<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required] for the transition period from
___________ to ___________.
Commission file number 0-18205
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HAWKINS ENERGY CORPORATION
--------------------------
(Name of Small Business Issuer in its charter)
Oklahoma 73-1345732
- ---------------------------- ---------------------
(State of Incorporation) (I.R.S. Employer)
Identification No.
Twenty East Fifth Street, Suite 1500, Tulsa, OK 74103
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 918-587-5815
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
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Common Stock, par value $.01 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenue for the year ended December 31, 1995 -- $10,022,000
Aggregate Market Value of Voting Stock held by Non-affiliates
on March 22, 1996 -- $2,843,632
Number of Shares of Common Stock Outstanding
on March 22, 1996 -- 12,980,668
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Issuer's Proxy Statement with respect to Annual
Meeting of Stockholders to be held May 29, 1996 is incorporated by
reference in Part III of the Form 10-KSB
Transitional Small Business Issuer Disclosure Format (Check one): Yes [ ]
No [X]
<PAGE>
TABLE OF CONTENTS
PAGE
----
PART I
Items 1. & 2 Description of Business and Properties............. 3
Item 3. Legal Proceedings.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 4A. Executive Officers of the Registrant............... 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters and Selected Financial Data.... 14
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 15
Item 7. Financial Statements............................... 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 18
PART III
Item 9. Directors and Executive Officers, Promoters, and
Control Persons of the Registrant; Compliance with
Section 16(a) of the Exchange Act.................. 19
Item 10. Executive Compensation............................. 19
Item 11. Security Ownership of Certain Beneficial Owners
and Management..................................... 19
Item 12. Certain Relationships and Related Transactions..... 19
Item 13. Exhibits and Reports on Form 8-K................... 19
Index to Consolidated Financial Statements......... F-1
Signatures
2
<PAGE>
HAWKINS ENERGY CORPORATION
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1995
PART I
ITEMS 1. AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES
GENERAL
- -------
Hawkins Energy Corporation (the "Company") is engaged in the production
of natural gas and oil, and in the leasing, remanufacturing and direct sale of
gas compression equipment to operators of producing natural gas wells and gas
gathering systems. Its principal geographical operating areas lie within the
states of Alabama, Mississippi, Louisiana, Oklahoma, Arkansas, Kansas and Texas.
The Company was incorporated in the state of Oklahoma in June 1989 for
the purpose of consolidating the businesses and assets of Equity Compressors,
Inc. ("Equity Compressors") and ten Hawkins Exploration oil and gas limited
partnerships. To effect the consolidation, the Company extended an exchange
offer to the stockholder of Equity Compressors and the partners of the limited
partnerships. Following approval by a majority in interest of the limited
partners in each of the ten limited partnerships, the Company acquired the
assets and assumed the liabilities of the partnerships and acquired the stock of
Equity Compressors, all in exchange for common stock of the Company, and
commenced operations on December 29, 1989.
The Company acquired Equity Compressors when its sole business was the
leasing of gas compression equipment to operators. Equity Compressors broadened
its scope of operations through its acquisition in April 1990 of a compressor
remanufacturing and service business. The business of the acquired company
centered around the acquisition, remanufacture and sale of existing gas
compressor units. By May 1990, this business was fully integrated into Equity
Compressors, and Equity Compressors relocated its headquarters from Tulsa to a
facility in Oklahoma City. This move positioned Equity Compressors
strategically in the heart of the Mid-Continent natural gas producing region.
In June 1993, the Company acquired Mid-South Compressors, Inc., a
privately held gas compression company ("Mid-South"). Mid-South leased
compression equipment throughout the gas producing regions of Mississippi,
Alabama and Northern Louisiana. The transaction involved the issuance of
approximately 5.4 million shares of Company common stock and the payment of $1.4
million in cash to Mid-South. The Company financed the cash portion of the
acquisition through additional borrowings.
In July 1993, the Company acquired all the outstanding shares of common
stock of Owens Compression Service, Inc. ("Owens"), a privately held company
that provided gas compression services primarily in East Texas and North
Louisiana in exchange for cash consideration of $42,000 and approximately 3.2
million shares of Company common stock.
During March 1995, the Board of Directors of Equity Compressors, Mid-
South and Owens each approved the formal merger of Mid-South and Owens with and
into Equity Compressors. The companies merged their operations under the Equity
Compressors name as of January 1, 1995. Currently, the businesses of Equity
Compressors include leasing, direct sales and remanufacturing services of
various types of gas compression equipment. At December 31, 1995, Equity
Compressors owned 448 gas compression units with a total of approximately 49,000
horsepower.
The Company is also engaged in the production of natural gas and oil
through its ownership in 66 producing wells. At December 31, 1995, these
properties were estimated to have proved reserves of 3,800,769 thousand cubic
feet ("Mcf") of natural gas and 912,878 barrels of oil of which 3,800,769 Mcf
and 281,605 barrels of oil are proved developed. Natural gas reserves
constituted approximately 69% of the Company's proved developed reserve base on
a "gas equivalent" basis (converting each barrel of oil to
3
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6 Mcf of natural gas, representing the estimated relative energy content of oil
and natural gas). However, crude oil makes up 59% of the total proved reserve
base which includes certain undeveloped oil reserves.
On December 30, 1994, the Company sold interests in 57 wells located in
the Arkoma Basin of northwest Arkansas resulting in a pre-tax gain of
$1,880,000. The natural gas reserves attributable to the properties sold
represented approximately one-third of the total equivalent natural gas reserves
owned by the Company. The proceeds from the sale were placed in trust and then
utilized to purchase oil and gas properties in 1995 resulting in a "like kind
exchange" for tax purposes, with the gain on sale being deferred for tax
purposes.
The Company closed a series of production acquisitions during the
second quarter of 1995 involving interests in 12 gas wells and 19 oil wells in
Arkansas, Oklahoma and Texas. These properties had estimated proved developed
reserves of approximately 286,000 barrels of oil and 2,000,000 Mcf of gas.
These numbers do not include the proved undeveloped reserves attributable to
secondary recovery on the Dickie Ranch Field which add an estimated 631,000
barrels of oil.
The primary business plan of the Company is growth within several
sectors of the natural gas industry. Most importantly, additions to the
Company's natural gas and oil reserve base are being pursued through
acquisitions and development drilling on the Company's properties. The Company
plans to expand its activities in the gas compression service sector by
increasing the volume of its direct sales and remanufacturing operations, and
through streamlining the type of gas compressors in its rental fleet. Also, the
Company is continuing to examine domestic and international opportunities in
several natural gas related areas including gas exploration, production,
compression, gathering and processing.
The Company had 87 employees at year-end 1995. Its principal executive
offices are maintained at Twenty East Fifth Street, Suite 1500, Tulsa, Oklahoma
74103.
GAS COMPRESSION OPERATIONS
- --------------------------
GENERAL. The Company conducts its compressor operations through Equity
Compressors, Inc., its wholly owned subsidiary. Equity Compressors, Inc.
currently operates facilities in Oklahoma City, Oklahoma, Columbia and Hamilton,
Mississippi, and Kilgore, Texas.
Within the continental U.S. there are over 250,000 gas wells with
annual production in excess of 18 trillion cubic feet of natural gas. A very
large portion of these wells are located in the seven state area of the
Company's compression operations. The ages of these wells range from a few days
to decades. The age of a gas well usually affects its need for compression. A
gas well has a natural flowing pressure which may or may not be adequate to
overcome the pipeline pressure at the point where the gas is introduced into a
gathering system or transmission pipeline. If the flowing pressure of the gas
is not adequate to overcome the pipeline pressure, it is not physically possible
to produce or transport the gas. Gas compression is used to overcome this
problem by boosting the flowing pressure of the gas. Theoretically, all gas
wells will eventually need compression to boost natural well flowing pressure to
exceed pipeline pressure. Historically gas compressors have generally been
purchased and operated by gas producers and gas transporters. In recent years,
these same groups have also used equipment leasing as an accepted means of
providing for their gas compression needs.
EQUIPMENT LEASING. At year-end 1995, the Company's rental fleet
included 448 compressors located in Alabama, Arkansas, Kansas, Louisiana,
Mississippi, Oklahoma and Texas. These compressors generally average 110
horsepower in size and their cost as a new unit averages about $80,000. The
Company's rental fleet is comprised of used, remanufactured equipment which was
acquired at a substantial discount to the cost of comparable new compressor
units. The fleet includes engines and compressors of various manufacturers.
The size and configuration of each compressor vary depending on the particular
application for which it is utilized. Consideration is given to the
differential between the wellhead and pipeline flowing pressures and the
volumes of gas delivered from the wellhead.
4
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At December 31, 1995, an affiliate of the Company leased eight of
Equity Compressors' 448 compressor units. The affiliate accounted for
approximately 1% of Equity Compressors' contract leasing revenues in 1995
compared to 3% in 1994.
The following table sets forth certain data concerning the Company's
activity in the acquisition and leasing of compressors:
<TABLE>
<CAPTION>
DECEMBER
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of units......................... 448 449 427 48
Average utilization rate during period.. 66% 78% 82% 90%
Equipment horsepower at end of period... 48,980 49,208 45,814 5,481
</TABLE>
At December 31, 1995, associated with the highly competitive market for
compression rental equipment and the low utilization rates experienced on
certain of the Company's equipment, the Company has identified certain
compression equipment (approximately 80 to 100 units) which it intends to
dispose of, with the sale expected to be completed in the first half of 1996.
The Company anticipates that the proceeds of this sale of equipment will be used
to acquire other compression equipment more suited to the current marketplace.
Lease Terms. Generally, the Company's compressors are leased to well
-----------
operators under written lease agreements for periods of six or twelve months.
These leases are sometimes renewed at the end of the lease term at which time
the rentals and other terms may be renegotiated. Contract leasing rates are
generally set as a percentage of the new value of the equipment. The
competitive marketplace determines the percentage used in new contracts and in
renewals of existing contracts. Once the minimum term has expired, the
equipment is leased on a month-to-month basis, with the lessor or the lessee
having the right to terminate the contract by giving a thirty day written
notice. A significant number of the compressors under lease at December 31,
1995 were on the month-to-month basis.
Under the typical lease terms, the lessee pays the costs of transporting
the compressor to the well site, installation and all fuel and other operating
costs. The compressors are operated on a daily basis by the employees of the
lessee. The Company maintains service departments which employ skilled
compressor mechanics who service and maintain compression equipment. Under the
most common type of lease, the lessee pays a flat fee for monthly compression
inclusive of service, equipment rental, lubricants and all parts and
maintenance.
REMANUFACTURING SERVICES. Remanufacturing services involve the overhaul
and rework of equipment owned by third parties. These services are performed
under contract with numerous customers, including gas gathering and transmission
companies, major oil companies, large independents and small producers to
overhaul and rework their gas compression equipment. Generally, the Company
prepares a description of the work to be conducted and the parts to be provided.
This description is accompanied by an estimate, or a fixed bid, of the costs to
be charged the customer for the overhaul work. In the event additional labor or
parts are required once the work is in process, the owner of the unit is
contacted regarding the work and additional charges are then agreed on.
Overhaul work is normally guaranteed for a period of ninety days.
COMPRESSOR SALES. The Company is also involved in the direct sales of
remanufactured gas compression equipment. The Company acquires, rebuilds and
sells previously owned gas compressor units to gas producers and transporters.
The Company maintains an inventory of compression parts and equipment at its
facilities in Oklahoma City, Oklahoma and Columbia, Mississippi. The Company is
able to sell its remanufactured equipment at a discount to the cost of
comparable new equipment, and in most cases is able to customize and complete a
compressor unit for a customer in substantially less time than the same customer
could acquire the equipment new from the original manufacturer. The Company
maintains a field service department which is responsible for the service and
maintenance of its direct sales units during their ninety-day warranty period.
5
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MARKET FOR SERVICES. The Company's current market for compression
equipment is Western Kansas, Oklahoma, Arkansas, Alabama, Louisiana,
Mississippi, East Texas and the Texas Panhandle. Producing gas wells tend to
decline in flowing pressure over time; therefore, the significant number of gas
wells drilled during the late 1970's and early 1980's are now entering a phase
in their economic lives which typically calls for compression. The Company
relies upon established relationships and the development of new ones with
operators of producing wells and gas gathering systems to maintain or increase
its share of this potentially expanding market for gas compression services.
The Company faces competition from a number of different companies, some of
which have larger staffs, more equipment and assets and greater financial
resources. The principal competition in the compressor leasing business comes
from major equipment fabricators who lease and sell gas compression equipment
and services.
The Company has a broad customer mix for its gas compression equipment
services. Sales to one customer accounted for 5% of total revenue in 1995, 4%
of revenues in 1994 and 10% of total revenues in 1993. In each of these years
these sales were to a different customer.
COMPLIANCE WITH ENVIRONMENTAL LAWS
- ----------------------------------
The design and operation of gas compressors is subject to certain federal
and state environmental laws and regulations which, directly or indirectly,
relate to the discharge of materials into the environment. Complete compliance
with all of such laws and regulations may affect the Company's operations and
costs as a result of their effect on the design, condition and operation of its
gas compressors or its costs of repairing or remanufacturing them. Under most
of the leases for the gas compressors, responsibility for compliance with the
majority of these laws and regulations is placed on the lessee. However, there
can be no assurance that the Company would not be liable for any penalties or
fines that may be imposed as a result of any material noncompliance. It is not
anticipated that the Company will be required in the near future to expend
amounts that are material in the aggregate to the Company's overall operations
by reason of such laws and regulations.
NATURAL GAS AND OIL OPERATIONS
- ------------------------------
GENERAL. The Company acquired interests in natural gas and oil wells by
acquiring the assets and assuming the liabilities of ten oil and gas limited
partnerships on December 29, 1989 as a result of the exchange offer. The
Company continually reviews opportunities to acquire additional producing
properties, sell portions of its producing properties and conducts additional
development drilling on its properties. The Company is engaged in the
production and sale of natural gas, condensate and crude oil from these
properties.
The Company has effective control of operations on 50 of the wells in which
its owns an interest. Currently, the Company engages an affiliated corporation
to handle the operations. During the second quarter of 1996, the Company
intends to directly assume operations of some of its key properties while
engaging a contract operator to manage the remainder.
SIGNIFICANT PROPERTIES. At December 31, 1995, the Company owned oil and
gas interests in 66 wells, undrilled leasehold interests and related assets
located in Arkansas, Kansas, Oklahoma and Texas. Exploration and development
efforts have been concentrated in the Anadarko, Arkoma and Permian Basins
located in the states listed above. It is expected that the Company will
continue to focus on these areas in its future operations, however, during the
first quarter of 1995 the Company began investigating exploration and production
opportunities in other domestic producing regions as well as several overseas
areas.
6
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ANADARKO BASIN
In the Anadarko Basin, the interests owned by the Company consist of 37
gross (14.76 net) wells of which 21 are controlled by the Company. The
properties in this basin contain proved reserves totalling 1,897,342 Mcf of gas
and 79,473 barrels of oil and represent approximately 26% of the present value
of the proved reserves of the Company at December 31, 1995.
ARKOMA BASIN
In the Arkoma Basin, the interests owned by the Company consist of 15 gross
(3.47 net) wells, all of which are controlled by the Company. The properties in
this basin contain proved reserves totalling 1,815,907 Mcf of gas and represent
approximately 19% of the present value of the proved reserves of the Company as
of December 31, 1995.
PERMIAN BASIN
In the Permian Basin the interest owned by the Company consists of 14 gross
(13.55 net) wells of which 14 are controlled by the Company. The properties in
this basin contain proved reserves totalling 87,520 Mcf of gas and 833,405
barrels of oil and represent approximately 55% of the present value of the
proved reserves of the Company at December 31, 1995.
DRILLING ACTIVITIES. During the periods indicated, the Company
participated in the drilling of the following development wells:
Years Ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Development:
Productive -- -- -- -- 2.0 .215
Non-Productive -- -- 1.0 .06 -- --
--------- ---------- ----------
Total -- -- 1.0 .06 2.0 .215
</TABLE>
PRODUCTIVE WELLS. The following table sets forth certain information
relating to oil and gas wells which are producing or which are shut in but
capable of producing oil and/or gas at December 31, 1995. A "gross" well is any
well in which the Company owned an interest while "net" wells equal the sum of
the Company's interests in the gross wells.
PRODUCTIVE WELLS
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
GROSS NET
----- ---
<S> <C> <C>
Oil 20 17.54
Gas 46 14.24
</TABLE>
ACREAGE. The following table sets forth the gross and net oil and gas
leasehold acreage of the Company as of December 31, 1995. "Gross" acreage
refers to any acreage in which the Company owns an interest while "net" acreage
refers to the Company's actual proportionate interest in the acreage.
7
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ACREAGE
AS OF DECEMBER 31, 1995
Developed
Gross Acres 19,178
Net Acres 6,359
PROVED RESERVES. The following table reflects the proved reserves of the
Company as estimated by Lee Keeling and Associates, Inc., independent petroleum
engineers, at the dates indicated. The increase in barrels of oil and Mcf of
gas from 1994 to 1995 is due to the purchase of 286,000 barrels and 2,000,000
Mcf of proved developed reserves and 631,273 barrels of oil classified as proved
undeveloped. The decrease in Mcf of gas from 1993 to 1994 is due to the sale of
1,451,000 Mcf, which represented approximately one-third of the Company's total
equivalent gas reserves at year-end December 31, 1994.
ESTIMATED PROVED RESERVES
(IN THOUSANDS)
AS OF DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
Oil Gas Oil Gas Oil Gas
Bbls Mcf Bbls Mcf Bbls Mcf
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C>
913 3,801 18 2,501 19 4,788
</TABLE>
The following table sets forth the estimated future net revenues from
proved reserves of the Company, before deducting the impact of federal and state
income taxes, based upon the report of Lee Keeling and Associates, Inc. and the
present value thereof. The present value of estimated future net revenues
discounted at 10% per annum was prepared using constant prices of approximately
$17.09 per barrel of oil and $1.92 per Mcf of gas, which were the average oil
and gas prices in effect at December 31, 1995. The 1996 net revenues disclosed
below reflect the expenditure of approximately $490,000 related to the Company's
proved undeveloped reserves.
ESTIMATED FUTURE NET REVENUES FROM PROVED RESERVES
<TABLE>
<CAPTION>
Estimated Future Net Revenues
Attributable to Production
During:
<S> <C>
1996........................... $ 531,298
1997........................... 1,806,136
1998........................... 1,743,336
1999........................... 1,614,745
2000........................... 1,393,059
Remainder...................... 7,495,701
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Total.......................... $14,584,275
===========
Net Present Value
(discounted at 10% per annum).. $ 8,609,996
===========
</TABLE>
The reserve data set forth herein represents estimates only. Reserve
engineering is a subjective process of estimating underground accumulations of
crude oil and natural gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates of different engineers may vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may
8
<PAGE>
justify revision of such estimate. Accordingly, reserve estimates often differ
from the quantities of crude oil and natural gas that are ultimately recovered.
The meaningfulness of such estimates is highly dependent upon the accuracy of
the assumptions upon which they were based.
MARKET FOR OIL AND GAS. The market for oil and gas production depends upon
a number of factors, including the availability of other domestic production,
crude oil imports, the proximity and size of oil and gas pipelines, the
marketing of competitive fuels and general fluctuations in the supply and demand
for oil and gas. For the past several years, there has existed a surplus of
imported oil and domestic natural gas. Such excess has resulted in reduced oil
and gas prices and curtailment of gas production. In addition, such
oversupplies may cause delays in marketing the natural gas from producing wells.
While certain of the Company's natural gas production is sold at the
wellhead to intrastate and interstate pipelines under contracts with terms
ranging from one to twenty years, most of its gas production is sold on the
"spot market" under commitments which generally extend for only thirty days.
All of the Company's long-term contracts contain provisions for readjustment of
price, termination and other terms customary in the industry. Certain of these
contracts contain "market out" and price adjustment provisions which could allow
the purchaser to cancel the contract or purchase the gas produced at a
substantially lower price. Likewise, if prices increase, the Company can cancel
the contract or require the gas produced to be purchased at the higher prices.
Approximately 59% of the Company's proved reserves are crude oil on an
equivalent unit basis, while the remaining 41% consist of natural gas.
Consequently, the financial results of the Company's gas and oil production
activities will be affected by positive or negative developments in the pricing
of and markets for both natural gas and crude oil. In previous years the
Company's proved reserve base consisted primarily of natural gas.
The Company does not believe that the loss of any of its oil purchasers
would have a material adverse effect on its operations. The loss of a gas
purchaser could result in contracts being executed for sales with prices less
than those previously in effect or in prolonged production delays. The loss or
termination of several gas purchase agreements or purchasers could, if not
replaced, adversely affect the Company's financial condition. The marketing of
oil and gas by the Company can be affected by a number of factors which are
beyond its control, the exact effects of which cannot be accurately predicted.
OIL AND GAS SALES PRICES AND PRODUCTION COSTS. The following table sets
forth the average sales prices per barrel of oil (including condensates and
other liquid hydrocarbons) and per Mcf of gas produced and the production
expense (including taxes and transportation charges) per equivalent Mcf of gas
production and Bbl of oil of the Company for each of the periods indicated.
AVERAGE SALES PRICES AND PRODUCTION COSTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Average Sales Price per Mcf of gas produced $ 1.60 $ 1.91 $ 2.05
Average Sales Price per barrel of oil produced $17.47 $16.16 $17.35
Production Costs per Mcfe $ .80 $ .65 $ .65
Production Cost per Bble $ 4.79 $ 3.91 $ 3.90
</TABLE>
REGULATIONS
- -----------
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies,
both federal and state, have issued rules and regulations binding on the oil and
gas industry and its individual members some of which carry substantial
penalties for the failure to comply.
9
<PAGE>
The regulatory burden on the oil and gas industry increases its cost of doing
business and, consequently, affects its profitability. Inasmuch as such laws
and regulations are frequently amended or reinterpreted, the Company is unable
to predict the future cost or impact of complying with such regulations.
EXPLORATION AND PRODUCTION. Exploration and production operations of the
Company are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled and the
plugging and abandoning of wells. The Company's operations are also subject to
various conservation matters. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of oil and gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely on voluntary pooling of lands and
leases. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations is to limit the amounts of oil and gas the Company
can produce from its wells, and to limit the number of wells or the locations at
which the Company can drill.
Oklahoma and Texas have adopted limits on gas production that attempt to
match production with market demand. In March 1992, Oklahoma enacted a law
which places statewide limits on gas production. The Oklahoma Corporation
Commission sets production levels quarterly. The production of natural gas from
a single well is limited to the greater of a specified Mcf per day or a
percentage of the total daily production capacity of the well. In April 1992,
the Texas Railroad Commission ("TRC") unanimously approved a new proration
system that eliminated monthly purchaser nominations as the starting point for
determining reservoir market demand. Instead, the TRC makes an initial
determination of reservoir market demand for prorated fields each month using
production in the same month from the previous year and the operator's forecast
for demand for that month. This initial determination is subject to certain
adjustments. Individual well allowable determinations are determined by an
enhanced capability determination routine. A well capacity is determined as the
lesser of the latest TRC well deliverability test on file or the highest monthly
production during the last six months. Alternatively, an operator may submit a
substitute capability determination that has been determined by a registered
professional engineer.
The Company cannot predict whether other states will adopt similar
legislation or rules governing gas production. The effect of the Oklahoma and
Texas provisions and any other restrictions, if adopted, could be to decrease
allowable production on certain properties, and the revenues from gas
properties. It is also possible that such legislation and regulations may result
in a decrease in natural gas production, which might also have the effect of
exerting upward pressure on prices of natural gas, although there can be no
assurance that any such increase will occur. However, if such restrictions do
result in increased prices of natural gas, they could face challenges in the
courts and there can be no assurance as to the outcome of any such challenge, or
federal legislation may be enacted to override the effects of state provisions.
Various federal, state and local laws and regulations covering the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect the Company's operations and costs as
a result of their effect on exploration, development and production operations.
The Company is also subject to laws and regulations concerning occupational
safety and health. It is not anticipated that the Company will be required in
the near future to expend amounts that are material in the aggregate to the
Company's overall operations by reason of environmental or occupational safety
and health laws and regulations, but inasmuch as such laws and regulations are
frequently changed, the Company is unable to predict the ultimate cost of
compliance.
Certain of the Company's oil and gas leases are granted by the federal
government and administered by various federal agencies. Such leases require
compliance with detailed federal regulations and orders which regulate, among
other matters, drilling and operations on these leases and calculation
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<PAGE>
of royalty payments to the federal government. The Mineral Lands Leasing Act of
1920 places limitations on the number of acres under federal leases that may be
owned in any one state. While subject to this law, the Company does not have a
substantial federal lease acreage position in any state or in the aggregate.
The Mineral Lands Leasing Act of 1920 and related regulations also may restrict
a corporation from the holding of a federal onshore oil and gas lease if stock
of such corporation is owned by citizens of foreign countries which are not
deemed reciprocal under such Act. Reciprocity depends, in large part, on
whether the laws of the foreign jurisdiction discriminate against a United
States person's ownership of rights to minerals in such jurisdiction. The
purchase of shares in the Company by citizens of foreign countries who are not
deemed to be reciprocal under such Act could have an impact on the Company's
ownership of federal leases.
MARKETING, GATHERING AND TRANSPORTATION. Federal legislation and
regulatory controls have historically affected the price of the gas produced by
the Company and the manner in which such production is marketed. Historically,
the transportation and sale for resale of gas in interstate commerce have been
regulated pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural
Gas Policy Act of 1978 (the "NGPA") and Federal Energy Regulatory Commission
("FERC") regulations promulgated thereunder. Since 1978, maximum selling prices
of certain categories of gas, whether sold in interstate or intrastate commerce,
have been regulated pursuant to the NGPA. The NGPA established various
categories of gas and provided for graduated deregulation of price controls of
several categories of gas and the deregulation of sales of certain categories of
gas. All price deregulation contemplated under the NGPA has already taken
place.
On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act") was enacted. The Decontrol Act amended the NGPA to remove, as
of July 27, 1989, both price and non-price controls from gas not subject to a
contract in effect on July 26, 1989. Gas under contract on July 26, 1989, was
decontrolled on the earlier of the termination of the contract or January 1,
1993. Gas from wells spudded after July 26, 1989, was decontrolled on May 15,
1991, even if those wells were still covered by an existing contract.
In December 1992, the FERC issued Order No. 547, which is a blanket
certificate of public convenience and necessity pursuant to Section 7 of the NGA
and which authorizes any company which is not an interstate natural gas pipeline
or an affiliate thereof to make sales for resale at negotiated rates in
interstate commerce of any category of gas that is subject to the Commission's
NGA jurisdiction. The blanket certificates were effective January 7, 1993, and
do not require any further application. There are certain requirements which
must be met before an affiliated marketer of an interstate pipeline can avail
itself of this certificate.
The cumulative impact on the Company of the deregulation provisions of the
NGPA, the Decontrol Act and Order No 547 is that the Company's gas production is
no longer subject to price regulation. Rather, it is subject only to that price
contractually agreed upon between the producer and purchaser. Under current
market conditions, deregulated gas prices under new contracts tend to be lower
than most regulated price ceilings previously prescribed by the NGPA.
In February 1988, the FERC issued Order No. 490, which promulgated new
abandonment regulations for expired, canceled or modified contracts involving
the sale of certain gas committed or dedicated to interstate commerce prior to
the enactment of the NGPA. The new rules largely eliminate delays and
regulatory burdens associated with securing approval to abandon gas service upon
termination or expiration of a contract for the sale of such gas. The new rules
also significantly facilitate certain pipelines' ability to discontinue
purchasing such gas under terms unfavorable to the pipeline in situations in
which the contract has expired or terminated, but abandonment authorization is
required to terminate the service. The Company has gas purchase agreements with
purchasers that have been abandoned pursuant to Order No. 490. Order No. 490 is
currently being challenged in the courts. The Company is unable to predict the
outcome of these proceedings, and is also unable to predict the consequences to
it of any possible future vacation of Order No. 490.
11
<PAGE>
Commencing in late 1985, the FERC issued a series of orders (Order No. 436,
Order No. 500 and related orders), which promulgated regulations significantly
altering the marketing and pricing of gas. Among other things, these regulations
(a) require interstate pipelines that elect to transport gas for others under
self-implementing authority to provide transportation services to all shippers
on a non-discriminatory basis, and (b) permit each existing firm sales customer
of any such pipeline to modify over at least a five-year period, its existing
purchase obligations. Although the new regulations do not directly regulate gas
producers such as the Company, the availability of non-discriminatory
transportation services and the ability of pipeline customers to modify their
existing purchase obligations under these regulations has greatly enhanced the
ability of producers to market their gas directly to end users and local
distribution companies. In this regard, access to markets through interstate
pipelines is critical to the Company's marketing initiatives.
In April 1992, (and clarified in August 1992 and finalized in November
1992), the FERC issued Order 636, a complex regulation which has had a major
impact on natural gas pipeline operations, services and rates. Among other
things, Order 636 requires each interstate pipeline company to "unbundle" its
traditional wholesale services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services, and
stand-by sales services) and to adopt a new rate making methodology to determine
appropriate rates for those services. To the extent the pipeline company or its
sales affiliate makes gas sales as a merchant in the future, it will do so in
direct competition with all other sellers pursuant to private contracts;
however, pipeline companies are not required to remain "merchants" of gas, and
many of the interstate pipeline companies have or will become transporters only.
Each pipeline company had to develop the specific terms of service in individual
proceedings. The new rules and various pipeline compliance filings are the
subject of appeals. The Company cannot predict whether and to what extent
judicial review will affect these matters.
As a result of Order 636 a number of interstate pipeline companies have (i)
"spun-down" their gathering systems from regulated pipeline transportation
companies to unregulated affiliates, (ii) spun-off gathering systems to non-
related entities, and/or (iii) "refunctionalized" portions of their pipeline
facilities from transmission to gathering. In a May 27, 1994 order and a
December 2, 1994 rehearing order, FERC ruled that it generally does not have
jurisdiction over gathering facilities absent abuse involving the pipeline-
affiliate relationship. However, FERC directed pipelines spinning down or off
their gathering systems to include certain Order No. 497 standards of conduct in
their tariffs and to enter into continuity of service agreements with existing
users or to execute a "default contract" with users with whom they cannot reach
agreement, with the default contract to contain a minimum two-year term, use the
pipeline gatherer's then current rate (with an appropriate escalator clause) for
existing customers for similar service, and contain terms and conditions
consistent with those applicable to the pipeline's gathering service. In
addition, the interstate pipeline must seek authority under Section 7(b) of the
NGA to abandon certified gathering facilities and must file for authority under
Section 4 of the NGA to terminate gathering service from both certified and
uncertified facilities. A consequence of this divestiture of gathering
facilities could be higher gathering fees.
With respect to oil pipeline rates subject to the FERC's jurisdiction, in
October 1993 the FERC issued Order No. 561 in order to fulfill the requirements
of Title XVIII of the Energy Policy Act of 1992. Order No. 561 establishes an
indexing system, effective January 1, 1995, under which oil pipelines will be
able to readily change their rates to track changes in the Producer Price Index
for Finished Goods (PPI-FG), minus one percent. This index established ceiling
levels for rates. Order No. 561 also permits cost-of-service proceedings to
establish just and reasonable rates for initial rates for new service. Cost-of-
service review may be invoked when an oil pipeline company claims it is
significantly under-recovering its costs, or when customers claim the pipeline's
rates are excessive in relation to actual costs. The order does not alter the
right of a pipeline to seek FERC authorization to charge market-bases rates.
However, until the FERC makes the finding that the pipeline does not exercise
significant market power, the pipeline's rates cannot exceed the applicable
index ceiling level or a level justified by the pipeline's cost of service.
12
<PAGE>
EMPLOYEES
- ---------
At December 31, 1995, Hawkins Energy had 81 full time employees and 6 part
time employees. Hawkins Energy has 80 employees in its gas compression
operations, one employee in its oil and gas operations and 6 employees in its
general corporate area. None of these employees are represented by a union or
labor organization. The Company considers its relations with these employees to
be satisfactory.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to each executive
officer of the Company. Executive officers are elected by the Board of Directors
of the Company and serve at its discretion.
NAME AGE POSITION
- ---- --- --------
Thomas F. Ostrye 43 Chairman of the Board,
President
Clifford S. Lewis 41 Vice President, Secretary & Treasurer
Don E. Smith 47 Vice President
Frank W. Gagliardi 38 Vice President
The following is a brief description of the business background of each of
the executive officers of the Company.
Mr. Ostrye has been President and Director since the formation of the
Company in 1989. He was employed by Hawkins Oil & Gas, Inc. as
Project/Administrative Manager (1987 to 1989), Project Manager (1985 to 1987)
and as Exploration Manager (1984 to 1985). Previously, he served: Enstar
Petroleum Company, Oklahoma City, Oklahoma as Exploration Manager (1982 to
1984); C & K Petroleum, Inc., Oklahoma City, Oklahoma and Midland, Texas as
District Geologist (1979 to 1982); and Marathon Oil Company, Midland, Texas as
Exploration Geologist (1975 to 1979). He holds a B.S. Degree in Geology from
State University College, Fredonia, New York and an M.A. Degree in Geology from
State University of New York, Buffalo, New York.
Mr. Lewis has been Vice President, Treasurer, Secretary and Director since
the inception of the Company in 1989. He has also served as Vice President and
Chief Financial Officer of Hawkins Oil & Gas, Inc. from 1988 to present.
Previously, he was employed by Hawkins Oil & Gas, Inc. as Controller (1986 to
1988), as Manager of Financial Accounting (1984 to 1986), Senior Financial
Accountant (1981 to 1984) and by Arthur Young & Company (now Ernst & Young) as
Senior Accountant. He holds a B.S. Degree in Accounting and an M.B.A. Degree
from Kansas State University.
Mr. Smith has served as Vice President and Director since June 1993. He
was founder and President of Mid-South Compressors, Inc. in Columbia,
Mississippi. From 1981 to 1985, he was the Branch Manager of Compressor
Systems, Inc. Previously, he was the founder and President of Oilfield
13
<PAGE>
Maintenance Service, Inc. from 1974 to 1981, and Division Compressor Mechanic of
Shell Oil Company from 1967 to 1974.
Mr. Gagliardi has served as Vice President since January 1996 and has been
with the Company since 1989 serving as Senior Exploration Geologist. He was
employed by Hawkins Oil & Gas, Inc. as Senior Exploration Geologist (1981 to
1989). Previously, he was employed with Boomer Drilling Company, Nowata,
Oklahoma, as an Exploration-Development Geologist (1980 to 1981) and with
Exploration Logging, Inc., Houston, Texas as a Wellsite Geologist (1979 to
1980). He holds a B.S. Degree in Geology (1979) from Edinboro State College,
Edinboro, Pennsylvania and a M.S. Degree in Environmental Engineering from
Oklahoma State University (1995).
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS AND
SELECTED FINANCIAL DATA
As of March 1, 1996, the Company had approximately 1,400 holders of record
of its Common Stock. The Company's stock is quoted on the market of NASDAQ in
Small Cap Markets under the symbol "HECI". The table below reflects the high
and low bid prices per share of the Company`s common stock for each calendar
quarter during 1995 and 1994 as quoted by NASDAQ. The bid quotations reflect
inter-dealer prices without adjustment for retail markups, markdowns or
commissions and may not reflect actual transactions.
<TABLE>
<CAPTION>
1995 1994
------------ ------------
QUARTER HIGH LOW HIGH LOW
- ------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
First 5/8 3/8 2 1
Second 9/16 7/16 1 5/8 1 1/8
Third 11/16 15/32 1 5/8 5/8
Fourth 5/8 15/32 7/8 3/8
</TABLE>
The Company has not paid any cash dividends on shares of its Common Stock
since its organization and currently intends to continue its policy of retaining
earnings, if any, for the Company's operations. The Company is prohibited by
certain loan agreement provisions from paying dividends.
14
<PAGE>
SELECTED FINANCIAL DATA
Certain selected financial data is presented for each of the five years
ended December 31.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands of dollars except per share amounts)
<S> <C> <C> <C> <C> <C>
Total revenues $10,022 $13,755 $ 9,038 $4,359 $5,876
Net Income (loss) (1,438) (1) 1,049 (2) 288 20 (371)
Income (loss) per
common share (.11) .08 .03 .01 (.10)
Total assets 26,041 27,914 26,357 7,541 9,221
Long term debt:
Current portion 682 2,263 570 1,925 943
Long-term portion 9,000 6,967 5,666 -- 1,884
Obligation under capital
lease -- -- 3,220 -- --
</TABLE>
(1) Includes a provision to reduce the carrying value of certain compression
equipment of $1,790,000.
(2) Includes gain on sale of oil and gas properties of $1,880,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported a net loss of $1,438,000 in 1995 due principally to a
provision to reduce the carrying value of the Company's compression equipment, a
decline in the leasing of natural gas compressors and lower prices received on
the sale of oil and gas. The Company's operating results were negatively
impacted by the weakening natural gas price environment during 1995. Lower
natural gas prices triggered aggressive price competition among competing gas
compressor rental companies resulting in lower rental rates and decreased
utilization of Equity Compressors' rental fleet.
The Company disposed of its Arkansas gas properties in December 1994
resulting in a pre-tax gain of $1,880,000 (approximately $1,160,000 after tax)
in a transaction treated as a like-kind exchange for income tax purposes as the
proceeds were reinvested in other oil and gas properties. The Company utilized
the escrowed sale proceeds to acquire properties with substantially high
expected oil and gas reserves than those estimated to have been sold in the
Arkansas property sale of December 1994. The net affect of the sale and
subsequent purchase of properties on the results of the operations of the
Company, except for the gain on sale, was not significant. The Company will
instigate a secondary recovery project on one of its newly acquired properties,
the Dickie Ranch Field, during 1996. This waterflood is estimated to recover in
excess of 600,000 barrels of oil net to the Company over the life of the
project.
In 1996, the Company is focused on expansion of its current oil and gas
production acquisition and enhancement business. Management believes there are
attractive opportunities for reserve additions similar to the acquisitions made
during 1995.
RESULTS OF OPERATIONS
- ---------------------
1995 VERSUS 1994
In 1995, compressor rental revenue decreased $904,000 from 1994. The
overall compressor utilization rate decreased in December 1995 to 66% from 78%
in December 1994, generally, as a result of lagging demand resulting from the
deterioration in gas prices and increased competition from larger rental
companies. Revenues from compressor sales and remanufacturing services
decreased $598,000
15
<PAGE>
or 27% in 1995 from 1994, also as a result of these market conditions. However,
the gross profit of $517,000 in 1995 was about the same as the $522,000 realized
during 1994. The profit margins on compressor sales and remanufacturing
increased to 32% in 1995 from 24% in 1994.
Compressor operating costs incurred on rental units decreased 3% primarily
due to the fewer number of actively leased units and the centralization of
compressor operations in Columbia, Mississippi. Compressor operating costs were
52% and 48% of related revenues for the years ended December 31, 1995 and 1994,
respectively. This percentage increase is generally related to the lower rental
rates on newly leased compressors.
Revenues from the sale of oil and gas decreased by $320,000 or 17% in 1995
from 1994, reflecting the sale of properties at year-end 1994 and a decrease in
the average sales price per Mcf of gas of 7% from $1.91 per Mcf in 1994 to $1.60
in 1995. The decline in oil and gas revenue was offset somewhat by $65,040
received by the Company from a financial hedge which provided a price floor of
$2.00 per Mcf on approximately 50% of the Company's production since May 1994.
This price hedge expired in April 1995. Oil and gas operating costs for 1995
were 2% lower than for 1994, primarily due to lower production due to the 1994
property sale, partially offset by initial one-time costs incurred on
acquisitions of new properties during early 1995.
Depletion, depreciation and amortization of the composite cost of evaluated
oil and gas properties is computed on the units-of-production method based on
estimated proved reserves. The 1995 expense related to oil and gas properties
is 34% less than 1994, due to lower production and the effect of property
acquisitions in 1995. Depreciation of the compressor fleet increased 2% in 1995
from 1994 due to acquisitions of equipment.
At December 31, 1995, associated with the highly competitive marketplace
for compression rental equipment and the low utilization rates experienced on
certain of the Company's equipment, the Company has identified certain equipment
which it intends to dispose of, with the sale expected to be completed in the
first half of 1996. Accordingly, the book value of the equipment has been
reduced to its estimated fair value of the approximately $800,000, resulting in
a provision to reduce the carrying value of the equipment of $1,790,000. For
the year ended December 31, 1995, these compressors generated revenues of
approximately $338,000 and depreciation expense of $246,000. The Company
anticipates that the proceeds of this sale of equipment will be used to acquire
other compression equipment more suited to the current marketplace, and as such,
this equipment remains classified as a long-term asset.
General and administrative expense decreased $740,000 or 29% due to
reductions in corporate expenses related to the Company's ongoing efforts to
control such costs, as well as certain administrative efficiencies resulting
from the merger of the Company's three wholly owned gas compressor subsidiaries.
Interest expense increased by $201,000 in 1995 compared to 1994 as a result
of additional bank borrowings.
1994 VERSUS 1993 VERSUS 1992
In 1994, the Company had net income of $1,049,000 compared to a net income
of $288,000 in 1993 and $20,000 in 1992. The improvement in 1994 net income
resulted principally from a gain on the sale of oil and gas properties.
Revenues from the sale of oil and gas decreased by $382,000 or 17% in 1994
from 1993, reflecting the sale of properties and a decrease in the average sales
price per Mcf of gas of 7% from $2.05 per Mcf in 1993 to $1.91 in 1994. Oil and
gas revenues decreased 15% in 1993 from 1992, reflecting a normal decline of
volumes produced and the sale of properties in 1993, which was somewhat offset
by a 21% increase in the average price received for gas production.
16
<PAGE>
Revenues from compressor sales decreased $354,000 or 14% in 1994 from 1993,
a result of a decrease in the average sales price per Mcf of gas which resulted
in a lagging demand for compressors. Revenues from compressor sales increased
$1.6 million, or 180% in 1993 from 1992, of which $1.2 million is related to
operations of Mid-South. The remaining increase is due principally to one sale
of three compressors completed by the Company.
In 1994, compressor rental revenue increased by $3.5 million over 1993 due
to a full year of the acquired entities. In 1993, compressor rental revenue
increased by $3.4 million of which $2.3 million and $.9 million are related to
the acquisitions of Mid-South and Owens, respectively. Equity Compressors
rental revenue increased by $.2 million as a result of additional units added to
the compressor rental fleet during 1993.
Oil and gas operating costs for 1994 were 2% lower than for 1993, primarily
due to the sale of producing wells. Oil and gas operating costs for 1993 were
19% lower than for 1992, primarily due to fewer producing wells and a reduction
in the amount of workover activity.
Compressor cost of sales in 1994 decreased $297,000 or 15% which is
consistent with the decrease in compressor sales. Profit margins on compressor
sales and remanufacturing increased to 24% in 1994 from 23% in 1993. Compressor
cost of sales increased $1.2 million or 140% in 1993 from 1992, which is
consistent with the increase in compressor sales. Profit margins on compressor
sales increased to 23% in 1993 from 9% in 1992 reflecting the sale of the three
large compressors in 1993 as well as the impact of Mid-South's sales.
Compressor operating costs incurred on rental units increased $1.7 million
in 1994 primarily due to the additional compressor rental activities of Mid-
South and Owens which, for the entire fiscal year, increased $1.2 million and
$.4, respectively, reflecting twelve months of 1994 activity versus six months
in 1993. Compressor operating costs incurred on rental units increased $1.4
million in 1993, primarily due to costs of the compressor rental activities of
Mid-South and Owens which totalled $950,000 and $450,000, respectively.
The 1994 depreciation, depletion and amortization expense related to oil
and gas properties is 6% less than 1993, due to an upward revision of reserve
estimates at year-end 1994. Depreciation of the compressor fleet increased to
$1,804,000 in 1994 from $908,000 in 1993. The 1993 depreciation, depletion and
amortization expense related to oil and gas properties was 37% less than 1992,
due to lower production volumes and an upward revision of reserve estimates at
year-end 1993. Depreciation of the compressor fleet increased to $908,000 in
1993 from $201,000 in 1992 due to the addition of approximately 400 units as a
result of the Mid-South and Owens mergers.
General and administrative expense increased $687,000 which includes an
increase of $454,000 due to the additions of the operations of Mid-South and
Owens, reflecting twelve months of activity in 1994 versus six months in 1993.
General and administrative expense increased $750,000 in 1993 versus 1992 which
includes an increase of $650,000 due to the additions of Mid-South and Owens and
an increase of $100,000 for Equity Compressors. The increase in Equity
Compressors general and administrative expense is due to the addition of three
new employees and wage and salary increases during 1993.
Interest expense increased by $355,000 in 1994 compared to 1993 as a result
of additional bank borrowings and higher interest rates in 1994. Interest
expense increased by $300,000 in 1993 as a result of additional bank borrowings
in 1993 to finance the previously discussed mergers.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
In September 1995, the Company refinanced its existing debt in order to
increase the amounts available for new investment and working capital. The debt
is structured as three separate notes and is collateralized by substantially all
of the assets of the Company. One note has an initial loan balance of
17
<PAGE>
$1.2 million and is being amortized at $35,000 per month, plus interest.
Another note, with an initial principal amount of $425,000 is amortized at
$8,854 per month, over 48 months, plus interest. A third note, an 18 month
revolving line of credit with a $12 million cap to allow for financing of asset
acquisitions, has an initial borrowing base of $8.5 million available for
general business purposes. At March 15, 1996, the Company had utilized $8.4
million of the credit line. Under the terms of the credit line, the outstanding
balance at March 31, 1997 will be converted to a term note payable over 36
months. The Company's new debt agreement includes amounts due in 1996 totalling
$682,000.
Net cash provided by operating activities decreased to $1 million in 1995
from $3.3 million primarily due to the net loss experienced in 1995 and
increased levels of receivables and inventory. Net cash used in investing
activities decreased to $1.5 million in 1995 from $3.2 million, due to decreased
acquisitions of compressor equipment in 1995. Net cash provided by financing
activities was $498,000, as additional 1995 borrowings were obtained by the
Company. At December 31, 1995 the Company had current assets of approximately
$3.5 million and current liabilities of $2.5 million. The Company anticipates
that 1996 cash flow from operations, as well as the credit line will be
sufficient to fund the Company's working capital and capital expenditure needs.
As a result of the 1994 oil and gas property sale and the 1993 acquisitions
of Mid-South and Owens, the Company's deferred tax liability increased
significantly. The potential turnaround of these deferred taxes is not likely
to occur in the near future, due to available accelerated depreciation remaining
on the purchased equipment associated with the acquisitions. Management
continues to monitor its exposure to near-term liabilities and to review
strategies to further defer the payment of such liabilities.
In October 1995, Statement of Financail Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires
the computation of compensation for grants of stock, stock options and other
equity instruments issued to employees based on fair value. The compensation
calculated is to either be recorded as an expense in the financial statements
or, alternatively, disclosed. The Company anticipates it will elect the
disclosure method of complying with the new standard. Under existing accounting
rules the Company's stock option grants have not resulted in compensation
expense. Accordingly, under the provisions of the new statement, pro forma net
income to be disclosed will be lower than net income reported in the financial
statements.
EFFECTS OF INFLATION
- --------------------
In recent years inflation has not had a significant impact on the Company's
operations or financial condition. The impact of inflation on the Company in
the future will depend on the relative increases, if any, the Company may
realize from its compressor sales and rental rates and the selling price of its
oil and gas.
ITEM 7. FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements required by this Item begin
at page F-1 following page 21 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information required by this item with respect to the Company's Directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the Section entitled "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act", respectively, of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting. The
information required by this item with respect to the Company's executive
officers appears at Item 4A of Part I of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
Section entitled "Compensation of Directors and Executive Officers" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
Section entitled "Voting Securities and Principal Holders Thereof" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
Section entitled "Certain Relationships and Related Transactions" of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Company's 1996 annual meeting.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation. Previously filed as Exhibit 3.2 to
the Company's Registration Statement on Form S-4 (S.E.C. File No.
33-30686), which Exhibit is incorporated herein by reference
thereto.
3.2 By-Laws. Previously filed as Exhibit 3.5 to the Company's
Registration Statement on Form S-4 (S.E.C. File No. 33-30686),
which Exhibit is incorporated herein by reference thereto.
10.1 Purchase Agreement dated February 9, 1988, by and between Merrico
Resources, Inc. and Hawkins Exploration. Previously filed as
Exhibit 10.14 to the Company's Registration Statement on Form S-4
(S.E.C. File No. 33-30686), which Exhibit is incorporated herein
by reference thereto.
10.2 Asset Purchase and Sale Agreement, Guarantee to Repurchase Stock
dated March 9, 1990, by and between Charles R. Hogue and Hawkins
Energy Corporation. Previously filed as Exhibit (C) to the
Company`s Form 8-K dated April 20, 1990, which Exhibit is
incorporated herein by reference thereto.
10.3 ECI Compressor Leasing Limited Partnership Agreement dated October
13, 1989 between Equity Compressors, Inc. and Limited Partners.
Previously filed as Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, which Exhibit is
incorporated herein by reference thereto .
10.4 Equity Compressors Leasing 1990 Limited Partnership dated July 31,
1990 between Equity Compressors, Inc. and Limited Partners.
Previously filed as Exhibit 10.4 to the
19
<PAGE>
Company's Annual Report on Form 10-K for the year ended December
31, 1991, which Exhibit is incorporated herein by reference
thereto.
10.5 Employment Agreement dated as of June 11, 1993, between Don E.
Smith and Mid-South Compressors, Inc. Previously filed as Exhibit
10.5 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1993, which Exhibit is incorporated herein by
reference thereto. (2)
10.6 Revolving credit and term loan agreement dated December 30, 1994
between the Company and Bank of Oklahoma. Previously filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994, which Exhibit is incorporated herein
by reference thereto.
10.7 Hawkins Energy Corporation Employee Stock Option Plan. Previously
filed as Exhibit 4(d) to the Company's Registration Statement on
Form S-8 (S.E.C. File No. 33-74740), which Exhibit is incorporated
herein by reference thereto. (2)
10.8 Hawkins Energy Corporation 1994 Directors Stock Option Plan.
Previously filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994, which Exhibit is
incorporated herein by reference thereto .
10.9 Hawkins Energy Corporation 401(k) Plans. Previously filed as
Exhibit 4(c) to the Company's Registration Statement on Form S-8
(S.E.C. File No. 33-74640), which Exhibit is incorporated herein
by reference thereto. (2)
10.10 Hawkins Energy Corporation Revolving Credit and Term Loan
Agreement dated September 1, 1995. (1)
21.1 Subsidiaries of the Registrant. (1)
23.1 Consent of Independent Accountants. (1)
23.2 Consent of Independent Petroleum Engineers. (1)
27 Financial Data Schedule. (1)
____________________
(1) Filed herewith.
(2) Management contract or agreement.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed for the three months ended December
31, 1995.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 of 15(d) 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.
HAWKINS ENERGY CORPORATION
DATE: March 25, 1996 By: /s/ Thomas F. Ostrye
--------------------------------------
Thomas F. Ostrye,
Chairman of the Board, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
DATE: March 25, 1996
/s/ Thomas F. Ostrye Chairman of the Board, President and Director
------------------------------
THOMAS F. OSTRYE
/s/ James F. Hawkins, Jr. Vice Chairman of the Board and Director
------------------------------
JAMES F. HAWKINS, JR.
/s/ Clifford S. Lewis Vice President, Treasurer,
----------------------------- Secretary and Director
CLIFFORD S. LEWIS (Principal Financial and Accounting Officer)
/s/ John B. Hawkins Director
-----------------------------
JOHN B. HAWKINS
/s/ Charles M. Butler, III Director
-----------------------------
CHARLES M. BUTLER, III
/s/ Donald C. Nejedly Director
-----------------------------
DONALD C. NEJEDLY
/s/ Don E. Smith Director
-----------------------------
DON E. SMITH
/s/ David J. Parsons Director
-----------------------------
DAVID J. PARSONS
21
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of independent accountants........................... F-2
Consolidated balance sheets................................. F-3
Consolidated statements of operations....................... F-4
Consolidated statements of changes in stockholders' equity.. F-5
Consolidated statements of cash flows....................... F-6
Notes to consolidated financial statements.................. F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Hawkins Energy Corporation
We have audited the consolidated balance sheets of Hawkins Energy
Corporation ("the Company") at December 31, 1995 and 1994 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1995 and 1994 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As explained in Note 2 to the Consolidated Financial Statements, in 1995
the Company changed its method of accounting for long-lived assets.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
March 25, 1996
F-2
<PAGE>
HAWKINS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 177 $ 115
Accounts receivable, less allowance for doubtful accounts
of $25 and $158 in 1995 and 1994, respectively.............. 1,377 760
Accounts receivable -- related party......................... 25 146
Notes receivable............................................. 262 172
Income tax receivable........................................ 58 42
Compressors and compressor parts inventory................... 1,458 1,261
Other........................................................ 121 59
------- -------
Total current assets........................................ 3,478 2,555
------- -------
Cash held for reinvestment in oil and gas properties.......... -- 2,513
------- -------
Property and Equipment, net (Note 4).......................... 21,399 21,430
------- -------
Goodwill and other intangibles, net of amortization of
$1,690 in 1995 and $1,633 in 1994.......................... 794 850
Notes receivable.............................................. 315 503
Other assets, net............................................. 55 63
------- -------
Total Assets.................................................. $26,041 $27,914
======= =======
Current Liabilities:
Current portion of long-term debt............................ $ 682 $ 2,263
Accounts payable and accrued liabilities..................... 1,778 1,779
Accounts payable - affiliate................................. 88 49
------- -------
Total current liabilities................................... 2,548 4,091
Long-term debt................................................ 9,000 6,967
Deferred income taxes......................................... 3,697 4,655
Other......................................................... 98 111
------- -------
Total Liabilities............................................. 15,343 15,824
------- -------
Commitments (Note 9)
Stockholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued.............................. -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
13,049,235 and 13,049,235 shares issued and 12,961,968 and
12,862,568 outstanding in 1995 and 1994, respectively....... 130 130
Additional paid-in capital................................... 12,114 12,114
Retained earnings (deficit).................................. (1,448) 52
Treasury stock, at cost (87,267 and 186,667 shares in
1995 and 1994, respectively)................................ (98) (206)
------- -------
Total stockholders' equity.................................... 10,698 12,090
------- -------
Total Liabilities and Stockholders' Equity.................... $26,041 $27,914
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------- ------- ------
(In thousands, except for
per share amounts)
<S> <C> <C> <C>
Revenues:
Oil and gas sales......................... $ 1,530 $ 1,850 $ 2,232
Compressor sales and remanufacturing...... 1,611 2,209 2,563
Compressor rentals and service fees....... 6,802 7,706 4,190
Interest and other income................. 102 79 60
Gain on sale of oil and gas properties
(Note 4)................................ -- 1,880 --
Gain (loss) on sale of assets............. (23) 31 (7)
------- ------- -------
Total revenues.......................... 10,022 13,755 9,038
------- ------- -------
Expenses:
Operating costs-oil and gas............... 621 636 646
Cost of compressor sales and
remanufacturing......................... 1,093 1,687 1,984
Operating costs-compressors............... 3,558 3,687 1,938
Depreciation, depletion and amortization.. 2,253 2,368 1,485
Provision to reduce the carrying value
of compressor equipment (Note 2)........ 1,790 -- --
General and administrative................ 1,850 2,590 1,903
Amortization of intangibles............... 73 106 82
Interest.................................. 1,043 842 487
Other..................................... 31 91 25
------- ------- -------
Total expenses.......................... 12,312 12,007 8,550
------- ------- -------
Income (loss) before income taxes........... (2,290) 1,748 488
Income tax benefit (expense)................ 852 (699) (200)
------- ------- -------
Net income (loss)........................... $(1,438) $ 1,049 $ 288
======= ======= =======
Income (loss) per common share.............. $ (.11) $ .08 $.03
======= ======= =======
Weighted average number of
shares outstanding......................... 12,931 12,826 8,730
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID IN EARNINGS TREASURY
STOCK CAPITAL (DEFICIT) STOCK TOTAL
------ --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1992 $ 39 $ 5,428 $(1,285) $ (259) $ 3,923
Issuance of stock in Mid-South
Acquisition (5,448,804 shares) 54 1,561 -- -- 1,615
Sale of stock to Mid-South
stockholders (400,000 shares) 4 496 -- -- 500
Issuance of stock in Owens
Acquisition (3,198,683 shares) 32 4,591 -- -- 4,623
Reclassification of common stock
subject to repurchase
(7,777 shares) 1 20 -- -- 21
Purchase of treasury stock
(12,300 shares) -- -- -- (10) (10)
Sale of treasury stock
(11,647 shares) -- 9 -- 9 18
Net Income -- -- 288 -- 288
------ ------- ------- ------ -------
Balances, December 31, 1993 $ 130 $12,105 $ (997) $ (260) $10,978
------ ------- ------- ------ -------
Sale of treasury stock -- 9 -- 54 63
(63,994 shares)
Net Income -- -- 1,049 -- 1,049
------ ------- ------- ------ -------
Balances, December 31, 1994 $ 130 $12,114 $ 52 $ (206) $12,090
------ ------- ------- ------ -------
Sale of treasury stock
(99,400 shares) -- -- (62) 108 46
Net Loss -- -- (1,438) -- (1,438)
------ ------- ------- ------ -------
Balances, December 31, 1995 $ 130 $12,114 $(1,448) $ (98) $10,698
====== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................. $(1,438) $ 1,049 $ 288
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depletion, depreciation, and
amortization............................ 2,326 2,474 1,567
Provision to reduce the carrying value
of compressor equipment................. 1,790 -- --
Bad debt expense........................... 52 69 --
Deferred taxes............................. (958) 567 (146)
(Gain) loss on sale of assets.............. 23 (1,911) 7
Changes in operating assets and liabilities:
Accounts receivable....................... (564) 618 (202)
Note receivable........................... 98 216 (851)
Compressors and parts inventory........... (234) 97 116
Accounts payable and accrued liabilities.. 25 13 217
Other..................................... (72) 149 (98)
------- ------ -------
Net cash provided by operating
activities.............................. 1,048 3,341 898
------- ------ -------
Cash flows from investing activities:
Additions to oil and gas
properties.................................. (2,534) (222) (343)
Proceeds from disposition of oil
and gas properties.......................... -- 2,499 534
Acquisitions of compressor and other
equipment................................... (1,753) (3,092) (1,196)
Proceeds from sale of compressor
and other equipment........................ 291 170 215
Cash held for reinvestment in
oil and gas properties...................... 2,513 (2,513) --
Increase in goodwill and
other assets................................ (1) (23) (60)
Acquisition of Mid-South (Note 3)............. -- -- (1,408)
Acquisition of Owens (Note 3)................. -- -- (42)
------- ------ -------
Net cash used in investing activities... (1,484) (3,181) (2,300)
------- ------ -------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE>
HAWKINS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Purchase of treasury stock............. $ -- $ -- $ (10)
Sale of treasury stock................. 46 63 18
Purchase of common stock subject
to repurchase........................ -- (23) --
Payments of capital lease obligations.. -- (3,099) (252)
Proceeds of long-term debt............. 1,804 6,797 7,585
Payments on long-term debt............. (1,352) (3,803) (6,517)
Proceeds of stock issuance............. -- -- 500
------- ------- -------
Net cash provided by (used in)
financing activities............ 498 (65) 1,324
------- ------- -------
Net increase (decrease) in cash
and cash equivalents................... 62 95 (78)
Cash and cash equivalents,
beginning of year...................... 115 20 98
------- ------- -------
Cash and cash equivalents,
end of year............................ $ 177 $ 115 $ 20
======= ======= =======
Supplemental disclosure of cash
flow information:
Interest paid.......................... $ 952 $ 759 $ 499
======= ======= =======
Income taxes paid...................... $ 170 $ 376 $ --
======= ======= =======
Non-cash investing and financing
activities:
Issuance of stock related to
acquistions.......................... $ -- $ -- $ 6,238
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<PAGE>
HAWKINS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Hawkins Energy Corporation (the "Company") is engaged in the
production of natural gas and oil, and in the leasing, remanufacturing and
direct sale of gas compression equipment to operators of producing natural gas
wells and gas gathering systems. Its principal geographical operating areas lie
within the states of Alabama, Mississippi, Louisiana, Oklahoma, Arkansas, Kansas
and Texas.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All inter-company transactions have
been eliminated.
Cash Equivalents
The Company includes in cash equivalents all investments with original
maturities of three months or less at the date of purchase, which are readily
convertible into known amounts of cash.
Property and Equipment
Compressor equipment held by the Company for rental purposes is stated
at cost and depreciated on a straight-line basis over an estimated 12 or 15-year
useful life. Buildings and other equipment are stated at cost and depreciated
over their estimated useful lives of 30 years and 5 years, respectively.
Repairs and maintenance are charged to expense as incurred and major
renewals and betterments are capitalized. Upon sale or retirement of equipment,
the cost of the equipment disposed of and the related accumulated depreciation
are removed from the accounts and the resulting gain or loss is reflected in
operations.
Realization of the carrying value of the Company's compressor
equipment is evaluated utilizing estimated future net cash flows from
utilization and considering the estimated fair value of the equipment. Changes
in these estimates could cause the Company to reduce the carrying value of its
compressor equipment (See Note 2).
Oil and Gas Operations
The Company accounts for its oil and gas exploration and development
activities on the full cost method of accounting prescribed by the Securities
and Exchange Commission ("SEC"). Accordingly, all productive and non-productive
costs incurred in connection with the acquisition, exploration and development
of oil and gas reserves are capitalized and amortized using the units-of-
production method based on proved oil and gas reserves. The Company's oil and
gas reserves are estimated annually by independent petroleum engineers. The
depreciation, depletion and amortization rates were $.43, $.48 and $.48 per
equivalent Mcf produced in 1995, 1994 and 1993, respectively. In the event the
unamortized cost of oil and gas properties being amortized exceeds the full cost
ceiling as defined by the SEC, the excess is charged to expense in the period
during which such excess occurs. Changes in reserve estimates or a decline in
oil and natural gas prices could cause the Company in the near-term to reduce
the carrying value of its oil and natural gas properties.
F-8
<PAGE>
Sales and abandonments of properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized unless a significant amount
of reserves is involved (see Note 4). Since all of the Company's oil and gas
properties are located in the United States, a single cost center is used.
Gas Balancing
The Company accounts for oil and gas revenue on the sales method--
recording revenues earned when gas is delivered. During such times as the
Company's sales of gas exceeds its percentage ownership in a well, such sales
are recorded as revenue unless total sales from the well have exceeded the
Company's share of total estimated reserves underlying the property, at which
time such excess is recorded as a liability. At December 31, 1995, based on the
year-end price of $1.92, the Company estimates its balancing position to be
approximately $50,000 on underproduced properties and $188,000 on overproduced
properties. The Company's policy is to record lease operating costs from all
wells to correspond with the related recognition of revenue.
Compressors and Compressor Parts Inventory
Compressors and compressor parts are carried at the lower of cost or
market, using specific identification of costs and weighted average costs,
respectively. At December 31, compressor and compressor parts inventory
consisted of:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Compressor Work in Progress $ 326 $ 146
Cylinders 281 218
Parts and Supplies 851 897
----- -----
$1,458 $1,261
====== ======
</TABLE>
Goodwill and Other Intangibles
Goodwill is amortized using the straight-line method over the estimated
benefit periods of twenty-four to thirty years. Goodwill is evaluated for
impairment based on estimated fair value whenever circumstances indicate that
its carrying value may not be recoverable and reduced if necessary. No
impairment has been recorded as of December 31, 1995. Noncompete agreements are
amortized using the straight-line method over the life of the agreement of seven
years.
Income Taxes
The Company uses the liability method of accounting for income taxes. This
method requires the measurement of deferred tax assets for deductible temporary
differences and deferred tax liabilities for taxable temporary differences.
Measurement of current and deferred tax liabilities and assets is based on
provisions of enacted tax law; the effects of future changes in tax laws or
rates are not included in the measurement. Deferred tax liabilities primarily
result from the recognition of depreciation, depletion and amortization in
different periods for financial reporting and tax purposes. Income tax expense
is the tax payable for the current year and the change during that year in
deferred tax assets and liabilities.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-9
<PAGE>
Financial Instruments and Concentration of Credit Risk
At December 31, 1994, the Company had natural gas price swaps related to
its production and sale of natural gas which provided the Company a minimum
price of $2.00 per Mmbtu and a maximum price of $2.38 per Mmbtu for 40,000 Mmbtu
per month for the months of January through April of 1995. The swaps were
accounted for as hedges of the Company's gas sales. Gains or losses
resulting from these swaps are recognized in the consolidated statement of
operations and included in operating cash flows in the same period as the
associated sale of natural gas occurs.
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade receivables with a variety of oil and gas
companies. The Company generally does not require collateral related to
receivables. Such credit risk is considered by management to be limited due to
the large number of customers comprising the Company's customer base.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Recently Issued Accounting Pronouncements
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires
the computation of compensation for grants of stock, stock options and other
equity instruments issued to employees based on fair value. The compensation
calculated is to be either recorded as an expense in the financial statements
or, alternatively, disclosed. The Company anticipates it will elect the
disclosure method of complying with the new standard. Under existing accounting
rules the Company's stock option grants have not resulted in compensation
expense. Accordingly, under the provisions of the new statement, pro forma net
income to be disclosed will be lower than net income reported in the financial
statements.
NOTE 2 PROVISION TO REDUCE THE CARRYING VALUE OF COMPRESSOR EQUIPMENT
In the fourth quarter of 1995, the Company adopted Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long Lived Assets and Long
Lived Assets to be Disposed Of." This standard requires that Long-lived assets
be evaluated for impairment whenever events or changes and circumstances
indicate that the carrying value of an asset may not be recoverable.
At December 31, 1995, associated with the highly competitive marketplace
for compression rental equipment and the low utilization rates experienced on
certain of the Company's equipment, the Company has identified certain equipment
which it intends to dispose of, with the sale expected to be completed in the
first half of 1996. Accordingly, the book value of the equipment has been
reduced to its estimated fair value of the approximately $800,000, resulting in
a provision to reduce the carrying value of the equipment of $1,790,000. For
the year ended December 31, 1995, these compressors generated revenues of
approximately $338,000 and depreciation expense of $246,000. The Company
anticipates that the proceeds of this sale of equipment will be used to acquire
other compression equipment more suited to the current marketplace, and as such,
this equipment remains classified as a long-term asset.
NOTE 3 ACQUISITIONS
Effective June 30, 1993, the Company acquired 100% of the common stock of
Mid-South Compressors, Inc., a company specializing in the purchase,
remanufacture, sale and leasing of gas compressors, for cash consideration of
$1,408,000 and the issuance of 5,448,804 shares of common stock. The
acquisition was accounted for as a purchase. Under the purchase method, the
assets and liabilities of Mid-South were recorded at their fair values. The
operating results of Mid-South have been included in the Company's consolidated
results of operations beginning July 1, 1993. Subsequent to the
F-10
<PAGE>
acquisition, the shareholders of Mid-South purchased 400,000 additional shares
of the Company's common stock for $500,000.
Effective July 1, 1993, the Company acquired 100% of the common stock of
Owens Compression Service, Inc., a company that provides gas compression
services primarily in North Louisiana and East Texas, for cash consideration of
$42,000 and the issuance of 3,198,683 shares of common stock. The acquisition
was accounted for as a purchase. The operating results of Owens have been
included in the Company's consolidated results of operations beginning July 1,
1993.
NOTE 4 PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994
------- -------
(In thousands)
<S> <C> <C>
Land and building................................ $ 299 $ 299
Oil and gas properties, on the full cost method.. 34,544 32,010
Compressor equipment............................. 22,110 22,473
Other equipment.................................. 469 451
------- -------
57,422 55,233
Less accumulated depreciation, depletion and
amortization.................................... 36,023 33,803
------- -------
Net property and equipment....................... $21,399 $21,430
======= =======
</TABLE>
On December 30, 1994, the Company sold interests in fifty-seven wells
located in the Arkoma Basin of northwest Arkansas. The natural gas reserves
attributable to the properties sold represented approximately one-third of the
total equivalent natural gas reserves owned by the Company. The Company
received $2,513,000 for the well interests and related production equipment and
recognized a gain of $1,880,000 on the sale. The proceeds from the sale were
utilized to purchase oil and gas properties, in early 1995 resulting in a "like
kind exchange" for tax purposes, with the gain on sale being deferred for tax
purposes.
In 1994, the Company acquired compressor equipment valued at $262,500 in
exchange for 210,000 shares of common stock. Each of the sellers had the right
to sell the shares back to the Company at $1.325 per share from July 1, 1994 to
January 15, 1995 if the shares were not registered on behalf of such sellers
pursuant to an effective registration statement under the Securities Act of
1933, as amended, prior to that date. In July 1994, one of the sellers of the
compressor equipment exercised the right to sell 105,000 shares of the Company's
common stock to the Company and the Company purchased such shares for $139,125.
In February 1995, the other seller exercised the same right and the Company
purchased 105,000 shares for $139,125.
F-11
<PAGE>
NOTE 5 LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following: 1995 1994
---- ----
(In thousands)
<S> <C> <C>
Note payable to bank at 2% over prime
(10% at December 31, 1995)(a)(e)............. $1,086 $1,417
Revolving line of credit at 2% over prime
(10% at December 31, 1995)(c)(e)............. 8,274 7,450
Note payable to bank at 2% over prime (c)(e)
(10.50% at December 31, 1995)................ 159 265
Notes payable, other.......................... 163 98
------ ------
Total debt.................................... 9,682 9,230
Less current portion.......................... 682 2,263
------ ------
Total long-term debt.......................... $9,000 $6,967
====== ======
</TABLE>
______
(a) In September 1995, the Company finalized an oil and gas loan of $1,225,722
to replace prior loans outstanding. Under the agreement, 34 monthly
principal installments of $35,000 commenced September 1, 1995 with a final
payment due July 31, 1998. Interest is payable monthly. The loan is
collateralized by the Company's interest in oil and gas properties.
(b) In September 1995, the Company also finalized a compressor equipment loan
with an initial borrowing base of $8,500,000. Under the agreement,
interest is payable monthly. The loan is collateralized by the Company's
compressor equipment and rental proceeds from these units with the
outstanding unpaid principal balance on March 31, 1997 being converted to
a 36 month term payout.
(c) In July 1993, the Company completed a sale of compression equipment to a
customer at a sales price of $888,000. The Company borrowed $425,000 to
partially finance the cost of the equipment. Principal payments due to the
bank are $8,854 per month for 48 months. The loan is collateralized by the
note receivable from the customer.
(e) Covenants related to the debt agreements include the maintenance of
specified levels of working capital, tangible net worth and debt service
ratio, as defined by the agreements. Additionally, the agreements prohibit
the payment of dividends and place limitations on the repurchase of shares
of the Company's stock and the incurrence of new borrowings. During 1995,
the Company was not in compliance with certain covenants of its debt
agreements, which were waived by the lender.
Long-term debt maturities as of December 31, 1995 are $682,000, $1,722,000,
$1,900,000, $1,655,000 and $1,655,000 in 1996, 1997, 1998, 1999 and 2000,
respectively, with a remainder of $2,068,000 due in subsequent years. Based on
the interest rates currently available to the Company for borrowings with
similar terms and maturities, the long-term debt at December 31, 1995
approximates fair value.
NOTE 6 INCOME TAXES
Consolidated income tax expense for each of the three years in the period
ended December 31, 1995, consists of the following components:
F-12
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current provision................... $ 20 $132 $346
Deferred expense (benefit).......... (872) 567 (146)
---- --- ----
Total income tax expense (benefit).. $(852) $699 $200
===== ===== ====
</TABLE>
The Company's effective tax rate on pre-tax income differs from the U.S.
federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
U.S. statutory regular tax rate..... (34%) 34% 34%
State taxes......................... (4%) 4% 4%
Goodwill and other.................. 1% 1% 3%
---- --- ---
Total............................... (37%) 39% 41%
==== === ===
</TABLE>
Deferred tax assets and liabilities are comprised of the following at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowances for losses............. $ 10 $ 34
Net operating loss carryforward... 894 399
Alternative minimum tax credit
carryforward.................... 335 197
------ ------
Gross deferred tax assets....... 1,239 630
====== ======
Deferred tax liabilities:
Property and equipment --
depreciation, depletion
and amortization*............... 4,936 5,285
------ ------
Gross deferred tax liabilities.. 4,936 5,285
------ ------
Net deferred tax liability.......... $3,697 $4,655
====== ======
</TABLE>
*Includes tax effect of cash held for reinvestment in oil and gas properties of
$2,513 as December 31, 1994.
At December 31, 1995, the Company had net operating loss carryforwards for
regular tax purposes of $2,352,000 which expire in 2009 and 2010. Deferred
income taxes of approximately $86,000 were reclassified to current in 1995 to
correct certain prior year estimates.
NOTE 7 COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN. On August 8, 1989, the Board of Directors of
Hawkins Energy adopted and its stockholders approved the Hawkins Energy Employee
Stock Option Plan (the "Stock Option Plan") which became effective on that date.
An aggregate of 130,000 shares of common stock are initially available for sale
upon exercise of options granted under the Stock Option Plan; provided, however,
that the number of shares available for options which may be granted under the
Stock Option Plan will automatically be increased without action of the
directors or stockholders of Hawkins Energy to an amount equal to (when added to
the number of shares of Hawkins Energy Common Stock subject to all other
F-13
<PAGE>
options granted by Hawkins Energy) 8% of the issued and outstanding shares of
common stock upon each issuance of shares of common stock occurring after
February 28, 1990 (other than issuances of shares upon the exercise of options
granted under the Stock Option Plan). The Board of Directors may make
authorized but unissued common stock available for the exercise of options or it
may utilize shares held in the treasury. The Stock Option Plan is not subject
to the provisions of the Employee Retirement Income Security Act of 1974 and the
options will not be "incentive stock options," as such term is defined in
Internal Revenue Code Section 422A.
At December 31, 1995, no options had been granted under this plan.
DIRECTOR STOCK OPTION PLAN. On August 8, 1989, the Board of Directors
adopted and the stockholders approved the Hawkins Energy Director Stock Option
Plan (the "1989 Director Plan") which became effective on that date. An
aggregate of 170,000 shares of Hawkins Energy Common Stock are available for
sale upon exercise of options granted under the Director Plan. The Director
Plan is not subject to the provisions of the Employee Retirement Income Security
Act of 1974 and the options will not be "incentive stock options," as such term
is defined in Internal Revenue Code Section 422A.
At December 31, 1995 and 1994, options for 170,000 shares at a price of
$2.50 had been granted under the plan and all were exercisable on those dates.
The 1989 Director Plan terminated on August 8, 1992. These options expire in
the year 2030.
On May 25, 1994, the Board of Directors adopted and the stockholders
approved the 1994 Director Stock Option Plan which became effective on that
date. Options to acquire an aggregate of 355,000 shares of Common Stock were
granted. At December 31, 1995, options for 355,000 shares at a price of $1.40
were exercisable. At December 31, 1995, no options had been exercised. These
options expire on May 24, 2004.
EMPLOYEE BENEFIT PLAN. Substantially all of the Company's employees are
covered by a defined contribution 401(k) plan adopted in 1991. The Company
matches 50% of the employee contributions up to a limit of 4% of employee annual
earnings. All matching contributions are made in Company stock. Total expense
related to the plan amounted to $48,000 in 1995, $55,000 in 1994 and $13,000 in
1993.
OTHER. Non-qualified options for 15,000 shares at a price of $2.50 per
share were granted to a former employee of the Company in 1990, all of which are
currently exercisable with an expiration date of January 2030.
NOTE 8 TRANSACTIONS WITH RELATED PARTIES
Amounts have been accrued in the years ended December 31 by the Company to
an affiliate for general and administrative overhead including rent and
production and drilling overhead as follows: $135,000 in 1995, $155,000 in 1994
and $187,000 in 1993.
Equity Compressors earned compressor rental revenues from an affiliate in
the amount of $104,000 in 1995, $154,000 in 1994 and $224,000 in 1993. Equity
earned rental revenues from a related entity of $67,000 in 1995, $227,000 in
1994, and $136,000 for the six month period of July 1, 1993 through December 31,
1993. At December 31, 1995 and 1994, Equity's receivable from the related
entity was $1,000 and $146,000, respectively.
NOTE 9 COMMITMENTS
The Company leases compressor equipment under contracts with terms ranging
from month to month to three years. The future revenues to be received under
contracts at December 31, 1995 are $549,000, $401,000, $388,000 and $65,000 in
1996, 1997, 1998 and 1999, respectively.
F-14
<PAGE>
The Company leases facilities for its corporate and field offices with
lease terms ranging from month to month to two years. The Company has certain
other operating leases for other facilities, office equipment and automobiles.
Future minimum rental payments under these leases total $251,000, $159,000,
$56,000, $7,000 and $2,000 for 1996, 1997, 1998, 1999 and 2000, respectively.
The Company's rental expense amounted to $400,000, $318,000 and $287,000 in
1995, 1994 and 1993, respectively.
NOTE 10 INDUSTRY SEGMENT INFORMATION
OPERATIONS BY INDUSTRY SEGMENT
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Oil and gas..................................... $ 1,571 $ 3,730 (2) $ 2,232
Compressor operations........................... 8,508 10,118 6,928
Intersegment.................................... (57) (93) (122)
--------- -------- --------
Total revenue................................. $ 10,022 $ 13,755 $ 9,038
========= ======== ========
Operating profit(loss)(includes depreciation,
depletion and amortization)
Oil and gas..................................... $ 63 $ 2,188 $ 575
Compressor operations........................... (563) (1) 1,752 1,432
--------- -------- --------
Total operating profit.......................... (500) 3,940 2,007
General corporate expense......................... (747) (1,350) (1,032)
Interest expense.................................. (1,043) (842) (487)
--------- -------- --------
Income (loss) before income taxes and cumulative
effect of accounting change..................... $ (2,290) $ 1,748 $ 488
========= ======== ========
Identifiable assets:
Oil and gas..................................... $ 4,277 $ 4,023 $ 2,712
Compressor operations........................... 21,764 23,891 23,645
--------- -------- --------
Total identifiable assets....................... $ 26,041 $ 27,914 $ 26,357
========= ======== ========
Capital expenditures:
Oil and gas..................................... $ 2,534 $ 222 $ 343
Compressor operations........................... 1,753 3,092 1,196
--------- -------- --------
Total capital expenditures...................... $ 4,287 $ 3,314 $ 1,539
========= ======== ========
Depreciation, depletion and amortization:
Oil and gas..................................... $ 350 $ 532 $ 566
Compressor operations........................... 1,976 1,942 1,001
--------- -------- --------
Total depreciation, depletion and
amortization.................................. $ 2,326 $ 2,474 $ 1,567
========= ======== ========
</TABLE>
(1) Includes a provision to reduce the carrying value of certain compression
equipment of $1,790,000.
(2) Includes gain on sale of oil and gas properties of $1,880,000.
Total revenues by industry segment includes revenues from both customers
and intersegment sales. In 1995, one compressor customer accounted for 5% of
total revenues and one gas purchaser
F-15
<PAGE>
accounted for 2% of total revenues. In 1994, one compressor customer accounted
for 4% of total revenues and one gas purchaser accounted for 4% of total
revenues. In 1993, one compressor customer accounted for 10% of total revenues
and one gas purchaser accounted for 6% of total revenues.
NOTE 11 OIL AND GAS INFORMATION (UNAUDITED AS TO RESERVE INFORMATION)
Capitalized costs at year-end and costs incurred during the year were as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Capitalized costs:
Proved properties............................... $34,544 $32,010 $48,754
Unproved properties............................. -- -- --
------- ------- -------
Total............................................. 34,544 32,010 48,754
Less:
Accumulated depreciation, depletion
and amortization and provision to reduce
carrying value.............................. 31,115 30,786 46,661
------- ------- -------
Net capitalized costs..................... $ 3,429 $ 1,224 2,093
======= ======= =======
Costs incurred:
Proved properties............................... 2,534 -- --
Development..................................... -- 222 343
------- ------- -------
Total costs incurred.......................... $ 2,534 $ 222 $ 343
======= ======= =======
</TABLE>
Results of operations for producing activities were as follows:
<TABLE>
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues.......................................... $ 1,530 $ 1,850 $ 2,232
Production costs.................................. (621) (636) (646)
Depreciation, depletion and amortization.......... (329) (477) (522)
Income taxes...................................... (220) (280) (404)
------- ------- -------
Results of operations for producing
activities (excluding overhead and
financing costs)................................ $ 360 $ 457 $ 660
======= ======= =======
</TABLE>
Estimated quantities of proved developed oil and natural gas reserves and
changes in net quantities of proved oil and natural gas reserves were as
follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
------------- -------------- -------------
Oil Gas Oil Gas Oil Gas
Bbls Mcf Bbls Mcf Bbls Mcf
----- ------ ----- ------- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves:
Beginning of year 18 2,501 19 4,788 49 4,654
Revision of estimates 3 (75) 3 111 3 867
Extensions and discoveries 631 -- -- -- 3 471
Purchase of reserves 286 2,000 -- -- -- --
Sales of reserves -- -- -- (1,451) (25) (274)
Production (25) (625) (4) (947) (11) (930)
--- ----- -- ------ --- -----
End of year 913 3,801 18 2,501 19 4,788
=== ===== == ====== === =====
Proved Developed Reserves: 282 3,801 18 2,501 19 4,788
=== ===== == ====== === =====
</TABLE>
Proved reserves are those quantities which, upon analysis of
geological and engineering data, appear with reasonable certainty to be
recoverable in the future from known oil and gas reservoirs under existing
economic and operating conditions. Proved developed reserves are those reserves
which can be expected to be recovered through existing wells with existing
equipment and operating methods.
Oil and gas reserves cannot be measured exactly. Estimates of oil and
gas reserves require extensive judgments of reservoir engineering data and are
generally less precise than other estimates made in connection with financial
disclosures. The Company utilizes Lee Keeling & Associates, Inc., independent
petroleum consultants, to estimate the Company's reserves.
Assigning monetary values to such estimates does not reduce the
subjectivity and changing nature of such reserve estimates. Indeed the
uncertainties inherent in the disclosure are compounded by applying additional
estimates of the rates and timing of production and the costs that will be
incurred in developing and producing the reserves. The information set forth
herein is therefore subjective and, since judgments are involved, may not be
comparable to estimates submitted by other oil and gas producers. In addition,
since prices and costs do not remain static and no price or cost escalations or
de-escalations have been considered, the results are not necessarily indicative
of the estimated fair market value of estimated proved reserves nor of estimated
future cash flows.
F-17
<PAGE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The standardized measure of discounted future net cash flows was
calculated using year-end prices and costs, and year-end statutory tax rates,
adjusted for permanent differences, that relate to existing proved oil and gas
reserves. Future net cash flows as of December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994 1993
------- --------- -------
(In thousands)
<S> <C> <C> <C>
Future cash flows................... $ 22,906 $ 4,414 $ 11,310
Production costs.................... (7,745) (2,145) (4,409)
Development costs................... (576) (94) (260)
Income tax expense.................. (5,410) (755) (2,332)
-------- -------- ---------
Future net cash flows............... 9,175 1,420 4,309
10% discount factor................. (3,759) (368) (1,277)
-------- -------- ---------
Standardized measure of discounted
future net cash flows............. $ 5,416 $ 1,052 $ 3,032
======== ======== =========
</TABLE>
The following table summarizes the principal factors comprising the changes
in the standardized measure of discounted future net cash flows.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
------ -------- ------
(In thousands)
<S> <C> <C> <C>
Standardized measure, beginning
of year.......................... $ 1,052 $ 3,032 $ 2,765
Sales of oil and gas net of
production costs................. (909) (1,214) (1,586)
Net changes in prices and
production costs................. 1,371 (1,173) 933
Extensions and discoveries less
related costs.................... 3,659 -- 516
Purchase of reserves............... 2,714 -- --
Sale of reserves................... -- (1,113) (524)
Revisions of previous estimates.... 74 135 842
Accretion of discount.............. 89 244 228
Change in income tax expense....... (2,634) 1,141 (142)
------- -------- --------
Standardized measure, end of year.. $ 5,416 $ 1,052 $ 3,032
======= ======== ========
</TABLE>
F-18
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE
- ------- ----------- ----
10.10 Revolving credit and term loan agreement, dated
September 1, 1995 between the Company and Bank of Oklahoma..
21.1 Subsidiaries of the Registrant..............................
23.1 Consent of Independent Accountants..........................
23.2 Consent of Independent Petroleum Engineers..................
27 Financial Data Schedule.....................................
<PAGE>
EXHIBIT 10.10
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND
TERM LOAN AGREEMENT
Dated as of
September 1, 1995
among
HAWKINS ENERGY CORPORATION
AND
EQUITY COMPRESSORS, INC.
"Borrowers"
and
BANK OF OKLAHOMA, NATIONAL ASSOCIATION
"BANK"
<PAGE>
THIRD AMENDED AND RESTATED REVOLVING
CREDIT AND TERM LOAN AGREEMENT
------------------------------
THIS THIRD AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT,
dated as of September 1, 1995 ("Agreement"), is entered into among HAWKINS
ENERGY CORPORATION, an Oklahoma corporation ("Hawkins") and EQUITY COMPRESSORS,
INC., an Oklahoma corporation ("Equity") (Hawkins and Equity being collectively
referred to as the "Borrowers") and BANK OF OKLAHOMA, NATIONAL ASSOCIATION, a
national banking association (the "Bank").
W I T N E S S E T H:
A. WHEREAS, the Borrowers have applied to the Bank for a restructure,
extension, modification and increase in the amount of of the Borrowers'
Revolving Credit Commitment, including, without limitation, consolidation of the
outstanding principal balance of the Second Term Loan as a part thereof, and
extension of the maturity of the First Term Loan, to be evidenced by the First
Term Note hereinafter described and defined; and
B. WHEREAS, the Borrowers have also applied to the Bank for an increase
in the Revolving Credit Commitment to a maximum principal amount of $12,000,000,
subject to Revolving Credit Borrowing Base limitations herein set forth, to be
evidenced by Borrowers' joint and several revolving credit note payable to the
order of the Bank in the original principal amount of $12,000,000; and
C. WHEREAS, the Bank is willing to extend the First Term Loan and
restructure, extend, modify and increase the Revolving Credit Commitment to the
Borrowers, subject to the terms, conditions, uses and provisions hereinafter set
forth, all of which are material to the Bank and without which the Bank would
not be willing to extend any of such Commitments described and defined herein;
and
D. WHEREAS, the Borrowers (as well as Mid South Compressors, Inc. ("Mid
South") and Owens Compression Services, Inc. ("Owens")) and the Bank are parties
to that certain First Amended and Restated Revolving Credit and Term Loan
Agreement dated as of July 14, 1993, as modified by the Modification thereto
dated as of September 24, 1993, and the Second Amended and Restated Revolving
Credit and Term Loan Agreement dated as of April 13, 1994, as modified by the
Modification thereto dated as of December 30, 1994 (collectively the "Prior
Agreements"), and in connection with the Borrowers' requested extension of the
First Term Loan, restructure, extension, modification and increase in the
aggregate amount of the Revolving Credit Commitment therein described and
defined from $1,000,000 to $12,000,000, the Borrowers and the Bank desire to
amend and restate the Prior Agreements by the terms of this Agreement; and
E. WHEREAS, Mid-South and Owens have been merged into Equity and Equity
is the successor-in-interest to all assets (including
<PAGE>
Collateral) previously owned and operated by Mid South and Owens, respectively.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, receipt of which is
acknowledged by the parties hereto, the parties agree as follows:
ARTICLE I
---------
CERTAIN DEFINITIONS
-------------------
When used herein, the following terms shall have the following meanings:
1.1 "Adjusted Gross Proceeds" shall mean (i) all proceeds received by the
-------------------------
Borrowers during the applicable period, whether directly or indirectly, from
purchasers of Hydrocarbons produced from the Mortgaged Property, plus (ii) all
----
amounts which Borrowers were entitled to receive during such period but which
were offset by the purchaser of production or an intermediary against
obligations (other than ordinary operating expenses) owing by the Borrowers;
less the amount of all gathering, severance and windfall profits taxes required
- ----
to be paid by the Borrowers with respect to said proceeds and all royalty and
overriding royalty payments to third parties and all ordinary and necessary
operating expenses paid by the Borrowers with respect to the Mortgaged Property,
excluding only such expenses that (i) qualify as capitalized items under GAAP or
(ii) are defined or described in the energy industry as workover expenses or
costs.
1.2 "Affiliate" shall mean any Person which, directly or indirectly,
-----------
controls, or is controlled by, or is under common control with, another Person
and any partner, officer or employee of any such Persons. For purposes of this
definition, "control" shall mean the power, directly or indirectly, to direct or
in effect cause the direction of the management and policies of such Person
whether by contract or otherwise.
1.3 "Applicable Prime Rate" shall mean the annual rate of interest
-----------------------
announced by Chase Manhattan Bank, National Association, New York, New York
("Chase") from time to time as its prime or base rate, which rate shall be the
rate used by Chase as a base or standard for pricing purposes and which shall
not necessarily be its "best" or lowest rate. Should Chase cease to announce a
prime or base rate or should it be merged, consolidated, liquidated or dissolved
in such a manner that it loses its separate corporate identity, then the
Applicable Prime Rate shall be the Prime Rate published by the Wall Street
-----------
Journal in its "Money Rates" column or a similar rate if such rate ceases to be
- -------
published. Any changes in the Applicable Prime Rate shall be effective as of
the date of the change.
- 2 -
<PAGE>
1.4 "Business Day" shall mean a day other than a Saturday, Sunday or a day
--------------
upon which banks in the State of Oklahoma are closed to business generally.
1.5 "CERCLA" shall mean the Comprehensive Environmental Response,
--------
Compensation and Liability Act of 1980, as amended, together with all
regulations and rulings promulgated with respect thereto.
1.6 "Closing Date" shall mean the effective date of this Agreement.
--------------
1.7 "Collateral" shall have the meaning assigned to that term in Article V
------------
of this Agreement.
1.8 "Commitments" shall mean the Revolving Credit Commitment and the Term
-------------
Commitments.
1.9 "Compressor Operating Income" shall mean the sum of rental/maintenance
-----------------------------
fees and revenues less the sum of direct compressor rental and operating
expenses per GAAP excluding from all such calculations the Stalwart Leases and
Stalwart Units.
1.10 "Current Assets" shall mean the value of the current assets determined
----------------
in accordance with GAAP on a consolidated basis.
1.11 "Current Liabilities" shall mean the amount of current liabilities
---------------------
determined in accordance with GAAP on a consolidated basis.
1.12 "Current Ratio" shall mean the ratio of Current Assets to Current
---------------
Liabilities.
1.13 "Default Rate" shall mean the Applicable Prime Rate plus eight
--------------
percentage points (8%).
1.14 "Environmental Laws" shall mean Laws, including without limitation
--------------------
federal, state or local Laws, ordinances, rules, regulations, interpretations
and orders of courts or administrative agencies or authorities relating to
pollution or protection of the environment (including, without limitation,
ambient air, surface water, groundwater, land surface and subsurface strata),
including without limitation CERCLA, SARA, RCRA, HSWA, OPA, HMTA, TSCA and other
Laws relating to (i) Polluting Substances or (ii) the manufacture, processing,
distribution, use, treatment, handling, storage, disposal or transportation of
Polluting Substances.
1.15 "ERISA" shall mean the Federal Employee Retirement Income Security Act
-------
of 1974, as amended, together with all regulations and rulings promulgated with
respect thereto.
1.16 "Event of Default" shall mean any of the events specified in Section
------------------
9.1 of this Agreement, and "Default" shall mean any
-------
- 3 -
<PAGE>
event, which together with any lapse of time or giving of any notice, or both,
would constitute an Event of Default.
1.17 "Finished Goods" shall mean that portion of the Inventory which
----------------
constitutes natural gas compressor units completed for lease or sale by one or
more of the Borrowers.
1.18 "First Term Note" shall mean the Borrowers' joint and several
-----------------
$1,225,722 replacement term note in the form of Exhibit "C" annexed to this
-----------
Agreement, to be delivered to the Bank pursuant to Section 3.2 hereof, together
with each and every replacement, extension, renewal, modification, substitution
and change in form thereof which may be from time to time and for any term or
terms effected.
1.19 "GAAP" shall mean generally accepted accounting principles applied on
------
a consistent basis in all material respects to those applied in the preceding
period, unless the Borrowers' outside accountants reasonably determine that
there should be a different application based upon relevant accepted Financial
Accounting Standards. Unless otherwise indicated herein, all accounting terms
will be defined according to GAAP.
1.20 "hereby", "herein", "hereof", "hereunder" and similar such terms shall
-----------------------------------------
mean and refer to this Agreement as a whole and not merely to the specific
section, paragraph or clause in which the respective word appears.
1.21 "HMTA" shall mean the Hazardous Materials Transportation Act, as
------
amended, together with all regulations and rulings promulgated with respect
thereto.
1.22 "HSWA" shall mean the Hazardous and Solid Waste Amendments of 1984, as
------
amended, together with all regulations and rulings promulgated with respect
thereto.
1.23 "Hydrocarbons" shall have the meaning assigned to that term in the
--------------
Mortgage.
1.24 "Indebtedness" shall mean and include any and all: (i) indebtedness,
--------------
obligations and liabilities of the Borrowers to the Bank incurred or which may
be incurred or purportedly incurred hereafter pursuant to the terms of this
Agreement or any of the other Loan Documents, and any replacements, amendments,
extensions, renewals, substitutions, amendments and increases in amount thereof,
including such amounts as may be evidenced by the Notes and all lawful interest,
late charges, loan closing fees, service fees, origination/facility fees,
commitment fees, fees in lieu of balances, letter of credit fees and other
charges, and all reasonable costs and expenses incurred in connection with the
preparation, filing and recording of the Loan Documents, including attorneys
fees and legal expenses; (ii) all reasonable costs and expenses paid or incurred
by the Bank, including attorneys fees, in
- 4 -
<PAGE>
enforcing or attempting to enforce collection of any Indebtedness and in
enforcing or realizing upon or attempting to enforce or realize upon any
collateral or security for any Indebtedness, including interest on all sums so
expended by the Bank accruing from the date upon which such expenditures are
made until paid, at an annual rate equal to the Default Rate; and (iii) all sums
expended by the Bank in curing any Event of Default or Default of the Borrowers
under the terms of this Agreement, the other Loan Documents or any other writing
evidencing or securing the payment of the Notes together with interest on all
sums so expended by the Bank accruing from the date upon which such expenditures
are made until paid, at an annual rate equal to the Default Rate.
1.25 "Inventory" shall mean and include all of Borrowers' natural gas
-----------
compressor units and other goods intended for sale or lease, all Raw Materials,
Work In Process, Finished Goods, packaging, labels, advertising materials and
all supplies of every kind or nature which are used or may be used in
manufacturing, selling, leasing, packing, shipping, advertising, leasing or
furnishing of goods (including natural gas compressor units), whether now owned
or hereafter acquired and wherever located including (without limitation) all
natural gas compressor units leased to Stalwart Energy Company.
1.26 "Laws" shall mean all statutes, laws, ordinances, regulations, orders,
------
writs, injunctions, or decrees of the United States, any state or commonwealth,
any municipality, any foreign country, any territory or possession, or any
Tribunal.
1.27 "Letters of Credit" shall mean any and all letters of credit issued by
-------------------
the Bank pursuant to the request of any of the Borrowers in accordance with the
provisions of Section 2.2 hereof which at any time remain outstanding and
subject to draw by the beneficiary, whether in whole or in part.
1.28 "Lien" shall mean any mortgage, pledge, security interest, assignment,
------
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement, any
lease in the nature thereof, and the filing of or agreement to give any
financing statement or other similar form of public notice under the Laws of any
jurisdiction).
1.29 "Loan Documents" shall mean this Agreement, the Notes, the Security
----------------
Instruments, the Mortgage and all other documents, instruments and certificates
executed and delivered to the Bank by the Borrowers pursuant to the terms of
this Agreement.
1.30 "Loans" shall mean all advances made and Letter of Credit draws funded
-------
hereunder pursuant to the Commitments, including all sums evidenced by the
Notes.
- 5 -
<PAGE>
1.31 "Mortgage" shall have the meaning assigned to that term in Section
----------
5.1(b) of the Prior Agreements, as amended and restated hereby.
1.32 "Mortgaged Property" shall mean the property covered by the Mortgage
--------------------
defined in Section 5.1(b) of this Agreement.
1.33 "Net Worth" shall mean, on any date as of which the amount thereof is
-----------
to be determined, the sum of the following determined on a consolidated basis in
accordance with GAAP:
(a) The amount of stated capital (less cost of treasury shares),
plus
----
(b) The amount of surplus and retained earnings (or, in the case of surplus
or retained earnings deficit, minus the amount of such deficit).
1.34 "Notes" shall mean the Revolving Credit Note, the First Term Note and
-------
the Third Term Note.
1.35 "OPA" shall mean the Oil Pollution Act of 1990, as amended, together
-----
with all regulations and rulings promulgated with respect thereto.
1.36 "Person" shall mean and include an individual, a partnership, a joint
--------
venture, a corporation, a trust, an unincorporated organization, and a
government or any department, agency or political subdivision thereof.
1.37 "Polluting Substances" shall mean all pollutants, contaminants,
----------------------
chemicals or industrial, toxic or hazardous substances or wastes and shall
include, without limitation, any flammable explosives, radioactive materials,
oil, hazardous materials, hazardous or solid wastes, hazardous or toxic
substances or related materials defined in CERCLA/SARA, RCRA/HSWA and in the
HMTA; provided, in the event either CERCLA/SARA, RCRA/HSWA or HMTA is amended so
as to broaden the meaning of any term defined thereby, such broader meaning
shall apply subsequent to the effective date of such amendment and, provided
further, to the extent that the Laws of any State or other Tribunal establish a
meaning for "hazardous substance, "hazardous waste," "hazardous material,"
"solid waste" or "toxic substance" which is broader than that specified in
CERCLA/SARA, RCRA/HSWA, or HMTA, such broader meaning shall apply.
1.38 "Raw Materials" shall mean that portion of the Inventory which
---------------
constitutes parts, components, accessories and materials to become a part of the
Finished Goods.
- 6 -
<PAGE>
1.39 "RCRA" shall mean the Resource Conservation and Recovery Act of 1976,
------
as amended, together with all regulations and rulings promulgated with respect
thereto.
1.40 "Revolving Credit Borrowing Base" shall have the meaning assigned to
---------------------------------
that term in Section 2.4 of this Agreement.
1.41 "Revolving Credit Commitment" shall mean the agreement of the Bank to
-----------------------------
make Revolving Credit Loans under Article II of this Agreement, and pursuant to
the terms and conditions hereof, from the Closing Date until March 31, 1997, or
such later date as the Bank may extend the commitment to make Revolving Credit
Loans by an extension in writing, unless earlier terminated pursuant to the
terms hereof.
1.42 "Revolving Credit Loans" shall mean the advances to the Borrowers
------------------------
described in Section 2.1 of this Agreement, including the sum of unfunded,
outstanding Letters of Credit issued pursuant thereto.
1.43 "Revolving Credit Note" shall mean the Borrowers' $12,000,000
-----------------------
replacement revolving credit note in the form of Exhibit "A" annexed to this
-----------
Agreement, to be delivered to the Bank pursuant to Section 2.2 hereof, together
with any and all extensions, renewals, modifications, substitutions and changes
in form thereof which may be from time to time and for any term or terms
effected.
1.44 "SARA" shall mean the Superfund Amendments and Reauthorization Act of
------
1987, as amended, together with all regulations and rulings promulgated with
respect thereto.
1.45 "Security Agreement" shall have the meaning assigned to that term in
--------------------
Article V of this Agreement.
1.46 "Security Instruments" shall mean the Mortgage, the Security Agreement
----------------------
and all other financing statements, assignments, security agreements, pledges,
lien entry forms, documents or writings and any and all amendments and
supplements thereto, granting, conveying, assigning, transferring or in any
manner providing the Bank with a security interest in any property as security
for the repayment of all or any part of the Indebtedness.
1.47 "Tangible Net Worth" shall mean Net Worth minus all assets which would
-------------------- -----
be classified as intangible assets under generally accepted accounting
principles, including (without limitation) good will, patents, franchises,
organization costs, research and development costs, covenants not to compete and
other deferred charges.
1.48 "Taxes" shall mean all taxes, assessments, fees, or other charges or
-------
levies from time to time or at any time imposed by any Laws or by any Tribunal.
- 7 -
<PAGE>
1.49 "Term Loans" shall mean the loans made to the Borrowers which are
------------
described in Section 3.1 hereof.
1.50 "Term Notes" shall mean the First Term Note and the Third Term Note.
------------
1.51 "Third Term Note" shall mean the Borrowers' $425,000 replacement term
-----------------
note in the form of Exhibit "E" annexed to the Prior Agreements, the current
-----------
unpaid principal balance of which is $203,650, together with each and every
extension, renewal, modification, substitution and change in form thereof which
may be from time to time and for any term or terms effected.
1.52 "Total Liabilities" shall mean the amount of all liabilities
-------------------
determined in accordance with GAAP on a consolidated basis.
1.53 "Tribunal" shall mean any municipal, state, commonwealth, Federal,
----------
foreign, territorial or other sovereign, governmental entity, governmental
department, court, commission, board, bureau, agency or instrumentality.
1.54 "TSCA" shall mean the Toxic Substances Control Act, as amended,
------
together with all regulations and rulings promulgated with respect thereto.
1.55 "Work in Process" shall mean that portion of Inventory, including
-----------------
natural gas compressors, upon which manufacturing, assembling, fabricating or
processing work has commenced but which does not yet constitute Finished Goods.
ARTICLE II
----------
REVOLVING CREDIT LOAN
---------------------
2.1 Revolving Credit Loans. The Bank agrees, upon the terms and subject
----------------------
to the conditions hereinafter set forth, to make Revolving Credit Loans from
time to time, on or after the Closing Date to the Borrowers in an amount equal
to the lesser of the maximum outstanding principal amount of $12,000,000
------
(provided, however, through March 31, 1996, the maximum outstanding principal
amount shall be $8,500,000) or the Revolving Credit Borrowing Base as defined in
Section 2.4 hereof, subject to reduction as hereinafter provided, the unpaid
principal balance of which is convertible to a thirty-six (36) month term loan
on March 31, 1997 (the "Conversion Date").
2.2 Revolving Credit Note. On the Closing Date, the Borrowers shall
---------------------
execute and deliver to the order of the Bank the Borrowers' joint and several
replacement revolving credit note in the principal amount of $12,000,000, the
form of which is annexed hereto as Exhibit "A" and hereby made a part hereof
-----------
(hereinafter
- 8 -
<PAGE>
referred to as "Revolving Credit Note"). The Revolving Credit Note shall be
dated as of the Closing Date, and shall bear interest payable monthly on the
last day of every month commencing September 30, 1995, on unpaid balances of
principal from time to time outstanding and on any past due interest at a
variable annual rate equal from day to day to the Applicable Prime Rate plus one
and one-half percentage points (1.5%). The unpaid and outstanding principal
balance of the Revolving Credit Note shall be converted on March 31, 1997 to a
term loan ("Convertible Term Loan") payable in thirty-five (35) consecutive
monthly principal payments each equal to one-sixtieth (1/60th) of the lesser of
------
the convertible amount or the Revolving Credit Borrowing Base as redetermined as
of October 31, 1996 (the "Redetermined Borrowing Base") payable on the last day
of each calendar month commencing April 30, 1997, with the remaining principal
due and payable at final maturity on March 31, 2000. All payments received
shall be applied first to accrued interest and then to the outstanding principal
amount owing on the Revolving Credit Note.
Prior to the Conversion Date, the Borrowers may from time to time make
prepayments of principal without premium or penalty, provided that on or after
April 1, 1997, interest on the amount prepaid, accrued to the prepayment date,
shall be paid on such prepayment date and a prepayment premium specified in
Section 3.8 below shall accompany such prepayment. The Borrowers may not
reborrow any amounts paid or prepaid on the Revolving Credit Note on or after
March 31, 1997. All payments and prepayments shall be made in lawful money of
the United States of America. All outstanding principal of and unpaid accrued
interest on the Revolving Credit Note not previously paid hereunder shall be due
and payable at final maturity on March 31, 2000, unless such final maturity
shall be extended by the Bank in writing or accelerated pursuant to the terms
hereof. After maturity (whether by acceleration or otherwise) the Revolving
Credit Note shall bear interest at the Default Rate, payable on demand.
Interest shall be calculated on the basis of a year of 365 days but assessed for
the actual number of days elapsed in each accrual period. Notwithstanding the
original stated principal amount of the Revolving Credit Note, in no event shall
the outstanding and unpaid principal amount advanced thereon exceed $8,500,000
until April 1, 1996 (the "Initial Redetermined Borrowing Base") without the
express prior written consent of the Bank and its Participant.
Upon the Borrowers' application from time to time by use of the Bank's
standard form Letter of Credit Application Agreement and subject to the terms
and provisions therein and herein set forth, the Bank agrees to issue standby
letters of credit on behalf of the Borrowers under the Revolving Credit
Commitment, provided that (i) any letters of credit be issued on behalf of or on
the account of Borrowers with an expiry date later than March 31, 1997 will, at
the Bank's sole option, be fully secured and collateralized by cash or cash
equivalent acceptable to the Bank in its sole discretion and held thereby from
and after conversion on March 31, 1997 until
- 9 -
<PAGE>
expiration or cancellation of such letter(s) of credit or payment of all draws
thereon on demand of the Bank and (ii) no letter of credit will be issued on
behalf of or for the account of the Borrowers if at the time of issuance the
outstanding amount of all unpaid Revolving Credit Loans (including the aggregate
outstanding and unfunded amount of unexpired letters of credit then existing)
under the Revolving Credit Commitment as evidenced by the Revolving Credit Note
plus the maximum amount of such Letter of Credit then being requested would
exceed the lesser of the Revolving Credit Borrowing Base or $12,000,000. If any
letter of credit is drawn upon at any time, each amount drawn, whether a full or
partial draw thereon, shall be automatically reflected by the Bank as an advance
on the Revolving Credit Note effective as of the date of the Bank's honoring the
sight draft. In consideration of the Bank's agreement to issue standby letters
of credit hereunder, the Borrowers agree to pay to the Bank letter of credit
fees equal to two percentage points (2%) per annum on the face amount of each
letter of credit, which such fee shall be due and payable to the Bank at the
time of issuance of each applicable letter of credit. The $12,000,000 Revolving
Credit Note shall constitute a replacement, extension and consolidation of the
$1,000,000 Revolving Credit Note annexed as Exhibit A to the April 13, 1994
Second Amendment and the unpaid principal balance ($6,589,612) of the $7,450,000
Second Term Note dated December 30, 1994, and described and defined in the Prior
Agreements, which such prior $1,000,000 Revolving Credit Note had an outstanding
principal balance of $838,756.39 as of the Closing Date.
2.3 Revolving Credit Advances, Payments and Voluntary Prepayment. Each
------------------------------------------------------------
Revolving Credit Loan requested by the Borrowers from the Bank shall (i) be
requested telephonically by Hawkins or in writing by Hawkins pursuant to a Loan
Advance Request, the form of which is annexed hereto as Exhibit "B", no later
-----------
than 1:00 o'clock P.M. (applicable current time in Tulsa, Oklahoma) on the date
upon which the advance is to be made; (ii) be in the amount of $5,000 or an
integral multiple thereof (unless the amount then available to borrow is less
than $5,000, in which event an advance may be made in the amount available);
(iii) not cause the aggregate outstanding and unpaid principal amount of the
Revolving Credit Note to exceed the Revolving Credit Borrowing Base; and (iv) be
advanced by the Bank on the applicable date, provided the request is timely made
in accordance with Section 2.3(i) hereof and all other conditions of funding are
met. Borrowers hereby appoint Hawkins as the Borrowers' duly authorized agent
for all purposes hereunder in connection with Revolving Credit Loans and
applications for the issuance of letters of credit pursuant to this Article II,
including (without limitation) the execution and delivery to the Bank for and on
behalf of all of the Borrowers Loan Advance Requests and letters of credit
applications. In consideration of Bank permitting telephonic requests for
advances, Borrowers state that they fully understand the risk attendant thereto,
agree to accept all such risk and hold Bank harmless from any loss which any of
the Borrowers may incur by reason of an
- 10 -
<PAGE>
advance being made in response to a telephonic request whether such is caused by
mistake or negligence of the Bank or otherwise, unless it is judicially
established that such loss was due to the gross negligence and wanton disregard
of the Bank. All advances made by the Bank shall, for mutual convenience, be
deposited to Borrowers' joint general deposit account No. 207937943 with the
---------
Bank (the "General Account"), and the Bank shall have no responsibility to
monitor the distribution of such advances in any other respect.
All advances made by the Bank on the Revolving Credit Note and all payments
or prepayments of principal and interest thereon made by the Borrowers shall be
recorded by the Bank in its records, and the aggregate unpaid principal amount
so recorded shall be conclusive evidence of the principal amount owing and
unpaid on the Revolving Credit Note. The failure to so record shall not,
however, limit or otherwise affect the obligations of the Borrowers hereunder or
under the Revolving Credit Note to repay the principal amount of each Revolving
Credit Loan together with all interest accrued thereon. If additional lines or
blanks shall be needed for the purpose of recording advances or payments on the
schedule, one or more additional schedules may be annexed to the Revolving
Credit Note and shall become a part thereof. All payments and prepayments shall
be made in lawful money of the United States of America. Any payments or
prepayments on the Revolving Credit Note received by the Bank after 1:30 o'clock
P.M. (applicable current time in Tulsa, Oklahoma) shall be deemed to have been
made on the next succeeding Business Day. All outstanding principal of and
accrued interest on the Revolving Credit Note not previously paid hereunder
shall be converted to the Convertible Term Loan on the Conversion Date, unless
such maturity shall be extended by the Bank in writing or accelerated pursuant
to the terms hereof.
2.4 Revolving Credit Borrowing Base. The Borrowers will not request, nor
-------------------------------
will they accept, the proceeds of any Revolving Credit Loans or advance under
the Revolving Credit Note at any time when the amount thereof, together with the
unpaid principal amount of the Revolving Credit Note and outstanding but
unfunded letters of credit, exceeds the Revolving Credit Borrowing Base. As
used in this Agreement, the term "Revolving Credit Borrowing Base" shall mean an
amount equal to the least of (x) sixty percent (60%) of the most recent
appraisal of the compressor fleet (excluding all Stalwart units) reflecting the
orderly liquidation value thereof and as otherwise prepared and determined in
accordance with Section 4.3 hereof; (y) a multiple equal to 2.25 times
Borrowers' compressor fleet most recent twelve (12) month trailing Compressor
Operating Income; or (z) $12,000,000. Through March 31, 1996, the Revolving
Credit Borrowing Base shall in no event exceed $8,500,000. The Revolving Credit
Borrowing Base shall be redetermined as of the Initial Redetermined Borrowing
Base date (April 1, 1996) and as of the Redetermined Borrowing Base date
(October 1, 1996) and as of the effective date of any sale pursuant to Section
3.7 hereof.
- 11 -
<PAGE>
2.5 Variance from Revolving Credit Borrowing Base. Any Revolving Credit
---------------------------------------------
Loan shall be conclusively presumed to have been made to the Borrowers by the
Bank under the terms and provisions hereof and shall be secured by all of the
Collateral and security described or referred to herein or in the Security
Instruments, whether or not such loan conforms in all respects to the terms and
provisions hereof. If the Bank should (for the convenience of the Borrowers or
for any other reason) make loans or advances which would cause the unpaid
principal amount of the Revolving Credit Note to exceed the amount of the
applicable Revolving Credit Borrowing Base, no such variance, change or
departure shall prevent any such loan or loans from being secured by the
Collateral and security created or intended to be created herein or in the
Security Instruments. The Revolving Credit Borrowing Base shall not in any
manner limit the extent or scope of the Collateral and security granted for the
repayment of the Revolving Credit Note (or any other Indebtedness) or limit the
amount of indebtedness under the Revolving Credit Note (or any other
Indebtedness) to be secured.
2.6 Revolving Credit Mandatory Prepayments. The Borrowers shall make
--------------------------------------
mandatory prepayments from time to time on the Revolving Credit Note in an
amount equal to the amount by which the unpaid principal balance outstanding
under the Revolving Credit Note exceeds the Revolving Credit Borrowing Base.
Each such mandatory prepayment shall be paid prior to the earlier of (a) one
Business Day after any of the Borrowers shall have knowledge that the unpaid
principal amount of the Revolving Credit Note exceeds the Revolving Credit
Borrowing Base, or (b) one Business Day after the Bank shall have made demand
that the Borrowers make such a mandatory prepayment.
2.7 Commitment Fees. From the Closing Date until the Revolving Credit
---------------
Commitment is terminated, the Borrowers shall pay to the Bank, as a commitment
fee for its Revolving Credit Commitment, an amount equal to one-half of one
percentage point (0.5%) per annum of the amount by which the then applicable
Revolving Credit Borrowing Base exceeds the outstanding unpaid principal balance
of the Revolving Credit Note from time to time computed daily on the basis of a
calendar year of 360 days but assessed for the actual number of days elapsed
during each accrual period. Such fee shall be payable quarterly as the same
accrues on the fifteenth (15th) day after the end of each quarter-annual period
ending March 31, June 30, September 30 and December 31, commencing October 15,
1995 (for that portion of the calendar quarter ending September 30, 1995 from
the Closing Date through such fiscal quarter ending date), and at the Conversion
Date of the Revolving Credit Note, whether by acceleration or otherwise. The
amount of Commitment Fees payable for each such a quarter shall be paid by a
debit to the joint General Account of Borrowers at the Bank (as more
particularly described in Section 2.3 hereof) in such amount. For the purposes
of this Section 2.7 and Section 10.9 hereof, Borrowers hereby appoint the Bank
their attorney-in-fact for the execution
- 12 -
<PAGE>
and performance of such debit, and hereby absolve the Bank of any loss or
negligence arising by virtue of its exercise of such power, except for gross
negligence or willful misconduct. Said power shall be deemed a power coupled
with an interest and shall be irrevocable.
2.8 Reductions or Termination of Revolving Credit Commitment. Borrowers
--------------------------------------------------------
may at any time permanently reduce the Revolving Credit Commitment upon
Borrowers giving to Bank written or telegraphic notice, before noon (Tulsa,
Oklahoma time) at least three (3) Business Days preceding the date of a proposed
reduction in the Revolving Credit Commitment, which notice shall set forth the
date and amount of the proposed reduction in the Revolving Credit Commitment.
Each reduction shall be in the aggregate principal amount of $100,000, or an
integral multiple thereof. Upon Borrowers giving to the Bank written or
telegraphic notice, before noon (Tulsa, Oklahoma time) at least three (3)
Business Days preceding the date of their proposed termination of the Revolving
Credit Commitment, which notice shall set forth the proposed termination date,
Borrowers may at any time so terminate the Revolving Credit Commitment, subject
only to the prepayment premium described in Section 3.8 hereof. On the
effective date of a reduction of the Revolving Credit Commitment, Borrowers
shall pay to Bank the Commitment Fees due pursuant to Section 2.7, and shall pay
to Bank such principal payment as may be necessary to cause the principal
outstanding under the Revolving Credit Note to be no greater than the Revolving
Credit Commitment as so reduced. In the event Borrowers elect to terminate the
Revolving Credit Commitment in whole, the Revolving Credit Note shall be paid in
full, including all accrued interest, Commitment Fees and applicable prepayment
premiums, at the time of any such termination in whole, at which time the
Revolving Credit Commitment shall also automatically terminate and the Bank
shall have no further obligations under the Revolving Credit Commitment.
ARTICLE III
-----------
TERM LOAN
---------
3.1 Term Loans. The Bank agrees, upon the terms and subject to the
----------
conditions hereinafter set forth, to extend the maturity date of the existing
term loan evidenced by the $1,700,000 First Term Note described and defined in
the Prior Agreements on or after the Closing Date to the Borrowers as set forth
in Section 3.2 hereof below.
3.2 First Term Note. On the Closing Date the Borrowers shall execute and
---------------
deliver to the order of the Bank the Borrowers' joint and several replacement
term note in the principal amount of $1,225,722, the form of which is annexed
hereto as Exhibit "C" and hereby made a part hereof (hereinafter referred to as
-----------
"First Term Note"). The First Term Note shall be dated as of the Closing Date,
- 13 -
<PAGE>
shall provide for thirty-four (34) consecutive monthly principal payments of
$35,000 per month payable on the last day of each calendar month commencing
September 30, 1995, with the remaining principal payable at maturity on July 31,
1998. The First Term Note shall bear interest, payable monthly on the last day
of every month commencing September 30, 1995, and at final maturity on July 31,
1998, on unpaid balances of principal from time to time outstanding and on any
past due interest at a variable annual rate equal from day to day to the
Applicable Prime Rate plus one and one-half percentage points (1.5%), subject to
adjustments thereto pursuant to the Interest Rate Adjustment Feature provisions
of Section 3.9 hereof. Notwithstanding the date of the First Term Note, the
principal and interest installment due and owing September 30, 1995, shall be
payable for the entire period of September 1, 1995 to September 30, 1995,
inclusive. All payments received shall be applied first to accrued interest and
then to the outstanding principal amount owing on the First Term Note. The
Borrowers may from time to time make prepayments of principal subject only to
the prepayment premium described in Section 3.8 hereof, provided that interest
on the amount prepaid, accrued to the prepayment date, shall be paid on such
prepayment date. The Borrowers may not reborrow any amounts paid or prepaid on
the First Term Note. All payments and prepayments shall be made in lawful money
of the United States of America. Any payments or prepayments on the First Term
Note received by the Bank after 1:30 o'clock P.M. (applicable current time in
Tulsa, Oklahoma) shall be deemed to have been made on the next succeeding
Business Day. All outstanding principal of and unpaid accrued interest on the
First Term Note not previously paid hereunder shall be due and payable at
maturity on July 31, 1998, unless such maturity shall be extended by the Bank in
writing or accelerated pursuant to the terms hereof. After maturity (whether by
acceleration or otherwise) the First Term Note shall bear interest at the
Default Rate, payable on demand. Interest shall be calculated on the basis of a
year of 360 days but assessed for the actual number of days elapsed in each
accrual period. The First Term Note shall constitute a replacement and
extension of the $1,416,664 First Term Note dated as of April 13, 1994 and
described and defined in the Prior Agreements, which such prior First Term Note
had an outstanding principal balance of $1,225,722 as of the Closing Date.
3.3 Second Term Note. The Second Term Note described and defined in the
----------------
Prior Agreements is consolidated into the Revolving Credit Note and the unpaid
principal balance of the Second Term Note on the Closing Date ($6,589,612) shall
be deemed paid by the initial Revolving Credit Loan advance made on the
Revolving Credit Note.
3.4 Third Term Note. The Borrowers' joint and several Third Term Note in
---------------
the original principal amount of $425,000 and dated July 14, 1993, as described
and defined in the Prior Agreement, shall remain in place and is not amended,
modified or extended hereby.
- 14 -
<PAGE>
3.5 Proceeds of Term Loans. Proceeds of the First Term Loan shall be used
----------------------
only for the purposes of refinancing of existing debt of the Borrowers to the
Bank as evidenced by the First Term Note described and defined in the Prior
Agreements. Proceeds of the Third Term Loan were used by Equity in connection
with the construction of certain compressors subject to the Stalwart Lease
described and defined in the Prior Agreements and were funded on or about July
14, 1993.
3.6 Proceeds of Sale of Mortgaged Property. In the event any undivided
--------------------------------------
interest in any of the Mortgaged Property is sold, the "Sales Proceeds" of any
such sale shall be applied initially to the outstanding principal balance of the
Notes as the Bank may select in its sole discretion; provided, however, no such
-------- -------
sale shall occur without the prior written consent of the Bank. Unless
otherwise directed by the Bank, all such amounts shall be applied initially to
principal installments due under the First Term Note in inverse order of their
respective maturity. For purposes of this section, "Sales Proceeds" shall mean
the greater of (i) sixty-five percent (65%) of the sales price of such Mortgaged
-------
Property; or (ii) sixty-five percent (65%) of the discounted present worth of
the Mortgaged Property being sold as evaluated and determined by the most recent
semi-annual engineering reports required by Section 4.1 hereof. In the event
the oil and gas properties sold were not individually evaluated in the most
recent semi-annual Bank determination, 65% of the sales proceeds thereof shall
be applied initially in reduction of the principal balance of the First Term
Note in the inverse order of their respective maturity as the Bank may select in
its sole discretion.
3.7 Sale of Compressor Units. In the event any of the compressor units of
------------------------
any of the Borrowers are sold, the "Sales Proceeds" of any such compressor unit
sale shall be applied initially to the outstanding principal balance of the
Notes as the Bank may select in its sole discretion; provided, however, no such
-------- -------
sale shall occur without the prior written consent of the Bank. Unless otherwise
directed by the Bank, all such amounts shall be applied to principal
installments due under the First Term Note in inverse order of their respective
maturity. For purposes of this section, "Sales Proceeds" shall mean the greater
-------
of (i) sixty percent (60%) of the sales price of such compressor units; or (ii)
sixty percent (60%) of the fair market value thereof stated in the most recent
annual compressor appraisal pursuant to Section 4.3 hereof. Such sale of
compressor unit(s) prior to the Conversion Date shall effect an automatic
redetermination of the Revolving Credit Borrowing Base in accordance with the
provisions of Section 2.4 hereof, excluding the unit(s) being sold.
3.8 Prepayment Premium. Any prepayment in full of principal on any of the
------------------
Notes shall be accompanied by a prepayment premium in an amount equal to one
percentage point (1%) of the highest aggregate amount of the sum of the
Revolving Credit Commitment plus the aggregate principal balance outstanding on
the Term Notes at any
- 15 -
<PAGE>
time during the six (6) month period immediately preceding the prepayment date.
Insofar as the Revolving Credit Commitment only is concerned, any termination
thereof in full by the Borrowers pursuant to the provisions of Section 2.8
hereof shall be accompanied a prepayment premium in an amount equal to one
percentage point (1%) of the then existing Revolving Credit Commitment being so
terminated (in addition to any applicable Commitment Fees also due to the Bank
pursuant to Section 2.7 hereof).
ARTICLE IV
----------
COLLATERAL BORROWING BASE
-------------------------
4.1 Semi-annual Engineering Reports (Oil and Gas Properties).
---------------------------------------------------------
(a) The Borrowers shall deliver to the Bank at the Borrowers' cost by each
May 20 and November 20, commencing November 20, 1995 such current data, reports
and engineering information as is necessary or appropriate for the Bank's
engineers or any other independent petroleum engineer acceptable to the Bank to
compile and prepare by each June 30 and December 31 (commencing December 31,
1995) an engineering report in form and substance satisfactory to the Bank,
evaluating the proven producing oil and gas reserves attributable to the
Borrowers' aggregate interest in the Mortgaged Property (as defined in
subsection (b) below), together with the expenses attributable thereto. The
engineering data and information furnished to the Bank by or on behalf of the
Borrowers shall be accompanied by such other information as shall be requested
by the Bank in order for it to make its determination of the Oil and Gas
Collateral Borrowing Base, and by a certificate of the Borrowers certifying that
the Borrowers have good and defensible title to the Mortgaged Properties valued
and that payments are being received from purchasers of production with respect
to said interests. At any time after thirty (30) days of the receipt of such
information and in no event later than each June 30 and December 31 (commencing
December 31, 1995) the Bank shall (i) make a determination of the present worth,
using such pricing and discount factor as it deems appropriate pursuant to the
Bank's then applicable energy lending and engineering policies, procedures and
pricing parameters, of the future net revenue estimated by the Bank to be
received by the Borrowers from production from the Mortgaged Properties so
evaluated, multiplied by a percentage then determined by the Bank to be
appropriate on the basis of the Bank's then applicable energy lending criteria;
and (ii) report in writing to the Borrowers such sum of the evaluation by the
Bank of such evaluated oil and gas properties (the "Oil and Gas Collateral
Borrowing Base"). The good faith determinations of Bank in such respects shall
be conclusive.
(b) The term "Mortgaged Property" shall refer only to such properties
covered by the Mortgage (or a supplemental mortgage or deed of trust, duly
executed, acknowledged and delivered by the
- 16 -
<PAGE>
Borrowers to the Bank in form satisfactory to counsel for the Bank) and which
properties are, at the time:
(i) Particularly and adequately described under the Mortgage or other
supplemental mortgage or deed of trust;
(ii) Completed or developed (in the case of oil and gas leases) to the
extent that value is being assigned to them by the Bank in connection with
such evaluation and the Bank has determined that such properties are
capable of producing oil or gas in commercial quantities; and
(iii) Approved as to title to the satisfaction of the Bank.
(c) Borrowers agree that the Bank shall be entitled at all times to have
the "Mortgaged Property" covered and encumbered by the Mortgage or supplemental
mortgages or deeds of trust constitute at least ninety percent (90%) of the
aggregate value of Borrowers' Proven Reserves determined in accordance with sub-
sections 4.1(a) and (b) above. For the purpose of determining the Oil and Gas
Collateral Borrowing Base and compliance herewith, the term "Proven Reserves",
in addition to properties that qualify as "Mortgaged Property" pursuant to the
criteria hereof and of subsection 4.1(b), shall refer only to such other oil and
gas mining, mineral and/or leasehold interests of Borrowers, if any, that
satisfy the criteria of clauses (ii) and (iii) of subsection 4.1(b) hereof above
in all respects.
4.2 Collateral Deficiency. Should the aggregate unpaid outstanding
---------------------
principal balance of the First Term Note at any time be greater than the Oil and
Gas Collateral Borrowing Base in effect at such time, the Bank may notify the
Borrowers in writing of the deficiency. Within fifteen (15) days from and after
the date of any such deficiency notice the Borrowers shall notify the Bank in
writing of their election to:
(a) Make a prepayment upon the First Term Note in an amount sufficient to
reduce the aggregate unpaid principal amount of the First Term Note to an
amount equal to or less than the amount of the Oil and Gas Collateral
Borrowing Base; or
(b) Execute and deliver to the Bank one or more supplemental mortgages,
deeds of trust, security agreements or pledges encumbering other properties
or assets in form and substance satisfactory to the Bank and its counsel
as additional security for the Notes (and all other Indebtedness) to the
extent such properties are acceptable to the Bank and of such value, as
determined by the Bank, that the Oil and Gas Collateral Borrowing
- 17 -
<PAGE>
Base will be increased to an amount equal to or greater than the aggregate
unpaid principal balance of the Notes in conformance with the Bank's then
applicable energy lending policies.
If the Borrowers shall have elected to make a prepayment on the First Term Note
under Section 4.2(a) hereof, such prepayment shall be due within fifteen (15)
days after the Borrowers shall have notified the Bank of such election, and the
prepayment shall be applied, at the Bank's option, to the principal payments of
the First Term Note in inverse order of maturity. If Borrowers shall elect to
execute and deliver one or more supplemental oil and gas mortgages and deeds of
trust to the Bank under Section 4.2(b) hereof, the Borrowers shall provide the
Bank with descriptions of the additional properties to be mortgaged (together
with any title opinions, current valuations and engineering reports applicable
thereto which may be requested by the Bank) at the time of the Borrowers notice
of such election and shall execute, acknowledge and deliver to the Bank the
appropriate supplemental mortgages and deeds of trust within five (5) Business
Days after such collateral documents shall be tendered to the Borrowers by the
Bank for execution, all in compliance with the provisions of clauses (i), (ii)
and (iii) of subsection 3.1(a) above.
4.3 Annual Appraisal of Compressors. On or before March 31 of each year,
-------------------------------
commencing March 31, 1996, detailed and comprehensive annual orderly liquidation
value appraisals of the combined compressor unit lease fleets of each of the
applicable Borrowers prepared at the sole cost and expense of the Borrowers by
an outside third party appraiser acceptable to the Bank shall be delivered to
the Bank.
ARTICLE V
---------
SECURITY
--------
5.1 Collateral. The repayment of the Indebtedness shall be secured by the
----------
following (the collateral described herein and in the Security Instruments being
collectively referred to as the "Collateral"):
(a) A continuing security interest pertaining thereto of first priority
in, and/or assignment, as security, of:
(i) all of the natural gas compressor units and fleets of each of
the Borrowers including such compressor fleets of Equity more
particularly described on Schedule 3 annexed to the Security Agreement
including all equipment, machinery, tools, blueprints, plans and
fixtures, whether now owned or hereafter acquired and all spare parts,
- 18 -
<PAGE>
Raw Materials, accessories, components, replacements or substitutions
thereof and therefor;
(ii) all of the Equipment and Inventory of each of the Borrowers,
wherever located and whether now owned or hereafter acquired,
including without limitation, all vehicles and other types of rolling
stock and all materials, parts, spare parts, components and supplies
of every kind and description, of the Borrowers, including all such
Equipment and Inventory located at (x) the fabrication maintenance
facility in Columbia, Mississippi, (y) the yards and/or storage areas
of Equity as more particularly described on Schedule 4 annexed to the
Security Agreement and at all other locations wherever they may be;
(iii) all accounts, lease receivables, reimbursements, notes
receivable, contracts, contract rights, general intangibles, chattel
paper, documents and instruments arising out of the sale, lease or
management of compressor units or compressor fleets or services
rendered and any and all agreements for the sale or lease of
compressor units or products or furnishing of services pertaining
thereto by any one or more of the Borrowers, including any and all
sales or lease agreements between Equity and Stalwart Energy Company,
Inc., including that certain Installment Sales Contract and Security
Agreement dated as of April 29, 1993 (the "Stalwart Contract"), and
further including without limitation, all employment agreements, lease
fleet agreements, sales contracts and purchase orders;
(iv) all general intangibles of the Borrowers, whether now owned or
hereafter acquired, including without limitation the following arising
out of, in connection with or pertaining to the lease, sale,
maintenance, construction or transportation of natural gas compressor
units:
(a) all lease and sales contracts, purchase orders and employee
agreements;
(b) all processes, formulae, scientific and/or technical
information, trade secrets, customer lists, plans, reports,
samples, prototypes, know-how, all items in application,
development or other pending status and all similar items which
are used in connection with the Borrowers' conduct of their
natural gas compressor business; and
- 19 -
<PAGE>
(c) all of Borrowers' rights, titles, interests, and benefits
under all partnerships and joint venture agreements between any
of the Borrowers and any other Person and under all leases of
natural gas compressors units (whether as lessor or lessee);
provided, however, that the Bank hereby assumes no liabilities,
obligations or responsibilities in connection therewith;
(v) all fixtures, furniture and equipment of Borrowers, now owned
or hereafter acquired, all additions, accessions, and substitutions
thereto and therefor, and all accessories, parts and equipment now or
hereafter affixed or used in connection with the Equity real property
located in Columbia, Marion County, Mississippi, Oklahoma City,
Oklahoma County, Oklahoma, and in or near Kilgore, Texas,
respectively, and described on schedules attached to the Security
Agreement, and all goods and other fixtures, furniture and equipment
acquired with the proceeds thereof;
(vi) all cash, money, certificates of deposit, time deposits and
demand deposits of any one or more of the Borrowers, at any time in
the possession or control of the Bank;
(vii) all ledgers, journals, books, records, vouchers, shipping
tickets, receipts, sales memoranda, contracts, partnership agreements,
joint venture agreements, correspondence and other writings, data or
papers evidencing or relating to the items or types of collateral
described above in subsections (i) through (viii), inclusive; and
(viii) all products and proceeds of and all replacements,
additions, substitutions, accessories, appurtenances, and parts for,
the items or types of collateral described above in subsections (i)
through (ix), inclusive, whether now owned or hereafter acquired
including, without limitation insurance proceeds.
(b) A first mortgage lien in and to Borrowers' Mortgaged Property as more
particularly described in the Mortgage, Deed of Trust, Security Agreement,
Financing Statement and Assignment (with power of sale) dated as of June
11, 1993, as amended by the First Amended and Supplemental Mortgage, Deed
of Trust, Security Agreement, Financing Statement and Assignment (with
Power of Sale) dated as of April 13, 1994, and as further amended by the
Second Amended and Supplemental Mortgage, Deed of
- 20 -
<PAGE>
Trust and Assignment (with Power of Sale) dated as of even date herewith
covering producing oil, gas and other leasehold and mineral interests
situated in Arkansas, Oklahoma, Texas and Kansas (collectively the
"Mortgage");
The foregoing security interests shall be granted to the Bank, as Secured
Party, pursuant to the terms of the Security Agreement and Assignment dated
as of June 11, 1993, as amended by the First Amended and Restated Security
Agreement and Assignment dated as of July 14, 1993, as further amended by
the Second Amended and Restated Security Agreement dated as of April 13,
1994, and as further amended by the Third Amended and Restated Security
Agreement dated as of even date herewith and in form and content acceptable
to the Bank and its legal counsel (collectively the "Security Agreement")
and the Mortgage; and the Borrowers shall execute such financing
statements, letters in lieu of production forms, assignments, notices and
other documents and instruments as shall be necessary or appropriate to
perfect the security interests thus created.
The Borrowers hereby acknowledge that all of the Collateral is granted to the
Bank as security for the repayment of all of the Indebtedness. If one or more
Notes are paid in full or satisfied, but any portion of the Indebtedness remains
unsatisfied, the Bank may retain its security interest in all of the Collateral
until the remaining Indebtedness is paid in full, even if the value of the
Collateral far exceeds the amount of Indebtedness outstanding.
5.2 Lockbox. Borrowers shall establish and maintain a lockbox in Bank
-------
pursuant to an agreement in form and substance satisfactory to Bank which shall
provide, in part, that: (a) Borrowers shall deposit all checks and other
instruments with respect to their accounts and lease receivables, compressor
management, maintenance, sales or rental proceeds and fees as well as all oil
and gas production run checks (including, without limitation, the Mortgaged
Properties) in the form received by them in the lockbox, concerning which
lockbox none of the Borrowers shall have any access or right of withdrawal, (b)
unless otherwise directed by Bank, Borrowers shall direct all of their account
debtors, natural gas compressor fleet/unit lessees, customers and purchasers of
production to make all payments in respect to their accounts receivable directly
to the lockbox at Bank, (c) Bank shall deposit all collected items received by
it to the general operating account of Borrowers with the Bank (account
#207937943) provided no Default shall have occurred and be continuing, and (d)
- ----------
if an Event of Default shall have occurred and be continuing, all such payments
may be applied to the Indebtedness, at such times and in such order as Bank may
elect.
- 21 -
<PAGE>
ARTICLE VI
----------
CONDITIONS PRECEDENT TO LOANS
-----------------------------
6.1 Conditions Precedent to Initial Revolving Credit Loan and Term Loans.
--------------------------------------------------------------------
The obligation of the Bank to make the initial Revolving Credit Loan under the
Revolving Credit Commitment, as modified, increased and extended, and the
extended and modified First Term Loan evidenced by the First Term Note is
subject to the satisfaction of all of the following conditions on or prior to
the Closing Date (in addition to the other terms and conditions set forth
herein):
(a) No Default. There shall exist no Event of Default or Default on the
----------
Closing Date.
(b) Representations and Warranties. The representations, warranties and
------------------------------
covenants set forth in Article VIII shall be true and correct on and as of
the Closing Date, with the same effect as though made on and as of the
Closing Date.
(c) Borrowers' Certificates. Each of the Borrowers shall have delivered
-----------------------
to the Bank a Certificate, dated as of the Closing Date, and signed by the
President or Vice President and the Secretary of each of the Borrowers
certifying (i) to the matters covered by the conditions specified in
subsections (a) and (b) of this Section 6.1, (ii) that the Borrowers have
performed and complied with all agreements and conditions required to be
performed or complied with by them prior to or on the Closing Date, (iii)
to the name and signature of each officer of each of the Borrowers
authorized to execute and deliver the Loan Documents and any other
documents, certificates or writings and to borrow under this Agreement, and
(iv) to such other matters in connection with this Agreement which the Bank
shall determine to be advisable. The Bank may conclusively rely on such
Certificate until it receives notice in writing to the contrary.
(d) Proceedings. On or before the Closing Date, all corporate
-----------
proceedings of the Borrowers shall be taken in connection with the
transactions contemplated by the Loan Documents and shall be satisfactory
in form and substance to the Bank and its counsel; and the Bank shall have
received certified copies, in form and substance satisfactory to the Bank
and its counsel, of the Articles or Certificate of Incorporation and By-
Laws of each of the Borrowers and the resolutions of the Board of Directors
of each of the Borrowers, as adopted, authorizing the execution and
delivery of the Loan Documents, the borrowings under this Agreement, and
the
- 22 -
<PAGE>
granting of the security interests in the Collateral pursuant to the
Security Instruments, to secure the payment of the Indebtedness.
(e) Security Instruments. The Borrowers shall have delivered to the Bank
--------------------
the Security Instruments, appropriately executed by all parties, attested,
sealed, witnessed and acknowledged to the satisfaction of the Bank and
dated as of the Closing Date, together with such financing statements, lien
entry forms and other documents as shall be necessary and appropriate to
perfect the Bank's security interests in the Collateral covered by said
Security Instruments.
(f) Notes. The Borrowers shall have delivered the Notes (except only for
-----
the Third Term Note which was issued to the order of the Bank on July 14,
1993, and remains outstanding) to the Bank, in each case appropriately
executed, and such other information with respect to the natural gas
compressor fleets/units of the Borrowers as shall be requested by the Bank.
(g) Second Amended and Supplemental Mortgage. Hawkins shall have
----------------------------------------
executed and delivered the Second Amended and Supplemental Mortgage to the
Bank in multiple counterparts and in recordable form.
(h) Title. Borrowers shall have provided the Bank with evidence
-----
satisfactory to the Bank and its legal counsel that Borrowers have valid,
merchantable title to the Mortgaged Property, including (without
limitation) title reports, title opinions (division order or otherwise
regarding the Mortgaged Property) and true and complete duly executed
assignments (in recordable form) from the prior record owner(s) thereof
pertaining to all of the Mortgaged Property evidencing transfer of lawful
title thereto to the applicable Borrowers.
(i) Opinion of Borrowers' Counsel. The Bank shall have received from
-----------------------------
Borrowers' counsel, Conner & Winters, a Professional Corporation, a
favorable closing opinion, satisfactory in form and substance to the Bank
and its counsel.
(j) Employment and Non-Compete Agreements. Non-Compete agreements with
-------------------------------------
key employees of Equity (including, without limitation, Don Smith)
previously executed and delivered to Hawkins, together with a five (5) year
employment contract with Don Smith, shall remain in full force and effect,
without amendment or modification since the Prior Agreements.
- 23 -
<PAGE>
(k) Security Agreement. Each of the Borrowers shall execute and deliver
------------------
to the Bank the Third Amended and Restated Security Agreement.
(l) Other Information. The Bank shall have received such other
-----------------
information, documents and assurances as shall be reasonably requested by
the Bank.
6.2 Conditions Precedent to All Revolving Credit Loans. The Bank shall
--------------------------------------------------
not be obligated to make any Revolving Credit Loan or convert the Revolving
Credit Note on the Conversion Date as contemplated by Section 2.1 hereof (i) if
at such time any Event of Default shall have occurred or any Default shall have
occurred and be continuing; (ii) if any of the representations, warranties and
covenants contained in Article VIII of this Agreement shall be false or untrue
in any material respect on the date of such loan, as if made on such date; or
(iii) unless the Revolving Credit Borrowing Base will support the additional
Revolving Credit Loan being requested. Each request by the Borrowers for an
additional Revolving Credit Loan shall constitute a representation by the
Borrowers that there is not at the time of such request an Event of Default or a
Default, and that all representations, warranties and covenants in Article VIII
of this Agreement are true and correct on and as of the date of each such
request.
ARTICLE VII
-----------
COVENANTS
---------
The Borrowers covenant and agree with the Bank that from the date hereof
and so long as this Agreement is in effect (by extension, amendment or
otherwise) and until payment in full of all Indebtedness and the performance of
all other obligations of the Borrowers under this Agreement, unless the Bank
shall otherwise consent in writing, which consent will not be unreasonably
withheld:
7.1 Payment of Taxes and Claims. The Borrowers will pay and discharge or
---------------------------
cause to be paid and discharged all Taxes imposed upon the income or profits of
the Borrowers or upon the property, real, personal or mixed, or upon any part
thereof, belonging to the Borrowers before the same shall be in default, and all
lawful claims for labor, rentals, materials and supplies which, if unpaid, might
become a Lien upon its property or any part thereof; provided however, that the
-------- -------
Borrowers shall not be required to pay and discharge or cause to be paid or
discharged any such Tax, assessment or claim so long as the validity thereof
shall be contested in good faith by appropriate proceedings, and adequate book
reserves shall be established with respect thereto, and the Borrowers shall pay
such Tax, charge or claim before any property subject thereto shall become
subject to execution.
- 24 -
<PAGE>
7.2 Maintenance of Corporate Existence. Each of the Borrowers will do or
----------------------------------
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises and will continue to
conduct and operate its business substantially as being conducted and operated
presently. Each of the Borrowers will become and remain qualified to conduct
business in each jurisdiction where the nature of the business or ownership of
property by such Borrowers may require such qualification.
7.3 Preservation of Property. Each of the Borrowers will at all times
------------------------
maintain, preserve and protect all franchises and trade names and keep all the
remainder of its properties which are used or useful in the conduct of its
respective businesses whether owned in fee or otherwise, or leased, in good
repair and operating condition; from time to time make, or cause to be made, all
needful and proper repairs, renewals, replacements, betterments and improvements
thereto so that the business carried on in connection therewith may be properly
and advantageously conducted at all times; and comply with all material leases
to which it is a party or under which it occupies property so as to prevent any
material loss or forfeiture thereunder.
7.4 Insurance. Each of the Borrowers will keep or cause to be kept
---------
adequately insured by financially sound and reputable insurers its plants,
equipment, compressor units (whether owned or leased) motor vehicles, and all
other property of a character usually insured by businesses engaged in the same
or similar businesses. Upon demand by the Bank any insurance policies covering
the Collateral shall be endorsed to provide for payment of losses to the Bank as
its interest may appear, to provide that such policies may not be canceled,
reduced or affected in any manner for any reason without thirty days prior
notice to the Bank, and to provide for any other matters which the Bank may
reasonable require; and such insurance shall be against fire, casualty and any
other hazards normally insured against and shall be in the amount of the full
value (less a reasonable deductible not to exceed amounts customary in the
industry for similarly situated businesses and properties) of the property
insured. The Borrowers shall at all times maintain adequate insurance against
damage to persons or property, which insurance shall be by financially sound and
reputable insurers and shall, without limitation, provide the following
coverages: comprehensive general liability (including, without limitation,
coverage, where applicable, damage caused by explosion, broad form property
damage coverage, broad form coverage for contractually independent contractors),
worker's compensation, products liability and automobile liability.
7.5 Compliance with Applicable Laws. Each of the Borrowers will comply
-------------------------------
with the requirements of all applicable Laws and orders of any Tribunal and
obtain any licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its properties or to the conduct of its business.
- 25 -
<PAGE>
7.6 Financial Statements and Reports.
--------------------------------
(a) Quarterly Operating Statements. The Borrowers shall maintain a
------------------------------
standard system of accounting and shall furnish to the Bank as soon as
practicable after the end of the first three quarters of each fiscal year,
commencing with the quarter ending June 30, 1995, and in any event within
forty-five (45) days after the end of each said quarter, consolidated and
consolidating operating statements for Hawkins which shall be certified on
behalf of Hawkins by the President or the chief financial officer of
Hawkins to have been prepared in accordance with GAAP consistently applied
and to fairly present the financial condition of Hawkins for such period
(on a consolidated and consolidating basis), and shall include at least a
balance sheet as at the end of such period, and a statement of income, all
in reasonable detail.
(b) Annual Financial Statements. As soon as practicable after the end of
---------------------------
each fiscal year of Hawkins and in any event within one-hundred twenty
(120) days thereafter, the Borrowers shall furnish to the Bank the
following financial statements (on a consolidated and consolidating basis),
together with a report thereon on and an unqualified opinion, prepared in
accordance with GAAP of reputable independent certified public accountants
of recognized standing selected by Hawkins and acceptable to the Bank:
(i) A balance sheet of Hawkins at the end of such year prepared on
a consolidated and consolidating basis,
(ii) A statement of income of Hawkins for such year prepared on a
consolidated and consolidating basis, and
(iii) A statement of cash flows of Hawkins for such year prepared
on a consolidated and consolidating basis,
setting forth in each case in comparative form the figures for the previous
fiscal year, if applicable, all in reasonable detail. The report of the
independent certified public accountants shall contain a certification that
in the course of the audit necessary for the certification of such
financial statements, they have obtained no knowledge of any Event of
Default or Default as defined herein, or, if any Event of Default or
Default existed or exists, specifying the nature and period of existence
thereof; provided, however, that such accountants shall not be liable to
the Bank by
- 26 -
<PAGE>
reason of their failure to obtain knowledge of any such Event of Default or
Default which would not be disclosed in the course of an audit conducted in
accordance with generally accepted auditing standards.
(c) Quarterly Certificates. As soon as available and in any event within
----------------------
forty-five (45) days after the end of each of the first three calendar
quarters of each year, concurrently with the furnishing of the applicable
quarterly statements pursuant to subsection 7.6(a), there shall be
furnished to Bank a certificate signed by the chief financial officer of
Borrowers stating that: (a) the financial statements were prepared
(subject to year end audit adjustments) in conformity with GAAP,
consistently applied; (b) a review of the activities of Borrowers for the
period covered by the financial statements has been made under his
supervision with a view to determining whether Borrowers have kept,
observed, performed and fulfilled all of their obligations under this
Agreement, the other Loan Documents and every other document or instrument
referred to herein; and (c) no Event of Default or an event which with the
passage of time or notice, or both, could become an Event of Default has
occurred, and is continuing, or a statement describing the nature, period
of existence and status of any such event(s) if existing. Such
certificates shall fully demonstrate the method of all calculations therein
contained insofar as compliance with financial covenants hereof are
concerned but shall not be qualified or limited because of restricted or
limited examination of any material portion of Borrowers' records by the
party preparing such quarterly statements.
(d) Annual/Special Covenant Certificates. Concurrently with the
------------------------------------
furnishing of the financial statements pursuant to 7.6(b), there shall be
furnished to Bank a separate certificate signed by the chief financial
officers of Borrowers stating that: (a) the financial statements were
prepared in conformity with GAAP on a basis consistently applied, and (b)
no Event of Default or an event which with the passage of time or notice,
or both, could become an Event of Default has occurred, and is continuing,
and status of any such event(s) if existing. Such certificate shall not be
qualified or limited because of restricted or limited examination of any
material portion of Borrowers' records by the party preparing such annual
statements. All certificates of Borrowers submitted pursuant to this
Agreement in connection with compliance with certain financial or other
covenants herein contained, including, without limitation, Sections 7.24
and 7.34 hereof, shall fully demonstrate the method of calculations therein
contained.
- 27 -
<PAGE>
(e) Special Auditing Reports. Promptly upon receipt thereof, the
------------------------
Borrowers shall deliver to the Bank a copy of each report submitted to the
Borrowers, by independent accountants in connection with any annual,
interim or special audit made by them of the books and records of the
Borrowers, including, without limitation, any comment letter submitted by
such accountants to management in connection with their audit.
(f) Budgets and Projections. Promptly upon completion thereof, the
-----------------------
Borrowers shall deliver to the Bank a copy of each operating budget and
projection of financial performance prepared for the Borrowers.
(g) Periodic Reports. Promptly upon their becoming available, copies of
----------------
all financial statements, reports, notices or proxy statements sent by the
Borrowers to their stockholders and all registration statements, periodic
reports and other statements and schedules filed by the Borrowers with any
securities exchange, the Securities and Exchange Commission or any similar
state or federal governmental authority.
7.7 Environmental Covenants. Borrowers will immediately notify the Bank
-----------------------
of and provide the Bank with copies of any notifications of discharges or
releases or threatened releases or discharges of a Polluting Substance on, upon,
into or from the Collateral which are given or required to be given by or on
behalf any of the Borrowers to any federal, state or local Tribunal if any of
the foregoing may materially and adversely affect any of the Borrowers or any
part of the Collateral, and such copies of notifications shall be delivered to
the Bank at the same time as they are delivered to the Tribunal. Borrowers
further agree promptly to undertake and diligently pursue to completion any
appropriate and legally required or authorized remedial containment and cleanup
action in the event of any release or discharge or threatened release or
discharge of a Polluting Substance on, upon, into or from the Collateral. At
all times while owning and operating the Collateral, the Borrowers will maintain
and retain complete and accurate records of all releases, discharges or other
disposal of Polluting Substances on, onto, into or from the Collateral,
including, without limitation, records of the quantity and type of any Polluting
Substances disposed of on or off the Collateral.
7.8 Environmental Indemnities. Borrowers hereby agree to indemnify,
-------------------------
defend and hold harmless the Bank and each of its officers, directors,
employees, agents, consultants, attorneys, contractors and each of its
affiliates, successors or assigns, or transferees from and against, and
reimburse said Persons in full with respect to, any and all loss, liability,
damage, fines, penalties, costs and expenses, of every kind and character,
including reasonable attorneys' fees and court costs, known or
- 28 -
<PAGE>
unknown, fixed or contingent, occasioned by or associated with any claims,
demands, causes of action, suits and/or enforcement actions, including any
administrative or judicial proceedings, and any remedial, removal or response
actions ever asserted, threatened, instituted or requested by any Persons,
including any Tribunal, arising out of or related to: (a) the breach of any
representation or warranty of Borrowers contained in Section 8.16 set forth
herein; (b) the failure of Borrower to perform any of its covenants contained in
Section 7.7 hereunder; (c) the ownership, construction, occupancy, operation,
use of the Collateral prior to the earlier of the date on which (i) the
Indebtedness and obligations secured hereby have been paid and performed in full
and the Security Instruments have been released, or (ii) the Collateral has been
sold by Bank following Bank's ownership of the Collateral by way of foreclosure
of the Liens granted pursuant hereto, deed in lieu of such foreclosure or
otherwise (the "Release Date"); provided, however, this indemnity shall not
apply with respect to matters caused by or arising solely from the Bank's
activities during any period of time the Bank acquires ownership of the
Collateral.
7.9 Quarterly Production Reports. At the Bank's request, Borrowers shall
----------------------------
furnish to the Bank as soon as practicable after the end of each calendar
quarter, and in any event within thirty (30) days after the quarter end, a
production report and an expense report for such quarter, certified by
Borrowers' chief financial officer as being true, correct and complete, showing
on a lease by lease basis (i) the gross proceeds from the sale of Hydrocarbons
produced from the Mortgaged Property (including additional properties mortgaged
subsequent to the Closing pursuant to Section 4.2 above) owned by Borrowers,
(ii) the severance, production ad valorem taxes and gathering taxes deducted
from or paid from the Mortgaged Property proceeds, (iii) the Adjusted Gross
Proceeds, (iv) the quantity of Hydrocarbons produced and sold from the Mortgaged
Property and the number and identity of wells operated, drilled or abandoned,
and (v) for each of the wells such operating and other expense and net income
information pertaining to the Mortgaged Property owned by Borrowers as the Bank
may request including, without limitation, a listing of material royalty
liabilities and obligations on a lease by lease basis.
7.10 Notice of Default. Immediately upon the happening of any condition or
-----------------
event which constitutes an Event of Default or Default or any default or event
of default under any other loan, mortgage, financing or security agreement, the
Borrowers will give the Bank a written notice thereof specifying the nature and
period of existence thereof and what actions, if any, the Borrowers are taking
and propose to take with respect thereto.
7.11 Notice of Litigation. Immediately upon becoming aware of the
--------------------
existence of any action, suit or proceeding at law or in equity before any
Tribunal, an adverse outcome in which would (i) materially impair the ability of
any of the Borrowers to carry on
- 29 -
<PAGE>
its business substantially as now conducted, (ii) materially and adversely
affect the condition (financial or otherwise) of any of the Borrowers, or (iii)
result in monetary damages in excess of $100,000, the Borrowers will give the
Bank a written notice specifying the nature thereof and what actions, if any,
the Borrowers are taking and propose to take with respect thereto.
7.12 Notice of Claimed Default. Immediately upon becoming aware that the
-------------------------
holder of any note or any evidence of indebtedness or other security of any of
the Borrowers has given notice or taken any action with respect to a claimed
default or event of default thereunder, if the amount of the note or
indebtedness exceeds $50,000 the Borrowers will give the Bank a written notice
specifying the notice given or action taken by such holder and the nature of the
claimed default or event of default thereunder and what actions, if any, the
Borrowers are taking and propose to take with respect thereto.
7.13 Notice of Change of Management. Within five (5) days after any change
------------------------------
in management of the Borrowers or any officers of any of the Borrowers holding
an office of President, Chairman or chief financial officer, the Borrowers shall
give written notice thereof to the Bank, together with a description of the
reasons for the change.
7.14 Requested Information. With reasonable promptness, the Borrowers will
---------------------
give the Bank such other data and information relating to the Borrowers as from
time to time may be reasonably requested by the Bank.
7.15 Field Audits. The Bank shall be permitted to conduct, at its own
------------
expense, an annual field audit of the Borrowers' accounts and books and records
relating thereto. Each field audit shall be conducted by agents of the Bank,
whether employees of the Bank or third-party agents selected by the Bank. The
Borrowers shall fully cooperate with the Bank and its agents in connection with
such field audits.
7.16 Inspection. The Borrowers will keep complete and accurate books and
----------
records with respect to the Collateral and their other properties, businesses
and operations and will permit employees and representatives of the Bank to
audit, inspect and examine the same and to make copies thereof and extracts
therefrom during normal business hours. All such records shall be at all times
kept and maintained at the offices of the Borrowers in Tulsa, Oklahoma. Upon
any Default or Event of Default, the Borrowers will surrender all of such
records relating to the Collateral to the Bank upon receipt of any request
therefor from the Bank.
7.17 Maintenance of Employee Benefit Plans. The Borrowers will maintain
-------------------------------------
each employee benefit plan as to which they may have any liability or
responsibility in compliance with ERISA and all other Laws applicable thereto.
- 30 -
<PAGE>
7.18 Disposition/Negative Pledge re Encumbrance of Collateral and Other
------------------------------------------------------------------
Assets. Borrowers will not sell or encumber any of the Collateral and Borrowers
- ------
will not sell, lease, transfer, scrap or otherwise dispose of or mortgage,
pledge, grant a security interest in or otherwise encumber any of Borrowers'
other oil and gas mining or mineral properties or assets, whether for
replacement or not, unless such sale or disposition shall be in the ordinary
course of business and for a full and fair consideration, subject to the
Borrowers' limited right to sell up to $100,000 worth in the aggregate of its
properties or assets not constituting Collateral (other than and expressly
excluding oil and gas leasehold, mining or other mineral interests wherever
located) in the ordinary course of business during any calendar year without
obtaining the Bank's prior consent. In no event shall Borrowers cause or permit
the voluntary or involuntary pledge, mortgage or other encumbrance, attachment
or levy of or against any of the properties or assets of whatsoever nature or
type to any Person (financial institution or otherwise).
7.19 Maximum Debt to Tangible Net Worth Ratio. The Borrowers will not at
----------------------------------------
any time permit the ratio of Hawkins' Total Liabilities (less deferred taxes) to
its Tangible Net Worth during the following fiscal year periods to be greater
than:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year 1995 1.5 to 1
Fiscal Year 1996 1.3 to 1
Fiscal Year 1997 through
Fiscal Year 2000 1.0 to 1
</TABLE>
7.20 Minimum Current/Quick Ratios. The Borrowers will not permit Hawkins'
Current/Quick Ratios to be less than the following during the applicable fiscal
year periods:
<TABLE>
<CAPTION>
Current Ratio Quick Ratio
------------- -----------
<S> <C> <C>
Fiscal Year 1995 1.1 to 1 .8 to 1
Fiscal Year 1996 1.1 to 1 .8 to 1
Fiscal Year 1997 through
Fiscal Year 2000 1.0 to 1 .6 to 1
</TABLE>
7.21 Capital Expenditures. The Borrowers agree not to make any capital
--------------------
expenditure during any fiscal year for the acquisition, construction, expansion
or improvements of capital assets (whether owned or leased or otherwise) that
aggregate in excess of $2,000,000 for such period or commit for any such capital
expenditure which, if made in the applicable period for delivery and payment for
such period, would result in gross capital expenditures in excess of the
$2,000,000 aggregate limitation herein set forth.
7.22 Limitation on Other Indebtedness. The Borrowers will not create,
--------------------------------
incur, assume, become or be liable in any manner in respect of, or suffer to
exist, any indebtedness whether evidenced by a note, bond, debenture, agreement,
letter of credit or similar or
- 31 -
<PAGE>
other obligation, or accept any deposits or advances of any kind, except (i)
trade payables and current indebtedness (other than for borrowed money) incurred
in, and deposits and advances accepted in, the ordinary course of business; (ii)
indebtedness incurred for the acquisition of assets secured by purchase money
security interests not exceeding $200,000 in the aggregate during any fiscal
year of the Borrower and (iii) the Indebtedness.
7.23 Limitation on Liens. The Borrowers will not create or suffer to exist
-------------------
any Lien upon any of their assets, whether real or personal property, except
purchase money security interests securing indebtedness incurred for the
acquisition of assets and Liens in favor of the Bank securing the Indebtedness.
7.24 Contingent Liabilities; Advances. Except for the items described on
--------------------------------
Exhibit "D" attached hereto, the Borrowers will not either directly or
- -----------
indirectly, (i) guarantee, become surety for, discount, endorse, agree
(contingently or otherwise) to purchase, repurchase or otherwise acquire or
supply or advance funds in respect of, or otherwise become or be contingently
liable upon the indebtedness, obligation or liability of any Person, (ii)
guarantee the payment of any dividends or other distributions upon the stock of
any corporation, (iii) discount or sell with recourse or for less than the face
value thereof, any of its notes receivable, accounts receivable or chattel
paper; (iv) loan, agree to loan, or advance money to any Person; or (v) enter
into any agreement for the purchase or other acquisition of any goods, products,
materials or supplies, or for the making of any shipments or for the payment of
services, if in any such case payment therefor is to be made regardless of the
non-delivery of such goods, products, materials or supplies or the non-
furnishing of the transportation of services; provided, however that the
foregoing shall not be applicable to endorsement of negotiable instruments
presented to or deposited with a bank for collection or deposit in the ordinary
course of business.
7.25 Merger, Consolidation, Acquisition, Etc. The Borrowers will not merge
---------------------------------------
or consolidate with or into any other Person; or permit any other Person to
consolidate with or merge into any of the Borrowers; or acquire all or
substantially all of the assets or properties or capital stock of any other
Person; or adopt or effect any plan of reorganization, recapitalization,
liquidation or dissolution; or acquire any properties or assets, other than in
the ordinary course of business; provided, however, Borrowers may enter into
letters of intent pertaining to merger, consolidation or acquisition subject to
obtaining the Bank's written consent thereto prior to consummation of the
transactions contemplated by such letter(s) of credit.
7.26 Dividends. The Borrowers will not declare, pay or become obligated to
---------
declare or pay any cash or other dividends on any class of their capital stock
now or hereafter outstanding, make any distribution of cash or property to
holders of any shares of such
- 32 -
<PAGE>
stock, or redeem, retire, purchase or otherwise acquire, directly or indirectly,
any shares of any class of their capital stock now or hereafter outstanding.
7.27 Change of Fiscal Year. None of the Borrowers will change its fiscal
---------------------
year from its present fiscal year (fiscal year ending December 31).
7.28 Change of Business. None of the Borrowers will engage in any business
------------------
activity substantially different from or unrelated to present business
activities and operations.
7.29 Articles of Incorporation; By-Laws and Assumed Names. The Borrowers
----------------------------------------------------
will not amend, alter, modify or restate their Articles or Certificate of
Incorporation or By-Laws in any way which would (i) change the corporate name or
adopt a trade name for any of the Borrowers; or (ii) in any manner adversely
affect the Borrowers' obligations or covenants to the Bank hereunder.
7.30 Transactions with Affiliates. The Borrowers will not enter into any
----------------------------
transaction, including (without limitation) the purchase, sale or exchange of
property or the rendering or furnishing of any service with any Affiliate of any
of the Borrowers, except transactions in the ordinary course of the business of
Borrowers and upon fair and reasonable terms no less favorable than Borrowers
would obtain in a transaction for the same purpose with a Person that is not an
Affiliate of any of the Borrowers.
7.31 Other Agreements. The Borrowers will not enter into or permit to
----------------
exist any agreement (i) which would cause an Event of Default or a Default
hereunder; or (ii) which contains any provision which would be violated or
breached by the performance of Borrowers' obligations hereunder or under any of
the other Loan Documents.
7.32 Payment of Indebtedness. The Borrowers hereby agree to pay, when due
-----------------------
and owing, all Indebtedness, whether or not evidenced by the Notes.
ARTICLE VIII
------------
REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Bank to enter into this Agreement and to make the Revolving
Credit Loans and the Term Loans to the Borrowers under the provisions hereof,
and in consideration thereof, the Borrowers represent, warrant and covenant as
follows:
8.1 Organization and Qualification. Each of the Borrowers is duly
------------------------------
organized, validly existing, and in good standing under the Laws of its
respective jurisdiction of incorporation, and is duly
- 33 -
<PAGE>
licensed and in good standing as a foreign corporation in each jurisdiction in
which the nature of the business transacted or the property owned is such as to
require licensing or qualification as such.
8.2 Litigation. Except for the action described on Exhibit "E" attached
---------- -----------
hereto, there is no action, suit, investigation or proceeding threatened or
pending before any Tribunal against or affecting any of the Borrowers or any
properties or rights of any of the Borrowers which, if adversely determined,
would result in a liability of greater than $100,000 or would otherwise result
in any material adverse change in the business or condition, financial or
otherwise, of any of the Borrowers. None of the Borrowers is in default with
respect to any judgment, order, writ, injunction, decree, rule or regulation of
any Tribunal.
8.3 Financial Statements. The Borrowers' most recent unaudited financial
--------------------
statements which have been furnished to the Bank have been prepared in
conformity with GAAP, show all material liabilities, direct and contingent, and
fairly present the financial condition of the Borrowers as of the date of such
statements and the results of their operations for the period then ended, and
since the date of such statements there has been no material adverse change in
the business, financial condition or operations of the Borrowers.
8.4 Conflicting Agreements and Other Matters. None of the Borrowers is in
----------------------------------------
default in the performance of any obligation, covenant, or condition in any
agreement to which it is a party or by which it is bound. None of the Borrowers
is a party to any contract or agreement or subject to any charter or other
corporate restriction which materially and adversely affects its business,
property or assets, or financial condition. None of the Borrowers is a party to
or otherwise subject to any contract or agreement which restricts or otherwise
affects the right or ability of the Borrowers to execute the Loan Documents or
the performance of any of their respective terms. Neither the execution nor
delivery of any of the Loan Documents, nor fulfillment of nor compliance with
their respective terms and provisions will conflict with, or result in a breach
of the terms, conditions or provisions of, or constitute a default under, or
result in any violation of, or result in the creation of any Lien (except those
created by the Loan Documents) upon any of the properties or assets of the
Borrowers pursuant to, or require any consent, approval or other action by or
any notice to or filing with any Tribunal (other than routine filings after the
Closing Date with the Securities and Exchange Commission, any securities
exchange and/or state blue sky authorities) pursuant to, the charter or By-Laws
of any of the Borrowers, any award of any arbitrator, or any agreement,
instrument or Law to which any of the Borrowers is subject.
8.5 Corporate Authorization. The Boards of Directors of the Borrowers
-----------------------
have duly authorized the execution and delivery of each
- 34 -
<PAGE>
of the Loan Documents and the performance of their respective terms. No other
consent of any other Person, except for the Bank, is required as a prerequisite
to the validity and enforceability of the Loan Documents.
8.6 Purposes. None of the Borrowers is engaged principally, or as one of
--------
its important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System) and no part of the proceeds of
any borrowing hereunder will be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying any margin
stock. If requested by the Bank, the Borrowers will furnish to the Bank a
statement in conformity with the requirements of Federal Reserve Form U-1,
referred to in Regulation U, to the foregoing effect. None of the Borrowers or
any agent acting on its behalf has taken or will take any action which might
cause this Agreement, or the Notes to violate any regulation of the Board of
Governors of the Federal Reserve System (including Regulations G, T, U and X) or
to violate any securities laws, state or federal, in each case as in effect now
or as the same may hereafter be in effect.
8.7 Compliance with Applicable Laws. The Borrowers are in compliance with
-------------------------------
all Laws, ordinances, rules, regulations and other legal requirements applicable
to them and the business conducted by them, the violation of which could or
would have a material adverse effect on their business or condition, financial
or otherwise. Neither the ownership of any capital stock of any of the
Borrowers, nor any continued role of any Person in the management or other
affairs of any of the Borrowers (i) will result or could result in the
Borrowers' noncompliance with any Laws, ordinances, rules, regulations and other
legal requirements applicable to the Borrowers, or (ii) could or would have a
material adverse effect on the business or condition, financial or otherwise, of
the Borrowers.
8.8 Possession of Franchises, Licenses. Each of the Borrowers possesses
----------------------------------
all franchises, certificates, licenses, permits and other authorizations from
governmental political subdivisions or regulatory authorities, free from
burdensome restrictions, that are necessary in any material respect for the
ownership, maintenance and operation of their respective properties and assets,
and none of the Borrowers is in violation of any thereof in any material
respect.
8.9 Leases. The Borrowers enjoy peaceful and undisturbed possession of
------
all leases necessary in any material respect for the operation of their
respective properties and assets, none of which contains any unusual or
burdensome provisions which might materially affect or impair the operation of
such properties and assets. All such leases are valid and subsisting and are in
full force and effect.
- 35 -
<PAGE>
8.10 Taxes. The Borrowers have filed all Federal, state and other income
-----
tax returns which are required to be filed and have paid all Taxes, as shown on
said returns, and all Taxes due or payable without returns and all assessments
received to the extent that such Taxes or assessments have become due. All Tax
liabilities of each of the Borrowers are adequately provided for on the books of
the Borrowers, including interest and penalties. No income tax liability of a
material nature has been asserted by taxing authorities for Taxes in excess of
those already paid.
8.11 Disclosure. Neither this Agreement nor any other Loan Document or
----------
writing furnished to the Bank by or on behalf of the Borrowers in connection
herewith contains any untrue statement of a material fact nor do such Loan
Documents and writings, taken as a whole, omit to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. There is no fact known to the Borrowers and not reflected in the
financial statements or exhibits hereto provided to the Bank which materially
adversely affects or in the future may materially adversely affect the business,
property, or assets, or financial condition of any of the Borrowers which has
not been set forth in this Agreement, in the Loan Documents or in other
documents furnished to the Bank by or on behalf of the Borrowers prior to the
date hereof in connection with the transactions contemplated hereby.
8.12 Investment Company Act Representation. None of the Borrowers is an
-------------------------------------
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
8.13 ERISA. Since the effective date of Title IV of ERISA, no Reportable
-----
Event has occurred with respect to any Plan. For the purposes of this section
the term "Reportable Event" shall mean an event described in Section 4043(b) of
ERISA. For the purposes hereof the term "Plan" shall mean any plan subject to
Title IV of ERISA and maintained for employees of the Borrowers, or of any
member of a controlled group of corporations, as the term "controlled group of
corporations" is defined in Section 1563 of the Internal Revenue Code of 1986,
as amended (the "Code"), of which any of the Borrowers is a part. Each Plan
established or maintained by any of the Borrowers is in material compliance with
the applicable provisions of ERISA, and the Borrowers have filed all reports
required by ERISA and the Code to be filed with respect to each Plan. The
Borrowers have met all requirements with respect to funding Plans imposed by
ERISA or the Code. Since the effective date of Title IV of ERISA there have not
been any nor are there now existing any events or conditions that would permit
any Plan to be terminated under circumstances which would cause the lien
provided under Section 4068 of ERISA to attach to the assets of the Borrowers.
The value of each Plan's benefits guaranteed under Title IV of ERISA on the date
hereof does not exceed the value of such Plan's assets allocable to such
benefits on the date hereof.
- 36 -
<PAGE>
8.14 Fiscal Year. The fiscal years of the respective Borrowers end as of
-----------
December 31 of each year.
8.15 Title to Properties; Authority. Borrowers have full power, authority
------------------------------
and legal right to own and operate the properties which they now own and
operate, and to carry on the lines of business in which it is now engaged, and
has good and marketable title to the Mortgaged Property in corporate capacity
subject to no Lien of any kind except Liens permitted by this Agreement. The
Borrowers own a working interest and net revenue interest in the oil and gas
leasehold estate for the Mortgaged Property of not less than the amounts set
forth on a well by well basis on Exhibit "F" attached hereto. Borrowers have
-----------
full power, authority and legal right to execute and deliver and to perform and
observe the provisions of this Agreement and the other Loan Documents.
Borrowers further represent to the Bank that any and all after acquired interest
in any one or more of the Mortgaged Property being concurrently or subsequently
assigned of record to Borrowers is and shall be deemed encumbered by the
Mortgage in all respects.
8.16 Environmental Representations. To the best of Borrowers' knowledge
-----------------------------
and belief, upon reasonable and good faith inquiry exercised with due diligence:
(a) Borrowers are not subject to any liability or obligation relating to
(i) the environmental conditions on, under or about the Collateral,
including, without limitation, the soil and ground water conditions at the
location of any of the Borrowers' properties, or (ii) the use, management,
handling, transport, treatment, generation, storage, disposal, release or
discharge of any Polluting Substance;
(b) Borrowers have not obtained and are not required to obtain or make
application for any permits, licenses or similar authorizations to
construct, occupy, operate or use any buildings, improvements, facilities,
fixtures and equipment forming a part of the Collateral by reason of any
Environmental Laws;
(c) Borrowers have taken all steps necessary to determine and has
determined that no Polluting Substances have been disposed of or otherwise
released on, onto, into, or from the Collateral (the term "release" shall
have the meanings specified in CERCLA/SARA, and the term "disposal" or
"disposed" shall have the meanings specified in RCRA/HSWA; provided, in the
event either CERCLA/SARA or RCRA/HSWA is amended so as to broaden the
meaning of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment and provided further, to
the extent that the laws of any State or Tribunal establish a meaning
- 37 -
<PAGE>
for "release," "disposal" or "disposed" which is broader than that
specified in CERCLA/SARA, RCRA/HSWA or other Environmental Laws, such
broader meaning shall apply);
(d) There are no PCB's or asbestos-containing materials, whether in the
nature of thermal insulation products such as pipe boiler or breech
coverings, wraps or blankets or sprayed-on or trowelled-on products in, on
or upon the Collateral; and
(e) There is no urea formaldehyde foam insulation ("UFFI") in, on or upon
the Collateral.
8.17 Oil and Gas Contracts. All contracts, agreements and leases related
---------------------
to any of the oil and gas mining, mineral or leasehold properties and all
contracts, agreements, instruments and leases to which the Borrowers are a
party, are valid and effective in accordance with their respective terms, and
all agreements included in the oil and gas mining, mineral or leasehold
properties in the nature of oil and/or gas purchase agreements, and oil and/or
gas sale agreements are in full force and effect and are valid and legally
binding obligations of the parties thereto and all payments due thereunder have
been made, except for those suspended for reasonable cause in the ordinary
course of business; and, there is not under any such contract, agreement or
lease any existing default by any party thereto or any event which, with notice
or lapse of time, or both, would constitute such default, other than minor
defaults which, in the aggregate, would result in losses or damages of more than
$100,000 to Borrowers.
8.18 Natural Gas Policy Act and Natural Gas Act Compliance. To the best of
-----------------------------------------------------
Borrowers' knowledge, all material filings and approvals under the Natural Gas
Policy Act of 1978, as amended, and the Natural Gas Act, as amended, or with the
Federal Energy Regulatory Commission (the "FERC") or required under any rules or
regulations adopted by the FERC which are necessary for the operation of
Borrowers' business or the Collateral in the manner in which they are presently
being operated have been made and the terms of the agreements and contractual
rights included in the Borrowers' business or the Collateral do not conflict
with or contravene any such Law, rule or regulation.
8.19 Take or Pay Obligations, Prepayments, BTU Adjustments and Balancing
-------------------------------------------------------------------
Problems. To the best of the Borrowers' knowledge, after diligent inquiry,
- --------
there is no take or pay obligation under any gas purchase agreement comprising a
portion of the Collateral which is not matched by a commensurate and
corresponding pay or take obligation binding upon the purchaser under a
corresponding gas sales agreement such that with respect to the ownership and
operation of the business operations of Borrowers or the Collateral, any such
obligation in favor of any seller under any gas purchase agreement to which the
Borrowers are a "buyer" is matched by a corresponding obligation on the part of
"purchasers" under
- 38 -
<PAGE>
corresponding gas sales agreements pursuant to which the Borrowers are the
"seller". Neither any of the Borrowers nor the Collateral is subject to
requirements to make BTU adjustments or effect gas balancing in favor of third
parties which would result in Borrowers being required to (i) deliver gas at a
price below that established in applicable gas sales agreements or on behalf of
and for the benefit of third parties in exchange or to otherwise compensate for
prior above market or above contract purchases of gas from Borrowers or their
predecessor in interest, or (ii) balance in kind by allowing other owners in the
Collateral to make up the past imbalances in gas sales, or (iii) balance in cash
by paying other owners of the collateral for the past gas imbalances except for
the matters described on Exhibit "G" hereto which have been disclosed to the
-----------
Bank.
8.20 Gas Purchase Obligations in Excess of Gas Sales Rights. The ownership
------------------------------------------------------
and operation of the business operations of Borrowers or the Collateral have not
resulted or will not result in the existence of minimum purchase obligations
under any gas purchase agreement (relating to the volume of gas to be taken
thereunder or the price to be paid with respect thereto for the duration of any
such gas purchase agreement) which are not matched by corresponding and
commensurate rights to sell all such gas under applicable gas sales agreements
at prices in excess of the amount to be paid therefor under gas purchase
agreements (without regard to costs associated with transporting any such gas
and risks of volume "shrinkage" occurring in the transportation process).
8.21 Ownership of Mortgaged Property. The Borrowers hereby represent,
-------------------------------
warrant and covenant that the Borrowers own working interests, royalty interests
and net revenue interests in the oil and gas leasehold estate for the Mortgaged
Property covered by the Mortgage not less than the amounts set forth on a well
by well basis on Exhibit "F" attached hereto.
-----------
ARTICLE IX
----------
EVENTS OF DEFAULT
-----------------
9.1 Events of Default. The occurrence of any one or more of the
-----------------
following events shall constitute an Event of Default hereunder (whether such
occurrence shall be voluntary or involuntary or come about or be effected by
operation of Law or otherwise):
(a) The Borrowers shall fail to make any payment or prepayment of
principal or interest upon any of the Notes, or fail to pay any other
Indebtedness after the same shall become due and payable (whether by
extension, renewal, acceleration or otherwise); or
- 39 -
<PAGE>
(b) Any representation or warranty of the Borrowers made herein or in any
writing furnished in connection with or pursuant to any of the Loan
Documents shall have been false or misleading in any material respect on
the date when made and continues to have a material adverse effect on one
or more of the Borrowers or their respective financial capacity or business
operations; or
(c) The Borrowers shall fail to duly observe, perform or comply with any
covenant, agreement or term (other than payment provisions which are
governed by Section 9.1(a) hereof) contained in this Agreement or any of
the Loan Documents and such default or breach shall have not been cured or
remedied within the earlier of thirty (30) days after any of the Borrowers
shall know (or should have known) of its occurrence or twenty (20) days
following receipt of notice thereof from the Bank; or
(d) Any of the Borrowers shall default in the payment of principal or of
interest on any other obligation for money borrowed or received as an
advance (or any obligation under any conditional sale or other title
retention agreement, or any obligation issued or assumed as full or partial
payment for property whether or not secured by purchase money Lien, or any
obligation under notes payable or drafts accepted representing extensions
of credit) beyond any grace period provided with respect thereto, or shall
default in the performance of any other agreement, term or condition
contained in any agreement under which such obligation is created (or if
any other default under any such agreement shall occur and be continuing
beyond any period of grace provided with respect thereto) if the effect of
such default is to cause the holder or holders of such obligation (or a
trustee on behalf of such holder or holders) to accelerate the due date of
such obligation prior to its scheduled date of maturity; or
(e) Any of the following: (i) any of the Borrowers shall become insolvent
or unable to pay its debts as they mature, make an assignment for the
benefit of creditors or admit in writing its inability to pay its debts
generally as they become due or fail generally to pay its debts as they
mature; or (ii) an order, judgment or decree is entered adjudicating any of
the Borrowers bankrupt or insolvent; or (iii) any of the Borrowers shall
petition or apply to any Tribunal for the appointment of a trustee,
receiver, custodian or liquidator of any of the Borrowers or of any
substantial part of the assets of any of the Borrowers, or shall commence
any proceedings relating to any of the Borrowers under any bankruptcy,
reorganization, compromise, arrangement,
- 40 -
<PAGE>
insolvency, readjustment of debts, dissolution, or liquidation Law of any
jurisdiction, whether now or hereafter in effect; or (iv) any such petition
or application shall be filed, or any such proceedings shall be commenced,
of a type described in subsection (iii) above, against any of the Borrowers
and any of the Borrowers by any act shall indicate its approval thereof,
consent thereto or acquiescence therein, or an order, judgment or decree
shall be entered appointing any such trustee, receiver, custodian or
liquidator, or approving the petition in any such proceedings, and such
order, judgment or decree shall remain unstayed and in effect, if being
vigorously contested, for more than sixty (60) days; or (v) any order,
judgment or decree shall be entered in any proceedings against any of the
Borrowers decreeing the dissolution of any of the Borrowers and such order,
judgment or decree shall remain unstayed and in effect for more than thirty
(30) days; or (vi) any order, judgment or decree shall be entered in any
proceedings against any of the Borrowers decreeing a split-up of any of the
Borrowers which requires the divestiture of a substantial part of the
assets of any of the Borrowers, and such order, judgment or decree shall
remain unstayed and in effect for more than thirty (30) days; or (vii) any
of the Borrowers shall fail to make timely payment or deposit of any amount
of tax required to be withheld by any of the Borrowers and paid to or
deposited to or to the credit of the United States of America pursuant to
the provisions of the Internal Revenue Code of 1986, as amended, in respect
of any and all wages and salaries paid to employees of the Borrowers; or
(f) Any final judgment on the merits for the payment of money in an
amount in excess of $100,000 shall be outstanding against any of the
Borrowers, and such judgment shall remain unstayed and in effect and unpaid
for more than thirty (30) days; or
(g) Any Reportable Event described in Section 8.13 hereof which the Bank
determines in good faith might constitute grounds for the termination of a
Plan therein described or for the appointment by the appropriate United
States District Court of a trustee to administer any such Plan shall have
occurred and be continuing thirty (30) days after written notice to such
effect shall have been given to any of the Borrowers by the Bank, or any
such Plan shall be terminated, or a trustee shall be appointed by a United
States District Court to administer any such Plan or the Pension Benefit
Guaranty Corporation shall institute proceedings to terminate any such Plan
or to appoint a trustee to administer any such Plan; or
- 41 -
<PAGE>
(h) Any default or event of default occurs under any of the other Loan
Documents.
9.2 Remedies. Upon the occurrence of any Event of Default referred to in
--------
Section 9.1(e) the Commitments shall immediately terminate and the Notes and all
other Indebtedness shall be immediately due and payable, without notice of any
kind. Upon the occurrence of any other Event of Default, and without prejudice
to any right or remedy of the Bank under this Agreement or the Loan Documents or
under applicable Law of under any other instrument or document delivered in
connection herewith, the Bank may (i) declare the Commitments terminated or (ii)
declare the Commitments terminated and declare the Notes and the other
Indebtedness, or any part thereof, to be forthwith due and payable, whereupon
the Notes and the other Indebtedness, or such portion as is designated by the
Bank shall forthwith become due and payable, without presentment, demand, notice
or protest of any kind, all of which are hereby expressly waived by the
Borrowers. No delay or omission on the part of the Bank in exercising any power
or right hereunder or under the Notes, the Loan Documents or under applicable
law shall impair such right or power or be construed to be a waiver of any
default or any acquiescence therein, nor shall any single or partial exercise by
the Bank of any such power or right preclude other or further exercise thereof
or the exercise of any other such power or right by the Bank. In the event that
all or part of the Indebtedness becomes or is declared to be forthwith due and
payable as herein provided, the Bank shall have the right to set off the amount
of all the Indebtedness of the Borrowers owing to the Bank against, and shall
have, and is hereby granted by the Borrowers, a lien upon and security interest
in, all property of each of the Borrowers in the Bank's possession at or
subsequent to such default, regardless of the capacity in which the Bank
possesses such property, including but not limited to any balance or share of
any deposit, collection or agency account. After Default all proceeds received
by the Bank may be applied to the Indebtedness in such order of application and
such proportions as the Bank, in its discretion, shall choose. At any time
after the occurrence of any Event of Default, the Bank may, at its option, cause
an audit of any and/or all of the books, records and documents of the Borrowers
to be made by auditors satisfactory to the Bank at the expense of the Borrowers.
The Bank also shall have, and may exercise, each and every right and remedy
granted to it for default under the terms of the Security Instruments and the
other Loan Documents.
ARTICLE X
---------
MISCELLANEOUS
-------------
10.1 Notices. Unless otherwise provided herein, all notices, requests,
-------
consents and demands shall be in writing and shall be either hand-delivered (by
courier or otherwise) or mailed by certified mail, postage prepaid, to the
respective addresses
- 42 -
<PAGE>
specified below, or, as to any party, to such other address as may be designated
by it in written notice to the other parties:
If to the Borrowers, to:
Hawkins Energy Corporation
400 South Boston Avenue, Suite 800
Tulsa, Oklahoma 74103
Attn: Clifford S. Lewis, Chief Financial Officer
If to the Bank, to:
Bank of Oklahoma, National Association
P. O. Box 2300
Bank of Oklahoma Tower
One Williams Center
Tulsa, Oklahoma 74192
Attn: Energy Department - 8th Floor
Hawkins is hereby designated and appointed and shall serve as agent for all of
the Borrowers insofar as notices hereunder are concerned and notice to Hawkins
shall be deemed notice to each of the Borrowers with the same force and effect
as if each such Borrower were individually notified in accordance herewith. All
notices, requests, consents and demands hereunder will be effective when hand-
delivered to the applicable notice address set forth above or when mailed by
certified mail, postage prepaid, addressed as aforesaid.
10.2 Place of Payment. All sums payable hereunder shall be paid in
----------------
immediately available funds to the Bank, at its principal banking offices at
Bank of Oklahoma Tower, One Williams Center in Tulsa, Oklahoma, or at such other
place as the Bank shall notify the Borrowers in writing. If any interest,
principal or other payment falls due on a date other than a Business Day, then
(unless otherwise provided herein) such due date shall be extended to the next
succeeding Business Day, and such extension of time will in such case be
included in computing interest, if any, in connection with such payment.
10.3 Survival of Agreements. All covenants, agreements, representations
----------------------
and warranties made herein shall survive the execution and the delivery of Loan
Documents. All statements contained in any certificate or other instrument
delivered by the Borrowers hereunder shall be deemed to constitute
representations and warranties by the Borrowers.
10.4 Parties in Interest. All covenants, agreements and obligations
-------------------
contained in this Agreement shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto, except that the
Borrowers may not assign their rights or obligations hereunder without the prior
written consent of the Bank.
- 43 -
<PAGE>
10.5 Governing Law and Jurisdiction. This Agreement and the Notes shall
------------------------------
be deemed to have been made or incurred under the Laws of the State of Oklahoma
and shall be construed and enforced in accordance with and governed by the Laws
of Oklahoma.
10.6 SUBMISSION TO JURISDICTION. THE BORROWERS HEREBY CONSENT TO THE
--------------------------
JURISDICTION OF ANY OF THE LOCAL, STATE, AND FEDERAL COURTS LOCATED WITHIN TULSA
COUNTY, OKLAHOMA AND WAIVE ANY OBJECTION WHICH BORROWERS MAY HAVE BASED ON
IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY PROCEEDING IN ANY
----- --- ----------
SUCH COURT AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON ANY OF THEM,
AND CONSENT THAT ALL SUCH SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER
DIRECTED TO ANY OF THEM AT THE ADDRESS SET FORTH IN SUBSECTION 10.1 HEREOF AND
THAT SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL
RECEIPT OR THREE (3) BUSINESS DAYS AFTER MAILED OR DELIVERED BY MESSENGER.
10.7 Maximum Interest Rate. Regardless of any provision herein, the Bank
---------------------
shall never be entitled to receive, collect or apply, as interest on the
Indebtedness any amount in excess of the maximum rate of interest permitted to
be charged by the Bank by applicable Law, and, in the event the Bank shall ever
receive, collect or apply, as interest, any such excess, such amount which would
be excessive interest shall be applied to other Indebtedness and then to the
reduction of principal; and, if all other Indebtedness and principal are paid in
full, then any remaining excess shall forthwith be paid to the Borrowers.
10.8 No Waiver; Cumulative Remedies. No failure to exercise, and no delay
------------------------------
in exercising, on the part of the Bank, any right, power or privilege hereunder
or under any other Loan Document or applicable Law shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
of the Bank. The rights and remedies herein provided are cumulative and not
exclusive of any other rights or remedies provided by any other instrument or by
law. No amendment, modification or waiver of any provision of this Agreement or
any other Loan Document shall be effective unless the same shall be in writing
and signed by the Bank. No notice to or demand on the Borrowers in any case
shall entitle the Borrowers to any other or further notice or demand in similar
or other circumstances.
10.9 Costs. The Borrowers agree to pay to the Bank on demand all
-----
reasonable costs, fees and expenses (including without limitation reasonable
attorneys fees and legal expenses) incurred or accrued by the Bank in connection
with the negotiation, preparation, execution, delivery, filing, recording and
administration of this Agreement, the Security Instruments and the other Loan
Documents, or any amendment, waiver, consent or modification thereto or thereof,
or any enforcement thereof. The Borrowers further agree that all such fees and
expenses shall be paid regardless of whether or not the transactions provided
for in this Agreement are
- 44 -
<PAGE>
eventually closed and regardless of whether or not any or all sums evidenced by
the Notes are advanced to the Borrowers by the Bank.
Upon Borrowers' failure to pay all such costs and expenses within ten (10)
days of the Bank's submission of invoices therefore, the Bank shall pay such
costs and expenses by debit to the joint General Account of Borrowers without
further notice to Borrowers.
10.10 Participation. The Borrowers recognize and acknowledge that the Bank
-------------
may sell participating interests in the Notes to one or more financial
institutions (the "Participants"). Upon receipt of notice of the identity and
address of each such Participant, the Borrowers shall thereafter supply such
Participant with the same information and reports communicated to the Bank,
whether written or oral. The Borrowers hereby acknowledge that each Participant
shall be deemed a holder of the applicable Notes to the extent of its
participation, and the Borrowers hereby waive their right, if any, to offset
amounts owing to the Borrowers from the Bank against any Participant's portion
of the applicable Notes.
10.11 WAIVER OF JURY. BORROWERS FULLY, VOLUNTARILY AND EXPRESSLY WAIVE ANY
--------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
RIGHTS UNDER THE NOTES, THIS AGREEMENT, THE SECURITY INSTRUMENTS OR UNDER ANY
AMENDMENT, SUPPLEMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED (OR WHICH MAY
IN THE FUTURE BE DELIVERED) IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT. BORROWERS AGREE THAT
ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A
JURY.
10.12 Full Agreement. This Agreement and the other Loan Documents contain
--------------
the full agreement of the parties and supersede all negotiations and agreements
prior to the date hereof, including the Prior Agreement which is replaced in its
entirety by this Second Amended and Restated Revolving Credit and Term Loan
Agreement.
10.13 Headings. The article and section headings of this Agreement are for
--------
convenience of reference only and shall not constitute a part of the text hereof
nor alter or otherwise affect the meaning hereof.
10.14 Severability. The unenforceability or invalidity as determined by a
------------
Tribunal of competent jurisdiction, of any provision or provisions of this
Agreement shall not render unenforceable or invalid any other provision or
provisions hereof.
10.15 Exceptions to Covenants. The Borrowers shall not be deemed to be
-----------------------
permitted to take any action or fail to take any action which is permitted as an
exception to any of the covenants contained herein or which is within the
permissible limits of any
- 45 -
<PAGE>
of the covenants contained herein if such action or omission would result in the
breach of any other covenant contained herein.
10.16 Confidential Treatment. Under the terms of this Agreement and
----------------------
certain of the other Loan Documents, the Bank is granted a security interest in,
inspection rights with respect to or other rights in certain data, files,
records and other materials which are proprietary to one or more of the
Borrowers or which constitute or contain confidential information and trade
secrets (collectively referred to as "Confidential Material"). The Bank hereby
covenants and agrees that except upon an Event of Default, and then only to the
extent necessary to protect its interests in such Confidential Material, the
Bank will use its best efforts to maintain the confidential status thereof.
10.17 Conflict with Security Instruments. To the extent the terms and
----------------------------------
provisions of any of the Security Instruments are in conflict with the terms and
provisions hereof, this Agreement shall be deemed controlling.
10.18 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amended and
Restated Revolving Credit and Term Loan Agreement to be duly executed and
delivered in Tulsa, Oklahoma, effective as of the day and year first above
written.
"Borrowers"
HAWKINS ENERGY CORPORATION
By /s/ Thomas F. Ostrye
------------------------------------
Thomas F. Ostrye, President
"Hawkins"
EQUITY COMPRESSORS, INC.
By /s/ Thomas F. Ostrye
------------------------------------
Thomas F. Ostrye, President
"Equity"
- 46 -
<PAGE>
"Bank"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By /s/ Jack D. Brannon
---------------------------------
Jack D. Brannon, Vice President
- 47 -
<PAGE>
EXHIBIT LIST
------------
Exhibit A - $12,000,000 Revolving Credit Note
Exhibit B - Revolving Loan Advance Request
Exhibit C - $1,225,722 First Term Note
Exhibit D - Liabilities
Exhibit E - Pending Litigation
Exhibit F - Title to Properties
Exhibit G - Take or Pay Disputes
<PAGE>
EXHIBIT A
---------
PROMISSORY NOTE
---------------
(Revolving Credit Note)
$12,000,000.00 Tulsa, Oklahoma
September 1, 1995
FOR VALUE RECEIVED, HAWKINS ENERGY CORPORATION, an Oklahoma corporation
and EQUITY COMPRESSORS, INC., an Oklahoma corporation (collectively the
"Borrowers"), hereby jointly and severally promise to pay to the order of BANK
OF OKLAHOMA, NATIONAL ASSOCIATION (the "Bank"), at the Bank's principal offices
in Tulsa, Oklahoma in lawful money of the United States of America, the
principal sum of TWELVE MILLION and NO/100 DOLLARS ($12,000,000.00) or so much
thereof as shall have been advanced hereunder and remains unpaid on March 31,
2000, with the outstanding unpaid balance hereof on March 31, 1997 ("Conversion
Date") being converted to a thirty-six (36) month term payout, payable in
thirty-five (35) consecutive monthly installments of principal each in an amount
equal to one-sixtieth (1/60th) of the lesser of the outstanding principal
------
balance hereof on March 31, 1997 or the Redetermined Convertible Borrowing Base
as of October 31, 1996, each due on the last day of each calendar month
commencing April 30, 1997, together with interest thereon on unpaid balances of
principal from time to time outstanding, payable on the last day of each
calendar month commencing September 30, 1995, and a final payment of all unpaid
principal and accrued interest due and payable at final maturity on March 31,
2000. Interest shall accrue on the unpaid balance of principal from time to
time outstanding and any past due interest at the variable annual rate of
interest hereinafter specified. All payments under this Note shall be applied
first to unpaid accrued interest and then to outstanding principal.
The rate of interest payable upon the indebtedness evidenced by this Note
shall be a variable annual rate of interest equal from day to day to the
Applicable Prime Rate, as hereinafter defined, plus one and one-half percentage
points (1.5%) per annum, but in no event at a rate which is greater than
permitted by applicable law. Any change in the Applicable Prime Rate shall be
effective with respect to this Note as of the date upon which any change in such
rate of interest shall occur. Interest shall be computed on the basis of a year
of 360 days but assessed for the actual number of days elapsed.
For the purposes of this Note, "Applicable Prime Rate" shall mean the
annual rate of interest announced by Chase Manhattan Bank, National Association,
New York, New York ("Chase") from time to time as its prime or base rate, which
shall be the rate used by Chase as a base or standard for pricing purposes and
which shall not necessarily be its "best" or lowest rate. Should Chase cease to
announce a prime or base rate, or should it be merged, consolidated, liquidated
or dissolved in such a manner that it loses its separate corporate or banking
identity, then the Applicable Prime Rate shall be the Prime Rate published by
the Wall Street Journal in its "Money Rates" column as the prime or base rate or
-------------------
a similar rate if such rate ceases to be published. Any change in the
<PAGE>
Revolving Credit Note
Page 2
Applicable Prime Rate shall be effective as of the date of the change.
After default in the payment of any amount of principal or interest owing
hereunder (whether on maturity, acceleration or otherwise) or upon the
occurrence of any Event of Default as described in the Third Amended and
Restated Revolving Credit and Term Loan Agreement dated as of even date herewith
between the Borrowers and the Bank (said Third Amended Loan Agreement as the
same may at any time hereafter be amended, supplemented or modified and in
effect together with the Prior Agreements therein described and defined being
collectively herein called the "Loan Agreement"), the entire unpaid principal
and accrued and unpaid interest hereunder shall, at the sole option of the Bank,
be accelerated and immediately become due and payable without notice by the
Bank, and the unpaid principal amount hereof shall bear interest computed at a
variable annual rate equal to the Applicable Prime Rate plus seven percentage
points (7%) per annum, but in no event at a rate which is greater than permitted
by applicable law. Upon default in the payment of any amount of interest
payable hereunder, such interest shall, to the full extent permitted by law,
bear interest at the same rate as principal.
This Note is made pursuant to the Loan Agreement and is the Revolving
Credit Note described and defined therein. The Loan Agreement, among other
things, contains provisions concerning the maximum Revolving Credit Borrowing
Base and adjustments thereto, for acceleration of the maturity hereof upon the
events, terms and conditions therein specified, facility fees, mandatory
principal prepayments, including as described in Section 3.8 of the Loan
Agreement, and voluntary prepayments hereof.
This Note is secured by the Collateral described in the Loan Agreement and
the Security Instruments described and defined in the Loan Agreement and in the
Prior Agreements therein defined which have been executed by the Borrowers and
delivered to the Bank. Reference is hereby made to the Security Instruments for
a description of the property, assets and interests thereby mortgaged, conveyed,
pledged and/or assigned, as the case may be, the nature and extent of the
security thereunder and the security interests created thereby, and the rights
of the Bank (or the holder of this Note) and the Borrowers in respect thereof.
Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity or in bankruptcy, receivership or other court
proceedings or this Note be placed in the hands of attorneys for collection
after default, the Borrowers agree to pay hereunder, in addition to the
principal and interest due and payable hereon, reasonable attorneys' fees, court
costs and other collection expenses incurred by the holder hereof.
<PAGE>
Revolving Credit Note
Page 3
The Borrowers hereby waive presentment for payment, demand, notice of
nonpayment, protest and notice of protest with respect to any payment hereunder
and agree to any extension of time with respect to any payment due hereunder, to
any substitution or release of the security or collateral described in the
Security Instruments and to the addition or release of any party liable
hereunder. No delay on the part of the holder hereof in exercising any rights
hereunder shall operate as a waiver of such rights.
If Bank deems itself insecure or upon the occurrence of any default
hereunder, Bank shall have the right, immediately and without further action by
it, to set off against this Note all money owed by Bank in any capacity to each
or any maker, guarantor, endorser or other person who is or might be liable for
payment hereof, whether or not due, and also to set off against all other
liabilities of each maker to Bank all money owed by Bank in any capacity to each
or any maker; and Bank shall be deemed to have exercised such right of setoff
and to have made a charge against such money immediately upon the occurrence of
such default even though such charge is made or entered into the books of Bank
subsequently thereto.
This Note replaces and consolidates the indebtedness evidenced by the
$1,000,000 Revolving Credit Note dated as of April 30, 1995 and the $7,450,000
Second Term Note dated as of December 30, 1994 from Borrowers and Mid-South
Compressors, Inc. and Owens Compression Services, Inc. to the Bank as more
particularly described in the Prior Agreements defined in the Loan Agreement.
This Note and the indebtedness evidenced hereby shall be construed and enforced
in accordance with and governed by the laws of the State of Oklahoma and is
delivered to the Bank in Tulsa, Oklahoma, by the undersigned duly authorized
corporate officers of the Borrowers.
HAWKINS ENERGY CORPORATION, an
Oklahoma corporation
By________________________________
Thomas F. Ostrye, President
EQUITY COMPRESSORS, INC., an
Oklahoma corporation
By________________________________
Thomas F. Ostrye, President
"Borrowers"
DUE: March 31, 2000
(convertible to term loan
on March 31, 1997 per
Section 2.1 of Loan Agreement)
<PAGE>
EXHIBIT B
---------
LOAN REQUEST, CERTIFICATION AND
CONFIRMATORY SECURITY AGREEMENT
FOR REVOLVING CREDIT NOTE
-------------------------
Bank of Oklahoma, N.A.
P.O. Box 2300
Tulsa, Oklahoma 74192
Attn: Energy Department
Gentlemen:
Pursuant to the provisions of the Third Amended and Restated Revolving
Credit and Term Loan Agreement dated as of September 1, 1995 (the "Credit
Agreement"), among the undersigned, Equity Compressors, Inc., Mid-South
Compressors, Inc. and Owens Compression Service, Inc. (collectively the
"Borrowers") and you, the undersigned, as agent for the Borrowers, hereby (i)
confirms and ratifies your continuing first and prior security interest and
mortgage lien in and to all of the Collateral (including proceeds thereof)
described or referred to in the Credit Agreement or in the Security Instruments
described therein; (ii) applies to you for a Revolving Credit Loan on the
Revolving Credit Note in the amount shown on Line 7 below; (iii) certifies that
no Event of Default or Default under the Credit Agreement has occurred and is
continuing as of the date hereof or exists or would continue to exist but for
the lapse of time or giving of notice, or both; (iv) represents and warrants to
you that the representations, covenants and warranties set forth or referred to
in the Credit Agreement are true and correct on and as of this date; and (v)
certifies to you the accuracy of the following information concerning the
Borrowing Base for the Revolving Credit Note:
1. Revolving Credit Borrowing Base
Before Letters of Credit $8,500,000
2. Unfunded Letters of Credit Out-
standing or Requested (Not to
exceed $1,000,000 in
the aggregate) $_____________
3. Net Revolving Credit Borrowing Base
(Line 1 minus Line 2) $_____________
4. Outstanding Revolving Credit
Note Principal Balance $_____________
5. Advance Requested $_____________
6. New Revolving Credit Loan Balance
(Line 4 plus Line 5, but
not to exceed Line 3) $__________
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ______
day of _______________, 199__.
HAWKINS ENERGY CORPORATION, an
Oklahoma corporation
By_________________________________________
(Title)
"Agent for Borrowers"
<PAGE>
EXHIBIT C
---------
TERM NOTE
---------
$1,225,722 Tulsa, Oklahoma
September 1, 1995
FOR VALUE RECEIVED, HAWKINS ENERGY CORPORATION, an Oklahoma corporation and
EQUITY COMPRESSORS, INC., an Oklahoma corporation (collectively the
"Borrowers"), hereby jointly and severally promise to pay to the order of BANK
OF OKLAHOMA, NATIONAL ASSOCIATION (the "Bank"), at the Bank's principal offices
in Tulsa, Oklahoma in lawful money of the United States of America, the
principal sum of ONE MILLION TWO HUNDRED TWENTY FIVE THOUSAND SEVEN HUNDRED
TWENTY TWO and NO/100 DOLLARS ($1,225,722), payable (i) in thirty-four (34)
consecutive monthly installments of principal each in the amount of $35,000 due
on the last day of each calendar month commencing September 30, 1995, together
with interest thereon on unpaid balances of principal from time to time
outstanding, payable on the last day of each calendar month commencing September
30, 1995, and (ii) a final payment of all unpaid principal and accrued interest
due and payable at maturity on July 31, 1998. Interest shall accrue on the
unpaid balance of principal from time to time outstanding and on any past due
interest, at the variable annual rate of interest hereinafter specified. All
payments under this Note shall be applied first to unpaid accrued interest and
then to outstanding principal.
The rate of interest payable upon the indebtedness evidenced by this Note
shall be a variable annual rate of interest equal from day to day to the
Applicable Prime Rate, as hereinafter defined, plus one and one-half percentage
points (1.5%) per annum. Any change in the Applicable Prime Rate shall be
effective with respect to this Note as of the date upon which any change in such
rate of interest shall occur. Interest shall be computed on the basis of a year
of 360 days but assessed for the actual number of days elapsed.
For the purposes of this Note, "Applicable Prime Rate" shall mean the
annual rate of interest announced by Chase Manhattan Bank, National Association,
New York, New York ("Chase") from time to time as its prime or base rate, which
shall be the rate used by Chase as a base or standard for pricing purposes and
which shall not necessarily be its "best" or lowest rate. Should Chase cease to
announce a prime or base rate, or should it be merged, consolidated, liquidated
or dissolved in such a manner that it loses its separate corporate or banking
identity, then the Applicable Prime Rate shall be the Prime Rate published by
the Wall Street Journal in its "Money Rates" column or a similar rate if such
-------------------
rate ceases to be published. Any change in the Applicable Prime Rate shall be
effective as of the date of the change.
After default in the payment of any amount of principal or interest owing
hereunder (whether on maturity, acceleration or otherwise) or upon the
occurrence of any Event of Default as described in the Revolving Credit and Term
Loan Agreement, dated as of June 11, 1993, as amended by that certain First
Amended and
<PAGE>
Term Note
Page 2
Restated Revolving Credit and Term Loan Agreement, dated as of July 14, 1993, as
modified by the Modification thereto dated as of September 24, 1993, as further
amended by that certain Second Amended and Restated Revolving Credit Agreement
dated as of April 13, 1994, as further modified by the Modification thereto
dated as of December 30, 1994, and as further amended by that certain Third
Amended and Restated Revolving Credit Agreement dated as of even date herewith
(the "Third Amended Agreement"), between and among the Borrowers and the Bank
(said Revolving Credit and Term Loan Agreement as amended and as the same may at
any time hereafter be amended, supplemented or modified and in effect being
herein collectively called the "Credit Agreement"), the entire unpaid principal
and accrued and unpaid interest hereunder shall be accelerated and immediately
become due and payable without notice by the Bank, and the unpaid principal
amount hereof shall bear interest computed at a variable annual rate equal to
the Applicable Prime Rate plus seven percentage points (7%) per annum, but in no
event at a rate which is greater than permitted by law. Upon default in the
payment of any amount of interest payable hereunder, such interest shall, to the
full extent permitted by law, bear interest at the same rate as principal.
This Note is made pursuant to the Credit Agreement and is the First Term
Note described and defined in the Third Amended Agreement. The Credit
Agreement, among other things, contains provisions for acceleration of the
maturity hereof upon the events, terms and conditions therein specified,
prepayment premiums, calculation and application of sale proceeds of certain
Collateral and voluntary prepayments hereof.
This Note is secured by the Collateral described in the Credit Agreement
and the Security Instruments described in the Credit Agreement (the "Security
Instruments") which have been executed by the Borrowers and delivered to the
Bank. Reference is hereby made to the Security Instruments for a description of
the property, assets and interests thereby mortgaged, conveyed, pledged and/or
assigned, as the case may be, the nature and extent of the security thereunder
and the security interests created thereby, and the rights of the Bank (or the
holder of this Note) and the Borrowers in respect thereof.
Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity or in bankruptcy, receivership or other court
proceedings or this Note be placed in the hands of attorneys for collection
after default, the Borrowers agree to pay hereunder, in addition to the
principal and interest due and payable hereon, reasonable attorneys' fees, court
costs and other collection expenses incurred by the holder hereof.
The Borrowers hereby waive presentment for payment, demand, notice of
nonpayment, protest and notice of protest with respect to any payment hereunder
and agree to any extension of time with
<PAGE>
Term Note
Page 3
respect to any payment due hereunder, to any substitution or release of the
security or collateral described in the Security Instruments and to the addition
or release of any party liable hereunder. No delay on the part of the holder
hereof in exercising any rights hereunder shall operate as a waiver of such
rights.
If Bank deems itself insecure or upon the occurrence of any default
hereunder, Bank shall have the right, immediately and without further action by
it, to set off against this Note all money owed by Bank in any capacity to each
or any maker, guarantor, endorser or other person who is or might be liable for
payment hereof, whether or not due, and also to set off against all other
liabilities of each maker to Bank all money owed by Bank in any capacity to each
or any maker; and Bank shall be deemed to have exercised such right of setoff
and to have made a charge against such money immediately upon the occurrence of
such default even though such charge is made or entered into the books of Bank
subsequently thereto.
This Note is a replacement, extension and substitute for that certain Term
Note in the original principal amount of $1,416,664 dated as of December 30,
1994, but shall not constitute a novation or extinguishment of the indebtedness
evidenced thereby.
This Note is executed and delivered to the Bank in Tulsa, Oklahoma, and the
indebtedness evidenced hereby shall be construed and enforced in accordance with
and governed by the laws of the State of Oklahoma.
HAWKINS ENERGY CORPORATION, an
Oklahoma corporation
By________________________________
Thomas F. Ostrye, President
EQUITY COMPRESSORS, INC., an
Oklahoma corporation
By________________________________
Thomas F. Ostrye, President
"Borrowers"
DUE: July 31, 1998
<PAGE>
EXHIBIT D
---------
LIABILITIES
-----------
There are no long-term liabilities of the Borrowers except the deferred tax
liability as recorded.
<PAGE>
EXHIBIT E
---------
PENDING LITIGATION
------------------
Burchfield vs. Equity Compressors, et al.
* ECI (also Hawkins, Jimmy Neher & Gary Bolich) were named in a defamation
suit brought by Ronnie Burchfield on April 21, 1993, Case No. CJ 93 3078 in
the District Court of Oklahoma County, Oklahoma (A copy of the Petition was
annexed to the Prior Agreement).
* The company is insured by Chubb who has assumed the defense of Hawkins, ECI
and Jimmy Neher under our liability policy. Gary Bolich, formerly ECI's
shop foreman, left the employ of ECI in March, 1993 and will be represented
by separate counsel initially.
* Management did not instigate, encourage or condone any defamatory
statements with regards to Mr. Burchfield, neither is it aware of any such
statements made by Jimmy Neher or Gary Bolich. An appearance has been
entered, and a response to the petition is being prepared by Chubb's
selected counsel at this time. The Company's counsel, Conner & Winters, is
being kept current of the pleadings and advising the Company accordingly.
<PAGE>
EXHIBIT F
---------
TITLE TO PROPERTIES
-------------------
HAWKINS ENERGY CORPORATION
Bank Loan dated September 13, 1995
<TABLE>
<CAPTION>
WELL NAME INTEREST INTEREST
--------- -------- --------
<S> <C> <C> <C>
1 Nelson,George 0.5400000 0.4095250
2 O'Neil 0.1382416 0.1059228
3 Klinger #2-12 0.9000000 0.6827346
4 Brown #1-9 0.3868745 0.2930797
5 Wilbur #1-2 0.2063224 0.1567742
6 Army Ammo #1-26 0.2667200 0.2227112
7 Dupree #4-36 0.0750000 0.0533224
8 Wells #1-28 0.8000000 0.6610625
9 Dupree #1-36 0.0750000 0.0533224
10 Kiowa #2-1169 0.2350000 0.1815375
11 Dupree #3-36 0.0750000 0.0533240
12 Scates #1-11 0.1128254 0.0843016
13 Stewart, Dorothy #1-8 0.3512500 0.2673953
14 Sanderson #1-8 0.4000000 0.3012102
15 Theis #1-6 0.4000000 0.3200000
16 Stahlman #1 0.2000000 0.1451249
17 Muir #1 0.8000000 0.6720001
18 Steinkuehler #1-15 0.2733470 0.2282330
19 Walker #1-33 0.4000000 0.3380000
20 Padberg-Souders #1-5 0.3890080 0.2883506
<CAPTION>
New Wells
---------
<S> <C> <C> <C>
1 Bocksnick #1 0.3750000 0.3000190
2 Cordell #1 0.3750000 0.2953368
3 Cordell #2 0.6279443 0.5059480
4 Chancellor #1 0.4991735 0.3940246
5 Chancellor #2 0.4991735 0.3940246
6 Martin, H #1 0.0900870 0.0753317
7 Martin, H #2 0.0000000 0.0106702
8 Smith, Leonard #1-20 0.0112816 0.0096450
9 Smith, Leonard #2-20 0.0112800 0.0096450
10 Smith, Leonard #3-16 0.0112800 0.0096450
11 W.Y. Young 0.7720000 0.6720000
12 Sweetin #1 0.5431580 0.4569167
13 Dean #1 0.5510229 0.4451443
14 Dickie Ranch A 0.9083425 0.6534616
15 Dickie Ranch B 0.9875000 0.8023438
16 Dickie Ranch Unit 0.9564125 0.6880429
17 Dickie Ranch 0.9718750 0.6855471
18 Lenoir 0.9875000 0.7104075
</TABLE>
<PAGE>
EXHIBIT G
---------
TAKE OR PAY DISPUTES
--------------------
The Borrowers are not involved in any take or pay disputes.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
STATE OF PERCENTAGE
SUBSIDIARY INCORPORATION OWNED
-------------------- ------------- ----------
Equity Compressors, Inc. Oklahoma 100%
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Hawkins Energy Corporation (the "Company") on Form S-3 of our report dated
March 25, 1996, on our audits of the consolidated financial statements of the
Company as of December 31, 1995 and 1994, and for the years ended December 31,
1995, 1994 and 1993, which report is included in this Annual Report on Form 10-
KSB.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
March 29, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the inclusion of the information incorporated by
reference in the Registration Statement of Hawkins Energy Corporation (the
"Company") on Form S-3 (No. 33-79684) with respect to the oil and gas reserve
information of the Company included in its Annual Report on Form 10-KSB for the
year ended December 31, 1995.
LEE KEELING AND ASSOCIATES, INC.
Tulsa, Oklahoma
March 20, 1996
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<PAGE>
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<PERIOD-START> JAN-01-1995
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