.
Subsequent to December 31, 1999, cash management for Pure continued to be
provided by Union Oil up to the date of merger; however, working capital, as it
related to operations subsequent to December 31, 1999 was allocated to Pure as
reflected in the consolidated balance sheet as of June 30, 2000.
Other
In the opinion of management, the unaudited consolidated financial
statements of Pure as of June 30, 2000 and for the three and six months ended
June 30, 2000 and 1999 include all adjustments and accruals, consisting only of
normal recurring accrual adjustments, which are necessary for a fair
presentation of the results for the interim period. These interim results are
not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Pure's Registration Statement
on Form S-4, filed on April 18, 2000.
Preparation of the accompanying consolidated 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the 1999 and first quarter of
2000 amounts to conform to the June 30, 2000 presentations.
8
<PAGE>
(2) The Merger and Contribution
On December 13, 1999, Pure, Union Oil, TRH, Inc. and Titan entered into
the Merger Agreement. The Merger Agreement provided that a subsidiary of Pure
would merge into Titan and Titan would become a wholly-owned subsidiary of Pure.
On May 24, 2000, the Titan stockholders approved the merger and on May 25, 2000
Union Oil and Titan closed the merger. Pure began trading on the New York Stock
Exchange under the symbol "PRS" on May 26, 2000.
Simultaneously with the merger, the Contribution occurred and Union Oil
received 32,708,067 shares of Pure common stock. Immediately following the
Contribution and the merger, Union Oil owned approximately 65.4% of outstanding
Pure common stock. Titan stockholders acquired the remaining 34.6% of Pure's
outstanding common stock in the merger and exchanged each share of Titan common
stock owned for .4302314 ("Exchange Ratio") of a share of Pure common stock.
At the effective time of the merger, each outstanding option to purchase
Titan common stock under the Titan's stock option plans (each a "Titan Common
Stock Option") was assumed by Pure (each an "Assumed Option") and became an
option to purchase that number of shares of Pure common stock equal (subject to
rounding) to the number of shares of Titan common stock that was subject to such
option immediately prior to the merger, multiplied by the Exchange Ratio. The
exercise price of each Assumed Option is equal to the quotient determined by
dividing the exercise price per share of the Titan common stock at which the
Titan Common Stock Option was exercisable immediately prior to the effective
time of the merger by the Exchange Ratio, rounded to the nearest whole cent.
The acquisition was made by the issuance of approximately 17.3 million shares
of Pure's common stock to the stockholders of Titan. The results of operations
of Titan have been included with Pure's since May 31, 2000.
The acquisition, accounted for on the purchase method, resulted in the
following noncash investing activities, in thousands:
Recorded amount of assets acquired $275,614
Deferred income tax asset 27,031
Liabilities assumed (150,560)
Common stock issued and stock options assumed (151,426)
-------
Cash costs, net of cash acquired $ 659
=======
The liabilities assumed primarily include amounts recorded for preacquisition
contingencies, debt of Titan of $106.9 million, and a mark-to-market hedge
obligation of $19.3 million.
Pro Forma Results of Operations (Unaudited)
The following table reflects the pro forma results of operations for the six
months ended June 30, 2000 and 1999 as though the Titan merger and the
Contribution had occurred as of January 1, 1999. The pro forma amounts are not
necessarily indicative of the results that may be reported in the future (in
thousands, except per share data).
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Revenues $ 136,481 $ 78,143
Net income (loss) $ 35,936 $ (17,515)
Net income (loss) per common share $ 0.72 $ (0.35)
Net income (loss) per common share - assuming dilution $ 0.71 $ (0.35)
</TABLE>
9
<PAGE>
(3) Debt
Debt consists of the following (in thousands):
June 30, December 31,
2000 1999
------------- -------------
Line of Credit $ 96,000 $ -
Unsecured line of credit - -
------------- -------------
$ 96,000 $ -
============= =============
Line of Credit
As a result of the Titan merger, Pure assumed an amended and restated
credit agreement (the "Credit Agreement") with Chase Bank of Texas, N.A. (the
"Bank"), which established a revolving credit facility of $250 million subject
to a borrowing base. All amounts outstanding are due and payable in full on
July 1, 2001. The borrowing base, which is $175 million at June 30, 2000, is
subject to redetermination annually each April by the lenders based on certain
proved oil and gas reserves and other assets of Pure. At June 30, 2000, the
outstanding principal was $96 million and the available borrowing capacity was
approximately $79 million. Pure is currently in the process of negotiating a
new credit facility.
Unsecured Credit Agreement
As a result of the Titan merger, Pure assumed a credit agreement, as amended
(the "Unsecured Credit Agreement"), with the Bank which establishes a revolving
credit facility, up to the maximum of $5 million. Individual borrowings may be
made for up to a three week period. The Unsecured Credit Agreement has no
maturity date and is cancelable at anytime by the Bank. The interest of each
loan under the Unsecured Credit Agreement is at a rate determined by agreement
between Pure and the Bank. The rate shall not exceed the maximum interest rate
permitted under applicable law. Interest rates generally are at the Bank's cost
of funds plus 1% per annum. At June 30, 2000, there was no outstanding
principal balance under the Unsecured Credit Agreement.
(4) Accrued Abandonment, Restoration and Environmental Liabilities
At June 30, 2000 and December 31, 1999, Pure had accrued $12.1 million and
$11.3 million, respectively, for the estimated future costs to abandon and
remove wells and production facilities. The amounts were charged to
depreciation, depletion and amortization expense. The total amount chargeable
to operations for abandonment (to be predominantly accrued on a unit-of-
production basis) is estimated to be approximately $29.5 million at June 30,
2000 and December 31, 1999. This estimate is based on abandonment cost studies
performed by a third party.
Pure's reserve for environmental remediation obligations totaled $1.1
million and $342,000 as of June 30, 2000 and December 31, 1999, respectively.
(5) Commitments and Contingencies
General
Pure is subject to contingent liabilities with respect to existing or
potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. Pure accrues liabilities when it is probable that future
costs will be incurred and such costs can be reasonably estimated. Such
accruals are based on developments to date and Pure's estimates of the outcomes
of these matters and its experience in contesting, litigating and settling other
matters. As the scope of the liabilities becomes better defined, there will be
changes in the estimates of future costs, which management, currently, believes
will not have a material effect on Pure's results of operations and financial
condition or liquidity.
10
<PAGE>
Environmental matters
Pure is subject to loss contingencies pursuant to federal, state and local
environmental laws and regulations. These include existing and possible future
obligations to investigate the effects of the release or disposal of certain
petroleum and chemical substances at various sites; to remediate or restore
these sites; to compensate others for damage to property and natural resources,
for remediation and restoration costs and for personal injuries; and to pay
civil penalties and, in some cases, criminal penalties and punitive damages.
These obligations relate to sites owned by Pure or others and are associated
with past and present operations.
Liabilities are accrued when it is probable that future costs will be
incurred and such costs can be reasonably estimated. However, in many cases,
investigations are not yet at a stage where Pure is able to determine whether it
is liable or, even if liability is determined to be probable, to quantify the
liability or estimate a range of possible exposure. In such cases, the amounts
of Pure's liabilities are indeterminate due to the potentially large number of
claimants for any given site or exposure, the unknown magnitude of possible
contamination, the imprecise and conflicting engineering evaluations and
estimates of proper clean-up methods and costs, the unknown timing and extent of
the corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, or other reasons.
As discussed in Note 4, Pure had accrued $1.1 million and $342,000 at June
30, 2000 and December 31, 1999, respectively, for estimated future environmental
assessment and remediation costs at various sites where liabilities for such
costs are probable.
Pure Resources Employment and Severance Agreements
Under circumstances specified in the new employment and/or severance
agreements entered into between Pure and its officers, each covered officer may
have the right to require Pure to purchase shares currently held or subsequently
obtained by the exercise of any option held by the officer at a calculated "net
asset value" per share (as defined in each officer's employment/severance
agreement). The circumstances under which certain officers may exercise this
right include the termination of the officer's employment for any reason after
three years following the merger, the termination of the officer without cause,
a change in control of either Pure or Unocal Corporation ("Unocal") and other
events specified in the agreements. The net asset value per share is calculated
by reference to each common share's pro rata amount of the present value of
proved reserves discounted at 10%, as defined, times 110%, less funded debt, as
defined. The amount reflected in the consolidated balance sheet at June 30,
2000, as common stock subject to repurchase is the estimated net asset value, as
defined, for each applicable officer's shares, owned prior to December 1, 1999,
and unexercised option shares less the amount of proceeds that would be received
upon exercise of the related options. Deferred compensation related to such
shares and options is calculated as the difference between the estimated net
asset value of the relevant number of Pure shares and the market value of Pure
shares held by each covered officer in the case of shares held or the exercise
price of shares subject to option. This arrangement will be treated as a
variable plan under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Based Compensation." Consequently, the total compensation for both shares
held and shares subject to option will be measured at the end of each quarter as
the calculated amount of net asset value and the market price of Pure shares
change. The total amount determined will be amortized as compensation expense
over a three-year period with any changes after three years being expensed in
the period of determination. On an annualized basis, at June 30, 2000, Pure
would incur a non-cash expense of approximately $9.2 million per year to
amortize the deferred compensation recorded as a result of these arrangements.
Each new employment and/or severance agreement will also obligate Pure to
make a severance payment ranging from one to three times the officer's salary,
including an average bonus, upon the occurrence of specified events such as
termination without cause or upon change in control. The aggregate severance
amounts potentially payable under these agreements total $4.5 million based on
the expected initial salaries of the affected officers.
Non-Dilution Agreement
Pure and Union Oil entered into a non-dilution agreement that provides
Union Oil with the right to maintain its percentage ownership of Pure. If Pure
issues capital stock, other than common stock issued under board-approved
incentive plans, for cash or credit, Union Oil will have the right to purchase
or subscribe for the number or amount of such capital stock equal to its
ownership percentage of Pure, up to 65.4%, at the same price at which the
capital stock is being issued. Pure must provide Union Oil with notice of an
issuance subject to this preemptive right at least 10 days prior to the issuance
and, if Union Oil elects to exercise the right, it must do so in such a way as
not to delay pricing and closing of
11
<PAGE>
the issuance. The preemptive right given by Pure will terminate if unexercised
within 10 days after receipt of the notice of the issuance of the capital stock.
If Pure issues any capital stock in exchange for property other than cash
or credit, Union Oil will have the right to purchase from Pure the additional
number of shares of capital stock necessary to enable Union Oil to maintain its
ownership percentage in Pure, up to 65.4%. Pure must give Union Oil written
notice of the issuance not later than 20 days prior to such issuance, and Union
Oil will have 30 days from the date of the issuance to elect to exercise its
rights by giving written notice to Pure. The cash price per share to be paid by
Union Oil for the additional shares of capital stock will be the market trading
price per share of Pure's common stock at the time of the issuance or in the
case of other capital stock, as determined in good faith by the Pure board of
directors.
Office Lease Agreement
In July 2000, Pure entered into a ten year office lease agreement with an
affiliate of Jack Hightower, Chief Executive Officer and Chairman of the Board
for Pure. The lease agreement terms are comparable to those that could be
reached in an arms-length transaction with a third party. The annual base rent
for years 1 through 5 is approximately $1.2 million per year and for years 6
through 10 is approximately $1.3 million per year.
Letters of Credit
At June 30, 2000, Pure had outstanding letters of credit of $144,000, which
were issued through the Credit Agreement.
Other matters
Pure also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. Pure's results of operations for a given reporting period, on the
basis of management's best assessment of the ultimate amount and timing of these
events, such expenses, or judgments, are not expected to have a material adverse
effect on Pure's financial condition or liquidity.
12
<PAGE>
(6) Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings
per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income and numerator for basic and diluted
net income per common share - income available
to common stockholders $17,022 $ 4,458 $30,696 $ 2,914
---------- ---------- ---------- ----------
Denominator:
Denominator for basic net income per common
share - weighted average common shares (a) 38,410 32,709 35,559 32,709
Effect of dilutive securities - employee stock
options not subject to "put" right 31 - 16 -
Dilutive effect of officers' stock options
subject to the "put" right under
employment/severance agreements (Note 5) 15 - 7 -
Dilutive effect of officers' individual common
stock held subject to the "put" right under
employment/severance agreements (Note 5) 181 - 91 -
---------- ---------- ---------- ----------
Denominator for diluted net income per common
share - adjusted weighted average common shares
and assumed conversions 38,637 32,709 35,673 32,709
========== ========== ========== ==========
Basic net income per common share $ 0.44 $ 0.14 $ 0.86 $ 0.09
========== ========== ========== ==========
Diluted net income per common share $ 0.44 $ 0.14 $ 0.86 $ 0.09
========== ========== ========== ==========
</TABLE>
----------------------
(a) Assumes common stock Union Oil received for its contribution of the Permian
Basin business unit was issued and outstanding since January 1, 1999.
Employee stock options to purchase 4,947,363 shares of common stock were
outstanding at June 30, 2000 but only 4,361,442 and 4,361,442 were included in
the computation of diluted net income per common share for the three and six
months ended June 30, 2000, due to the average market price of Pure common stock
being greater than the option price. The remaining 585,921 and 585,921 shares
for the three and six months ended June 30, 2000 were anti-dilutive due to (a)
the option price being greater than the average market price of the common stock
of Pure, since May 26, 2000 or (b) the assumed proceeds under the treasury stock
method derived more shares being repurchased than the related options. There
were no potentially dilutive securities in 1999.
13
<PAGE>
(7) Incentive Plans
Pure 1999 Incentive Plan
In connection with the merger agreement, Pure's board of directors adopted,
and Union Oil as sole stockholder of Pure approved, the Pure 1999 Incentive
Plan. The plan provides that Pure may grant awards of Pure common stock under
the Pure 1999 Incentive Plan. The awards under the Pure 1999 Incentive Plan
include (a) stock options that do not qualify as incentive stock options under
Section 422 of the Internal Revenue Code, (b) stock appreciation rights, or
"SARs", (c) cash awards, (d) stock awards and (e) performance awards. These
awards, other than cash awards, may be settled in shares of restricted or
unrestricted common stock of Pure.
The number of shares of Pure common stock that may be subject to
outstanding awards under the Pure 1999 Incentive Plan at any one time is equal
to twelve percent of the total number of outstanding shares of Pure common stock
plus outstanding common stock equivalents, as defined in the 1999 Pure Incentive
Plan, minus the total number of shares of Pure common stock subject to
outstanding awards under any other stock-based plan for employees or directors
of Pure. The number of shares authorized under the Pure 1999 Incentive Plan and
the number of shares subject to an award under the Pure 1999 Incentive Plan will
be adjusted for stock splits, stock dividends, recapitalizations, mergers, and
other changes affecting the capital stock of Pure.
The board of directors of Pure or any committee designated by it will
administer the Pure 1999 Incentive Plan. Pure intends to have its Compensation
Committee administer the plan. The Compensation Committee will have broad
discretion to administer the Pure 1999 Incentive Plan, interpret its provisions
and adopt policies for implementing the Pure 1999 Incentive Plan.
The following table calculates the number of shares or options available to
grant under Pure's 1999 Incentive Plan as of June 30, 2000:
<TABLE>
<S> <C>
Common stock outstanding 50,023,856
Options awarded under the Pure 1999 Incentive Plan 4,663,560
Assumed options from Titan 458,015
Options exercised (23,996)
Options cancelled/forfeited (150,216)
-----------
Common stock equivalents 54,971,219
===========
Maximum shares/options allowed under the Pure 1999 Inccentive Plan 6,596,546
Less: Outstanding awards under the Pure 1999 Incentive Plan (4,513,560)
Outstanding options under the Titan 1996 Incentive Plan (336,984)
Outstanding options under the Titan 1999 Incentive Plan (79,032)
Outstanding options under the OEDC Stock Awards Plan (17,787)
-----------
Shares/options available for future grant 1,649,183
===========
</TABLE>
14
<PAGE>
In connection with the merger agreement, the board of directors of Pure
granted stock options to purchase Pure common stock to the officers of Pure,
under the Pure 1999 Incentive Plan. The options granted, on December 13, 1999,
are described in the following table:
<TABLE>
<CAPTION>
Number of Exercise
Options Price Vesting Period Expiration Date
------------ ----------- ------------------ -----------------
<S> <C> <C> <C> <C>
1,500,000 $ 9.30 Ratably over 3 years December 13, 2009
1,010,000 $ 9.30 Ratably over 4 years December 13, 2009
600,000 $17.08 Ratably over 3 years December 13, 2009
390,000 $17.08 Ratably over 4 years December 13, 2009
------------
3,500,000
============
</TABLE>
As of June 30, 2000, Pure granted 1,163,560 additional options to non-
officers. Certain grants were done at an exercise price below Pure's stock
price on the date of grant; consequently, Pure recorded deferred compensation of
$3.0 million. The deferred compensation will be amortized over the vesting
period, generally four years.
Assumed Titan Stock Options
Pure, as part of the merger, assumed each outstanding and unexercised option
to purchase a share of Titan stock issued under various Titan related employee
benefit plans. As a result of the merger all the outstanding Titan options
fully vested. Each Titan option converted into an option to purchase .4302314
shares of Pure common stock at an exercise price equal to the exercise price of
the Titan options divided by .4302314. At May 26, 2000, Pure assumed Titan
options, on a post-merger converted basis, to purchase 458,015 shares of Pure
common stock.
(8) Other Current Liabilities
The other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
Accrued oil and gas production expenses $ 15,663 $ -
Income taxes payable 3,000 -
Accrued interest payable 1,187 -
Other 206 -
--------------- ---------------
$ 20,056 $ -
=============== ===============
</TABLE>
15
<PAGE>
(9) Exploration and Abandonment
Exploration and abandonment expense consists of the following (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Geological and geophysical staff $ 596 $ 527 $ 860 $ 944
Uneconomical exploratory projects 271 - 1,389 -
Impaired unproved properties 423 189 768 376
Scismic costs 9 55 9 582
Other 50 108 52 458
------------- ------------ ------------ -----------
$ 1,349 $ 879 $ 3,078 $ 2,360
============= ============ ============ ===========
</TABLE>
(10) Derivative Financial Instruments
Pure may utilize various option and swap contracts and other financial
instruments to hedge the effect of price changes on future oil and gas
production. The index price for the natural gas collars settles based on NYMEX
Henry Hub, while the oil collar settles based on the prices for West Texas
Intermediate on NYMEX. The basis swaps lock in the basis differential between
NYMEX Henry Hub and the El Paso/Permian delivery point or the Waha West Texas
delivery point.
The following table sets forth the future volumes hedged by year and the
range of prices to be received based upon the fixed price of the individual
option and swap contracts and other financial instruments outstanding at June
30, 2000, all of which were assumed as a result of the Titan merger:
<TABLE>
<CAPTION>
2000 2001
---------- ---------
<S> <C> <C>
Gas related derivatives:
Collar options (a)
Volume (MMBtu) 5,520,000 4,065,000
Index price per MMBtu (floor-ceiling prices) $2.60 - $3.32 $2.60 - $3.32
Basis swaps:
Volume (MMBtu) 5,060,000 4,065,000
Index Price per MMBtu $.095 - $.120 $.095 - $.120
Oil related derivatives:
Collar options:
Volume (Bbls) 644,000 452,500
Index price per Bbl (floor-ceiling prices) $16.50 - $23.40 $16.50 - $20.48
</TABLE>
--------------------
(a) Includes amounts in which a counterparty has the option to extend the collar
option from October 1, 2000 to June 30, 2001, on volumes of 15,000 MMBtu per
day at a floor and ceiling price of $2.60 and $3.08 per MMBtu, respectively.
As a result of the Titan merger, Pure marked to market as of the merger date
all the outstanding financial derivatives held by Titan which resulted in a
liability of approximately $19.3 million, see Note 2. The mark-to-market
obligation will be amortized as a non-cash benefit to oil and gas revenues over
the remaining term of the hedges as the related production takes place.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Union Oil Merger
-----------------
On December 13, 1999, Titan and Union Oil entered into an agreement to
merge Titan and the Permian Basin business unit of Union Oil into a new company.
The resulting company is Pure Resources, Inc., a publicly-traded company.
Titan's assets historically included oil and gas exploration and production
assets in the Permian Basin of West Texas and southeastern New Mexico, Brenham
Dome area of south central Texas and the Central Gulf Coast region of Texas.
On May 24, 2000, the Titan stockholders approved the merger and on May 25,
2000 Union Oil and Titan closed the merger. Pure began trading on the New York
Stock Exchange under the symbol "PRS" on May 26, 2000.
Pure has approximately 50 million shares of common stock outstanding after
completion of the merger. Union Oil holds approximately 65.4% (32.7 million
shares) of Pure. The remaining 34.6% (17.3 million shares) ownership is held by
the previous stockholders of Titan common stock who exchanged each share of
Titan common stock for .4302314 of a share of Pure common stock.
General
Pure is an independent energy company engaged in the exploitation,
development, exploration and acquisition of oil and gas properties. Pure's
strategy is to grow reserves, production and net income per share by:
. identifying acquisition opportunities that provide significant development and
exploratory drilling potential,
. exploiting and developing its reserve base,
. pursuing exploration opportunities for oil and gas reserves,
. capitalizing on advanced technology to identify, explore and exploit projects,
and
. emphasizing a low overhead and operating cost structure.
Pure uses the successful efforts method of accounting for its oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that result in proved reserves,
and to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not result in proved reserves and geological and
geophysical costs are expensed. Costs of significant nonproducing properties,
wells in the process of being drilled and significant development projects are
excluded from depletion until such time as the related project is developed and
proved reserves are established or impairment is determined.
Impact of Commodity Prices
During 1998 and through the first quarter of 1999, the posted price of West
Texas intermediate crude oil ("WTI") ranged from $15.75 to $8.00 per barrel. The
WTI prices for crude oil from the second quarter of 1999 to the present have
shown significant improvement over those during 1998 and early 1999.
A return of low prices for crude oil, natural gas or other commodities sold
by Pure could have a material adverse effect on Pure's results of operations and
cash flows, on the quantities of crude oil and natural gas that can be
economically produced from its fields, and on the quantities and economic values
of its proved reserves and potential resources. Such adverse pricing scenarios
could result in write-downs of the carrying values of Pure's properties and
materially adversely affect Pure's financial condition, as well as its results
of operations and cash flows.
17
<PAGE>
Impact on Pure of Ancillary Agreements and Severance Arrangements
Stockholders Voting Agreement
Pure, Union Oil and Jack D. Hightower (Chairman of the Board, Chief
Executive Officer and President of Pure) have entered into a stockholders voting
agreement in which Union Oil and Mr. Hightower have agreed to vote their shares
of Pure capital stock to cause two persons designated by Mr. Hightower, up to
five persons designated by Union Oil, and one person agreed upon by Union Oil
and Mr. Hightower to be elected to Pure's board of directors. Under the
agreement, Hightower will vote to elect to the Pure board (a) five designees of
Union Oil, if Union Oil owns greater than 50% of Pure's common stock; (b) four
designees of Union Oil, if Union Oil owns greater than 35% but not more than 50%
of Pure's common stock; or (c) two designees of Union Oil, if Union Oil owns
greater than 10% but not more than 35%.
Union Oil will have the right to approve the nomination of the directors
designated by Mr. Hightower, other than Mr. Hightower himself, which approval
may not be unreasonably withheld. No more than two of the persons designated
by Union Oil under the agreement may be affiliates of Union Oil. In the event
that Union Oil is entitled to designate three or more persons under the
agreement, one of the Union Oil affiliates designated must be approved by Mr.
Hightower, and any non-Union Oil affiliate designated must be approved by Mr.
Hightower. In each case Mr. Hightower's approval may not be unreasonably
withheld. Pursuant to the Merger Agreement, the board initially consists of
eight directors.
The stockholders voting agreement will terminate if Union Oil and its
affiliates beneficially own less than 10% of the outstanding common stock of
Pure or Mr. Hightower ceases to be the Chief Executive Officer of Pure.
Other Matters
Under the business opportunities agreement between Pure and Union Oil, Pure
has agreed to limit its business activities. The agreement's restrictions may
limit Pure's ability to diversify its operating base following the merger.
Because of Pure's geographic concentration, any regional events that increase
costs, reduce availability of equipment or supplies, reduce demand or limit
production may impact Pure more than if its operations were more geographically
diversified.
Mr. Hightower's employment agreement and new Pure officer severance agreements
will entitle covered Pure officers to require Pure to purchase his or her Pure
common stock at a price that may be in excess of market value in the event of a
change of control of Pure or Unocal and in some circumstances following
termination of employment. On June 30, 2000, when the trading price of Pure
common stock was $17.88 per share, the "per share net asset value" of Pure,
calculated in accordance with the agreements was estimated at approximately
$18.76. At June 30, 2000, Pure would incur a non-cash expense of approximately
$9.2 million per year for three years to amortize the deferred compensation
recorded as a result of these arrangements. The amortization amounts will
change quarterly based on relative changes in the net asset value and market
value of the Pure shares.
Basis of Presentation
The accompanying consolidated financial statements, prior to the merger, are
presented as a carve-out from the financial statements of Union Oil and reflect
the activity related to its Permian Basin business unit during the periods
presented. The functions listed below were managed centrally and support several
business units. The costs were allocated based on each business unit's share of
total revenues, prior to December 31, 1999, and were considered reasonable by
Union Oil's management. Effective January 1, 2000, Union Oil established
procedures by which to accumulate actual costs associated with Permian Basin
business unit. Subsequent to December 31, 1999, results of operations for Pure
include only actual costs that are attributable to Pure. Support costs
decreased in the first and second quarters of 2000, as compared to past
quarters, as a result of a reduction of support being provided from Union Oil's
Sugar Land, Texas and Lafayette, Louisiana offices due to the then pending
merger of the Permian Basin business unit with Titan.
18
<PAGE>
General and Administrative Costs
General and administrative costs include charges related to activities such
as accounting, legal, human resources, marketing, planning and public relations.
General and administrative costs allocated from Union Oil to the Permian Basin
business unit were $2.0 million and $3.5 million for the three and six months
ended June 30, 1999, respectively. General and administrative costs charged to
the Permian Basin business unit were $600,000 and $1.4 million for the three and
six months ended June 30, 2000, respectively.
Indirect Production Costs
Indirect production costs include charges for procurement and logistics,
reservoir engineering, production engineering, workover, drilling, loss control,
and health, environment and safety. Indirect production costs allocated from
Union Oil to the Permian Basin business unit were $700,000 and $1.5 million for
the three and six months ended June 30, 1999, respectively. Indirect production
costs charged to the Permian Basin business unit were $300,000 and $600,000 for
the three and six months ended June 30, 2000, respectively.
Indirect Exploration Costs
Indirect exploration costs include charges for the chief geologist's
department, the chief geophysicist's department, and the land department.
Exploration costs allocated from Union Oil were $400,000 and $900,000 for the
three and six months ended June 30, 1999, respectively. Indirect exploration
costs charged to the Permian Basin business unit were $100,000 and $200,000 for
the three and six months ended June 30, 2000, respectively.
Operating Data
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Production:
Oil and condensate (MBbls).................................... 1,113 894 2,039 1,825
Natural gas (MMcf)............................................ 8,523 7,536 15,679 14,721
Total (MBOE).................................................. 2,534 2,150 4,652 4,278
Average daily production:
Oil and condensate (Bbls)..................................... 12,231 9,824 11,205 10,082
Natural gas (Mcf)............................................. 93,662 82,810 86,150 81,332
Total (BOE)................................................... 27,841 23,626 25,564 23,638
Average sales price per unit (excluding effects of hedging):
Oil and condensate (per Bbl).................................. $ 27.83 $ 15.86 $ 27.99 $ 13.81
Natural gas (per Mcf)......................................... $ 2.94 $ 1.70 $ 2.64 $ 1.37
Total (per BOE)............................................... $ 22.12 $ 12.54 $ 21.16 $ 10.62
Average sales price per unit (including effects of hedging):
Oil and condensate (per Bbl).................................. $ 27.54 $ 15.86 $ 27.83 $ 13.81
Natural gas (per Mcf)......................................... $ 2.94 $ 1.70 $ 2.64 $ 1.37
Total (per BOE)............................................... $ 21.99 $ 12.54 $ 21.09 $ 10.62
Expenses per BOE:
Production costs, excluding production and other taxes........ $ 4.16 $ 3.40 $ 3.76 $ 3.46
Production and other taxes.................................... $ 2.03 $ 0.95 $ 1.76 $ 0.92
General and administrative.................................... $ 0.90 $ 0.94 $ 0.67 $ 0.83
Depletion, depreciation and amortization...................... $ 3.73 $ 3.84 $ 3.73 $ 3.94
</TABLE>
19
<PAGE>
Results of Operations
Pure completed the Titan merger in May 2000. The results of operations and
cash flows for Pure include the Titan results of operations and cash flows for
the month of June 2000.
Three Months Ended June 30, 2000 as compared to Three Months Ended June 30,
1999
Pure's revenues from the sale of oil and natural gas were $30.6 million and
$25.1 million for the three months ended June 30, 2000 and $14.2 million and
$12.8 million for the three months ended June 30, 1999, respectively. Compared
with 1999, Pure's average oil sales prices increased by $12.07 per Bbl, or 76%,
while average gas sales prices increased by $1.24 per Mcf, or 73%. The increase
in production of 384,000 BOE in 2000 is primarily the result of the Titan
merger, offset by normal production declines. The Titan properties contributed
approximately 486,000 BOE of production in 2000.
Pure's oil and gas production expenses excluding production and other taxes
were $10.6 million ($4.16 per BOE) and $7.3 million ($3.40 per BOE) for the
three months ended June 30, 2000 and 1999, respectively. Production expenses
increased $3.3 million which is primarily the result of (a) production costs
from the Titan properties in June 2000, (b) an increase of $1.2 million in
special well repair expenditures between periods, (c) costs related to the
assimilation of the Titan properties without the effects of any economies of
scale, and (d) decrease of $400,000 between periods in Union Oil's indirect
costs. As of the date of the Titan merger, Pure will no longer incur Union
Oil's indirect costs. As a result of the merger and new management of all of
Pure properties, there have been certain fundamental changes in how the assets
are managed. Certain costs that a major oil company, such as Union Oil, treated
as production expenses may be more readily seen as general and administrative
expenses by an independent oil company, such as Pure. Accordingly, certain
costs will be reflected in general and administrative expenses.
Production and other taxes were $5.1 million ($2.03 per BOE) and $2.0
million ($.95 per BOE) for the three months ended June 30, 2000 and 1999,
respectively. The increase in production and other taxes is primarily
attributable to increase in oil and gas revenues associated with increased
commodity prices and the revenues from the assets in the Titan merger.
General and administrative expenses were $2.3 million ($.90 per BOE) and
$2.0 million ($.94 per BOE) for the three months ended June 30, 2000 and 1999,
respectively. General and administrative expenses increased as a result of (a)
the Titan merger, (b) subsequent to merger, the classification of certain costs
as general and administrative versus production expense as noted above, and (c)
offset by a $1.4 million decrease in Union Oil's indirect costs between periods.
As of the date of the Titan merger, Pure will no longer incur Union Oil's
indirect costs.
Depletion, depreciation, and amortization expense (DD&A) was $9.5 million
($3.73 per BOE) and $8.3 million ($3.84 per BOE) for the three months ended June
30, 2000 and 1999, respectively. DD&A increased in absolute amounts due
primarily to the inclusion of the Titan properties for the month of June 2000.
Pure's exploration and abandonment expense was $1.3 million and $892,000
for the three months ended June 30, 2000 and 1999, respectively. Increase in
exploration expenses is primarily related to (a) increase in geological and
geophysical staff and related costs as a result of the Titan merger and (b)
offset by a $300,000 decrease in Union Oil's indirect costs between periods.
In 2000, Pure has interest expense due to assuming the debt of Titan in the
merger.
Other expense primarily relates to transitional type costs associated with
the merger, the Union Oil contribution of properties into Pure and certain
transaction costs of Union Oil directly related to the merger.
Income tax expense was $9.2 million and $2.2 million for the three months
ended June 30, 2000 and 1999, respectively. Income tax expense increased due to
increased earnings between periods.
20
<PAGE>
Six Months Ended June 30, 2000 as compared to Six Months Ended June 30, 1999
Pure's revenues from the sale of oil and natural gas were $56.7 million and
$41.4 million for the six months ended June 30, 2000 and $25.2 million and $20.2
million for the six months ended June 30, 1999, respectively. Compared with
1999, Pure's average oil sales prices increased by $14.23 per Bbl, or 103%,
while average gas sales prices increased by $1.27 per Mcf, or 93%. The increase
in production of 375,000 BOE in 2000 is primarily the result of the Titan
merger, offset by normal production declines. The Titan properties contributed
approximately 486,000 BOE of production in 2000.
Pure's oil and gas production expenses excluding production and other taxes
were $17.5 million ($3.76 per BOE) and $14.8 million ($3.46 per BOE) for the six
months ended June 30, 2000 and 1999, respectively. Production expenses
increased $2.7 million which is the result of (a) production costs from the
Titan properties in June 2000, (b) an increase of $1.9 million in special well
repair expenditures between periods, (c) costs related to the assimilation of
the Titan properties without the effects of any economies of scale, and (d)
decrease of $900,000 between periods in Union Oil's indirect costs. As of the
date of the Titan merger, Pure will no longer incur Union Oil's indirect costs.
As a result of the merger and new management of all of Pure properties, there
have been certain fundamental changes in how the assets are managed. Certain
costs that a major oil company, such as Union Oil, treated as production
expenses may be more readily seen as general and administrative expenses by an
independent oil company, such as Pure. Accordingly, certain costs will be
reflected in general and administrative expenses.
Production and other taxes were $8.2 million ($1.76 per BOE) and $3.9
million ($.92 per BOE) for the six months ended June 30, 2000 and 1999,
respectively. The increase in production and other taxes is primarily
attributable to increase in oil and gas revenues associated with increased
commodity prices and the revenues from the assets in the Titan merger.
General and administrative expenses were $3.1 million ($.67 per BOE) and
$3.6 million ($.83 per BOE) for the six months ended June 30, 2000 and 1999,
respectively. General and administrative expenses have decreased as a result of
(a) a $2.1 million decrease in Union Oil's indirect costs between periods, (b)
offset by the Titan merger increasing costs, and (c) subsequent to merger, the
classification of certain costs as general and administrative versus production
expense as noted above. As of the date of the Titan merger, Pure will no longer
incur Union Oil's indirect costs.
Depletion, depreciation, and amortization expense (DD&A) was $17.4 million
($3.73 per BOE) and $16.8 million ($3.94 per BOE) for the six months ended June
30, 2000 and 1999, respectively. DD&A increased in absolute amounts due
primarily to the inclusion of the Titan properties for the month of June 2000.
Pure's exploration and abandonment expense was $3.1 million and $2.4
million for the six months ended June 30, 2000 and 1999, respectively. Increase
in exploration expenses is primarily related to (a) increase in geological and
geophysical staff and related costs as a result of the Titan merger and (b)
offset by a $700,000 decrease in Union Oil's indirect costs between periods.
In 2000, Pure has interest expense due to assuming the debt of Titan in the
merger.
Other expense primarily relates to transitional type costs associated with
the merger, the Union Oil contribution of properties into Pure and certain costs
of Union Oil directly related to the merger.
Income tax expense was $16.5 million and $1.4 million for the six months
ended June 30, 2000 and 1999, respectively. Income tax expense increased due to
increased earnings between periods.
21
<PAGE>
Liquidity and Capital Resources
Pure's primary source of capital after the merger will be its cash flow from
operations. Its other source of capital, if needed, will be Titan's existing
credit facilities after the merger. Pure is in the process of obtaining a new
credit facility to replace the Titan credit facility. Although no specific
terms are known, Pure will seek to obtain a $400 to $500 million credit
facility.
Pure's primary source of capital resources prior to the merger was its cash
flow from operations. Pure's other source of capital resources prior to the
merger, if needed, was infusion of funds from Union Oil. All financing
activities for Pure prior to the closing of the merger were performed at the
corporate level for Union Oil and its business units, and Union Oil has
historically provided cash management services through a centralized treasury
system. Pure has historically maintained no cash balances and no interest has
been charged or received on the cash balances transferred or received from Union
Oil. Pure's net cash settlements with Union Oil were included in the owner's
net investment on the balance sheets and were shown as settlements with owner in
the financing activities on the consolidated statements of cash flows. The net
settlements with Union Oil were $15.8 million and $15.2 million for the six
months ended June 30, 2000 and 1999, respectively. Subsequent to the merger,
Union Oil has not provided any additional cash management services to Pure.
Net Cash Provided by Operating Activities
Cash flow from operating activities for Pure was $19.2 million and $46.7
million for the three and six months ended June 30, 2000 compared to $13.3
million and $20.2 million for the three and six months ended June 30, 1999. The
increase in net cash provided by operating activities was primarily due to
increased commodity prices.
Capital Expenditures
Capital expenditures were $13.3 million and $36.0 million for the three and
six months ended June 30, 2000 as compared to $3.9 million and $5.2 million for
the three and six months ended June 30, 1999, respectively. Capital
expenditures increased significantly in the second quarter of 2000 due mainly to
an increase in developmental expenditures. The increased expenditures included
the purchase of additional interests in the San Juan Basin, North Riley,
Reinecke, and Gomez fields for $5.5 million, $3.5 million, $2.3 million and $1.0
million, respectively. Development drilling was significantly reduced in the
first and second quarters of 1999 primarily due to decreased commodity prices.
Pure and Titan each estimated $50 million of capital expenditures for 2000
for a combined total of approximately $100 million. The primary sources of
funding will be Pure's cash flow from operations and funding from credit
facilities.
Costs Incurred
Pure requires capital primarily for the acquisition, exploration and
development of oil and gas properties as well as for general working capital
needs. The following table sets forth costs incurred by Pure in its
acquisition, exploration and development activities.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- -------------------------
2000 1999 2000 1999
----------- ------------ ------------ ------------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Property acquisition:
Proved (a) $ 231,756 $ 39 $ 244,393 $ 39
Unproved (a) 13,297 3 12,684 80
Exploration 3,435 723 4,536 2,117
Development 7,992 3,798 19,421 4,942
----------- ------------ ------------ ------------
Total costs incurred $ 256,480 $ 4,563 $ 281,034 $ 7,178
=========== ============ ============ ============
</TABLE>
-----------------
(a) Includes $229.0 million and $12.8 million of proved and unproved
properties, respectively, related to the Titan merger.
22
<PAGE>
Capital Resources
Pure's primary capital resources are net cash provided by operating
activities and the availability under the Credit Agreement, of which
approximately $79 million was available at June 30, 2000.
Credit Agreement
As a result of the merger, Pure assumed an amended and restated credit
agreement (the "Credit Agreement") with Chase Bank of Texas, N.A. (the "Bank"),
which established a revolving credit facility of $250 million subject to a
borrowing base. The borrowing base, which is $175 million at June 30, 2000, is
subject to redetermination annually each April, by the lenders based on certain
proved oil and gas reserves and other assets of Pure. To the extent the
borrowing base is less than the aggregate principal amount of all outstanding
loans and letters of credit under the Credit Agreement, such deficiency must be
cured by Pure ratably within 180 days, by either prepaying a portion of the
outstanding amounts under the Credit Agreement or pledging additional collateral
to the lenders. A portion of the Credit Agreement is available for the issuance
of up to $15.0 million of letters of credit, of which $144,000 was outstanding
at June 30, 2000. All amounts outstanding are due and payable in full on July
1, 2001. At June 30, 2000, the outstanding principal was $96 million and the
available capacity was approximately $79 million.
At Pure's option, borrowings under the Credit Agreement bear interest at
either the "Base Rate" (i.e. the higher of the applicable prime, commercial
lending rate, or the federal funds rate plus .5% per annum) or the Eurodollar
rate, plus 1% to 1.50% per annum, depending on the level of Pure's aggregate
outstanding borrowings. In addition, the Company is committed to pay quarterly
in arrears a fee of .300% to.375% of the unused borrowing base.
The Credit Agreement contains certain covenants and restrictions that are
customary in the oil and gas industry. In addition, the line of credit is
secured by substantially all of the oil and gas properties Pure acquired from
Titan.
Liquidity and Working Capital
At June 30, 2000 the Company had $2.3 million of cash and cash equivalents.
The Company's ratio of current assets to current liabilities was .77 at June 30,
2000. The working capital deficits are due partially to Pure maintaining low
cash levels for cash management purposes. Pure, at June 30, 2000, has
availability under its Credit Agreement to fund any working capital deficit. As
discussed in Note 1 of Notes to Consolidated Financial Statements, Pure had no
working capital at December 31, 1999.
Unsecured Credit Agreement
As a result of the merger, Pure assumed a credit agreement, as amended (the
"Unsecured Credit Agreement"), with the Bank which establishes a revolving
credit facility, up to the maximum of $5 million. Individual borrowings may be
made for up to a three week period. The Unsecured Credit Agreement has no
maturity date and is cancellable at any time by the Bank. Proceeds of the
Unsecured Credit Agreement are utilized to fund short-term needs (less than
thirty days). The Company had no outstanding principal under the Unsecured
Credit Agreement at June 30, 2000.
The interest rate of amounts outstanding under the Unsecured Credit Agreement
is at a rate determined by agreement between Pure and the Bank. The rate shall
not exceed the maximum interest rate permitted under applicable law. Interest
rates generally are the Bank's cost of funds plus 1% per annum.
Other Matters
Stock Options and Compensation Expense
In connection with the merger, the Contribution and subsequent issuances,
Pure issued options to officers and non-officers to purchase 4,513,560 shares of
Pure common stock. Certain options awarded the officers and non-officers had an
exercise price that was below the Pure stock price on the date of grant.
Accordingly, Pure recorded deferred compensation of $3.0 million related to non-
officer options and will expense the amount over a four-year period. The
options related to officers are subject to the "put" discussed in the following
paragraph. For the three and six months ended June 30, 2000 Pure expensed
approximately $263,000 related to these options.
23
<PAGE>
As discussed in Note 5 of the Notes to Consolidated Financial Statements
officers of Pure may have the right to require Pure to purchase shares owned as
of December 1, 1999 or subsequently obtained by the exercise of any option held
by the officer at a calculated "net asset value" per share (as defined in each
officer's employment/severance agreement). The circumstances under which certain
officers may exercise this right include the termination of the officer's
employment for any reason after three years following the merger, the
termination of the officer without cause, a change in control of either Pure or
Unocal Corporation ("Unocal") and other events specified in the agreements. The
net asset value per share is calculated by reference to each common share's pro
rata amount of the present value of proved reserves discounted at 10%, as
defined, times 110%, less funded debt, as defined. The amount reflected in the
consolidated balance sheet at June 30, 2000, as common stock subject to
repurchase is the estimated net asset value, as defined, for each applicable
officer's shares, owned prior to December 1, 1999, and unexercised option shares
less the amount of proceeds that would be received upon exercise of the related
options. Deferred compensation related to such shares and options is calculated
as the difference between the estimated net asset value of the relevant number
of Pure shares and the market value of Pure shares held by each covered officer
in the case of shares held or the exercise price of shares subject to option.
This arrangement will be treated as a variable plan under Accounting Principles
Board Opinion No. 25 "Accounting for Stock Based Compensation." Consequently,
the total compensation for both shares held and shares subject to option will be
measured at the end of each quarter as the calculated amount of net asset value
and the market price of Pure shares change. The total amount determined will be
amortized as compensation expense over a three-year period with any changes
after three years being expensed in the period of determination. At June 30,
2000, Pure would incur a non-cash expense of approximately $9.2 million per year
to amortize the deferred compensation recorded as a result of these
arrangements.
Disclosure about Market Risk
Pure historically has held no derivative instruments related to interest rate
exposure risks as Union Oil has historically retained all the debt and related
interest charges. Union Oil (not Pure) had mitigated its exposure to
fluctuations in crude oil and natural gas prices for the Permian Basin business
unit.
Hedging Activities
Pure may use swap agreements and other financial instruments in an attempt
to reduce the risk of fluctuating oil and gas prices and interest rates.
Settlement of gains or losses on the hedging transactions are generally based on
the difference between the contract price and a formula using NYMEX or other
major indices related prices and is reported as a component of oil and gas
revenues as the associated production occurs. At June 30, 2000 Pure had, as a
result of the Titan merger, hedging transactions with respect to approximately
5,520,000 and 4,065,000 MMBtu of its future 2000 and 2001, respectively,
estimated natural gas production and 644,000 and 452,500 barrels of its future
2000 and 2001, respectively, estimated crude oil production For additional
information, see Note 10 of Notes to Consolidated Financial Statements. Pure has
no interest rate financial derivatives at June 30, 2000.
Environmental and Other Laws and Regulations
Pure's business is subject to certain federal, state and local laws and
regulations relating to the exploration for the development, production and
transportation of oil and gas, as well as environmental and safety matters.
Many of these laws and regulations have become more stringent in recent years,
often imposing greater liability on a larger number of potentially responsible
parties. Although Pure believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and Pure is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations. Pure has no material commitments for capital
expenditures to comply with existing environmental requirements.
Nevertheless, changes in existing environmental laws or in interpretations
thereof could have a significant adverse impact on the operating costs of Pure,
as well as the oil and gas industry in general.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes conditions
under which a derivative may be designated as a hedge, and establishes standards
for reporting changes in the fair value of a derivative. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2001.
Early adoption is permitted. Pure has not evaluated the effects of implementing
SFAS No. 133.
24
<PAGE>
Pure Unaudited Pro Forma Data
The following reflects unaudited pro forma data related to the Contribution
and merger discussed in Notes 1 and 2 of the Notes to Consolidated Financial
Statements and the sale of certain operating assets by Titan. The unaudited pro
forma combined data assumes the Contribution, the merger and the sale of certain
operating assets by Titan in 1999 had taken place as of January 1, 1999 with
respect to the unaudited pro forma combined statements of operations and related
operational data. The pro forma amounts are not necessarily indicative of the
results that may be reported in the future (dollars in thousands, except per
unit amounts):
Statement of Operations Data
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Total revenues $ 136,481 $ 75,037
Oil and gas production costs (25,631) (23,049)
Production and other taxes (11,118) (6,443)
General and administrative expenses (7,792) (6,867)
Amortization of deferred compensation (5,144) (5,142)
Exploration and abandonment costs (6,435) (7,706)
Depreciation, depletion and amortization (24,942) (25,034)
Other expenses, net (3,148) (3,078)
Income tax (expense) benefit (18,296) 798
--------- ---------
Net income (loss) $ 33,975 $ (1,484)
========= =========
EBITDAX (a) $ 91,569 $ 38,485
========= =========
</TABLE>
These pro forma amounts differ from those disclosed in Note 2 of the Notes to
the Consolidated Financial Statements, primarily due to the following additional
pro forma adjustments (a) sale by Titan of certain operating assets in 1999, (b)
elimination of merger costs incurred by Pure in 2000 and (c) recording effects
of amortizing deferred compensation for the periods presented.
____________
(a) EBITDAX as used herein is calculated by adding interest expense, income
taxes, depletion, depreciation and amortization, impairment of long-lived
assets, restructuring costs, amortization of deferred compensation,
exploration and abandonment costs, and other noncash charges to net income
(loss). EBITDAX is included herein because management believes that some
investors find it to be a useful analytical tool. Other companies may
calculate EBITDAX differently, and we cannot assure you that such figures
are comparable with similarly-titled figures for such other companies.
25
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Production:
Oil and condensate (MBbls)................................. 2,970 2,908
Natural gas (MMcf)......................................... 24,337 22,453
Total (MBOE)............................................... 7,026 6,650
Average sales price per unit (including effects of hedging):
Oil and condensate (per Bbl)............................... $ 25.45 $ 13.55
Natural gas (per Mcf)...................................... $ 2.49 $ 1.57
Total (per BOE)............................................ $ 19.40 $ 11.21
</TABLE>
26
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures
The following quantitative and qualitative information is provided about
financial instruments to which Pure is a party as of June 30, 2000, and from
which Pure may incur future earnings gains or losses from changes in market
interest rates and commodity prices. Pure does not enter into derivative or
other financial instruments for trading purposes.
Commodity Price Sensitivity:
The following table provides information about Pure's derivative financial
instruments that are sensitive to changes in natural gas and crude oil commodity
prices. See Note 10 of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" for specific information regarding the terms of
Pure's commodity derivative financial instruments that are sensitive to natural
gas and crude oil commodity prices.
<TABLE>
2000 2001 Total Fair Value
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Natural Gas Hedge Derivatives (a):
Collar option contracts (b)
Notional volumes (MMBtu) 5,520,000 4,065,000 9,585,000 ($11,206,595)
Weighted average short call
strike price per MMBtu (c) $ 2.650 $ 2.633 $ 2.643
Weighted average long put strike
price per MMBtu (c) $ 3.200 $ 3.160 $ 3.183
Basis differential contracts (d):
Notional Volumes (MMBtu) 5,060,000 4,065,000 9,125,000 $ 2,654
Weighted average MMBtu strike price $ 0.111 $ 0.112 $ 0.111
Crude Oil Hedge Derivatives (a):
Collar option contracts:
Notional Volume (Bbls) 644,000 452,500 1,096,500 $ (8,506,138)
Weighted average short call
strike price per Bbl (c) $ 16.930 $ 16.500 $ 16.750
Weighted average long put strike
price per Bbl (c) $ 21.240 $ 20.480 $ 20.930
</TABLE>
----------------
(a) See Note 10 of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information related to hedging
activities.
(b) A counterparty has the option to extend a collar option from October 1, 2000
to June 30, 2001 on volumes of 15,000 MMBtu per day at a floor and ceiling
price of $2.60 and $3.08 per MMBtu, respectively. The fair value assumes
the extension is exercised by the counterparty.
(c) The strike prices are based on the prices traded on the NYMEX.
(d) The basis differential relates to the spread between the NYMEX price and an
El Paso/Permian price or Waha West Texas price.
27
<PAGE>
Interest Rate Sensitivity:
The following table provides information about Pure's financial instruments
that are sensitive to interest rates. The debt obligations are presented in the
table at their contractual maturity dates together with the weighted average
interest rates expected to be paid on the debt. The weighted average interest
rates for the variable debt represents the weighted average interest paid and/or
accrued in June 2000. See Note 3 of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for specific information regarding
the terms of Pure's debt obligations that are sensitive to interest rates.
<TABLE>
2000 2001 Total Fair Value
--------------- --------------- ---------------- -----------------
(in thousands, except interest rates)
<S> <C> <C> <C> <C>
Debt (a):
Variable rate debt:
Chase Bank of Texas, N.A. (Secured) $ - $96,000 $96,000 $96,000
Average interest rate - % 7.63%
Chase Bank of Texas, N.A. (Unsecured) $ - $ - $ - $ -
Average interest rate - % -%
</TABLE>
------------------
(a) See Note 3 of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for additional information related to debt.
Qualitative Disclosures
Pure, from time to time, may enter into interest rate and commodity price
derivative contracts as hedges against interest rate and commodity price risk.
See Note 10 of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for discussions relative to Pure's objectives and general
strategies associated with its hedging instruments. Pure is a borrower under
variable rate debt instruments that give rise to interest rate risk. See Note 3
of Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for specific information regarding the terms of Pure's debt
obligations. Pure's policy and strategy, as of June 30, 2000 is to only enter
into interest rate and commodity price derivative instruments that qualify as
hedges of its existing interest rate or commodity price risks.
Pure historically has held no derivative instruments related to interest rate
exposure risks as Union Oil has historically retained all the debt and related
interest charges.
Pure is a producer of various hydrocarbon commodities such as crude oil and
condensate, natural gas and associated petroleum-based products and is subject
to the associated price risks. Unocal Energy Trading, another business unit of
Union Oil, has historically bought a majority of Pure's sales of crude oil and
natural gas at spot prices.
Union Oil (not Pure) has historically mitigated its exposure to fluctuations
in crude oil and natural gas prices through Unocal Energy Trading. Unocal
Energy Trading uses hydrocarbon derivative financial instruments, such as
futures contracts, swaps, and options with maturities of 24 months or less to
mitigate overall exposure to price changes. Historically, hedging and trading
gains and losses incurred by Union Oil were not allocated to Pure and were not
reflected in the Permian Basin business unit's presented results. Therefore,
historically, Pure's associated price risks were not mitigated.
As of June 30, 2000, Pure's primary risk exposures associated with financial
instruments to which it is a party include crude oil and natural gas price
volatility and interest rate volatility. Pure's primary risk exposures
associated with financial instruments have not changed significantly since
December 31, 1999.
28
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2 Changes in Securities and Use of Proceeds
Pursuant to the Agreement and Plan of Merger (the "Merger Agreement") dated
December 13, 1999, as amended, among Pure Resources, Inc., Union Oil Company of
California, TRH, Inc., and Titan Exploration, Inc., Union Oil Company of
California, Union Oil Company of California contributed its Permian Basin
business unit to a subsidiary of Pure Resources in exchange for 32,708,067
shares (the "Shares") of Pure Resources' common stock and the assumption by the
Pure Resources subsidiary of the associated liabilities simultaneously with the
merger contemplated by the Merger Agreement, which was consummated on May 25,
2000. The shares were issued pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended. An appropriate legend was affixed to
the certificate issued in such transaction, and Union Oil Company of California
was given access to information about Pure Resources, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
Prior to the consummation on May 25, 2000 of the merger contemplated by the
Merger Agreement, Union Oil Company of California owned all 1,000 outstanding
shares of common stock of Pure Resources, Inc. Pursuant to a Consent of Sole
Stockholder dated as of April 18, 2000, the sole stockholder of Pure Resources,
Inc. approved and adopted the Equity Plan for Outside Directors of Pure
Resources, Inc.
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Amended and Restated Stockholders Voting Agreement dated April 10, 2000 by
and among Pure Resources, Inc. (formerly named Titan Resources Holdings,
Inc.), Union Oil Company of California and Jack D. Hightower (filed as
Exhibit 10.20 to Titan Exploration, Inc.'s Annual Report on Form 10-K, as
amended, as filed on April 12, 2000, and incorporated herein by
reference).
10.2 Pure Resources, Inc. Equity Plan for Outside Directors (filed as Exhibit
10.9 to the Registrant's Form S-4 (No. 333-34970) and incorporated herein
by reference).
10.3 Amendment to Titan 401(k) Plan, renaming it the Pure Resources 401(k) Plan
and otherwise amending the plan (filed as Exhibit 4.1.1 to the
Registrant's Form S-8 (No. 333-37868) and incorporated herein by
reference).
10.4 Registration Rights Agreement by and between Jack D. Hightower and Pure
Resources, Inc. dated as of May 25, 2000 (filed as Exhibit 4.1 to Jack D.
Hightower's Schedule 13D filed June 5, 2000 and relating to securities of
Pure Resources, Inc.).
10.5 Form of executive officer letter agreement dated May 25, 2000 between Pure
Resources I, Inc. (formerly named Titan Resources I, Inc.) and each of
certain officers.
10.6 Form of Confidentiality and Non-Compete Agreement dated May 25, 2000
between Pure Resources, Inc., Titan Exploration, Inc. and Pure Resources
I, Inc. (formerly named Titan Resources I, Inc.), and each of certain
officers.
10.7 Not used.
10.8 Not used.
10.9 Office Lease Agreement, dated July 5, 2000, between Midland Prop., LTD and
Pure Resources I, Inc.
10.10 Letter Agreement, dated June 22, 2000, among Titan Exploration, Inc.,
Chase Bank of Texas, N.A., and Financial Institutions now and thereafter
parties thereto.
27 Financial Data Schedule.
(b) Reports Submitted on Form 8-K:
1. Form 8-K filed on June 9, 2000 (date of event May 25, 2000) reporting
the consummation of the merger contemplated by the Agreement and Plan
of Merger dated December 13, 1999, as amended, among Pure Resources,
Inc., Union Oil Company of California, TRH, Inc., and Titan
Exploration, Inc. The report included unaudited pro forma financial
statements giving effect to the merger, and the report incorporated by
reference certain financial statements of Titan Exploration, Inc.
2. Form 8-K filed on July 5, 2000 (date of event June 27, 2000) reporting
the engagement of KPMG LLP as Pure Resources, Inc.'s independent
auditors for the fiscal year ending December 31, 2000, as amended by
Amendment No. 1 to Form 8-K filed July 17, 2000.
30
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PURE RESOURCES, INC.
By: /s /Jack Hightower
--------------------------------------
Jack Hightower
President and Chief Executive Officer
By: /s/ William K. White
--------------------------------------
William K. White
Vice President and Chief Financial Officer
Date: August 14, 2000
31
