<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K
-------------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 25, 2000
PURE RESOURCES, INC.
--------------------
(Exact name of Registrant as specified in its charter)
Delaware 001-15899 74-2952918
-------- --------- ----------
(State or other jurisdiction of Commission (I.R.S. Employer
incorporation or organization) File Number Identification No.)
500 West Texas, Suite 200 79701
--------
Midland, Texas (Zip Code)
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (915) 498-8600
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On December 13, 1999, Pure Resources, Inc., a Delaware corporation
("Pure Resources"), Union Oil Company of California, a California corporation
("Union Oil"), TRH, Inc., a Delaware corporation and wholly-owned subsidiary of
Pure Resources ("Merger Sub"), and Titan Exploration, Inc., a Delaware
corporation ("Titan") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), as amended.
The closing of the transactions contemplated by the Merger Agreement
occurred on May 25, 2000, at which time, in accordance with the Merger
Agreement, (i) Pure Resources acquired substantially all of Union Oil's oil and
gas exploration and production assets in the Permian Basin and San Juan Basin
areas of Texas, New Mexico and Colorado in exchange for 32,708,067 shares of
Pure Resources, Inc. common stock, par value $.01 per share (the "Pure Common
Stock"), and (ii) Titan merged with and into Merger Sub and became a wholly-
owned subsidiary of Pure Resources (the "Merger"). In the Merger, each
outstanding share of common stock of Titan, other than shares owned by Titan or
any wholly owned subsidiary of Titan, were converted into the right to receive
.4302314 of a share of Pure Common Stock. As a result, the former stockholders
of Titan became entitled to receive upon conversion of their shares a total of
17,290,933 shares of Pure Common Stock. The consideration for the Merger was
determined in arm's-length negotiations between Pure Resources and Union Oil.
Pure Resources intends to operate and use the oil and gas exploration
and production assets contributed to Pure Resources by Union Oil in
substantially the same manner as they were used by Union Oil prior to the
Merger.
In connection with the Merger Agreement, Pure Resources, Union Oil and
Jack D. Hightower ("Mr. Hightower") entered into an Amended and Restated
Stockholders Voting Agreement dated April 10, 2000 (the "Voting Agreement").
Pursuant to the Voting Agreement Union Oil and Mr. Hightower agreed to vote
their shares of Pure Common 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 Resources' board of
directors. Under the Voting Agreement, Mr. Hightower will vote to elect to Pure
Resources' board (a) five designees of Union Oil, if Union Oil owns greater than
50% of Pure Common Stock; (b) four designees of Union Oil, if Union Oil owns
greater than 35% but not more than 50% of Pure Common Stock; or (c) two
designees of Union Oil, if Union Oil owns greater than 10% but not more than 35%
of Pure Common Stock. The Voting Agreement will terminate if Union Oil and its
affiliates beneficially own less than 10% of Pure Common Stock or if Mr.
Hightower ceases to be the Chief Executive Officer of Pure Resources. Of the
eight members of the Board of Directors of Pure Resources, Timothy H. Ling and
Darrell Chessum are executive officers of Union Oil and Unocal Corporation, a
Delaware corporation and the sole stockholder of Union Oil ("Unocal"), and
Graydon Laughbaum and H D Maxwell are former employees of Unocal or its
affiliates.
Simultaneously with the execution of the Merger Agreement, Union Oil,
Pure Resources and Titan entered into a Business Opportunities Agreement (the
"Business Opportunities Agreement") pursuant to which Pure Resources has agreed,
except with the consent of Union Oil, which it may withhold in its sole
discretion, that Pure Resources and its subsidiaries will not engage in any
business other than the E&P Business (described below) and will not pursue any
business opportunity that involves any direct or indirect ownership interest in
any properties located outside of a designated area that includes all of Kansas,
New Mexico and Oklahoma, portions of southern and southeastern Colorado and
western Arkansas and onshore Texas, except for areas of East Texas. For
purposes of the agreement, "E&P Business" means generally the oil and gas
exploration, exploitation, development and production business, and it does not
include the oilfield service business. In the Business Opportunities Agreement,
Pure Resources agreed that it will have no interest or expectancy in any
business opportunity that does not consist exclusively of the E&P Business
within the designated areas. The provisions described in this paragraph will
terminate when Union Oil no longer owns at least 35% of the ordinary voting
power for the election of Pure Resources directors.
Pure Resources also agreed in the Business Opportunities Agreement
that Union Oil, its affiliates, its board designees under the Voting Agreement,
and companies in which Union Oil has an interest, which participate with Union
Oil or of which a board designee is a director, officer or employee shall not be
restricted by the relationship between Union Oil and Pure Resources or otherwise
from engaging in any business even though it is in competition with the business
or activities of Pure Resources or its subsidiaries, so long as their actions do
not conflict with specified standards of conduct, which are summarized below.
The Business Opportunities Agreement does not affirmatively restrict Union Oil's
business activities, including within the designated areas.
1
<PAGE>
The parties also have agreed in the Business Opportunities Agreement that,
as long as the activities of Union Oil, its affiliates or board designees or
other related companies are conducted in accordance with the specified
standards, which are summarized in the next paragraph:
. Union Oil, its affiliates or board designees or other related
companies will not have to offer Pure Resources or any of its
subsidiaries any business opportunity;
. Pure Resources will have no interest or expectancy in any business
opportunity pursued by Union Oil, its affiliates and board designees
and related companies; and
. Pure Resources has waived any claim that any business opportunity
pursued by Union Oil, its affiliates or board designees or any related
company constitutes a corporate opportunity of Pure Resources or any
of its subsidiaries that should have been presented to Pure Resources.
The standards specified in the Business Opportunities Agreement generally
provide that Union Oil, its affiliates and board designees and related companies
must conduct their businesses through the use of their own personnel and assets
and not with the use of any personnel or assets of Pure Resources. The Business
Opportunities Agreement will not allow a board designee of Union Oil to usurp a
corporate opportunity solely for his or her personal benefit, as opposed to
pursuing, for the benefit of Union Oil, an affiliate or Union Oil or any related
company, an opportunity in accordance with the specified standards.
Additionally, Pure Resources and Union Oil entered into a Non-Dilution
Agreement dated December 13, 1999 (the "Nondilution Agreement"), under which
Union Oil has certain rights to maintain its percentage ownership of Pure
Resources in the event of future issuances of equity by Pure Resources. If Pure
Resources 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 Resources, up to 65.4%, at the same price at
which the capital stock is being issued. Pure Resources 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 the issuance. The
preemptive right given by Pure Resources with respect to any issuance will
terminate if unexercised within 10 days after receipt of the notice of the
issuance of the capital stock.
If Pure Resources issues any capital stock in exchange for property other
than cash or credit, Union Oil will have the right to purchase from Pure
Resources the additional number of shares of capital stock necessary to enable
Union Oil to maintain its ownership percentage in Pure Resources, up to 65.4%.
Pure Resources 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
Resources. 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
Common Stock at the time of the issuance or in the case of other capital stock,
as determined in good faith by the Pure Resources board of directors.
Shares of Pure Common Stock issued to Union Oil under the Non-Dilution
Agreement will be entitled to the benefits of the Registration Rights Agreement
described below. Pure Resources also has agreed that if shares are issued
because of the Non-Dilution Agreement, Pure Resources will cause those shares to
be listed for trading or quotation on any securities exchanges or quotation
systems on which the securities of that class are then listed for trading or
quotation.
Pure Resources entered into a Registration Rights Agreement with Union Oil
on December 13, 1999 (the "Registration Rights Agreement"). The Registration
Rights Agreement provides that at any time and from time to time after 120 days
following the closing date of the Merger, but no more than one time in a twelve
month period, Union Oil will have the right to require Pure Resources to effect
a registration of all or a portion of the Pure Common Stock under the Securities
Act of 1933, as amended, owned by Union Oil. If Union Oil demands registration
of less than all of the Pure Resources shares it owns, the portion must be at
least (a) 4,300,000 shares, as adjusted for any stock dividends, splits or
otherwise, or (b) shares having an estimated aggregate offering price to the
public of at least $50 million, whichever is lower. The Registration Rights
Agreement also provides Union Oil with piggyback registration rights,
2
<PAGE>
which give Union Oil the right to include shares of Pure Common Stock held by it
in registrations initiated by Pure Resources or by any other holder of Pure
Common Stock.
Item 5. Other Events.
Pure Resources Unaudited Pro Forma Data
The following reflects unaudited pro forma data related to the Merger
discussed in Item 2. The unaudited pro forma combined data assumes the Merger
had taken place on March 31, 2000 with respect to the unaudited pro forma
combined balance sheet and as of January 1, 1999 with respect to the unaudited
pro forma combined statement of operations and related operational data. The
unaudited pro forma combined statement of operations for the year ended December
31, 1999 also reflects the sale of selected operating assets of Titan as if they
were sold on January 1, 1999. For complete unaudited pro forma combined
financial statements, see Item 7(b). This unaudited pro forma financial data
should be read in conjunction with the 1999 audited financial statements and
related notes of Pure Resources (formerly "Union Oil Company of California's
Permian Basin business unit") included in Pure Resources' Registration Statement
on Form S-4, filed April 18, 2000 and the unaudited financial statements and
related notes, as of March 31, 2000 included in Pure Resources' Quarterly Report
filed on Form 10-Q for the quarter ended March 31, 2000. Also, the historical
financial data of Titan should be read in conjunction with the data below, see
Item 7(a).
Balance Sheet Data (March 31, 2000):
<TABLE>
<S> <C>
Total assets..................................................................................... $589,890
Long-term debt................................................................................... $103,648
Equity........................................................................................... $324,972
</TABLE>
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Total revenues................................................... $186,737 $64,608
Net Income....................................................... $ 15,602 $15,365
</TABLE>
Operational Data:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Production:
Oil (MBbls)..................................................... 5,855 1,473
Natural gas (MMcf).............................................. 50,856 12,331
Total (MBOE).................................................... 14,331 3,528
Average sales price per unit (excluding effects of hedging):
Oil (per Bbl)................................................... $ 17.41 $ 27.64
Natural gas (per Mcf)........................................... $ 1.68 $ 2.16
Total (per BOE)................................................. $ 13.07 $ 19.09
Expenses per BOE:
Production costs, excluding production and other taxes.......... $ 3.44 $ 3.42
Production and other taxes...................................... $ 1.02 $ 1.36
General and administrative...................................... $ 1.04 $ .96
Depreciation, depletion and amortization........................ $ 3.39 $ 3.46
</TABLE>
3
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
-----------------------------------------
(1) The following is hereby incorporated by reference to Titan
Exploration, Inc.'s 1999 Annual Report on Form 10-K, as amended:
<TABLE>
<S> <C>
-- Independent Auditors' Report
-- Consolidated Balance Sheets as of December 31, 1999 and 1998
-- Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997
-- Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997
-- Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
-- Notes to Consolidated Financial Statements
</TABLE>
(2) The following is hereby incorporated by reference to Titan
Exploration, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000:
<TABLE>
<S> <C>
-- Unaudited Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999
-- Unaudited Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999
-- Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999
-- Notes to Consolidated Financial Statements
</TABLE>
(b) Pro Forma Financial Information.
-------------------------------
<TABLE>
<CAPTION>
<S> <C>
-- Introduction to Pro Forma Financial Information
-- Unaudited Pro Forma Combined Balance Sheet at March 31, 2000
-- Unaudited Pro Forma Combined Statement of Operations for Three Months ended March 31, 2000
-- Unaudited Pro Forma Combined Statement of Operations for Year ended December 31, 1999
-- Notes to Pro Forma Unaudited Combined Financial Statements.
</TABLE>
(c) Exhibits
--------
2.1 Agreement and Plan of Merger among Union Oil, Titan, Pure Resources
(formerly named Titan Resources Holdings, Inc.), and Merger Sub
dated December 13, 1999 (incorporated herein by reference to Exhibit
2.3 to the Schedule 13D filed by Unocal and Union Oil with respect
to Titan on December 23, 1999); Amendment No. 1 thereto dated April
14, 2000 (incorporated herein by reference to Exhibit 2.2 to the
Registration Statement on Form S-4 filed by Pure Resources (file No.
333-34970)).
2.2 Business Opportunities Agreement among Union Oil, Titan, Merger Sub
and Pure Resources (formerly named Titan Resources Holdings, Inc.)
dated December 13, 1999 (incorporated herein by reference to Exhibit
2.4 to the Schedule 13D filed by Unocal and Union Oil with respect
to Titan on December 23, 1999).
4.1 Registration Rights Agreement among Union Oil and Pure Resources
(formerly named Titan Resources Holdings, Inc.) dated December 13,
1999 (incorporated herein by reference to Exhibit 10.1 to the
Registration Statement on Form S-4 filed by Pure Resources (file No.
333-34970)).
4
<PAGE>
10.1 Amended and Restated Stockholders Voting Agreement dated April 10,
2000 by and among Pure Resources, Union Oil and Jack D. Hightower
(incorporated by reference to Exhibit 10.20 to Titan Exploration,
Inc.'s Annual Report on Form 10-K, as amended, as filed on April 12,
2000).
10.2 Non-Dilution Agreement dated December 13, 1999 between Pure
Resources (formerly named Titan Resources Holdings, Inc.) and Union
Oil (incorporated herein by reference to Exhibit 10.21 to Titan
Exploration, Inc.'s Annual Report on Form 10-K, as amended, as filed
on April 12, 2000).
23.1* Consent of KPMG LLP, independent auditors.
_____________________
*Filed herewith
5
<PAGE>
INDEX TO PRO FORMA FINANCIAL INFORMATION
----------------------------------------
<TABLE>
<CAPTION>
Pure Resources, Inc.: Page
--------------------- ----
<S> <C>
Introduction to Pro Forma Information.................................................................... F-1
Unaudited Pro Forma Combined Balance Sheet as of March 31, 2000.......................................... F-2
Unaudited Pro Forma Combined Statement of Operations for Three Months ended March 31, 2000............... F-3
Unaudited Pro Forma Combined Statement of Operations for Year ended December 31, 1999.................... F-4
Notes to Unaudited Combined Financial Statements......................................................... F-5
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
PURE RESOURCES, INC.
The unaudited pro forma combined financial statements were prepared to
assist in the analysis of the financial effects of the merger of a wholly-owned
subsidiary of Pure Resources, Inc. ("Pure Resources") with and into Titan
Exploration, Inc. ("Titan") and the related transactions. Pursuant to the terms
of the merger agreement, Union Oil Company of California ("Union Oil")
contributed the assets and liabilities of its Permian Basin business unit, which
was an operating unit of Union Oil, to a newly-formed subsidiary, Pure
Resources, in exchange for common stock of Pure Resources. Pure Resources'
wholly-owned subsidiary, TRH, Inc., merged with and into Titan and the Titan
stockholders received approximately 34.6% of Pure Resources' common stock in
exchange for the outstanding Titan shares. Consequently, Pure Resources will
account for the transaction as a purchase of Titan. The unaudited pro forma
combined financial statements have been prepared as if the merger had taken
place on March 31, 2000, with respect to the unaudited pro forma combined
balance sheet and as of January 1, 1999, with respect to the unaudited pro forma
combined statements of operations. The unaudited pro forma combined statements
of operations also reflect the sales of selected operating assets of Titan as if
they were sold on January 1, 1999.
The unaudited pro forma financial statements and related notes are
presented for illustrative purposes only. If the merger had occurred in the
past, Pure Resources' financial position or operating results might have been
different from those presented in the unaudited pro forma information. The
unaudited pro forma information should not be relied upon as an indication of
the financial position or operating results that Pure Resources would have
achieved if the merger and the asset sales had taken place at the dates
specified. You should also not rely on the unaudited pro forma information as an
indication of the future results that Pure Resources will achieve after the
merger. In addition, future results may vary significantly from the results
reflected in the accompanying unaudited pro forma combined financial statements
because of normal production declines, changes in product prices, future
acquisitions and divestitures and other factors.
The following unaudited pro forma combined financial statements and related
notes should be read in conjunction with (i) the financial statements and
related notes of Pure Resources (formerly "Union Oil's Permian Basin business
unit") included in the Registration Statement filed on Form S-4 filed by Pure
Resources, dated April 18, 2000; (ii) the March 31, 2000 Quarterly Report on
Form 10-Q filed by Pure Resources; and (iii) the consolidated financial
statements of Titan incorporated by reference in this document.
F-1
<PAGE>
Pure Resources, Inc.
Unaudited Pro Forma Combined Balance Sheet
March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Pure
Resources
Pure Pro Forma
Resources Titan Adjustments Combined
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ -- $ 1,535 $ 1,535
Accounts receivable:
Oil and gas.............................. 12,263 12,181 24,444
Other.................................... 2 70 72
Inventories................................... -- 595 595
Prepaid expenses and other current assets..... 118 971 1,089
---------- ---------- -----------
Total current assets.............. 12,383 15,352 27,735
---------- ---------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties........................ 854,791 354,259 (162,106) (b) 1,046,944
Unproved properties...................... 5,197 14,964 10,000 (b) 30,161
Accumulated depletion, depreciation and
amortization.................................. (554,127) (132,973) 132,973 (b) (554,127)
---------- ---------- -----------
305,861 236,250 522,978
---------- ---------- -----------
Other property and equipment, net.................. -- 4,458 (7) (b) 4,451
Deferred income taxes.............................. -- 19,348 9,466 (b) --
(28,814) (c)
Deferred compensation (Note 5)..................... -- -- 29,860 (d) 29,860
Other assets....................................... 3,915 1,138 (187) (b) 4,866
---------- ---------- -----------
$ 322,159 $ 276,546 $ 589,890
========== ========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade.................................... $ 2,940 $ 4,430 $ 7,370
Accrued interest......................... -- 1,096 1,096
Other.................................... 13,103 11,104 24,207
---------- ---------- -----------
Total current liabilities......... 16,043 16,630 32,673
---------- ---------- -----------
Long-term debt..................................... -- 96,000 10,610 (b) 103,648
(2,962) (f)
Other liabilities.................................. 19,618 852 20,470
Deferred income taxes.............................. 75,076 -- (28,814) (c) 46,262
Common Stock subject to repurchase (Note 5)........ -- -- 61,865 (d) 61,865
Equity:
Preferred Stock............................... -- -- --
Common Stock.................................. -- 440 327 (a) 500
(267) (b)
Additional paid-in capital.................... -- 285,265 211,095 (a) 330,649
(133,981) (b)
(32,005) (d)
275 (e)
Treasury stock, at cost....................... -- (25,764) 25,764 (b) --
Deferred compensation......................... -- -- (275) (e) (275)
Notes receivable -- officers and employees.... -- (8,864) 2,962 (f) (5,902)
Accumulated deficit........................... -- (88,013) 88,013 (b) --
Owner's net investment........................ 211,422 -- (211,422) (a) --
---------- ---------- -----------
Total equity...................... 211,422 163,064 324,972
---------- ---------- -----------
$ 322,159 $ 276,546 $ 589,890
========== ========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-2
<PAGE>
Pure Resources, Inc.
Unaudited Pro Forma Combined Statement of Operations
Three months ended March 31, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pure
Resources
Pure Pro Forma
Resources Titan Adjustments Combined
-------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Gas sales....................................... $ 16,299 $ 10,369 $ 26,668
Oil sales....................................... 26,098 11,720 37,818
Other operating revenues........................ 122 -- 122
-------------- ------------ --------------
Total revenues............................. 42,519 22,089 64,608
-------------- ------------ --------------
Expenses:
Oil and gas production (Note 6)................. 6,919 5,159 12,078
Production and other taxes...................... 3,056 1,753 4,809
General and administrative (Note 6)............. 845 2,544 3,389
Amortization of deferred compensation
(Note 5)........................................ -- -- 2,488 (d) 2,505
17 (e)
Exploration and abandonment..................... 1,385 2,731 4,116
Depletion, depreciation and amortization........ 8,240 4,567 (602) (g) 12,205
-------------- ------------ --------------
Total expenses............................. 20,445 16,754 39,102
-------------- ------------ --------------
Operating income........................... 22,074 5,335 25,506
-------------- ------------ --------------
Other income (expense):
Interest income................................. -- 137 137
Interest expense................................ -- (1,769) (143) (h) (1,912)
Other........................................... (1,100) (91) 1,100 (i) (91)
-------------- ------------ --------------
Income before income taxes................. 20,974 3,612 23,640
Income tax (expense) benefit......................... (7,301) (1,264) 290 (j) (8,275)
-------------- ------------ --------------
Net income................................. $ 13,673 $ 2,348 $ 15,365
============== ============ ==============
Net income per share....................... $ .06 $ .31
============ ==============
Net income per share - assuming
dilution................................... $ .06 $ .30
============ ==============
Weighted average common shares outstanding........... 40,190 50,000
============ ==============
See accompanying notes to unaudited pro forma combined financial statements
</TABLE>
F-3
<PAGE>
Pure Resources, Inc.
Unaudited Pro Forma Combined Statement of Operations
Year ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pure
Resources
Pure Assets Pro Forma
Resources Titan Sold Adjustments Combined
------------- ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Gas sales.................................. $ 48,633 $ 38,866 $ (2,156) $ 85,343
Oil sales.................................. 64,613 36,851 (950) 100,514
Other operating revenues................... 880 -- -- 880
-------- -------- -------- --------
Total revenues........................... 114,126 75,717 (3,106) 186,737
-------- -------- -------- --------
Expenses:
Oil and gas production (Note 6)............ 32,268 18,643 (1,566) 49,345
Production and other taxes................. 8,579 6,116 (59) 14,636
General and administrative (Note 6)........ 7,836 7,771 (745) 14,862
Amortization of deferred compensation
(Note 5)................................. -- 5,049 -- 4,904 (d) 10,022
69 (e)
Exploration and abandonment................ 5,232 11,049 (383) 15,898
Depletion, depreciation and amortization... 33,393 19,222 (1,570) (2,534) (g) 48,511
Impairment of long-lived assets............ 345 31,783 (25,900) 6,228
-------- -------- -------- --------
Total expenses........................... 87,653 99,633 (30,223) 159,502
-------- -------- -------- --------
Operating income (loss).................. 26,473 (23,916) 27,117 27,235
-------- -------- -------- --------
Other income (expense):
Equity in net loss of affiliates........... -- (182) 115 (67)
Interest income............................ -- 102 -- 102
Interest expense........................... -- (7,320) -- 1,622 (h) (5,698)
Gain (loss) on sale of assets.............. -- 1,344 -- 1,344
Other...................................... -- 1,629 (541) 1,088
-------- -------- -------- --------
Income (loss) before income taxes........ 26,473 (28,343) 26,691 24,004
Income tax (expense) benefit................. (8,685) 20,069 -- (19,786) (j) (8,402)
-------- -------- -------- --------
Net income (loss).......................... $ 17,788 $ (8,274) $ 26,691 $ 15,602
======== ======== ======== ========
Net income (loss) per share............... $ (.22) $ .31
======== ========
Net income (loss) per share - assuming
dilution................................. $ (.22) $ .30
======== ========
Weighted average common shares
outstanding................................ 38,038 50,000
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-4
<PAGE>
PURE RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
March 31, 2000 and December 31, 1999
Note 1. Basis of Presentation
The unaudited pro forma combined financial statements have been
prepared to reflect the merger of TRH, Inc., a wholly owned subsidiary of Pure
Resources, Inc. ("Pure Resources"), with and into Titan Exploration, Inc.
("Titan"), with Pure Resources (a wholly-owned subsidiary of Union Oil Company
of California ("Union Oil") prior to the transaction) resulting as the parent of
Titan, all as provided in the agreement and plan of merger described elsewhere
herein. Under the terms of the merger agreement, Union Oil contributed the
assets and liabilities of its Permian Basin business unit to a newly-formed
subsidiary, Pure Resources, in exchange for common stock of Pure Resources. Pure
Resources' wholly-owned subsidiary, TRH, Inc., merged with and into Titan with
Titan stockholders receiving 34.6% of Pure Resources' common stock in exchange
for the outstanding Titan shares. Consequently, Pure Resources accounted for the
transaction as a purchase of Titan. The unaudited pro forma combined financial
statements have been prepared as if the merger had taken place on March 31, 2000
with respect to the unaudited combined balance sheet and as of January 1, 1999
with respect to the unaudited pro forma combined statements of operations. The
unaudited pro forma combined statements of operations also reflect the sales of
selected operating assets of Titan as if they were sold on January 1, 1999.
Following is a description of the individual columns included in these
unaudited pro forma combined financial statements:
Pure Resources. Represents the balance sheet as of March 31, 2000 and
results of operations for the three-months ended March 31, 2000 and the year
ended December 31, 1999 of Pure Resources (formerly "Union Oil's Permian Basin
business unit").
Titan. Represents the consolidated balance sheet as of March 31, 2000
and the consolidated results of operations for the three-months ended March 31,
2000 and the year ended December 31, 1999 of Titan.
Assets Sold. Represents the reversal of the operations of the assets
sold ("Assets Sold") by Titan during the year ended December 31, 1999 as if such
sales had taken place on January 1, 1999. The Assets Sold are primarily
comprised of two dispositions: (a) the $71.3 million sale for cash of Titan's
Gulf of Mexico assets in May 1999 and (b) the $5.4 million sale for cash of
Titan's Gulf Coast assets in April 1999. See Titan's Form 10-K for the year
ended December 31, 1999 for additional details regarding the Assets Sold.
Note 2. Pro Forma Entries
(a) To record the effects of the capitalization of Pure Resources by
the Permian Basin business unit assets and liabilities being
contributed to Pure Resources. Pure Resources issued 32,709,067
shares of $.01 par value common stock to Union Oil.
(b) To record the effect of Pure Resources' issuing a total of
17,290,933 shares of $.01 par value common stock to the
stockholders of Titan at an exchange ratio of .4302314 shares of
Pure Resources common stock for each outstanding share of Titan
common stock. Additionally, the purchase price reflects the
issuance by Pure Resources of 459,377 options to purchase Pure
Resources common stock, which were valued at their estimated fair
value using the Black-Scholes option pricing model (the weighted
average estimated fair value price was $3.39), in exchange for the
outstanding options of Titan. The share price for Pure Resources
common stock issued was $8.86 per share. The Pure Resources share
price was derived from taking the average of the Titan common
stock closing price, adjusted for the exchange ratio, on the
announcement date of the proposed merger and the closing price one
day prior and subsequent to the announcement date. Shares and
options subject to marketability restrictions (1,859,970 shares
and 33,141 options) were valued at a discounted share price (80%
of market). This transaction has been treated as a purchase of
Titan by Pure Resources.
F-5
<PAGE>
The preliminary purchase price (actual purchase price is not expected to
differ materially from the preliminary purchase price) has been calculated
as follows (in thousands):
<TABLE>
<S> <C>
Pure Resources common stock $ 149,947
Pure Resources stock options 1,510
Estimated costs of Titan severance agreements 6,500
Estimated acquisition costs 4,110
----------
Purchase price $ 162,067
==========
</TABLE>
The following is the breakdown of the preliminary purchase price allocation
(actual purchase price allocation is not expected to differ materially from
the preliminary purchase price) and the related adjustments to the
historical amounts of Titan (in thousands):
<TABLE>
<CAPTION>
Titan Purchase
Historical Price
Amounts Adjustments Allocation
------- ----------- ----------
<S> <C> <C> <C>
Current assets, excluding cash and cash equivalents $ 13,817 $ 13,817
Proved oil and gas properties, net 221,286 (29,133) (i) 192,153
Unproved oil and gas properties 14,964 10,000 (ii) 24,964
Other property, plant and equipment 4,458 (7) (iii) 4,451
Deferred tax asset 19,348 9,466 (iv) 28,814
Other assets 1,138 (187) (iii) 951
Current liabilities (16,630) (16,630)
Long-term debt (96,000) (10,610) (v) (106,610)
Other liabilities (852) (852)
Common stock (440) 267 (vi) (173)
Additional paid-in-capital (285,265) 133,981 (vi) (151,284)
Treasury stock 25,764 (25,764) (vii) -
Notes receivable - officers and employees 8,864 8,864
Accumulated deficit 88,013 (88,013) (viii) -
---------- ----------
Cash $ (1,535) $ (1,535)
========== ==========
</TABLE>
________________________
(i) To adjust proved oil and gas properties, net of
accumulated depletion, to fair value based on reserve
studies less the excess of fair value over the allocated
purchase price.
(ii) To adjust unproved oil and gas properties to fair value
based on management's estimate of market values.
(iii) To adjust various other assets to fair value.
(iv) To adjust deferred taxes as a result to the purchase price
allocation.
(v) Record the estimated transaction costs ($4.1 million) and
costs for amounts payable under Titan's existing severance
and retention bonus agreements ($6.5 million); for
additional details and terms see Note 5.
(vi) To adjust the for the value of the Pure Resources common
stock and options issued in the Merger.
(vii) To eliminate the Titan treasury stock in accordance with
the terms of the merger.
(viii) To eliminate Titan's historical accumulated deficit.
(c) To properly classify the deferred income taxes.
(d) To record deferred compensation and common stock subject to rights to
require a purchase in connection with agreements between Pure Resources
and the certain officers of Pure Resources specified in the merger
agreement which allow the applicable officers to require Pure Resources
to purchase their shares of common stock for an amount determined by
reference to a calculated net asset value. The applicable officers will
have the right to require Pure Resources to purchase the shares after
three years upon
F-6
<PAGE>
termination or earlier under other specified circumstances. The
associated deferred compensation is amortized over a three-year period.
See Note 5 for additional information.
(e) To record deferred compensation on stock options issued to certain
officers in which the option price is less than the stock price on date
of grant (assumed to be March 31, 2000 for pro forma purposes). The
associated deferred compensation is amortized over the four-year vesting
period.
(f) To record the required repayments from the amounts received by certain
officers from the Titan Severance Agreements (see Note 5), of
outstanding debts certain officers have to Titan.
(g) To adjust depletion and depreciation expense to reflect the allocated
purchase price of Titan's property and equipment.
(h) To adjust interest expense for (a) the application of the net sales
proceeds from the Assets Sold to reduce Titan's long-term debt, (b) the
incurrence of long-term debt to fund the payments of the severance
agreements and transaction costs and (c) the application of proceeds
received from the application of certain officers severance payments
(see Note 5) against outstanding indebtedness to Titan. The net sales
proceeds were $74.0 million which reduced interest expense approximately
$2.2 million in 1999. The payments to fund the severance agreements and
transaction costs of approximately $10.6 million increased interest
expense by $.2 million and $.8 million in 2000 and 1999, respectively.
The proceeds received by the officers for payment of their indebtedness
to Titan reduced interest expense $56,000 and $.2 million in 2000 and
1999, respectively. The weighted average interest rates were 7.5% and
7.0% in 2000 and 1999, respectively.
(i) To reverse merger related costs expensed by Pure Resources.
(j) To adjust income tax expense.
Note 3. Income Taxes
Pure Resources accounts for income taxes as provided in Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
Note 4. Supplemental Oil and Gas Reserve Information
The following unaudited pro forma combined supplemental information
regarding the oil and gas activities of Pure Resources is presented pursuant to
the disclosure requirements promulgated by the Securities and Exchange
Commission and Statement of Financial Accounting Standards No. 69, "Disclosures
About Oil and Gas Producing Activities". The pro forma combined reserve
information is presented as if the merger and Assets Sold had occurred on
January 1, 1999.
Management emphasizes that reserve estimates are inherently imprecise and
subject to revision and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available; such changes could
be significant.
F-7
<PAGE>
Quantities of oil and gas reserves
Set forth below is a pro forma summary of the changes in the net quantities
of oil and condensate and natural gas reserves for the year ended December 31,
1999.
Oil and Natural
Condensate Gas
(MBbls) (MMcf)
----------- ----------
Total Proved Reserves:
Balance, January 1, 1999 60,504 630,516
Revisions of previous estimates 14,960 (36,272)
Purchase of minerals-in-place 1,056 8,285
Sales of minerals-in-place (2) (28)
Extensions and discoveries 1,149 34,035
Production (5,855) (50,856)
------ -------
Balance, December 31, 1999 71,812 585,680
====== =======
Proved Developed Reserves:
January 1, 1999 49,387 492,884
December 31, 1999 60,599 458,852
Standardized measure of discounted future net cash flows
The pro forma combined standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and gas (with consideration
of price changes only to the extent provided by contractual arrangements) to the
estimated future production of oil and gas reserves less estimated future
expenditures (based on year-end costs) to be incurred in developing the
reserves. Future income taxes are calculated by comparing discounted future
cash flows to the tax basis of oil and gas properties, plus available
carryforwards and credits, and applying the current tax rate to the difference.
December 31,
1999
--------------
(in thousands)
Future:
Cash inflows $ 2,763,862
Production costs (1,102,075)
Development costs (a) (121,142)
Future income taxes (427,364)
--------------
Future net cash flows 1,113,281
10% annual discount for estimated timing of cash flows (474,827)
--------------
Standardized measure of discounted net cash flows $ 638,454
==============
________________
(a) Includes dismantlement and abandonment costs of $34.9 million.
F-8
<PAGE>
Changes relating to the standardized measure of discounted future net cash flows
The principal sources of the change in the pro forma combined standardized
measure of discounted future net cash flows for the year ended December 31, 1999
are as follows (in thousands):
Standardized measure, beginning of year $ 352,302
Extensions and discoveries less related costs 40,908
Changes in estimated future development costs (20,114)
Revisions of previous quantity estimates 47,042
Net change in income taxes (176,211)
Net change in prices and production costs 425,203
Sales, net of production costs (121,876)
Accretion of discount 36,235
Purchases of minerals-in-place 18,103
Sales of minerals-in-place (13)
Other 36,875
---------
Standardized measure, end of year $ 638,454
=========
Note 5. Employment and Severance Agreements
Pure Resources Employment and Severance Agreements
Under circumstances specified in the new employment and/or severance
agreements (these agreements are unrelated to the current Titan severance
agreements) agreed to or to be entered into between Pure Resources and its
officers, each covered officer will have the right to require Pure Resources to
purchase shares currently held or subsequently obtained by the exercise of any
option held by the officer to Pure Resources at a calculated "net asset value"
per share (as defined in each officer's employment agreement). The circumstances
under which the 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 Resources 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 at 10%, as defined, times 110%, less funded debt, as defined. The
amount reflected in the accompanying pro forma combined balance sheet as common
stock subject to repurchase reflects the estimated net asset value, as defined,
for each applicable officer's shares and unexercised option shares (including
options issued by Pure Resources) 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 ($6.88 per share at March 31, 2000) of the relevant number of
Pure Resources shares and the market value ($5.00 per share at March 31, 2000)
of Titan shares held by each applicable covered officer in the case of share
held or the exercise price of shares subject to option. This arrangement will be
treated as a variable plan under Accounting Principles Board Option 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 Resources 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.
Each new employment and/or severance agreement (these agreements are
unrelated to the current Titan severance agreements) will also obligate Pure
Resources 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.
F-9
<PAGE>
Titan Severance Agreements
Each of nine current executive officers of Titan is a party to a severance
and retention bonus agreement dated June 10, 1999. The covered employees are
eligible to receive severance benefits in the event of a qualifying termination
of their employment on or within one year following a "change in control" of
Titan, as that term is defined in the severance agreements.
The officers subject to these Titan severance agreements will become
officers of Pure Resources. These officers will receive the payments, which at
March 31, 2000 are estimated to be approximately $6.5 million, as disclosed in
Note 2 (b) (v). These payments will be made to the officers upon signing a
general release to the severance agreement and entering into a confidentiality
and non-compete agreement. The payments, pursuant to the general release, will
be (a) reduced for withholding taxes and (b) then applied to any outstanding
indebtedness the officers has with Titan, if any.
Note 6. Cost Savings.
The unaudited pro forma combined statements of operations do not give any
effect to potential cost savings, including for production or general and
administrative costs, which Pure Resources believes will result from the
integration of the operations of the two companies. Management expects to begin
to realize such projected cost savings in the fourth quarter of 2000. The full
annual impact of such projected cost savings is expected to be achieved in the
fiscal year ended December 31, 2001, and is estimated to be approximately $5
million annually beginning in 2001.
F-10
<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.
Date: June 9, 2000 By: /s/ William K. White
---------------------
William K. White,
Vice President-Finance and
Chief Financial Officer
