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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
Commission File Number 0-20838
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CLAYTON WILLIAMS ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2396863
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Six Desta Drive - Suite 6500
Midland, Texas 79705-5510
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (915) 682-6324
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.10 Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the outstanding Common Stock, $.10 par
value, of the registrant held by non-affiliates of the registrant as of March
22, 2000, based on the closing price as quoted on the Nasdaq Stock Market's
National Market as of the close of business on said date, was $65,489,076.
There were 9,176,199 shares of Common Stock, $.10 par value, of the
registrant outstanding as of March 22, 2000.
Documents incorporated by reference:
(1) The information required by Part III of Form 10-K is found in the
registrant's definitive Proxy Statement which will be filed with the
Commission not later than April 30, 2000. Such portions of the
registrant's definitive Proxy Statement are incorporated herein by
reference.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business," "Item 3.
Legal Proceedings," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Item 7A. Quantitative and Qualitative
Disclosure About Market Risks," and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Form 10-K that address activities, events or developments that Clayton
Williams Energy, Inc. and its subsidiaries (the "Company") expects, projects,
believes or anticipates will or may occur in the future, including such matters
as oil and gas reserves, future drilling and operations, future production of
oil and gas, future net cash flows, future capital expenditures and other such
matters, are forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: the volatility of oil and gas prices, the Company's drilling
results, the Company's ability to replace short-lived reserves, the availability
of capital resources, the reliance upon estimates of proved reserves, operating
hazards and uninsured risks, competition, government regulation, the ability of
the Company to implement its business strategy, and other factors referenced in
this Form 10-K.
Item 1 - Business
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements." See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.
General
Clayton Williams Energy, Inc. and its subsidiaries (the "Company") is an
independent oil and gas company engaged in the exploration for and development
and production of oil and natural gas primarily in Texas, Louisiana and New
Mexico. A significant portion of the Company's proved oil and gas reserves are
concentrated in the Cretaceous Trend (the "Trend"), which extends from south
Texas through east Texas, Louisiana and other southern states and includes the
Austin Chalk, Buda, and Georgetown formations. Although low oil prices caused
the Company to temporarily suspend Trend drilling activities from April 1998
through September 1999, the Company is currently drilling horizontal wells in
this area and is also conducting secondary water frac operations on existing
Trend wells.
Since 1997, the Company has initiated several exploratory projects
designed to reduce its dependence on Trend drilling for future production and
reserve growth. These new areas include the Company's Cotton Valley Pinnacle
Reef exploratory project, which targets deep gas structures in the vicinity of
its core properties in east central Texas, as well as other exploratory projects
in south Texas, Louisiana and Mississippi.
As of December 31, 1999, the Company had estimated proved reserves
totaling 11,904 MBbls of oil and 30.1 Bcf of gas with $176.5 million of
estimated future net revenues before income taxes (discounted at 10% and based
on year-end prices). During 1999, the Company added 4,790 MBOE of estimated
proved reserves through extensions and discoveries, 54% of which were classified
as proved undeveloped reserves at December 31, 1999. The Company held interests
in 496 gross (283.4 net) oil and gas wells and owned leasehold interests in
408,944 gross (221,948 net) undeveloped acres at December 31, 1999.
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During 1999, the Company sold its interest in eight non-operated oil and
gas wells located in Matagorda County, Texas for $5.2 million and sold all of
its interests in the Jalmat Field located in Lea County, New Mexico for $12.5
million. Proceeds from these sales were used to reduce the amount of outstanding
indebtedness on the Company's secured bank credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Drilling, Exploration and Production Activities
Following is a discussion of the Company's significant drilling,
exploration and production activities during 1999, together with its plans for
capital and exploratory expenditures in 2000. Under current economic conditions,
the Company presently plans to spend $43 million on exploration and development
activities during 2000. The Company may increase or decrease its planned
activities for 2000, depending upon drilling results, product prices, the
availability of capital resources, and other factors affecting the economic
viability of such activities.
The Trend
The Company holds a 113,000 net acre lease block (the "North Giddings
Block") in the updip area of the Giddings Field in Burleson, Robertson and Milam
Counties, Texas. In addition to Trend drilling potential, a significant portion
of the acreage in the North Giddings Block is also prospective for Cotton Valley
Pinnacle Reef exploration activities (see "Cotton Valley Exploratory Project").
The Company has developed more than half of this acreage by the drilling of 112
gross (108.2 net) horizontal Trend wells through December 31, 1999.
The economic viability of the Company's Trend drilling activities is
highly dependent upon the price of oil expected to be realized during the early
years of a well's productive life due to high initial production rates and steep
decline rates which are characteristic of most Trend wells. Due to the low oil
prices that prevailed during 1998 and the first half of 1999, the Company
suspended its Trend drilling activities from April 1998 through September 1999.
As a result, capital expenditures on Trend drilling and leasing activities in
1999 totaled $7.8 million, as compared to $9.1 million in 1998 and $44.1 million
in 1997. The suspension of Trend drilling contributed significantly to declines
in oil production from 1997 levels.
Oil prices have increased dramatically in recent months, and accordingly,
the Company has resumed drilling activities in the Trend. However, based upon
the production performance of wells previously drilled by the Company in the
southern portion of the North Giddings Block, the Company does not currently
believe that the reserve potential in this area is sufficient to justify a
multiple-well drilling program on the remaining undeveloped acreage. Instead,
the Company plans to spend approximately $11.8 million during the current year
to further exploit the developed portion of its Trend acreage by drilling new
horizontal wells in areas that warrant development on an increased density basis
and by conducting secondary water frac operations on existing wells. Trend
drilling and water frac activities accounted for approximately 67% of the 4,790
MBOE of proved reserves added in 1999 through extensions and discoveries, most
of which were classified as proved undeveloped reserves at December 31, 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's current production of oil and gas in the Trend is derived
principally from the Austin Chalk formation in the Giddings Field. At December
31, 1999, the Company had interests in 268 gross (204.3 net) producing wells in
the Giddings Field, including 198 horizontal and 70 vertical wells. For the year
ended December 31, 1999, the Company's daily net production in the Giddings
Field averaged approximately 4,672 Bbls of oil and 4,844 Mcf of gas. The Company
operates 82% of its wells in the Giddings Field.
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Cotton Valley Exploratory Project
The Company is actively exploring for gas reserves in the prolific Cotton
Valley Pinnacle Reef play on a portion of its acreage in the North Giddings
Block in Robertson County, Texas. As opposed to Trend formations, which are
encountered at depths of 5,500 to 7,000 feet in this area, the Cotton Valley
formation is encountered at depths below 15,000 feet. During 1999, the Company
spent $8.1 million on drilling, leasing and seismic activities related to the
Cotton Valley Exploratory Project and completed construction of certain gas
gathering and processing systems in the area. The Company completed the J. C.
Fazzino Unit #1 into the edge of one of the anomalies identified by a 3-D
seismic survey and drilled and completed the J. C. Fazzino Unit #2 to the center
of the same anomaly. Although the Company owns all of the working interest in
both wells, the Fazzino #2 was drilled pursuant to a non-recourse vendor
financing arrangement which grants to participating vendors an overriding
royalty interest in approximately 40% of the production from the Fazzino #2, and
any subsequent wells drilled under this arrangement, until payout (plus an
agreed-upon rate of return).
As of December 31, 1999, the Company's net remaining gas reserves
attributable to the Fazzino #1 and Fazzino #2 were approximately 2.9 Bcf and 7.3
Bcf, respectively, as estimated by the Company's independent engineers based on
guidelines established by the Securities and Exchange Commission. The process of
estimating oil and gas reserves is complex and requires significant decisions
and assumptions in the evaluation of available geological, geophysical,
engineering and economic data. As a result, such estimates are inherently
imprecise, particularly with respect to wells such as the Fazzino #1 and the
Fazzino #2 where the production history is limited and the production rates have
been restricted by plant capacity. Therefore, these reserve estimates are
subject to downward or upward revisions based upon future production
performance, and the amount of any such revisions may have a material effect on
the Company's total proved oil and gas reserves (see "Properties - Reserves").
In December 1999, the Company began drilling the Varisco Estate #1, a
16,400 foot test of the second reef anomaly which the Company expects to
complete in April 2000. In addition, the Company has begun drilling operations
on the McGrew #1, a 17,000 foot test of the third reef anomaly. Both the Varisco
Estate #1 and the McGrew #1 are being drilled pursuant to the same vendor
financing arrangement as the Fazzino #2.
The Company plans to spend approximately $12 million during 2000 on
drilling, leasing and seismic activities in connection with the Cotton Valley
Exploratory Project, including the construction of a 70,000 Mcf per day gas
treating plant with a scheduled start-up date of April 1, 2000. Currently, the
Company is unable to produce the Fazzino #1 and the Fazzino #2 at their optimum
production rates due to limited plant capacity. However, once the new gas plant
is operational, the Company expects to have adequate processing capacity to
accommodate the planned expansion of its Pinnacle Reef production base for the
near term.
Other Exploration and Development Activities
Louisiana
The Company spent $2.5 million during 1999 on various exploratory
prospects in Louisiana, including costs to drill exploratory wells, conduct
seismic surveys and acquire leases. The Company drilled 3 gross (1.6 net)
exploratory wells in Louisiana during 1999, of which 1 gross well (.6 net) was
completed as an oil discovery. The Company also successfully completed a third
well in this area in February 2000. The Company plans to spend $9.8 million in
Louisiana during 2000 primarily on prospects being identified by 3-D seismic
data to which the Company has access through a negotiated arrangement with a
geophysical service company.
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New Mexico
The Company plans to spend approximately $5.8 million during 2000 to drill
and complete 12 developmental oil wells in Eddy County, New Mexico. These wells
will be completed in two zones, the Yeso formation at a depth of about 4,000
feet and also in the Grayburg San Andres formation at depths ranging from 2,500
feet to 3,700 feet.
Partnership Management
The Company serves as general partner of a limited partnership which the
Company formed in 1998 to facilitate the acquisition of certain oil and gas
properties in east Texas. The Company acquired an undivided 10% interest in the
purchased assets for $4.9 million, and the partnership acquired the remaining
90% for $36.2 million. After the limited partner receives an agreed-upon rate of
return, the Company's general partnership interest will increase from 1% to 35%.
Marketing Arrangements
The Company sells substantially all of its oil production under short-term
contracts based on prices quoted on the New York Mercantile Exchange ("NYMEX")
for spot West Texas Intermediate contracts, less agreed-upon deductions which
vary by grade of crude oil. The majority of the Company's gas production is sold
under short-term contracts based on pricing formulas which are generally market
responsive.
The Company believes that the loss of any of its oil and gas purchasers
would not have a material adverse effect on its results of operations due to the
availability of other purchasers.
Natural Gas Services
The Company owns an interest in and operates six gas gathering systems and
six gas processing plants in the states of Texas and Mississippi. These natural
gas service facilities consist of interests in approximately 70 miles of
pipeline, five treating plants (one of which is a 70,000 Mcf per day gas
treating plant currently being constructed in connection with the Company's
Cotton Valley Pinnacle Reef play), one liquids extraction plant and three
compressor stations. The Company does not derive a significant portion of its
consolidated operating income from natural gas services and does not consider
this business to be a strategic part of its business plan.
Competition and Markets
Competition in all areas of the Company's operations is intense. The oil
and gas industry as a whole also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual consumers.
Major and independent oil and gas companies and oil and gas syndicates actively
bid for desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties. A number of the Company's
competitors have financial resources and acquisition, exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete with these
companies. Such companies may be able to pay more for productive oil and gas
properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit.
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The market for oil, gas and natural gas liquids produced by the Company
depends on factors beyond its control, including domestic and foreign political
conditions, the overall level of supply of and demand for oil, gas and natural
gas liquids, the price of imports of oil and gas, weather conditions, the price
and availability of alternative fuels, the proximity and capacity of gas
pipelines and other transportation facilities and overall economic conditions.
Regulation
The Company's oil and gas exploration, production and related operations
are subject to extensive rules and regulations promulgated by federal, state and
local agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
spacing, plugging and abandonment of such wells. The statutes and regulations of
certain states limit the rate at which oil and gas can be produced from the
Company's properties.
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of gas produced by the Company, as well as the revenues received by
the Company for sales of such production. Since the mid-1980s, the FERC has
issued various orders, culminating in its Order No. 636 series, that have
significantly altered the marketing and transportation of gas. These orders
resulted in a fundamental restructuring of interstate pipeline sales and
transportation services, including the unbundling by interstate pipelines of the
sales, transportation, storage and other components of the city-gate sales
services such pipelines previously performed. These FERC actions were designed
to increase competition within all phases of the gas industry. It is difficult
to predict the net impact on the Company of these revised marketing rules. The
interstate regulatory framework may enhance the Company's ability to market and
transport its gas, although it may also subject the Company to greater
competition and to the more restrictive pipeline imbalance tolerances and
greater associated penalties for violation of such tolerances.
Sales of oil and natural gas liquids by the Company are not regulated and
are made at market prices. The price the Company receives from the sale of those
products is affected by the cost of transporting the products to market. The
FERC has implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rate
to inflation, subject to certain conditions and limitations. These regulations
could increase the cost of transporting oil and natural gas liquids by pipeline.
The Company is not able to predict with any certainty what effect, if any, these
regulations will have on it, but, other factors being equal, the regulations
may, over time, tend to increase transportation costs or reduce wellhead prices
for oil and natural gas liquids.
Environmental Matters
Operations of the Company pertaining to oil and gas exploration,
production and related activities are subject to numerous and constantly
changing federal, state and local laws governing the discharge of materials into
the environment or otherwise relating to environmental protection. These laws
and regulations may require the acquisition of certain permits prior to or in
connection with drilling activities, restrict or prohibit the types, quantities
and concentration of substances that can be released into the environment in
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connection with drilling and production, restrict or prohibit drilling
activities that could impact wetlands, endangered or threatened species or other
protected areas or natural resources, require some degree of remedial action to
mitigate pollution from former operations, such as pit cleanups and plugging
abandoned wells, and impose substantial liabilities for pollution resulting from
the Company's operations. Such laws and regulations may substantially increase
the cost of exploring for, developing, producing or processing oil and gas and
may prevent or delay the commencement or continuation of a given project and
thus generally could have a material adverse effect upon the capital
expenditures, earnings, or competitive position of the Company. Management of
the Company believes it is in substantial compliance with current applicable
environmental laws and regulations, and the cost of compliance with such laws
and regulations has not been material and is not expected to be material during
the next fiscal year. Nevertheless, changes in existing environmental laws and
regulations or in the interpretations thereof could have a significant impact on
the operating costs of the Company, as well as the oil and gas industry in
general. For instance, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas production wastes as "hazardous
wastes," which reclassification would make exploration and production wastes
subject to much more stringent handling, disposal and clean-up requirements.
State initiatives to further regulate the disposal of oil and gas wastes and
naturally occurring radioactive materials, if adopted, could have a similar
impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or the site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances at the site
where the release occurred. Under CERCLA, such persons may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. The Company is able to
control directly the operation of only those wells with respect to which it acts
as operator. Notwithstanding the Company's lack of direct control over wells
operated by others, the failure of an operator other than the Company to comply
with applicable environmental regulations may, in certain circumstances, be
attributed to the Company. Management of the Company believes that it has no
material commitments for capital expenditures to comply with existing
environmental requirements.
State water discharge regulations and federal waste discharge permitting
requirements adopted pursuant to the Federal Water Pollution Control Act
prohibit or are expected in the future to prohibit the discharge of produced
water and sand and some other substances related to the oil and gas industry,
into coastal waters. Although the costs to comply with zero discharge mandates
under state or federal law may be significant, the entire industry will
experience similar costs and the Company believes that these costs will not have
a material adverse impact on the Company's financial condition and operations.
Title to Properties
As is customary in the oil and gas industry, the Company performs a
minimal title investigation before acquiring undeveloped properties. A title
opinion is obtained prior to the commencement of drilling operations on such
properties. The Company has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. Substantially all of the Company's oil
and gas properties are currently mortgaged to secure borrowings under the
Company's secured bank credit facility and may be mortgaged under any future
credit facilities entered into by the Company.
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Operational Hazards and Insurance
The Company's operations are subject to the usual hazards incident to the
drilling and production of oil and gas, such as blowouts, cratering, explosions,
uncontrollable flows of oil, gas or well fluids, fires and pollution and other
environmental risks. These hazards can cause personal injury and loss of life,
severe damage to and destruction of property and equipment, pollution or
environmental damage and suspension of operation.
The Company maintains insurance of various types to cover its operations.
The limits provided under its general liability policies total $32 million. In
addition, the Company maintains operator's extra expense coverage which provides
for care, custody and control of selected wells during drilling operations. The
occurrence of a significant adverse event, the risks of which are not fully
covered by insurance, could have a material adverse effect on the Company's
financial condition and results of operations. Moreover, no assurances can be
given that the Company will be able to maintain adequate insurance in the future
at rates it considers reasonable.
Employees
Presently, the Company has 87 full-time employees. None of the Company's
employees is subject to a collective bargaining agreement. The Company considers
its relations with its employees to be good.
Offices
The Company leases approximately 40,000 square feet of office space in
Midland, Texas and approximately 1,400 square feet of office space in Houston,
Texas.
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Item 2 - Properties
The Company's properties consist primarily of oil and gas wells and its
ownership in leasehold acreage, both developed and undeveloped. At December 31,
1999, the Company had interests in 496 gross (283.4 net) oil and gas wells and
owned leasehold interests in 408,944 gross (221,948 net) undeveloped acres.
Reserves
The following table sets forth certain information as of December 31, 1999
with respect to the Company's estimated proved oil and gas reserves and the
present value of estimated future net revenues therefrom, discounted at 10%
("PV-10 Value").
Proved Proved
Developed Undeveloped Total
--------- ----------- -----
Oil (MBbls) .......................... 9,028 2,876 11,904
Gas (MMcf) ........................... 26,960 3,181 30,141
MBOE ................................. 13,521 3,407 16,928
PV-10 Value:
Before income taxes ............ $148,705 $ 27,795 $176,500
After income taxes ............. $151,642
The following table sets forth certain information as of December 31, 1999
regarding the Company's proved oil and gas reserves in each of its principal
producing areas.
<TABLE>
<CAPTION>
Proved Reserves Percentage of
------------------------------ Present Value of Present Value of
Total Oil Percent of Future Net Future Net
Oil Gas Equivalent Total Oil Revenues Before Revenues Before
Area or Field (MBbls) (MMcf) (MBOE) Equivalent Income Taxes Income Taxes
- ------------- ------- ------ ------ ---------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Trend ............ 11,302 9,950 12,960 76.6% $143,827 81.4%
Cotton Valley .... -- 10,177 1,696 10.0% 17,110 9.7%
East Texas ....... 22 5,663 966 5.7% 3,971 2.3%
West Texas / New
Mexico ......... 468 2,820 938 5.5% 7,722 4.4%
Louisiana ........ 68 233 107 0.6% 1,152 0.7%
Other ............ 44 1,298 261 1.6% 2,718 1.5%
-------- -------- -------- ------- -------- -------
Total ...... 11,904 30,141 16,928 100.0% $176,500 100.0%
======== ======== ======== ======= ======== =======
</TABLE>
The estimates as of December 31, 1999 of proved reserves, future net
revenues from proved reserves and the PV-10 Value before income taxes set forth
in this Form 10-K were based on a report prepared by Williamson Petroleum
Consultants, Inc. (the "Independent Engineers"). For purposes of preparing such
estimates, the Independent Engineers reviewed production data through October
1999 for properties representing 86% of the estimated present value of the
Company's proved developed producing reserves and through earlier dates for the
balance of the Company's properties. In order to calculate the proved reserve
estimates as of December 31, 1999, the Independent Engineers assumed that
production for each of the Company's properties since the date of the last
production data reviewed was in accordance with the production decline curve for
such property.
In accordance with applicable guidelines of the Securities and Exchange
Commission (the "Commission"), the estimates of the Company's proved reserves
and future net revenues therefrom set forth
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herein are made using oil and gas sales prices estimated to be in effect as of
the date of such reserve estimates and are held constant throughout the life of
the properties. Estimated quantities of proved reserves and future net revenues
therefrom are affected by changes in oil and gas prices. Oil and gas prices
increased substantially from December 31, 1998 to December 31, 1999, resulting
in significant increases in the Company's estimated future net revenues and
estimated reserve quantities. The weighted average of the sales prices utilized
for the purposes of estimating the Company's proved reserves and the future net
revenues therefrom as of December 31, 1999 were $25.09 per Bbl of oil and $2.36
per Mcf of gas, as compared to $10.33 per Bbl and $1.77 per Mcf as of December
31, 1998. Both oil and gas prices have increased significantly since December
31, 1999.
Also in accordance with Commission guidelines, the estimates of the
Company's proved reserves and future net revenues therefrom are made using
current lease and well operating costs estimated by the Company. Lease operating
expenses for oil wells operated by the Company in the Austin Chalk, Buda and
Georgetown formations were estimated using a combination of fixed and
variable-by-volume costs consistent with the Company's experience in operating
such wells. For purposes of calculating future net revenues and PV-10 Value,
operating costs exclude accounting and administrative overhead expenses
attributable to the Company's working interest in wells operated by it under
joint operating agreements, but include administrative costs associated with
production offices.
The Independent Engineer's report relies upon various assumptions,
including assumptions required by the Commission as to oil and gas prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. The process of estimating oil and gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result, such
estimates are inherently imprecise. Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth herein. In addition, the Company's
reserves may be subject to downward or upward revision based upon production
history, results of future development and exploration, prevailing oil and gas
prices and other factors, many of which are beyond the Company's control. Actual
production, revenues, taxes, development expenditures and operating expenses
with respect to the Company's reserves will likely vary from the estimates used,
and such variances may be material.
Approximately 20% of the Company's total proved reserves at December 31,
1999 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in the Independent Engineers' report as
of December 31, 1999 assumes, based on the Company's estimates, that aggregate
capital expenditures by the Company of approximately $19.3 million through 2002
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated.
The PV-10 Value referred to herein should not be construed as the current
market value of the estimated oil and gas reserves attributable to the Company's
properties. In accordance with applicable requirements of the Commission, the
PV-10 Value from proved reserves is generally based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net revenues also will be affected by
changes in consumption and changes in governmental regulations or taxation. The
timing of actual future net revenues from proved reserves, and thus their actual
present value, will be affected by the timing of both the production and the
incurrence of expenses in connection with development and production of oil and
gas properties. In addition, the 10% discount factor, which is required by the
Commission to be used in calculating discounted future net revenues for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and gas industry in general.
9
<PAGE>
Since January 1, 1999, the Company has not filed an estimate of its net
proved oil and gas reserves with any federal authority or agency other than the
Commission.
Exploration and Development Activities
The Company drilled, or participated in the drilling of, the following
numbers of wells during the periods indicated. Wells in progress at the end of
any period are excluded.
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
Gross Net Gross Net Gross Net
Development Wells:
Oil ............... 3 2.4 10 6.6 33 28.0
Gas ............... 1 .3 -- -- 1 .2
Dry ............... 1 .5 -- -- -- --
----- ----- ----- ------ ----- ------
Total ........... 5 3.2 10 6.6 34 28.2
===== ===== ===== ====== ===== ======
Exploratory Wells:
Oil ............... 1 .6 2 .8 8 7.5
Gas ............... 2 2.0 4 2.2 -- --
Dry ............... 3 1.1 10 6.6 5 1.9
----- ----- ----- ------ ----- ------
Total ........... 6 3.7 16 9.6 13 9.4
===== ===== ===== ====== ===== ======
Total Wells:
Oil ............... 4 3.0 12 7.4 41 35.5
Gas ............... 3 2.3 4 2.2 1 .2
Dry ............... 4 1.6 10 6.6 5 1.9
----- ----- ----- ------ ----- ------
Total ........... 11 6.9 26 16.2 47 37.6
===== ===== ===== ====== ===== ======
The information contained in the foregoing table should not be considered
indicative of future drilling performance, nor should it be assumed that there
is any necessary correlation between the number of productive wells drilled and
the amount of oil and gas that may ultimately be recovered by the Company.
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors on a day rate basis under
standard drilling contracts.
10
<PAGE>
Productive Well Summary
The following table sets forth certain information regarding the Company's
ownership, as of December 31, 1999, of productive wells in the areas indicated.
Oil Gas Total
----------------- ---------------- -----------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Trend ............. 292 225.7 22 15.2 314 240.9
West Texas / New
Mexico .......... 24 12.9 11 1.2 35 14.1
Louisiana ......... 2 1.2 3 .8 5 2.0
East Texas ........ -- -- 108 10.7 108 10.7
Cotton Valley ..... -- -- 2 2.0 2 2.0
Other ............. 8 6.3 24 7.4 32 13.7
----- ------- ----- ------ ----- -------
Total ........ 326 246.1 170 37.3 496 283.4
===== ======= ===== ====== ===== =======
The Company seeks to act as operator of the wells in which it owns a
significant interest. As operator of a well, the Company is able to manage
drilling and production operations as well as other matters affecting the
production and sale of oil and gas. In addition, the Company receives fees from
other working interest owners for the operation of the wells. At December 31,
1999, the Company was the operator of 390 wells, or approximately 79% of the 496
total wells in which it has a working interest. Production from these operated
wells represented approximately 91% of the Company's total net production for
1999.
Volumes, Prices and Production Costs
The following table sets forth certain information regarding the
production volumes of, average sales prices received from, and average
production costs associated with the Company's sales of oil and gas for the
periods indicated.
Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
Oil and Gas Production Data :
Oil (MBbls) ........................... 1,876 2,528 2,903
Gas (MMcf) ............................ 4,847 4,833 5,091
Total (MBOE) .......................... 2,684 3,334 3,752
Average Oil and Gas Sales Price (1):
Oil ($/Bbl) ........................... $ 17.44 $ 16.20 $ 19.80
Gas ($/Mcf)(2) ........................ $ 2.34 $ 2.35 $ 2.64
Average Production Costs
Lease operations ($/BOE)(3) ........... $ 4.18 $ 4.27 $ 4.32
- ----------
(1) Includes effects of hedging transactions.
(2) Includes natural gas liquids.
(3) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies), workover costs and the administrative costs of production
offices, insurance and property and severance taxes.
11
<PAGE>
Development, Exploration and Acquisition Expenditures
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities during the periods indicated.
Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Property Acquisitions:
Proved .......................... $ -- $ 7,077 $ --
Unproved ........................ 3,221 10,602 14,042
Developmental Costs ............... 8,199 7,285 32,656
Exploratory Costs ................. 6,912 22,319 13,813
------- ------- -------
Total ........................... $18,332 $47,283 $60,511
======= ======= =======
Acreage
The following table sets forth certain information regarding the Company's
developed and undeveloped leasehold acreage as of December 31, 1999 in the areas
indicated. This table excludes options to acquire leases and acreage in which
the Company's interest is limited to royalty, overriding royalty and similar
interests.
<TABLE>
<CAPTION>
Developed Undeveloped Total
----------------- ----------------- -----------------
Gross Net Gross Net Gross Net
<S> <C> <C> <C> <C> <C> <C>
Trend / Cotton Valley . 114,848 104,133 81,235 60,967 196,083 165,100
Louisiana ............. 868 729 49,774 21,796 50,642 22,525
West Texas / New Mexico 2,005 1,259 10,676 2,479 12,681 3,738
East Texas ............ 2,477 1,665 -- -- 2,477 1,665
Other (1) ............. 13,013 6,510 267,259 136,706 280,272 143,216
------- ------- ------- ------- ------- -------
Total ............ 133,211 114,296 408,944 221,948 542,155 336,244
======= ======= ======= ======= ======= =======
</TABLE>
(1) Net undeveloped acres are attributable to the following areas: the Glen
Rose area in Southeast Texas - 71,435; Colorado - 18,684; Mississippi -
13,739; Alabama - 13,486; Wyoming - 8,515; South Texas - 8,325, and other
- 2,522.
Item 3 - Legal Proceedings
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements." See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.
The Company is a defendant in a suit styled The State of Texas, et al v.
Union Pacific Resources Company et al, presently pending in Lee County, Texas.
The suit attempts to establish a class action consisting of unidentified royalty
and working interest owners throughout the State of Texas. Among other things,
the plaintiffs are seeking actual and exemplary damages for alleged violation of
various statutes relating to common carriers and common purchasers of crude oil
including discrimination in the purchase of oil by giving preferential treatment
to defendants' own oil and conspiring to keep the posted price or sales price of
oil below market value. A general denial has been filed. Because the Company is
neither a common purchaser nor common carrier of oil, management of the Company
believes there is no merit to the allegations as they relate to the Company or
its operations.
12
<PAGE>
In addition, the Company is a defendant or codefendant in minor lawsuits
that have arisen in the ordinary course of business. While the outcome of these
lawsuits cannot be predicted with certainty, management does not expect any of
these to have a material adverse effect on the Company's consolidated financial
condition or results of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders of the
Registrant during the fourth quarter of its fiscal year ended December 31, 1999.
13
<PAGE>
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's Common Stock is quoted on the Nasdaq Stock Market's National
Market under the symbol "CWEI". As of December 31, 1999, there were
approximately 1,200 beneficial and record stockholders. The following table sets
forth, for the periods indicated, the high and low sales prices for the Common
Stock, as reported on the National Market:
High Low
------ - ---------
Year Ended December 31, 1999:
Fourth Quarter ................. $ 16 1/4 $ 9 13/16
Third Quarter .................. 14 1/4 5 3/8
Second Quarter ................. 6 15/16 4 1/16
First Quarter .................. 11 1/4 2 11/16
Year Ended December 31, 1998:
Fourth Quarter ................. $ 10 1/2 $ 6 1/2
Third Quarter .................. 11 3/4 5 5/16
The quotations in the table above reflect inter-dealer prices without
retail markups, markdowns or commissions. On March 22, 2000, the last reported
sale price for the Common Stock on the Nasdaq Stock Market's National Market was
$14.50.
The Company has not paid any cash dividends on its Common Stock, and the
Board of Directors does not anticipate paying any cash dividends in the
foreseeable future. The terms of the Company's secured bank credit facility
limit the payment of cash dividends by the Company during any fiscal year to a
maximum of 50% of the Company's net income during such period, assuming
compliance with other terms thereof. Subject to the restrictions imposed by the
Company's lenders, future dividend policy will depend on a number of factors,
including future earnings, capital requirements, the financial condition and
future prospects of the Company and such other factors as the Board of Directors
may deem relevant.
14
<PAGE>
Item 6 - Selected Financial Data
The following table sets forth selected consolidated financial data for
the Company as of the dates and for the periods indicated. The consolidated
financial data for each of the years in the five-year period ended December 31,
1999 was derived from audited financial statements of the Company. The data set
forth in this table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales ...................... $ 44,366 $ 51,932 $ 70,929 $ 60,610 $ 43,883
Natural gas services ................... 3,684 3,795 4,559 4,281 5,388
-------- -------- -------- -------- --------
Total revenues .................... 48,050 55,727 75,488 64,891 49,271
-------- -------- -------- -------- --------
Costs and expenses:
Lease operations ....................... 11,222 14,237 16,205 14,776 13,533
Exploration:
Abandonments and impairments ...... 5,245 16,128 2,692 597 1,472
Seismic and other ................. 1,418 4,501 7,629 1,036 83
Natural gas services ................... 3,098 3,242 3,955 3,437 3,714
Depreciation, depletion and amortization 20,810 31,665 31,273 23,758 25,110
Impairment of property and equipment (1) 81 8,493 236 1,186 10,259
General and administrative ............. 3,929 4,299 4,181 3,266 3,708
-------- -------- -------- -------- --------
Total costs and expenses .......... 45,803 82,565 66,171 48,056 57,879
-------- -------- -------- -------- --------
Operating income (loss) ........... 2,247 (26,838) 9,317 16,835 (8,608)
-------- -------- -------- -------- --------
Other income (expense):
Interest expense ....................... (2,893) (2,384) (1,767) (3,440) (5,493)
Gain on sales of property and equipment 10,926 53 155 293 5,978
Other income ........................... 474 85 62 42 44
-------- -------- -------- -------- --------
Total other income (expense) ...... 8,507 (2,246) (1,550) (3,105) 529
-------- -------- -------- -------- --------
Income (loss) before income taxes ........... 10,754 (29,084) 7,767 13,730 (8,079)
Income tax expense .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ........................... $ 10,754 $(29,084) $ 7,767 $ 13,730 $ (8,079)
======== ======== ======== ======== ========
Net income (loss) per common share:
Basic .................................. $ 1.19 $ (3.27) $ .87 $ 1.80 $ (1.31)
======== ======== ======== ======== ========
Diluted ................................ $ 1.18 $ (3.27) $ .85 $ 1.76 $ (1.31)
======== ======== ======== ======== ========
Weighted average common shares outstanding:
Basic .................................. 9,005 8,905 8,888 7,624 6,165
======== ======== ======== ======== ========
Diluted ................................ 9,148 8,905 9,094 7,800 6,165
======== ======== ======== ======== ========
Other Data:
Net cash provided by operating activities ... 24,738 $ 33,505 $ 39,324 $ 40,306 $ 24,203
EBITDAX (2) ................................. 29,801 $ 33,949 $ 51,147 $ 43,412 $ 28,316
December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Balance Sheet Data:
Working capital (deficit) .......................................... $ (6,649) $ (15,848) $ (6,369)
Total assets ....................................................... 109,166 120,653 134,562
Long-term debt ..................................................... 30,500 39,100 35,700
Stockholders' equity ............................................... 56,117 44,394 73,074
</TABLE>
- ----------
(1) The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for Impairment of Long-Lived Assets"
effective October 1, 1995.
(2) EBITDAX refers to earnings before income taxes, interest expense,
depreciation, depletion and amortization, impairment of property and
equipment, exploration costs, and other income (expense). EBITDAX is a
financial measure commonly used in the Company's industry and should not
be considered in isolation or as a substitute for net income, cash flow
provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity.
15
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements." See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.
The following discussion is intended to assist in understanding the
Company's historical consolidated financial position at December 31, 1999, and
results of operations and cash flows for each of the three years in the period
ended December 31, 1999. The Company's historical Consolidated Financial
Statements and notes thereto included elsewhere in this Form 10-K contain
detailed information that should be referred to in conjunction with the
following discussion.
Overview
A significant portion of the Company's proved oil and gas reserves are
concentrated in the Trend. Oil and gas production in the Trend is generally
characterized by a high initial production rate, followed by a steep rate of
decline. In order to maintain its oil and gas reserve base, production levels
and cash flow from operations, the Company needs to maintain or increase its
level of drilling activity and achieve comparable or improved results from such
activities. However, low oil prices caused the Company to temporarily suspend
Trend drilling activities from April 1998 through September 1999, resulting in
significant declines in oil production from 1997 levels.
Since 1997, the Company has initiated several exploratory projects
designed to reduce its dependence on Trend drilling for future production and
reserve growth. These new areas include the Company's Cotton Valley Pinnacle
Reef exploratory project, which targets deep gas structures in the vicinity of
its core properties in east central Texas, as well as other exploratory projects
in south Texas, Louisiana and Mississippi, and emphasize the development of
long-life gas reserves. During 1999, the Company devoted a substantial portion
of its capital expenditures to these new areas. In the aggregate, exploratory
drilling activities accounted for about 32% of the Company's 4,790 MBOE of
proved reserves added through extensions and discoveries during 1999.
The Company follows the successful efforts method of accounting for its
oil and gas properties, whereby costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized using the
unit-of-production method based on estimated proved reserves. Costs of unproved
properties are initially capitalized. Those properties with significant
acquisition costs are periodically assessed and any impairment in value is
charged to expense. The amount of impairment recognized on unproved properties
which are not individually significant is determined by amortizing the costs of
such properties within appropriate groups based on the Company's historical
experience, acquisition dates and average lease terms. Exploration costs,
including geological and geophysical expenses and delay rentals, are charged to
expense as incurred. Exploratory drilling costs, including the cost of
stratigraphic test wells, are initially capitalized but charged to expense if
and when the well is determined to be unsuccessful.
16
<PAGE>
Results of Operations
The following table sets forth certain operating information of the
Company for the periods presented:
Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Oil and Gas Production Data:
Oil (MBbls) .............................. 1,876 2,528 2,903
Gas (MMcf) ............................... 4,847 4,833 5,091
Total (MBOE) (1) ......................... 2,684 3,334 3,752
Average Oil and Gas Sales Prices (2):
Oil ($/Bbl) .............................. $ 17.44 $ 16.20 $ 19.80
Gas ($/Mcf) .............................. $ 2.34 $ 2.35 $ 2.64
Operating Costs and Expenses ($/BOE Produced):
Lease operations ......................... $ 4.18 $ 4.27 $ 4.32
Oil and gas depletion .................... $ 7.46 $ 9.24 $ 8.10
General and administrative ............... $ 1.46 $ 1.29 $ 1.11
Net Wells Drilled (3):
Exploratory Wells ........................ 3.7 9.6 9.4
Developmental Wells ...................... 3.2 6.6 28.2
- ----------
(1) Gas is converted to barrel of oil equivalents (BOE) at the ratio of six
Mcf of gas to one Bbl of oil.
(2) Includes effects of hedging transactions.
(3) Excludes wells being drilled or completed at the end of each period.
1999 Compared to 1998
Revenues
Oil and gas sales decreased 14% from $51.9 million in 1998 to $44.4
million in 1999 due primarily to a 26% decline in oil production, offset in part
by an 8% increase in the Company's average oil price (net of hedging
transactions). The decline in oil production was caused primarily by the
suspension of Trend drilling activities from April 1998 through September 1999
in response to low oil prices. Gas production from new wells, primarily
attributable to the Cotton Valley Pinnacle Reef area, was offset by the loss of
production from two gas properties sold in 1999.
The Company's average price per barrel of oil increased 8% after giving
effect to an $.11 per barrel loss on hedging activities in 1999 as compared to a
$3.50 per barrel gain in 1998. Average gas prices were consistent after giving
effect to a $.02 per Mcf hedging loss in 1999 as compared to a $.23 Mcf gain in
1998.
Costs and Expenses
Lease operations expenses decreased 21% from $14.2 million in 1998 to
$11.2 million in 1999 due primarily to a combination of cost reduction measures
implemented by the Company, beginning in the fourth quarter of 1998, and lower
costs attributable to the sale of two gas properties in 1999. Oil and gas
production on a BOE basis decreased 19% during the current period, causing a 2%
decrease in lease operations expenses on a BOE basis from $4.27 per BOE in 1998
to $4.18 per BOE in 1999.
Exploration costs decreased from $20.6 million in 1998 to $6.7 million in
1999 due primarily to the charge-off during the 1998 period of 10 gross (6.6
net) exploratory dry holes totaling $7.7 million and $8.4 million of unproved
property impairments, as compared to only 3 gross (1.1 net) exploratory dry
holes totaling
17
<PAGE>
$1.2 million and $4 million of unproved property impairments during 1999.
Because the Company follows the successful efforts method of accounting, the
Company's results of operations may be adversely affected during any accounting
period in which seismic costs, exploratory dry hole costs, and unproved property
impairments are expensed.
Depreciation, depletion and amortization ("DD&A") expense decreased 34%
from $31.7 million in 1998 to $20.8 million in 1999 due primarily to a 19%
decrease in the Company's average depletion rate per BOE. The lower depletion
rate was attributable to the effects of higher oil and gas prices on estimated
quantities of proved reserves combined with a 19% decline in oil and gas
production on a BOE basis. Under the successful efforts method of accounting,
costs of oil and gas properties are amortized on a unit-of-production method
based on estimated proved reserves. The average depletion rate per BOE was $7.46
in 1999 compared to $9.24 in 1998.
General and administrative ("G&A") expenses decreased 9% from $4.3 million
in 1998 to $3.9 million in 1999 due primarily to certain cost reduction measures
initiated in December 1998. These cost reduction measures, consisting primarily
of personnel layoffs and salary reductions, were originally expected to achieve
a 33% annual savings. However, many of these measures were reversed during the
last half of 1999 due to an increase in drilling activity prompted by higher
product prices.
The Company recorded a provision for impairment of property and equipment
of $8.5 million during the fourth quarter of 1998 in accordance with Statement
of Financial Accounting Standards No. 121 "Accounting for Impairment of
Long-Lived Assets" ("SFAS 121"), as compared to an $81,000 provision in 1999.
The 1998 provision applied to certain oil and gas properties in east central
Texas, south Texas, the Texas Gulf Coast, Louisiana, and Mississippi and was
caused primarily by a decline in forecasted oil and gas prices, while the 1999
provision related to a minor value property.
Interest Expense and Other
Interest expense increased 21% from $2.4 million in 1998 to $2.9 million
in 1999 due primarily to a combination of lower capitalized interest and higher
average levels of indebtedness on the Company's secured bank credit facility
(the "Credit Facility"). The average daily principal balance outstanding on such
facility during 1999 was $42 million compared to $40.8 million in 1998. The
effective annual interest rate on bank debt, including bank fees, during the
1999 and 1998 periods was 8.1%. Capitalized interest was $420,000 less during
the 1999 period due to a decrease in unproved acreage.
Gain on sales of property and equipment increased from $53,000 in 1998 to
$10.9 million in 1999. The 1999 gain resulted primarily from the sale of the
Company's interests in eight non-operated oil and gas wells located in Matagorda
County, Texas, and its interests in the Jalmat Field located in Lea County, New
Mexico.
1998 Compared to 1997
Revenues
Oil and gas sales decreased 27% from $70.9 million in 1997 to $51.9
million in 1998 due primarily to lower oil prices. The Company's average oil
price during the current period declined 18% (after giving effect to a $3.50 per
barrel gain on hedging activities). Excluding hedging transactions, the
Company's average price per barrel of oil declined 36% from $19.76 in 1997 to
$12.70 in 1998. Although oil production for 1998 decreased 13% as compared to
1997, several factors related to the current depressed levels of oil prices had
a negative impact on production. In April 1998, the Company suspended its Trend
drilling program until oil prices improve and stabilize. The Company also
implemented an oil curtailment strategy during 1998 which resulted in a decrease
of approximately 100,000 barrels of oil production during the year. All of the
Company's gas
18
<PAGE>
discoveries in 1998 were either completed late in the year or are currently
waiting on pipeline connections. Accordingly, production from new wells has not
been sufficient to offset the recent decline in oil production attributable to
the suspension of Trend drilling. Furthermore, until these wells and other
exploratory projects establish and sustain commercial levels of production,
there can be no assurance that the Company will be successful in its efforts to
offset the decline in production.
Costs and Expenses
Lease operations expenses decreased 12% from $16.2 million in 1997 to
$14.2 million in 1998 due primarily to lower production taxes resulting from a
significant decline in oil prices. Oil and gas production on a BOE basis
decreased 11% during the current period, causing a 1% decrease in lease
operations expenses on a BOE basis from $4.32 per BOE in 1997 to $4.27 per BOE
in 1998.
Exploration costs doubled from $10.3 million in 1997 to $20.6 million in
1998 due primarily to the charge-off of 10 gross (6.6 net) exploratory dry holes
during the 1998 period totaling $7.7 million and $8.4 million of unproved
property impairments. These 1998 charges were offset in part by a $3.3 million
reduction in seismic costs from 1997 to 1998. Because the Company follows the
successful efforts method of accounting, the Company's results of operations may
be adversely affected during any accounting period in which seismic costs,
exploratory dry hole costs, and unproved property impairments are expensed.
DD&A expense increased 1% from $31.3 million in 1997 to $31.7 million in
1998 due primarily to a 14% increase in the Company's average depletion rate per
BOE attributable to the effects of lower oil and gas prices on estimated
quantities of proved reserves. This increase in the average depletion rate was
substantially offset by an 11% decline in oil and gas production on a BOE basis.
Under the successful efforts method of accounting, costs of oil and gas
properties are amortized on a unit-of-production method based on estimated
proved reserves. The average depletion rate per BOE was $9.24 in 1998 compared
to $8.10 in 1997.
G&A expenses were relatively constant from 1997 to 1998. However,
beginning in December 1998, the Company implemented certain cost reduction
measures, consisting primarily of personnel layoffs and salary reductions, in
order to reduce overhead and conserve financial resources. Through these
efforts, the Company expects to reduce G&A expenses in 1999 by approximately 33%
on an annualized basis.
The Company recorded a provision for impairment of property and equipment
of $8.5 million during the fourth quarter of 1998 in accordance with SFAS 121,
as compared to a $236,000 provision in 1997. The 1998 provision applied to
certain oil and gas properties in east central Texas, south Texas, the Texas
Gulf Coast, Louisiana, and Mississippi and was caused primarily by a decline in
forecasted oil and gas prices.
Interest Expense and Other
Interest expense increased 33% from $1.8 million in 1997 to $2.4 million
in 1998 due primarily to higher average levels of indebtedness on the Company's
secured bank credit facility (the "Credit Facility"), offset in part by an
increase in capitalized interest and slightly lower average interest rates. The
average daily principal balance outstanding on such facility during 1998 was
$40.8 million compared to $24 million in 1997. The effective annual interest
rate on bank debt, including bank fees, during the 1998 period was 8.1% compared
to 8.7% in 1997. Capitalized interest was $621,000 higher during the 1998 period
due to a significant increase in unproved acreage.
19
<PAGE>
Liquidity and Capital Resources
Overview
The Company's primary financial resource is its oil and gas reserves. In
accordance with the terms of the Credit Facility, the banks establish a
borrowing base, as derived from the estimated value of the Company's oil and gas
properties, against which the Company may borrow funds as needed to supplement
its internally generated cash flow as a source of financing for its capital
expenditure program. Product prices, over which the Company has very limited
control, have a significant impact on such estimated value and thereby on the
Company's borrowing availability under the Credit Facility. Within the confines
of product pricing, the Company must be able to find and develop or acquire oil
and gas reserves in a cost effective manner in order to generate sufficient
financial resources through internal means to complete the financing of its
capital expenditure program.
The following discussion sets forth the Company's current plans for
capital expenditures in 2000, and the expected capital resources needed to
finance such plans.
Capital Expenditures
The Company plans to spend $43 million on exploration and development
activities during 2000, including $11.8 million in the Trend, $12 million on the
Cotton Valley Exploratory Project, $9.8 million on various exploratory prospects
in Louisiana and $9.4 million on other projects. See "Business - Drilling,
Exploration and Production Activities."
The Company may increase or decrease its planned activities for 2000,
depending upon drilling results, product prices, the availability of capital
resources, and other factors affecting the economic viability of such
activities.
Capital Resources
Credit Facility
The Credit Facility provides for a revolving loan facility in an amount
not to exceed the lesser of the borrowing base, as established by the banks, or
that portion of the borrowing base determined by the Company to be the elected
borrowing limit. At December 31, 1999, the borrowing base was $48 million and
the outstanding advances were $30.5 million. The borrowing base is subject to
redetermination at any time, but at least semi-annually, and is made at the
discretion of the banks. If the redetermined borrowing base is less than the
amount of outstanding indebtedness, the Company will be required to (i) pledge
additional collateral, (ii) prepay the excess in not more than five equal
monthly installments, or (iii) elect to convert the entire amount of outstanding
indebtedness to a term obligation based on amortization formulas set forth in
the loan agreement.
Working Capital and Cash Flow
During 1999, the Company generated cash flow from operating activities of
$24.7 million, received $19.1 million in proceeds from the sale of property and
equipment, repaid $24.4 million of indebtedness on the Credit Facility and spent
$19.7 million on capital expenditures.
The Company's working capital deficit decreased from $15.8 million at
December 31, 1998 to $6.6 million at December 31, 1999. At December 31, 1998,
the Company classified $15.8 million of its outstanding indebtedness on the
Credit Facility as a current liability based on the required levels of
repayments during 1999. In November 1999, the banks redetermined the borrowing
base and did not require any mandatory principal
20
<PAGE>
repayments. The Company also reported $7.5 million of net book values on
properties held for resale as current assets as of December 31, 1998, while no
properties were classified as current assets as of December 31, 1999.
The Company believes that the funds available under the Credit Facility
and cash provided by operations will be adequate to fund the Company's
operations and projected capital and exploratory expenditures during 2000.
However, because future cash flows and the availability of borrowings under the
Credit Facility are subject to a number of variables, such as prevailing prices
of oil and gas, actual production from existing and newly-completed wells, the
Company's success in developing and producing new reserves, and the uncertainty
with respect to the amount of funds which may ultimately be required to finance
the Company's exploration program, there can be no assurance that the Company's
capital resources will be sufficient to sustain the Company's exploratory and
development activities.
Inflation
Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the Company's
results of operations during 1999.
Information Systems for the Year 2000
Historically, certain computer software systems, as well as certain
hardware containing embedded chip technology, such as microcontrollers and
microprocessors, were designed to utilize a two-digit date field and
consequently, they may not have been able to properly recognize dates in the
year 2000. This could have resulted in system failures. The Company relies on
its computer-based management information systems, as well as embedded
technology, to operate instruments and equipment in conducting its day-to-day
business activities. Certain of these computer-based programs and embedded
technology may not have been designed to function properly with respect to the
application of dating systems relating to the year 2000.
In response, the Company developed a "Year 2000 Plan" in 1998 and
established an internal group to identify and assess potential areas of risk and
to make any required modifications to its computer systems and equipment used in
oil and gas exploration, production, gathering and gas processing activities.
The Year 2000 Plan was comprised of various phases, including assessment,
remediation, testing and contingency plan development.
By early 1999, the Company's inventory of computer hardware and software
was substantially Year 2000 compliant. The programming modifications for the oil
and gas accounting and production systems were completed by the software vendor
in 1997 and were installed and tested by the Company in November 1998. The
Company also uses monitor and control equipment with embedded chip technology in
its production and gas processing operations. The various systems were reviewed
in conjunction with the overall Year 2000 Plan and were found to be Year 2000
compliant based on manufacturers' representations.
In 1999, the Company also began to monitor the compliance efforts of
purchasers, vendors, contractors and other third parties ("Third Party
Providers") with whom it does business and whose computer-based systems and/or
embedded technology equipment interface with those of the Company to ensure that
operations would not be adversely affected by the Year 2000 compliance problems
of others.
The Company has experienced no computer systems or equipment failures
related to the arrival of the Year 2000. All systems and equipment have
continued to be operational, and the Company has no reason to believe that any
of its systems and equipment are not Year 2000 compliant. Furthermore, the
Company is not aware of any Year 2000 compliance problems of Third Party
Providers which have adversely affected, or which may in the future adversely
affect, the Company's ability to conduct business with such Third Party
Providers.
21
<PAGE>
The costs to implement the Year 2000 Plan were nominal since the primary area
for remediation involved software covered by a maintenance agreement. The
Company believes that the Year 2000 Plan has been successfully completed and,
except for routine monitoring of its computer systems and equipment, does not
plan to take any further action in regards to Year 2000 issues.
Item 7A - Quantitative and Qualitative Disclosure About Market Risks
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements." See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.
The Company's business is impacted by fluctuations in commodity prices and
interest rates. The following discussion is intended to identify the nature of
these market risks, describe the Company's strategy for managing such risks, and
to quantify the potential affect of market volatility on the Company's financial
condition and results of operations.
Oil and Gas Prices
The Company's financial condition, results of operations, and capital
resources are highly dependent upon the prevailing market prices of, and demand
for, oil and natural gas. These commodity prices are subject to wide
fluctuations and market uncertainties due to a variety of factors that are
beyond the control of the Company. These factors include the level of global
demand for petroleum products, foreign supply of oil and gas, the establishment
of and compliance with production quotas by oil-exporting countries, weather
conditions, the price and availability of alternative fuels, and overall
economic conditions, both foreign and domestic. It is impossible to predict
future oil and gas prices with any degree of certainty. Sustained weakness in
oil and gas prices may adversely affect the Company's financial condition and
results of operations, and may also reduce the amount of net oil and gas
reserves that the Company can produce economically. Any reduction in reserves,
including reductions due to price fluctuations, can have an adverse affect on
the Company's ability to obtain capital for its exploration and development
activities. Similarly, any improvements in oil and gas prices can have a
favorable impact on the Company's financial condition, results of operations and
capital resources. Based on the Company's 1999 levels of oil and gas production,
a $1 change in the price per Bbl of oil and a $.10 change in the price per Mcf
of gas would result in an aggregate change in gross revenues of approximately
$2.4 million.
During 1998 and continuing into 1999, the oil and gas industry operated in
a depressed commodity price environment. Oil prices during the first quarter of
1999 fell to their lowest levels in history when adjusted for inflation. Since
then, oil prices have steadily improved, and in March 2000, peaked at over $34
per barrel on the NYMEX. Gas prices have also improved since March 1999, but
like the oil markets, remain very volatile.
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to mitigate its exposure to
price fluctuations. While the use of these hedging arrangements limits the
downside risk of price declines, such use may also limit any benefits which may
be derived from price increases. The Company uses various financial instruments,
such as swaps and collars, whereby monthly settlements are based on differences
between the prices specified in the instruments and the settlement prices of
certain futures contracts quoted on the NYMEX or certain other indices.
Generally, when the applicable settlement price is less than the price specified
in the contract, the Company receives a settlement from the counterparty based
on the difference. Similarly, when the applicable settlement price is higher
than the specified price, the Company pays the counterparty based on the
difference. The instruments
22
<PAGE>
utilized by the Company differ from futures contracts in that there is not a
contractual obligation which requires or permits the future physical delivery of
the hedged products.
Except for a floor of $10.00 per barrel on 800,000 barrels of oil
production from January 1999 through June 1999, the Company did not have any
significant hedging arrangements in place for 1999. However, in January 2000,
the Company entered into swap arrangements covering 1,830,000 MMBtu of its gas
production from February 2000 through May 2000 at an average price of $2.26 per
MMBtu. This position was subsequently terminated at an aggregate loss of
approximately $800,000.
Also in February 2000, the Company entered into swap arrangements covering
740,000 barrels of its oil production from July 2000 through December 2000 and
from April 2001 through October 2001 at an average price of $22.49 per barrel
(ranging from a high of $25.00 per barrel in July 2000 to a low of $20.03 in
October 2001), and entered into a collar arrangement covering 170,000 barrels of
its oil production from January 2001 through March 2001 at an average floor
price of $20.66 per barrel and an average ceiling price of $23.81 per barrel.
Interest Rates
All of the Company's outstanding indebtedness at December 31, 1999 is
subject to market rates of interest as determined from time to time by the banks
pursuant to the Credit Facility. See "Capital Resources". The Company may
designate borrowings under the Credit Facility as either "Base Rate Loans" or
"Eurodollar Loans." Base Rate Loans bear interest at a fluctuating rate that is
linked to the discount rates established by the Federal Reserve Board.
Eurodollar Loans bear interest at a fluctuating rate that is linked to LIBOR.
Any increases in these interest rates can have an adverse impact on the
Company's results of operations and cash flow. Although various financial
instruments are available to hedge the effects of changes in interest rates, the
Company does not consider the risk to be significant and has not entered into
any interest rate hedging transactions. Based on the Company's outstanding
indebtedness at December 31, 1999 of $30.5 million, a change in interest rates
of 25 basis points would affect future annual interest payments by approximately
$76,000.
Item 8 - Financial Statements and Supplementary Data
For the financial statements and supplementary data required by this Item
8, see the Index to Consolidated Financial Statements included elsewhere in this
Form 10-K.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
23
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
The Information required by this Item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1999.
Item 11 - Executive Compensation
The information required by this Item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1999.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1999.
Item 13 - Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference
to the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1999.
24
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements and Schedules
For a list of the consolidated financial statements filed as part of this
Form 10-K, see the Index to Consolidated Financial Statements on page F-1.
No financial statement schedules are required to be filed as a part of
this Form 10-K.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
Exhibits
Exhibit
Number Description of Exhibit
- ---------- ------------------------------------------------------------------
**3.1 Second Restated Certificate of Incorporation of the Company, filed
as an exhibit to the Form S-2 Registration Statement, Registration
No. 333-13441
**3.2 Bylaws of the Company, filed as an exhibit to the Form S-1
Registration Statement, Registration No. 33-43350
*10.1 Seventh Restated Loan Agreement dated as of December 1, 1999,
among Clayton Williams Energy, Inc., Warrior Gas Co., CWEI
Acquisitions, Inc., Bank One, Texas, N.A. and Union Bank of
California, N.A.
**10.2 1993 Stock Compensation Plan, filed as an exhibit to the Form S-8
Registration Statement, Registration No. 33-68318
**10.3 First Amendment to 1993 Stock Compensation Plan, filed as an
exhibit to the December 31, 1995 Form 10-K
**10.4 Second Amendment to the 1993 Stock Compensation Plan, filed as an
exhibit to the Form S-8 Registration Statement, Registration No.
33-68318
**10.5 Outside Directors Stock Option Plan, filed as an exhibit to the
Form S-8 Registration Statement, Registration No. 33-68316
**10.6 First Amendment to Outside Directors Stock Option Plan, filed as
an exhibit to the December 31, 1995 Form 10-K
**10.7 Bonus Incentive Plan, filed as an exhibit to the Form S-8
Registration Statement, Registration No. 33-68320
**10.8 First Amendment to Bonus Incentive Plan, filed as an exhibit to
the December 31, 1997 Form 10-K
**10.9 Amended and Restated 401(k) Plan & Trust, filed as an exhibit to
the December 31, 1995 Form 10-K
**10.10 Second Amendment to Amended and Restated 401(k) Plan & Trust,
filed as an exhibit to the December 31, 1995 Form 10-K
25
<PAGE>
Exhibit
Number Description of Exhibit
- ---------- ------------------------------------------------------------------
**10.11 Third Amendment to Amended and Restated 401(k) Plan & Trust, filed
as an exhibit to the December 31, 1995 Form 10-K
**10.12 Executive Incentive Stock Compensation Plan, filed as an exhibit
to the Form S-8 Registration Statement, Registration No. 33-92834
**10.13 First Amendment to Executive Incentive Stock Compensation Plan,
filed as an exhibit to the December 31, 1996 Form 10-K
**10.14 Consolidation Agreement dated May 13, 1993 among Clayton Williams
Energy, Inc., Warrior Gas Co. and the Williams Entities, filed as
an exhibit to the Form S-1 Registration Statement, Registration
No. 33-43350
**10.15 Agreement dated April 23, 1993 between the Company and Robert C.
Lyon, filed as an exhibit to the Form S-1 Registration Statement,
Registration No. 33-43350
**10.16 Service Agreement effective October 1, 1995 among Clayton Williams
Energy, Inc. and certain Williams Entities, filed as an exhibit to
the December 31, 1995 Form 10-K
**21 Subsidiaries of the Registrant, filed as an exhibit to the
December 31, 1996 Form 10-K
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Clayton
Williams Energy, Inc. authorizing signature pursuant to Power of
Attorney
*27 Financial Data Schedule for the year ended December 31, 1999
- ----------
* Filed herewith
** Incorporated by reference to the filing indicated
26
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 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.
CLAYTON WILLIAMS ENERGY, INC.
(Registrant)
By: /s/ CLAYTON W. WILLIAMS *
--------------------------------------
Clayton W. Williams
Chairman of the Board, President
and Chief Executive Officer
In accordance with 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 dates indicated.
Signature Title Date
- ------------------------------ ----------------------------- --------------
/s/ CLAYTON W. WILLIAMS * Chairman of the Board, March 28, 2000
- ------------------------------ President and Chief Executive
Clayton W. Williams Officer and Director
/s/ L. PAUL LATHAM Executive Vice President, March 28, 2000
- ------------------------------ Chief Operating Officer and
L. Paul Latham Director
/s/ MEL G. RIGGS * Senior Vice President - March 28, 2000
- ------------------------------ Finance, Secretary, Treasurer,
Mel G. Riggs Chief Financial Officer and
Director
/s/ JERRY F. GRONER * Vice President - Land and March 28, 2000
- ------------------------------ Lease Administration and
Jerry F. Groner Director
/s/ STANLEY S. BEARD * Director March 28, 2000
- ------------------------------
Stanley S. Beard
/s/ WILLIAM P. CLEMENTS * Director March 28, 2000
- ------------------------------
William P. Clements
/s/ ROBERT L. PARKER * Director March 28, 2000
- ------------------------------
Robert L. Parker
* By: /s/ L. PAUL LATHAM
----------------------------
L. Paul Latham
Attorney-in-Fact
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants ................................. F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Operations .................................... F-4
Consolidated Statements of Stockholders' Equity .......................... F-5
Consolidated Statements of Cash Flows .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Clayton Williams Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Clayton
Williams Energy, Inc. (a Delaware corporation) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clayton Williams Energy,
Inc. as of December 31, 1999 and 1998, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 25, 2000
F-2
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
December 31,
----------------------
1999 1998
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ....................................... $ 1,634 $ 1,424
Accounts receivable:
Trade, net ................................................. 2,661 6,782
Affiliates ................................................. 729 244
Oil and gas sales .......................................... 9,846 3,628
Inventory ....................................................... 717 1,230
Property held for resale ........................................ -- 7,521
Other ........................................................... 313 482
--------- ---------
15,900 21,311
--------- ---------
PROPERTY AND EQUIPMENT
Oil and gas properties, successful efforts method ............... 436,831 424,360
Natural gas gathering and processing systems .................... 9,810 8,292
Other ........................................................... 10,350 10,480
--------- ---------
456,991 443,132
Less accumulated depreciation, depletion and amortization ....... (363,985) (343,857)
--------- ---------
Property and equipment, net ................................ 93,006 99,275
--------- ---------
OTHER ASSETS .......................................................... 260 67
--------- ---------
$ 109,166 $ 120,653
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable:
Trade ...................................................... $ 13,648 $ 16,384
Affiliates ................................................. 310 65
Oil and gas sales .......................................... 7,785 3,433
Current maturities of long-term debt ............................ -- 15,800
Accrued liabilities and other ................................... 806 1,477
--------- ---------
22,549 37,159
--------- ---------
LONG-TERM DEBT ........................................................ 30,500 39,100
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share; authorized - 3,000,000
shares; issued and outstanding - none .......................... -- --
Common stock, par value $.10 per share; authorized - 15,000,000
shares; issued - 9,167,779 shares in 1999 and
8,937,561 shares in 1998 ....................................... 917 894
Additional paid-in capital ...................................... 70,690 69,744
Retained deficit ................................................ (15,490) (26,244)
--------- ---------
56,117 44,394
--------- ---------
$ 109,166 $ 120,653
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share)
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
REVENUES
Oil and gas sales ...................... $ 44,366 $ 51,932 $ 70,929
Natural gas services ................... 3,684 3,795 4,559
-------- -------- --------
Total revenues .................... 48,050 55,727 75,488
-------- -------- --------
COSTS AND EXPENSES
Lease operations ....................... 11,222 14,237 16,205
Exploration:
Abandonments and impairments ...... 5,245 16,128 2,692
Seismic and other ................. 1,418 4,501 7,629
Natural gas services ................... 3,098 3,242 3,955
Depreciation, depletion and amortization 20,810 31,665 31,273
Impairment of property and equipment ... 81 8,493 236
General and administrative ............. 3,929 4,299 4,181
-------- -------- --------
Total costs and expenses .......... 45,803 82,565 66,171
-------- -------- --------
Operating income (loss) ........... 2,247 (26,838) 9,317
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense ....................... (2,893) (2,384) (1,767)
Gain on sales of property and equipment 10,926 53 155
Other .................................. 474 85 62
-------- -------- --------
Total other income (expense) ...... 8,507 (2,246) (1,550)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ............ 10,754 (29,084) 7,767
-------- -------- --------
INCOME TAX EXPENSE
Current ................................ -- -- --
Deferred ............................... -- -- --
-------- -------- --------
Total income tax expense .......... -- -- --
-------- -------- --------
NET INCOME (LOSS) ............................ $ 10,754 $(29,084) $ 7,767
======== ======== ========
Net income (loss) per common share:
Basic .................................. $ 1.19 $ (3.27) $ .87
======== ======== ========
Diluted ................................ $ 1.18 $ (3.27) $ .85
======== ======== ========
Weighted average common shares outstanding:
Basic .................................. 9,005 8,905 8,888
======== ======== ========
Diluted ................................ 9,148 8,905 9,094
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
------------------- Additional Retained
No. of Par Paid-In Earnings Treasury
Shares Value Capital (Deficit) Stock Total
------- -------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1996 ................. 8,928 $ 893 $ 70,248 $ (4,927) $ -- $ 66,214
Repurchase of common stock
for treasury ............... -- -- -- -- (1,520) (1,520)
Issuance of stock through
compensation plans .......... 53 5 608 -- -- 613
Net income ................... -- -- -- 7,767 -- 7,767
------- -------- -------- -------- -------- --------
BALANCE,
December 31, 1997 ................. 8,981 898 70,856 2,840 (1,520) 73,074
Cancellation of treasury stock (95) (9) (1,511) -- 1,520 --
Issuance of stock through
compensation plans .......... 52 5 399 -- -- 404
Net loss ..................... -- -- -- (29,084) -- (29,084)
------- -------- -------- -------- -------- --------
BALANCE,
December 31, 1998 ................. 8,938 894 69,744 (26,244) -- 44,394
Issuance of stock through
compensation plans .......... 230 23 946 -- 969
Net income ................... -- -- -- 10,754 -- 10,754
------- -------- -------- -------- -------- --------
BALANCE,
December 31, 1999 ................. 9,168 $ 917 $ 70,690 $(15,490) $ -- $ 56,117
======= ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................. $ 10,754 $(29,084) $ 7,767
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation, depletion and amortization ..... 20,810 31,665 31,273
Impairment of property and equipment ......... 81 8,493 236
Exploration costs ............................ 5,245 16,128 2,692
Gain on sales of property and equipment ...... (10,926) (53) (155)
Other ........................................ 274 375 582
Changes in operating working capital:
Accounts receivable .......................... (2,582) 2,842 (1,088)
Accounts payable ............................. 1,064 1,448 766
Other ........................................ 18 1,691 (2,749)
-------- -------- --------
Net cash provided by operating activities 24,738 33,505 39,324
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment ............... (19,683) (53,720) (56,167)
Proceeds from sales of property and equipment ..... 19,060 260 303
Other ............................................. (200) -- --
-------- -------- --------
Net cash used in investing activities ... (823) (53,460) (55,864)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt ...................... -- 19,200 17,700
Repayments of long-term debt ...................... (24,400) -- --
Repurchase of common stock for treasury ........... -- -- (1,520)
Proceeds from sale of common stock ................ 695 29 31
-------- -------- --------
Net cash provided by (used in) financing
activities ............................ (23,705) 19,229 16,211
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ....................................... 210 (726) (329)
CASH AND CASH EQUIVALENTS
Beginning of period ............................... 1,424 2,150 2,479
-------- -------- --------
End of period ..................................... $ 1,634 $ 1,424 $ 2,150
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amounts
capitalized ..................................... $ 3,021 $ 2,291 $ 1,668
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Clayton Williams Energy, Inc. (a Delaware corporation) and its
subsidiaries (collectively, the "Company") is an independent oil and gas company
engaged in the exploration for and development and production of oil and natural
gas primarily in Texas, Louisiana and New Mexico.
Substantially all of the Company's oil and gas production is sold under
short-term contracts which are market-sensitive. Accordingly, the Company's
financial condition, results of operations, and capital resources are highly
dependent upon prevailing market prices of, and demand for, oil and natural gas.
These commodity prices are subject to wide fluctuations and market uncertainties
due to a variety of factors that are beyond the control of the Company. These
factors include the level of global demand for petroleum products, foreign
supply of oil and gas, the establishment of and compliance with production
quotas by oil-exporting countries, weather conditions, the price and
availability of alternative fuels, and overall economic conditions, both foreign
and domestic. From time to time, the Company utilizes hedging transactions with
respect to a portion of its oil and gas production to mitigate its exposure to
price fluctuations (see Note 9).
2. Summary of Significant Accounting Policies
Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Clayton
Williams Energy, Inc. and its subsidiaries. The Company accounts for its
interests in joint ventures and partnerships (all of which are undivided) using
the proportionate consolidation method, whereby its share of assets,
liabilities, revenues and expenses are consolidated with other operations. All
significant intercompany transactions and balances associated with the
consolidated operations have been eliminated.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for its
oil and gas properties, whereby costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized using the
unit-of-production method based on estimated proved reserves. Proceeds from
sales of properties are credited to property costs, and a gain or loss is
recognized when a significant portion of an amortization base is sold or
abandoned.
Exploration costs, including geological and geophysical expenses and delay
rentals, are charged to expense as incurred. Exploratory drilling costs,
including the cost of stratigraphic test wells, are initially capitalized but
charged to exploration expense if and when the well is determined to be
unsuccessful. The acquisition costs of unproved acreage are initially
capitalized and are carried at cost, net of accumulated impairment provisions,
until such leases are transferred to proved properties or charged to exploration
expense as impairments of unproved properties.
Natural Gas and Other Property and Equipment
Natural gas gathering and processing systems consist primarily of gas
gathering pipelines, compressors and gas processing plants. Other property and
equipment consists primarily of field equipment and facilities, office
equipment, leasehold improvements and vehicles. Major renewals and betterments
are
F-7
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
capitalized while the costs of repairs and maintenance are charged to expense as
incurred. The costs of assets retired or otherwise disposed of and the
applicable accumulated depreciation are removed from the accounts, and any gain
or loss is included in other income in the accompanying consolidated statements
of operations.
Depreciation of natural gas gathering and processing systems and other
property and equipment is computed on the straight-line method over the
estimated useful lives of the assets, which range from 3 to 39 years.
Valuation of Property and Equipment
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for Impairment of Long-Lived Assets" ("SFAS 121"),
which requires that the Company's long-lived assets, including its oil and gas
properties, be assessed for potential impairment in their carrying values
whenever events or changes in circumstances indicate such impairment may have
occurred.
SFAS 121 provides for future revenue from the Company's oil and gas
production to be estimated based upon prices at which management reasonably
estimates such products will be sold. These estimates of future product prices
may differ from current market prices of oil and gas. Any downward revisions to
management's estimates of product prices could result in an impairment of the
Company's oil and gas properties in future periods.
Unproved oil and gas properties with individually significant acquisition
costs are periodically assessed and any impairment in value is charged to
exploration costs. The amount of impairment recognized on unproved properties
which are not individually significant is determined by amortizing the costs of
such properties within appropriate groups based on the Company's historical
experience, acquisition dates and average lease terms.
Income Taxes
The Company follows the asset and liability method prescribed by Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Under this method of accounting for income taxes, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in enacted tax rates is recognized in income in the
period that includes the enactment date.
Inventory
Inventory consists primarily of tubular goods and other well equipment
which the Company plans to utilize in its ongoing exploration and development
activities and is carried at the lower of cost or market value.
Capitalization of Interest
Interest costs associated with maintaining the Company's inventory of
unproved oil and gas properties are capitalized. During the years ended December
31, 1999, 1998 and 1997, the Company capitalized interest totaling approximately
$547,000, $967,000 and $346,000, respectively.
Statements of Cash Flows
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-8
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128"). Basic net income (loss) per common share is based on the weighted average
number of common shares outstanding during each period. Diluted net income per
share gives further effect to the additional dilution, if any, related to
outstanding employee stock options. In periods when a net loss is reported,
diluted loss per share is the same as basic loss per share since the effects of
outstanding employee stock options are anti-dilutive.
Stock-Based Compensation
The Company accounts for stock-based compensation utilizing the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25").
Revenue Recognition and Gas Balancing
The Company utilizes the sales method of accounting for natural gas
revenues whereby revenues are recognized based on the amount of gas sold to
purchasers. The amount of gas sold may differ from the amount to which the
Company is entitled based on its revenue interests in the properties. The
Company did not have any significant imbalance positions at December 31, 1999,
1998 or 1997.
Investments in Equity Securities
The Company accounts for investments in equity securities as "available
for sale" investments under Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities." As of
December 31, 1999, the Company held equity securities in a corporation which
operates an internet marketplace for petroleum services and equipment. The
investment is carried at its cost of $200,000, which management believes
approximates its fair market value, and is classified as a non-current other
asset in the accompanying balance sheet at December 31, 1999.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. For the years ended December
31, 1999, 1998 and 1997, the Company reported no differences between
comprehensive income and net income.
Reclassifications
Certain reclassifications of prior year financial statement amounts have
been made to conform to current year presentations.
3. Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------
1999 1998
------- -------
(In thousands)
Secured Bank Credit Facility (matures July 31, 2001) $30,500 $54,900
Less current maturities ............................ -- 15,800
------- -------
$30,500 $39,100
======= =======
Aggregate maturities of long-term debt at December 31, 1999 are as
follows: 2000 - $0; and 2001 - $30,500,000.
F-9
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Secured Bank Credit Facility
The Company's secured bank credit facility provides for a revolving loan
facility in an amount not to exceed the lesser of the borrowing base, as
established by the banks, or that portion of the borrowing base determined by
the Company to be the elected borrowing limit. At December 31, 1999, the
borrowing base was $48 million and the outstanding advances were $30.5 million.
The borrowing base, which is based on the discounted present value of future net
revenues from oil and gas production, is subject to redetermination at any time,
but at least semi-annually, and is determined at the discretion of the banks. If
the redetermined borrowing base is less than the amount of outstanding
indebtedness, the Company will be required to (i) pledge additional collateral,
(ii) prepay the excess in not more than five equal monthly installments, or
(iii) elect to convert the entire amount of outstanding indebtedness to a term
obligation based on amortization formulas set forth in the loan agreement.
Substantially all of the Company's oil and gas properties are pledged to secure
advances under the credit facility.
All outstanding balances on the credit facility may be designated, at the
Company's option, as either "Base Rate Loans" or "Eurodollar Loans" (as defined
in the loan agreement), provided that not more than two Eurodollar traunches may
be outstanding at any time. Base Rate Loans bear interest at the fluctuating
Base Rate plus a Base Rate Margin ranging from 0% to 3/8% per annum, depending
on levels of outstanding advances and letters of credit. Eurodollar Loans bear
interest at the LIBOR rate plus a Eurodollar Margin ranging from 1.75% to 2.5%
per annum. At December 31, 1999, the Company's indebtedness under the credit
facility consisted of $20 million of Eurodollar Loans at a rate of 8.7% and
$10.5 million of Base Rate Loans at a rate of 8.8%. The book value of
outstanding advances under the credit facility approximates its estimated fair
market value.
In addition, the Company pays the banks a commitment fee equal to 1/4% per
annum on the unused portion of the revolving loan commitment. Interest on the
revolving loan and commitment fees are payable quarterly, and all outstanding
principal and interest will be due July 31, 2001.
The loan agreement contains financial covenants that are computed
quarterly and require the Company to maintain minimum levels of working capital,
cash flow and net tangible assets. The Company was in compliance with all of the
financial covenants at December 31, 1999. In addition, the Company is required
to comply with other non-financial covenants contained in the loan agreement. At
the request of the Company, the banks agreed to modify a certain non-financial
covenant to permit the Company to invest $200,000 in the equity securities of a
corporation which operates an internet marketplace for petroleum services and
equipment.
4. Property Held for Resale
At December 31, 1998, the Company had identified two properties for sale
in 1999. The net book value of these properties aggregated $7.5 million and was
classified as a current asset in the accompanying consolidated balance sheet at
December 31, 1998. In January 1999, the Company completed the sale of its
interest in eight non-operated oil and gas wells located in Matagorda County,
Texas for $5.2 million. In April 1999, the Company sold its interests in the
Jalmat Field located in Lea County, New Mexico for $12.5 million. Proceeds from
these sales were used to reduce indebtedness on the secured bank credit
facility. The Company reported a net gain of $10.2 million from the sale of
these two properties in 1999.
5. Stockholders' Equity
In January 1997, the Company repurchased 95,000 shares of its common stock
on the open market at a cost of $1,520,000. These shares were classified as
treasury stock until they were cancelled in June 1998. The cost of the cancelled
shares was reclassified as a reduction in common stock and additional paid-in
capital.
F-10
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Earnings Per Share
In 1997, the Company adopted SFAS 128, which changes the method of
computing and disclosing earnings per share for periods ending after December
15, 1997. In accordance with SFAS 128, basic earnings per common share was
computed by dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the period. Diluted earnings per common share
was computed by including the dilutive effect, if any, of outstanding employee
stock options utilizing the treasury stock method. For all periods presented,
the differences between basic shares and diluted shares were attributable to the
dilutive effect of employee stock options.
7. Stock Compensation Plans
1993 Plan
The Company has reserved 898,200 shares of common stock for issuance under
the 1993 Stock Compensation Plan ("1993 Plan"). The 1993 Plan provides for the
issuance of nonqualified stock options with an exercise price which is not less
than the market value of the Company's common stock on the date of grant. All
options granted through December 31, 1999 expire 10 years from the date of grant
and become exercisable based on varying vesting schedules.
The following table reflects activity in the 1993 Plan for 1999, 1998 and
1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
--------- ----------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year . 722,052 $ 11.23 632,269 $ 10.99 458,766 $ 8.46
Granted (a) . 304,870 $ 5.50 110,168 $ 11.61 210,700 $ 15.36
Exercised ... (188,200) $ 3.55 (12,305) $ 2.39 (12,791) $ 2.53
Forfeited ... (18,668) $ 10.85 (8,080) $ 11.69 (24,406) $ 5.53
Cancelled (b) (293,889) $ 14.15 -- -- -- --
--------- -------- ---------
End of year ....... 526,165 $ 9.03 722,052 $ 11.23 632,269 $ 10.99
========= ======== =========
Exercisable ....... 254,204 $ 11.02 261,089 $ 7.72 194,357 $ 6.00
========= =========== ======== =========== ========= =========
Issuable .......... 148,329 140,642 242,730
========= ======== =========
</TABLE>
- ----------
(a) In addition to the reissuances described in Note (b), the Company granted
new options as follows: 1999 - 9,981 shares at $5.50 per share and 1,000
shares at $6.00 per share; 1998 - 102,168 shares at $11.69 per share,
3,000 shares at $9.06 per share, and 5,000 shares at $11.50 per share; and
1997 - 48,700 shares at $14.00 per share, 12,000 shares at $14.44 per
share and 150,000 shares at $15.88 per share.
(b) In 1999, the Company exchanged options to purchase 293,889 shares, which
were originally granted in 1997 and 1998 at a weighted average price of
$14.15 per share, for an equal number of options at a price of $5.50 per
share.
In November 1999, certain employees of the Company, including one officer,
borrowed an aggregate of $834,000 from a bank in order to finance the exercise
of stock options granted under the 1993 Plan. The Company guaranteed the loans,
and accordingly, was contingently liable for the full amount of such loans at
December 31, 1999.
Directors Plan
The Company has reserved 86,300 shares of common stock for issuance under
the Outside Directors Stock Option Plan ("Directors Plan"). Since inception of
the Directors Plan, the Company has issued options covering 21,000 shares of
common stock (3,000 per year from 1993 through 1999) at option prices ranging
from $3.25 to $18.50 per share. All options expire 10 years from the date of
grant and are fully
F-11
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exercisable upon issuance. At December 31, 1999, options to purchase 17,000
shares were outstanding, and 65,300 shares remain available for future grants.
Bonus Incentive Plan
The Company has reserved 115,500 shares of common stock for issuance under
the Bonus Incentive Plan. The plan provides that the Board of Directors each
year may award bonuses in cash, common stock of the Company, or a combination
thereof. In November 1997, cash awards totaling $31,500 and stock awards
totaling 9,310 shares of common stock at a market price of $16.00 per share were
granted to certain employees and officers. At December 31, 1999, 106,190 shares
remain available for issuance under this plan.
Stock Compensation Plans
The Company has a compensation plan which permits the Company to pay all
or part of selected executives' salaries in shares of common stock in lieu of
cash. The Company reserved an aggregate of 500,000 shares of common stock for
issuance under this plan. During 1999, 1998 and 1997, the Company issued 36,919,
28,789 and 30,808 shares, respectively, of common stock to one officer in lieu
of cash compensation aggregating $264,000, $278,000 and $421,000, respectively.
The amounts of such compensation are included in general and administrative
expense in the accompanying consolidated financial statements.
Supplemental Disclosure
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes a fair value method and
disclosure standards for stock-based employee compensation arrangements, such as
stock option plans. As permitted by SFAS 123, the Company has elected to
continue following the provisions of APB 25 for such stock-based compensation,
under which no compensation expense has been recognized. Had compensation
expense for these plans been determined consistent with SFAS 123, the Company's
net income (loss) and net income (loss) per share would have been as follows:
1999 1998 1997
--------- ---------- ---------
(In thousands, except per share)
Net income (loss):
As reported .................. $ 10,754 $ (29,084) $ 7,767
Pro forma .................... 9,613 $ (30,172) $ 7,175
Net income (loss) per share:
Basic:
As reported ................ $ 1.19 $ (3.27) $ .87
Pro forma .................. $ 1.07 $ (3.39) $ .81
Diluted:
As reported ................ $ 1.18 $ (3.27) $ .85
Pro forma .................. $ 1.05 $ (3.39) $ .79
SFAS 123 requires the use of option valuation models which were generally
developed for use in estimating the fair value of traded options which have no
vesting restrictions, are fully transferable and generally have shorter life
expectancies. These valuation models also require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock option plans have characteristics significantly different
from those of traded options, and because changes in the subjective
F-12
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of the above pro forma disclosures, the fair value of each
option grant is estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for grants in
1999, 1998 and 1997, respectively: risk-free interest rates of 5.5%, 5.2% and
6.1%; dividend yields of 0%; volatility factors of the expected market price of
the Company's common stock of .74, .55 and .575; and a life expectancy of each
option of 7 years.
8. Transactions with Affiliates
During the periods presented, the Company and various entities controlled
by the Company's principal stockholder provided certain general and
administrative services to one another. General and administrative expenses in
the accompanying financial statements are net of charges by the Company to
affiliates for services aggregating $788,000, $664,000 and $684,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, and include charges
to the Company by affiliates for rents and services aggregating $259,000,
$102,000 and $200,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company believes that all related party transactions are on
terms no less favorable than those available from unrelated third parties.
Accounts receivable from affiliates and accounts payable to affiliates
include, among other things, amounts for charges whereby the Company is the
operator of certain wells in which affiliates own an interest. These charges are
on terms which are consistent with the terms offered to unaffiliated third
parties which own interests in wells operated by the Company.
9. Commitments and Contingencies
Leases
The Company leases office space from affiliates and nonaffiliates under
noncancelable operating leases. Rental expense pursuant to the office leases
amounted to $408,000, $345,000 and $337,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Future minimum payments under noncancelable leases at December 31, 1999,
are as follows:
Operating
Leases
--------------
(In thousands)
2000 .......................................... $ 536
2001 .......................................... 475
2002 .......................................... 94
Thereafter .................................... 13
-------
Total minimum lease payments ............... $ 1,118
=======
Concentration of Credit Risk
The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other conditions.
The Company has not experienced significant credit losses on such receivables.
F-13
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hedging Activities
From time to time, the Company utilizes forward sale and other financial
option arrangements, such as swaps and collars, to reduce price risks on the
sale of its oil and gas production. The Company accounts for such arrangements
as hedging activities and, accordingly, records all realized gains and losses as
oil and gas revenues in the period the hedged production is sold. Included in
oil and gas revenues are losses totaling $310,000 in 1999, net gains totaling
$9,871,000 in 1998 (comprised of gains of $10,024,000, partially offset by
losses of $153,000), and gains totaling $252,000 in 1997.
The Company did not have any open hedge positions as of December 31, 1999.
However, subsequent to December 31, 1999, the Company entered into certain
financial option arrangements, as follows:
- Swap arrangements covering 1,830,000 MMBtu of its gas production
from February 2000 through May 2000 at an average price of $2.26.
This position was subsequently terminated at an aggregate loss of
approximately $800,000.
- Swap arrangements covering 740,000 barrels of its oil production
from July 2000 through December 2000 and from April 2001 through
October 2001 at an average price of $22.49 (ranging from a high of
$25.00 per barrel in July 2000 to a low of $20.03 in October 2001).
- Collar arrangements covering 170,000 barrels of its oil production
from January 2001 through March 2001 at an average floor price of
$20.66 and an average ceiling price of $23.81.
Legal Proceedings
The Company is a defendant in a suit styled The State of Texas, et al v.
Union Pacific Resources Company et al, presently pending in Lee County, Texas.
The suit attempts to establish a class action consisting of unidentified royalty
and working interest owners throughout the State of Texas. Among other things,
the plaintiffs are seeking actual and exemplary damages for alleged violation of
various statutes relating to common carriers and common purchasers of crude oil
including discrimination in the purchase of oil by giving preferential treatment
to defendants' own oil and conspiring to keep the posted price or sales price of
oil below market value. A general denial has been filed. Because the Company is
neither a common purchaser nor common carrier of oil, management of the Company
believes there is no merit to the allegations as they relate to the Company or
its operations.
The Company is involved in various legal proceedings arising in the normal
course of its business, including actions for which insurance coverage is
available. While the ultimate results of these proceedings cannot be predicted
with certainty, the Company does not believe that the outcome of any of these
matters will have, individually or in the aggregate, a material adverse effect
on its financial condition; however, they could have a material impact on
results of operations in an annual or interim period.
10. Impairment of Property and Equipment
The Company has recorded provisions for impairment under SFAS 121 of
$81,000, $8,493,000 and $236,000 for the years 1999, 1998 and 1997,
respectively. The 1998 provision was attributable to certain oil and gas
properties in east central Texas, south Texas, the Texas Gulf Coast and
Louisiana. The impairment was caused primarily by a decline in forecasted oil
and gas prices. Fair market value of the impaired assets was estimated to be the
present value of expected future cash flows at an appropriate discount rate. The
provisions for 1999 and 1997 related to certain minor value properties.
The Company has also recorded provisions for impairment of unproved
properties aggregating $4 million, $8.4 million and $763,000 in 1999, 1998 and
1997, respectively, and have charged such impairments to exploration costs in
the accompanying statements of operations.
F-14
<PAGE>
11. Purchases of Assets
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 1998, the Company purchased certain oil and gas properties in
north Texas for $1.8 million with an effective date of September 1, 1998.
In November 1998, the Company and an affiliated limited partnership
acquired certain oil and gas properties in east Texas for an aggregate purchase
price of $41.1 million, net of closing adjustments. The effective date for
accounting purposes was December 1, 1998. All revenues and expenses subsequent
to the stated effective date of April 1, 1998, but prior to December 1, 1998,
were accounted for as adjustments to the purchase price. The Company acquired an
undivided 10% interest in the purchased assets for $4.9 million of the adjusted
purchase price. In addition, the Company serves as general partner of the
limited partnership which acquired the remaining 90%. After the limited partner
receives an agreed-upon rate of return, the Company's general partnership
interest will increase from 1% to 35%.
12. Income Taxes
Since the Company's consolidation in May 1993, the Company has incurred
net losses for financial reporting purposes aggregating $15.5 million and has
recognized cumulative tax losses of approximately $37.1 million which can be
carried forward and used to offset future taxable income. Tax loss carryforwards
begin to expire in 2008. Due to the uncertainty of realizing the related future
benefits from tax loss carryforwards, valuation allowances have been recorded to
the extent net deferred tax assets exceed net deferred tax liabilities at
December 31, 1999, 1998 and 1997.
The tax effected temporary differences and tax loss carryforwards which
comprise net deferred tax assets and liabilities are as follows:
December 31,
---------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Deferred tax assets (liabilities):
Depreciable and depletable property .... $ (6,183) $ (2,394) $(12,828)
Tax loss carryforwards ................. 12,961 12,295 12,584
Other .................................. 956 970 936
Valuation allowance .................... (7,734) (10,871) (692)
-------- -------- --------
Net deferred tax asset (liability) . $ -- $ -- $ --
======== ======== ========
All of the differences between the statutory income tax rates and the
effective income tax rates are attributable to the change in the valuation
allowance.
13. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that derivatives be recognized as assets or liabilities and measured at
their fair value. SFAS 133 will be adopted in 2001 and is not expected to have a
material effect on the Company's financial condition or operations.
The Financial Accounting Standards Board has issued an exposure draft of
an interpretation to APB 25 which may adversely affect the Company's results of
operations in periods subsequent to its final issuance. The interpretation
requires certain stock options which the Company repriced in April 1999 to be
F-15
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
treated as compensatory. Accordingly, the Company will be required to recognize
compensation expense on such options to the extent that the quoted market value
of the Company's common stock in future periods exceeds its quoted market value
on the effective date of the final interpretation. Since the Company cannot
accurately predict the quoted market value at any future date, the Company
cannot presently quantify the level of compensation expense which may be
reported in future periods. However, any charge against earnings required
pursuant to the interpretation will be a non-cash expense and will not affect
cash flow from operating activities.
14. Quarterly Financial Data (Unaudited)
The following table summarizes results for each of the four quarters for
the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
(In thousands, except per share)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Total revenues ........................ $ 8,326 $ 10,780 $ 13,736 $ 15,208 $ 48,050
Gross profit (a) ...................... $ 4,961 $ 7,301 $ 9,981 $ 11,487 $ 33,730
Net income (loss) ..................... $ (185) $ 7,948 $ 1,896 $ 1,095 $ 10,754
Net income (loss) per common share (b):
Basic ............................ $ (.02) $ .89 $ .21 $ .12 $ 1.19
Diluted .......................... $ (.02) $ .87 $ .20 $ .12 $ 1.18
Year ended December 31, 1998:
Total revenues ........................ $ 17,765 $ 14,848 $ 12,384 $ 10,730 $ 55,727
Gross profit (a) ...................... $ 13,019 $ 10,233 $ 8,327 $ 6,669 $ 38,248
Net income (loss) ..................... $ 962 $ (6,196) $ (2,425) $(21,425) $(29,084)
Net income (loss) per common share (b):
Basic ............................ $ .11 $ .70 $ (.27) $ (2.40) $ (3.27)
Diluted .......................... $ .11 $ .70 $ (.27) $ (2.40) $ (3.27)
</TABLE>
- ----------
(a) Gross profit is computed by the sum of oil and gas sales plus natural gas
services revenues less operating expenses. Operating expenses consist of
lease operations and costs associated with natural gas services.
(b) The sum of the individual quarterly net income (loss) per share amounts
may not agree to the total for the year due to each period's computation
based on the weighted average number of common shares outstanding during
each period.
15. Costs of Oil and Gas Properties
The following table sets forth certain information with respect to costs
incurred in connection with the Company's oil and gas producing activities.
Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Property acquisitions:
Proved .................. $ -- $ 7,077 $ --
Unproved ................ 3,221 10,602 14,042
Developmental costs ............. 8,199 7,285 32,656
Exploratory costs ............... 6,912 22,319 13,813
------- ------- -------
Total ................... $18,332 $47,283 $60,511
======= ======= =======
F-16
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the capitalized costs for oil and gas
properties:
December 31,
-------------------------
1999 1998
--------- ---------
(In thousands)
Proved properties .............................. $ 431,311 $ 415,471
Unproved properties ............................ 5,520 8,889
--------- ---------
Total capitalized costs ........................ 436,831 424,360
Accumulated depreciation, depletion and
amortization ................................. (347,970) (328,231)
--------- ---------
Net capitalized costs .................. $ 88,861 $ 96,129
========= =========
16. Oil and Gas Reserve Information (Unaudited)
The estimates of proved oil and gas reserves utilized in the preparation
of the consolidated financial statements were prepared by independent petroleum
engineers. Such estimates are in accordance with guidelines established by the
Securities and Exchange Commission and the Financial Accounting Standards Board,
which require that reserve reports be prepared under economic and operating
conditions existing at the registrant's year end with no provision for price and
cost escalations except by contractual arrangements. The Company's reserves are
substantially located onshore in the United States.
The Company emphasizes that reserve estimates are inherently imprecise.
Accordingly, the estimates are expected to change as more current information
becomes available. In addition, a portion of the Company's proved reserves is
undeveloped, which increases the imprecision inherent in estimating reserves
which may ultimately be produced.
The following table sets forth proved oil and gas reserves together with
the changes therein (oil in MBbls, gas in MMcf, gas converted to MBOE at one
MBbl per six MMcf):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Oil Gas MBOE Oil Gas MBOE Oil Gas MBOE
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves
Beginning of period .......... 5,741 38,854 12,217 8,410 32,861 13,887 8,507 35,798 14,474
Revisions .................... 5,077 663 5,188 (744) (3,248) (1,285) (726) 1,020 (556)
Extensions and discoveries ... 3,239 9,306 4,790 254 8,768 1,716 3,532 1,134 3,721
Sales of minerals-in-place ... (277) (13,835) (2,583) -- -- -- -- -- --
Purchases of minerals-in-place -- -- -- 349 5,306 1,233 -- -- --
Production ................... (1,876) (4,847) (2,684) (2,528) (4,833) (3,334) (2,903) (5,091) (3,752)
------ ------ ------ ------ ------ ------ ------ ------ ------
End of period ................ 11,904 30,141 16,928 5,741 38,854 12,217 8,410 32,861 13,887
====== ====== ====== ====== ====== ====== ====== ====== ======
Proved developed reserves
Beginning of period .......... 5,504 32,215 10,873 7,826 27,392 12,392 7,199 30,496 12,282
====== ====== ====== ====== ====== ====== ====== ====== ======
End of period ................ 9,028 26,960 13,521 5,504 32,215 10,873 7,826 27,392 12,392
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-17
<PAGE>
CLAYTON WILLIAMS ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The standardized measure of discounted future net cash flows relating to
proved reserves was as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Future cash inflows .................................... $ 369,584 $ 128,149 $ 219,528
Future costs:
Production ..................................... (76,507) (43,647) (67,207)
Development .................................... (24,861) (9,999) (13,445)
Income taxes ................................... (56,959) -- (10,445)
--------- --------- ---------
Future net cash flows .................................. 211,257 74,503 128,431
10% discount factor .................................... (59,615) (22,442) (36,028)
--------- --------- ---------
Standardized measure of discounted future net cash flows $ 151,642 $ 52,061 $ 92,403
========= ========= =========
</TABLE>
Changes in the standardized measure of discounted future net cash flows
relating to proved reserves were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Standardized measure, beginning of period .......... $ 52,061 $ 92,403 $ 135,713
Net changes in sales prices, net of production costs 63,593 (31,210) (49,024)
Revisions of quantity estimates .................... 58,821 (6,103) (4,376)
Accretion of discount .............................. 5,206 9,992 16,067
Changes in future development costs, including
development costs incurred that reduced future
development costs ................................. 1,850 8,415 8,622
Changes in timing and other ........................ (7,348) (2,758) (874)
Net change in income taxes ......................... (24,858) 7,515 17,442
Extensions and discoveries ......................... 46,892 7,165 23,557
Sales, net of production costs ..................... (33,144) (37,695) (54,724)
Sales of minerals-in-place ......................... (11,431) -- --
Purchases of minerals-in-place ..................... -- 4,337 --
--------- --------- ---------
Standardized measure, end of period ................ $ 151,642 $ 52,061 $ 92,403
========= ========= =========
</TABLE>
F-18
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ----------- ------------------------------------------------------------------
10.1 Seventh Restated Loan Agreement dated as of December 1, 1999,
among Clayton Williams Energy, Inc., Warrior Gas Co., CWEI
Acquisitions, Inc., Bank One, Texas, N.A. and Union Bank of
California, N.A.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Williamson Petroleum Consultants, Inc.
24.1 Power of Attorney
24.2 Certified copy of resolution of Board of Directors of Clayton
Williams Energy, Inc. authorizing signature pursuant to Power of
Attorney
27 Financial Data Schedules for the year ended December 31, 1999
<PAGE>
EXHIBIT 10.1
Seventh Restated Loan Agreement dated as of December 1, 1999, among Clayton
Williams Energy, Inc., Warrior Gas Co., CWEI Acquisitions, Inc., Bank One,
Texas, N.A. and Union Bank of California, N.A.
<PAGE>
SEVENTH RESTATED LOAN AGREEMENT
AMONG
CLAYTON WILLIAMS ENERGY, INC.,
WARRIOR GAS CO.,
CWEI ACQUISITIONS, INC.,
BANK ONE, TEXAS, N.A.
AND UNION BANK OF CALIFORNIA, N.A.
DECEMBER 1, 1999
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions. ............................................................1
2. Commitments of the Banks..................................................9
(a) Terms of Revolving Commitment...................................9
(b) Letters of Credit..............................................10
(c) Procedure for Advances on the Revolving Loan...................11
(d) Procedure for Obtaining Letters of Credit......................12
(e) Several Obligations............................................12
3. Notes Evidencing Loans...................................................12
(a) Form of Revolving Notes .......................................12
(b) Interest Rates ................................................13
(c) Payment of Interest ...........................................13
(d) Payment of Principal ..........................................13
(e) Issuance of Additional Notes ..................................13
4. Interest Rates...........................................................13
(a) Options........................................................13
(b) Interest Rate Determination....................................14
(c) Conversion Option..............................................14
(d) Recoupment.....................................................14
5. Special Provisions Relating to Eurodollar Loans..........................15
(a) Unavailability of Funds or Inadequacy of Pricing...............15
(b) Reserve Requirements...........................................15
(c) Taxes..........................................................16
(d) Change in Laws.................................................16
(e) Option to Fund.................................................16
(f) Indemnity......................................................17
6. Collateral Security......................................................17
7. Borrowing Base...........................................................18
(a) Initial Borrowing Base.........................................18
(b) Subsequent Determinations of Borrowing Base....................18
(c) Voluntary Decreases in Borrowing Base..........................18
(d) Monthly Commitment Reduction...................................19
i
<PAGE>
8. Fees.....................................................................19
(a) Unused Portion Fee.............................................19
(b) Borrowing Base Increase Fee....................................19
(c) Letter of Credit Fee...........................................19
(d) Agency Fee.....................................................19
9. Prepayments..............................................................19
(a) Voluntary Prepayments..........................................19
(b) Mandatory Prepayment...........................................20
10. Representations and Warranties. .........................................20
(a) Creation and Existence.........................................20
(b) Power and Authorization........................................21
(c) Binding Obligations............................................21
(d) No Legal Bar or Resultant Lien.................................21
(e) No Consent.....................................................21
(f) Financial Condition............................................21
(g) Liabilities....................................................21
(h) Litigation.....................................................22
(i) Taxes; Governmental Charges....................................22
(j) Titles, Etc....................................................22
(k) Defaults.......................................................22
(l) Casualties; Taking of Properties...............................22
(m) Use of Proceeds; Margin Stock..................................23
(n) Location of Business and Offices...............................23
(o) Compliance with the Law........................................23
(p) No Material Misstatements......................................23
(q) ERISA..........................................................23
(r) Public Utility Holding Company Act.............................24
(s) Environmental Matters..........................................24
(t) Guarantor......................................................24
(u) Year 2000 Compliance...........................................24
11. Conditions of Lending....................................................25
12. Affirmative Covenants....................................................26
(a) Financial Statements and Reports...............................27
(b) Certificates of Compliance.....................................28
(c) Taxes and Other Liens..........................................28
(d) Compliance with Laws...........................................29
(e) Further Assurances.............................................29
(f) Performance of Obligations.....................................29
(g) Insurance......................................................29
ii
<PAGE>
(h) Accounts and Records...........................................30
(i) Right of Inspection............................................30
(j) Notice of Certain Events.......................................30
(k) ERISA Information and Compliance...............................30
(l) Environmental Reports and Notices..............................31
(m) Maintenance....................................................31
(n) Title Matters..................................................31
(o) Curative Matters...............................................31
(p) Additional Collateral..........................................32
(q) Year 2000 Compatibility........................................32
13. Negative Covenants.......................................................32
(a) Liens..........................................................33
(b) Debts, Guaranties and Other Obligations........................33
(c) Current Ratio..................................................34
(d) Ratio of Cash Flow to Debt Service.............................34
(e) Limitation on Sale of Collateral...............................34
(f) Mergers and Consolidations.....................................34
(g) Use of Proceeds................................................35
(h) Loans or Advances..............................................35
(i) Hedging Transactions...........................................35
(j) Dividends......................................................35
(k) Investments....................................................35
(l) Change of Control..............................................36
(m) Minimum Tangible Net Worth.....................................36
14. Events of Default........................................................36
15. Exercise of Rights. .....................................................39
16. Notices..................................................................39
17. The Agent and the Banks..................................................39
(a) Appointment and Authorization..................................39
(b) Note Holders...................................................40
(c) Consultation with Counsel......................................40
(d) Documents......................................................40
(e) Resignation or Removal of Agent................................40
(f) Responsibility of Agent........................................40
(g) Independent Investigation......................................42
(h) Indemnification................................................42
(i) Benefit of Section 17..........................................43
(j) Pro Rata Treatment.............................................43
iii
<PAGE>
(k) Interests of Banks.............................................43
(l) Failure By Any Bank to Provide Funds to Agent..................43
18. Expenses.................................................................44
19. Indemnity................................................................45
20. Governing Law............................................................45
21. Invalid Provisions.......................................................46
22. Maximum Interest Rate....................................................46
23. Amendments...............................................................46
24. Multiple Counterparts....................................................46
25. Conflict.................................................................46
26. Survival.................................................................46
27. Parties Bound............................................................47
28. Assignments and Participations...........................................47
29. Waiver of Jury Trial.....................................................48
30. Other Agreements.........................................................49
31. Written Consent..........................................................49
iv
<PAGE>
Exhibits:
Exhibit A - Notice of Borrowing
Exhibit B - Renewal Revolving Note
Exhibit C - Financial Condition
Exhibit D - Liabilities
Exhibit E - Litigation
Exhibit F - Environmental Matters
v
<PAGE>
SEVENTH RESTATED LOAN AGREEMENT
THIS SEVENTH RESTATED LOAN AGREEMENT (hereinafter referred to as the
"Agreement") executed as of the 1st day of December, 1999, by and among CLAYTON
WILLIAMS ENERGY, INC, a Delaware corporation ("CWE"), WARRIOR GAS CO., a Texas
corporation ("Warrior") (CWE and Warrior being hereinafter sometimes
collectively referred to as "Borrower"), CWEI ACQUISITIONS, INC., a Delaware
corporation (hereinafter referred to as "Guarantor"), BANK ONE, TEXAS, N.A., a
national banking association ("Bank One") and UNION BANK OF CALIFORNIA, N.A., a
national banking association ("Union") (Bank One and Union each in their
capacity as a lender hereunder together with each and every future holder of any
note issued pursuant to this Agreement are hereinafter collectively referred to
as "Banks" and individually as "Bank") and Bank One as "Agent".
W I T N E S S E T H:
WHEREAS, as of July 16, 1998, Borrower, Bank One, Paribas and Union
entered into a Sixth Restated Loan Agreement (the "Loan Agreement"), pursuant to
the terms of which the Banks agreed to provide a $100,000,000 reducing revolving
loan facility to Borrower;
WHEREAS, the Borrower, the Banks and the Agent entered into a First
Amendment to Sixth Restated Loan Agreement, a Second Amendment to Sixth Restated
Loan Agreement and a Third Amendment to Sixth Restated Loan Agreement;
WHEREAS, Bank One and Union have acquired all of the interests of other
Banks, including Paribas, in the Loan Agreement and the rights and obligations
arising thereunder;
WHEREAS, Borrower, Bank One and Union have agreed to renew, extend, amend
and restate the Sixth Restated Loan Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Definitions. When used herein the terms "Agent", "Agreement", "Bank
One", "Banks", "Borrower", "Guarantor" and "Union" shall have the meanings
indicated above. When used herein the following terms shall have the following
meanings:
(a) Advance or Advances - A loan or loans hereunder.
(b) Borrowing Base - The value, determined by the Banks in
accordance with their customary standards, assigned by the Banks from time
to time to the Collateral less the aggregate amount of any outstanding CWE
guarantees of Vendor Financings.
(c) Borrowing Base Deficiency - The term "Borrowing Base Deficiency"
is used herein as defined in Section 9(b) hereof.
<PAGE>
(d) Borrowing Date - The date elected by the Borrower pursuant to
(i) Section 2(c) hereof for an Advance on the Revolving Loan or (ii)
Section 4(c) hereof for a change in interest rate placement on the
Revolving Loan.
(e) Business Day - The normal banking hours during any day (other
than Saturdays or Sundays) that banks are legally open for business in
Dallas, Texas.
(f) Cash Flow - The Williams Consolidated Entities' cash flow from
operations before working capital changes, excluding cash flow
attributable to Vendor Financing, calculated in accordance with GAAP for
the fiscal quarter being measured.
(g) Collateral - The term "Collateral" is used herein as defined in
Section 6 hereof.
(h) Commitment Percentage - The percentage of the Revolving
Commitment that each Bank is severally obligated to fund hereunder, which,
as of the date of this Agreement is:
BANK ONE, TEXAS, N.A. 55%
UNION BANK OF CALIFORNIA, N.A. 45%
(i) Current Assets - The sum of the Williams Consolidated Entities'
current assets, determined in accordance with GAAP, plus any unused
portion of the Elected Borrowing Limit and less any current assets
attributable to Vendor Financing transactions.
(j) Current Liabilities - The total of the Williams Consolidated
Entities' current liabilities, determined in accordance with GAAP,
excluding therefrom (i) trade and revenue payables arising from Vendor
Financings, and (ii) current maturities outstanding under the Notes.
(k) Debt Service - At the end of each fiscal quarter, the sum of (i)
the current portion of all notes payable as defined by GAAP (excluding
amounts outstanding on the Revolving Commitment), plus (ii) the average
Revolving Commitment during such quarter divided by twenty (20), plus
(iii) the sum of all amounts paid or payable by Borrower during such
fiscal quarter as a result of its election made pursuant to Section
9(b)(C) hereof.
(l) Effective Date - The date of this Agreement.
(m) Elected Borrowing Limit - The term "Elected Borrowing Limit" is
used herein as defined in Section 7(c) hereof.
(n) Engineered Value - The term "Engineered Value" is used herein as
defined in Section 12(p) hereof.
2
<PAGE>
(o) Environmental Laws - The Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Super Fund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601, et
seq., the Resource Conservation and Recovery Act, as amended by the
Hazardous Solid Waste Amendment of 1984, 42 U.S.C.A. Section 6901, et
seq., the Clean Air Act, 42 U.S.C.A. Section 1251, et seq., the Toxic
Substances Control Act, 15 U.S.C.A. Section 2601, et seq., and all other
laws relating to air pollution, water pollution, noise control and/or the
handling, discharge, disposal or recovery of on-site or off-site
hazardous substances or materials, as each of the foregoing may be
amended from time to time.
(p) Environmental Liability - Any claim, demand, obligation, cause
of action, accusation, allegation, order, violation, damage, injury,
judgment, penalty or fine, cost of enforcement, cost of remedial action or
any other costs or expense whatsoever, including reasonable attorneys'
fees and disbursements, resulting from the violation or alleged violation
of any Environmental Law or the imposition of any Environmental Lien (as
hereinafter defined) which would individually or in the aggregate have a
Material Adverse Effect.
(q) Environmental Lien - A Lien in favor of any court, governmental
agency or instrumentality or any other person (i) for any liability under
any Environmental Law or (ii) for damages arising from or cost incurred by
such court or governmental agency or instrumentality or other person in
response to a release or threatened release of hazardous or toxic waste,
substance or constituent into the environment.
(r) ERISA - The Employee Retirement Income Security Act of 1974, as
amended.
(s) Eurodollar Business Day - A Business Day on which dealings in
U.S. Dollar deposits are carried on in the London interbank market.
(t) Eurodollar Interest Period - With respect to any Eurodollar Loan
(i) initially, the period commencing on the date such Eurodollar Loan is
made and ending thirty (30), sixty (60), ninety (90), one hundred twenty
(120) or one hundred eighty (180) days thereafter as selected by the
Borrower pursuant to Section 4(a)(ii) and (ii) thereafter, each period
commencing on the day following the last day of the next preceding
Interest Period applicable to such Eurodollar Loan and ending thirty (30),
sixty (60), ninety (90), one hundred twenty (120) or one hundred eighty
(180) days thereafter, as selected by the Borrower pursuant to Section
4(a)(ii); provided, however, that (i) if any Eurodollar Interest Period
would otherwise expire on a day which is not a Eurodollar Business Day,
such Interest Period shall expire on the next succeeding Eurodollar
Business Day unless the result of such extension would be to extend such
Interest Period into the next calendar month, in which case such Interest
Period shall end on the immediately preceding Eurodollar Business Day,
(ii) if any Eurodollar Interest Period begins on the last Eurodollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the
3
<PAGE>
calendar month at the end of such Interest Period) such Interest Period
shall end on the last Eurodollar Business Day of a calendar month, and
(iii) any Eurodollar Interest Period which would otherwise expire after
the Maturity Date shall end on such Maturity Date.
(u) Eurodollar Loan - Any loan during any period which bears
interest at the Eurodollar Rate, or which would bear interest at such rate
if the Maximum Rate ceiling was not in effect at a particular time.
(v) Eurodollar Margin - The fluctuating Eurodollar Margin in effect
from day to day shall be:
(i) two and one-half percent (2.50%) per annum whenever the
Total Outstandings are greater than 75% of the Elected Borrowing
Limit in effect at the time in question;
(ii) two and one-quarter percent (2.25%) per annum whenever
the Total Outstandings are greater than 50%, but less than or equal
to 75%, of the Elected Borrowing Limit in effect at the time in
question;
(iii) two percent (2%) per annum whenever the Total
Outstandings are greater than 25%, but less than or equal to 50%, of
the Elected Borrowing Limit in effect at the time in question;
(iv) one and three-quarters percent (1.75%), whenever the
Total Outstandings are 25% or less of the Elected Borrowing Limit in
effect at the time in question.
(w) Eurodollar Rate - With respect to each Eurodollar Interest
Period, the rate of interest per annum at which deposits in immediately
available and freely transferable funds in U.S. Dollars are offered to the
Agent (at approximately 10:00 a.m., Dallas, Texas time three Eurodollar
Business Days prior to the first day of each Eurodollar Interest Period)
in the London interbank market for delivery on the first day of such
Eurodollar Interest Period in an amount equal to or comparable to the
principal amount of the Eurodollar Loan to which such Eurodollar Interest
Period relates. Each determination of the Eurodollar Rate by the Agent
shall, in the absence of error, be conclusive and binding.
(x) Event of Default - The term "Event of Default" is used herein as
defined in Section 14 hereof.
(y) Financial Statements - The Williams Consolidated Entities'
consolidated balance sheets, income statements and statements of cash flow
prepared in accordance with GAAP.
4
<PAGE>
(z) GAAP - Generally accepted accounting principles, consistently
applied.
(aa) Good and Defensible Title - Title held by the Borrower and
Guarantor that is free from defects as would cause a reasonable doubt in
the mind of a reasonable and prudent purchaser in the area where the
Collateral is situated and cause him if he were purchasing such Collateral
to refuse to accept such Collateral at its full agreed value. The title of
Borrower and Guarantor may be subject to drilling obligations in leases,
farmout agreements, operating agreements, covenants, restrictions, rights,
easements, liens, encumbrances and minor irregularities in title which
collectively do not interfere with the occupation, use and enjoyment of
such Collateral in the normal course of business as presently conducted or
contemplated to be conducted by Borrower and Guarantor or materially
impair the value thereof for such business.
(bb) Hedging Transactions - Any contract, agreement or transaction
for the hedging or forward sale of crude oil and/or natural gas including
but not limited to transactions involving swaps, caps, collars, floors and
futures transactions.
(cc) Interest Payment Date - The earlier of (i) the last day of each
Interest Period or (ii) the last day of each calendar quarter.
(dd) Interest Period - Any Prime Rate Interest Period, or Eurodollar
Interest Period.
(ee) Letters of Credit - The term "Letters of Credit" is used herein
as defined in Section 2(c) hereof.
(ff) Lien - Any mortgage, deed of trust, pledge, security interest,
assignment, encumbrance or lien (statutory or otherwise) of every kind and
character.
(gg) Loan Documents - This Agreement, the Note, the Security
Instruments and all other documents executed in connection with the
transaction described in this Agreement.
(hh) Majority Banks - Banks holding at least 100% ownership of the
Revolving Commitment which shall include the Agent.
(ii) Material Adverse Effect - Any Material Adverse Effect on the
assets or properties, liabilities, financial condition, business,
operations, affairs or circumstances of Borrower and Guarantor, taken as a
whole, from those reflected in the Financial Statements of Borrower and
Guarantor or from the facts represented or warranted in this Agreement or
any other Security Instrument.
(jj) Maturity Date - July 31, 2001.
5
<PAGE>
(kk) Maximum Rate - At the particular time in question, the maximum
rate of interest which, under applicable law, may then be charged. If such
maximum rate of interest changes after the date hereof, the Maximum Rate
shall be increased or decreased, as the case may be, without notice to
Borrower from time to time as of the effective date of each such change in
the Maximum Rate. If applicable law ceases to provide for such a maximum
rate of interest, the Maximum Rate shall be equal to eighteen percent
(18%) per annum.
(ll) Monthly Commitment Reduction - The term "Monthly Commitment
Reduction" is used herein as defined in Section 7(d) hereof.
(mm) Negative Pledge Property - All producing oil and gas properties
and interests, from time to time, of Borrower or Guarantor which are not
mortgaged or pledged to the Banks.
(nn) Net Income - The Williams Consolidated Entities' Net Income
determined in accordance with GAAP.
(oo) Notes - The Revolving Notes.
(pp) Notice of Borrowing - The term "Notice of Borrowing" is used
herein as defined in Section 2(d) hereof.
(qq) Oil and Gas Properties - All oil, gas and mineral properties
and interests, and related personal properties, in which Borrower or
Guarantor has granted and hereinafter grants (to the satisfaction of
Agent) to Banks a first and prior lien and security interest.
(rr) Permitted Liens - The term Permitted Lien shall mean (i)
royalties, overriding royalties, reversionary interests, production
payments and similar burdens granted by Borrower or Guarantor with respect
to the Oil and Gas Properties if the net cumulative effect of such burdens
does not operate to deprive Borrower or Guarantor of any material right in
respect of its assets or properties (except for rights customarily granted
with respect to such interests); (ii) statutory liens, including liens for
taxes or other assessments that are not yet delinquent (or that, if
delinquent, are being contested in good faith by appropriate proceedings
and for which Borrower or Guarantor has set aside on its books adequate
reserves in accordance with GAAP); (iii) easements, rights of way,
servitudes, permits, surface leases and other rights in respect to surface
operations, pipelines, grazing, logging, canals, ditches, reservoirs or
the like, conditions, covenants and other restrictions, and easements of
streets, alleys, highways, pipelines, telephone lines, power lines,
railways and other easements and rights of way on, over or in respect of
Borrower's or Guarantor's assets or properties; (iv) materialmen's,
mechanic's, repairman's, employee's, contractor's, sub-contractor's,
operator's and other Liens incidental to the construction, maintenance,
development or operation of Borrower's or Guarantor's assets or properties
to the extent not delinquent (or which, if delinquent, are being contested
in good faith by appropriate
6
<PAGE>
proceedings and for which Borrower or Guarantor has set aside on its books
adequate reserves in accordance with GAAP); (v) all contracts, agreements
and instruments, and all defects and irregularities and other matters
affecting Borrower's or Guarantor's assets and properties which were in
existence at the time Borrower's or Guarantor's assets and properties were
originally acquired by Borrower or Guarantor and all routine operational
agreements entered into in the ordinary course of business, which
contracts, agreements, instruments, defects, irregularities and other
matters and routine operational agreements are not such as to,
individually or in the aggregate, interfere materially with the operation,
value or use of Borrower's or Guarantor's assets and properties,
considered in the aggregate; (vi) liens in connection with workmen's
compensation, unemployment insurance or other social security, old age
pension or public liability obligations; (vii) legal or equitable
encumbrances deemed to exist by reason of the existence of any litigation
or other legal proceeding or arising out of a judgment or award with
respect to which an appeal is being prosecuted in good faith; (viii)
rights reserved to or vested in any municipality, governmental, statutory
or other public authority to control or regulate Borrower's or Guarantor's
assets and properties in any manner, and all applicable laws, rules and
orders from any governmental authority; (ix) landlords liens; (x) liens
created by or pursuant to this Agreement or the Security Instruments; (xi)
liens existing at the date of this Agreement which have been disclosed to
Banks in Borrower's or Guarantor's Financial Statements or identified on
Exhibit "C" hereto; (xii) liens arising from indebtedness incurred by
Borrower or Guarantor, which indebtedness is described in Section 13(b);
and (xiii) Liens securing the Subordinated Debt. Provided, however, that
the definition of the term "Permitted Liens" does not include liens of any
kind or character which are prior by perfection to the liens on the
Collateral held by the Banks, or which may, by operation of law, become
prior to such liens held by the Banks.
(ss) Person - An individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality
thereof.
(tt) Plan - Any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower is required to contribute on
behalf of its respective employees.
(uu) Prime Rate - The fluctuating rate of interest per annum
established from time to time by Bank One as its Prime Rate (which rate of
interest may not be the lowest, best or most favorable rate of interest
which Bank One may charge on loans to its customers). Each change in the
Prime Rate shall become effective without prior notice to Borrower
automatically as of the opening of business on the date of such change in
the Prime Rate.
(vv) Prime Rate Interest Period - With respect to any Advance on the
Revolving Loan which is a Prime Rate Loan, the period ending on the last
Business Day of each month; provided, however, that (A) if any Prime Rate
Interest Period would end on a day which is not a Business Day, such
Interest Period shall be extended to the next succeeding Business
7
<PAGE>
Day, and (B) if any Prime Rate Interest Period would otherwise end after
the Maturity Date such Interest Period shall end on the Maturity Date.
(ww) Prime Rate Loans - Any loan during any period which bears
interest at the Prime Rate or which would bear interest at the Prime Rate
if the Maximum Rate ceiling was not in effect at that particular time.
(xx) Prime Rate Margin - The fluctuating Prime Rate Margin in effect
from day to day shall be:
(i) three-eighths of one percent (3/8%) per annum whenever the
Total Outstandings are greater than 75% of the Elected Borrowing
Limit in effect at the time in question;
(ii) one-fourth of one percent (1/4%) per annum whenever the
Total Outstandings are greater than 50%, but less than or equal to
75%, of the Elected Borrowing Limit in effect at the time in
question;
(iii) one-eighth of one percent (1/8%) per annum whenever the
Total Outstandings are greater than 25%, but less than or equal to
50%, of the Elected Borrowing Limit in effect at the time in
question;
(iv) zero, whenever the Total Outstandings are 25% or less of
the Elected Borrowing Limit in effect at the time in question.
(yy) Release Price - The term "Release Price" is used herein as
defined in Section 13(e) hereof.
(zz) Revolving Commitment - Subject to the provisions of Section
2(a) hereof, as to all Banks, the lesser of (i) $100,000,000.00 or (ii)
the Elected Borrowing Limit, and as to each Bank its obligation to make a
Revolving Loan in the amount of the lesser of (i) its Commitment
Percentage times $100,000,000, or (ii) its Commitment Percentage times the
Elected Borrowing Limit.
(aaa) Revolving Loan - Loan or loans made under the Revolving
Commitment pursuant to Section 2(a) hereof.
(bbb) Revolving Notes - The $55,000,000 Renewal Revolving Note,
dated the Effective Date, payable to Bank One and the $45,000,000 Renewal
Revolving Note, dated the Effective Date, payable to Union.
(ccc) Security Instruments - The term Security Instruments is used
collectively herein to mean this Agreement, all Deeds of Trust, Mortgages,
Security Agreements and
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Assignments of Production and Financing Statements, and other collateral
documents covering certain of Borrower's and Guarantor's oil, gas and
mineral properties and interest, and related personal property, and all
amendments and supplements thereof, all pledge agreements covering stock
and notes, and other collateral documents covering other collateral, all
such documents to be in form and substance satisfactory to Agent.
(ddd) Subsidiaries - Warrior, Clajon Industrial Gas, Inc.,
Guarantor, Clayton Williams Venezuela, Inc., Clayton Williams Trading
Company, Clayton Williams Midland, Inc. and any other corporation or
entity of which voting securities or other ownership interests having
ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at any time owned directly
or indirectly by Borrower.
(eee) Tangible Net Worth - An amount equal to the total
shareholder's equity shown on the consolidated balance sheet of the
Williams Consolidated Entities, less all intangible assets including, but
not limited to, good will, all as determined in accordance with GAAP.
(fff) Total Outstandings - As of any date, the total principal
balance outstanding on the Notes plus the total face value of all
outstanding Letters of Credit.
(ggg) Unused Portion Fee - The term "Unused Portion Fee" is used
herein as defined in Section 8(a) hereof.
(hhh) Vendor Financings - Non-recourse vendor financings by CWE or
its Subsidiaries for services, equipment or materials on other than
customary trade payable terms.
(iii) Williams Consolidated Entities - CWE and its Subsidiaries
which are consolidated with it under GAAP.
2. Commitments of the Banks.
(a) Terms of Revolving Commitment. On the terms and conditions
hereinafter set forth, each Bank agrees severally to make Advances to
Borrower from time to time during the period beginning on the Effective
Date and ending on the Maturity Date in such amounts as Borrower may
request up to an amount not to exceed, in the aggregate principal amount
outstanding at any time, the Revolving Commitment. Provided, however, that
notwithstanding anything to the contrary contained herein, but subject to
the right of Borrower under Section 9(b) hereof, the Total Outstandings,
as of any date, shall never exceed the lesser of (i) $100,000,000.00, or
(ii) the Borrowing Base. The obligation of each Bank to make Advances
under the Revolving Commitment shall be limited to such Bank's Commitment
Percentage of such Advance. Notwithstanding any other provision of this
Agreement, no Advance shall be required to be made hereunder if any Event
of Default (as
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hereinafter defined) has occurred and is continuing or if any event or
condition has occurred that may, with notice, be an Event of Default.
Borrower shall have the option pursuant to Section 4 hereof to determine
whether Advances hereunder shall be made as Prime Rate Loans or Eurodollar
Loans; provided, however, that Borrower shall not have the option to elect
a Eurodollar Loan at any time when less than $5,000,000 in Prime Rate
Loans are outstanding. Each Advance made as a Prime Rate Loan shall be an
aggregate amount of at least $100,000 or a whole number multiple thereof.
Each Advance made as a Eurodollar Loan shall be in an aggregate amount of
at least $250,000, or in integral multiples thereof. No more than two (2)
Eurodollar tranches may be outstanding at any time.
(b) Letters of Credit. On the terms and conditions hereinafter set
forth, Agent shall from time to time during the period beginning on the
Effective Date and ending on the Maturity Date upon request of Borrower
issue Letters of Credit for the account of Borrower (the "Letters of
Credit") in such face amounts as Borrower may request, but not to exceed
in the aggregate face amount at any time outstanding the sum of Ten
Million Dollars ($10,000,000.00). The face amount of all Letters of Credit
issued and outstanding hereunder shall be considered as Advances on the
Revolving Commitment for Borrowing Base purposes and all payments made by
Agent (or by another issuing Bank) on such Letters of Credit shall be
considered as Advances under the Revolving Notes. The obligations of the
Agent or any other issuing Bank on such Letters of Credit shall be secured
by all of the Collateral. Each Letter of Credit issued for the account of
Borrower hereunder shall (i) be in favor of such beneficiaries as
specifically requested by Borrower, (ii) have an expiration date not
exceeding the earlier of (A) two (2) years from the date of their
issuance, or (B) the Maturity Date, and (iii) contain such other terms and
provisions as may be required by Agent or the issuing Bank. In the event
that at the Maturity Date there are outstanding Letters of Credit with
expiration dates beyond the Maturity Date, Borrower and Banks agree that
all Collateral pledged to secure the Notes and the other obligations of
Borrower hereunder and under the other documents executed in connection
herewith shall continue to secure the obligations of Borrower to Agent or
other issuing Bank on such outstanding Letters of Credit until such time
as either (a) all such Letters of Credit have expired by their terms or
(b) the Agent or other issuing Bank has received indemnification from a
party satisfactory to the Agent or the other issuing Bank, as the case may
be, as to Borrower's obligations under any such outstanding Letters of
Credit. Each Bank (other than the Agent) agrees that, upon issuance of any
Letter of Credit hereunder, it shall automatically acquire a participation
in the Agent's liability under such Letter of Credit in an amount equal to
such Bank's Commitment Percentage of such liability, and each Bank (other
than the Agent) thereby shall absolutely, unconditionally and irrevocably
assume, as primary obligor and not as surety, and shall be unconditionally
obligated to the Agent to pay and discharge when due, its Commitment
Percentage of the Agent's liability under such Letter of Credit. Upon
delivery by such Bank of funds to pay and discharge such liability, such
Bank shall be treated as having purchased a participating interest in an
amount equal to the amount of such funds delivered to the Agent by such
Bank in the obligation of Borrower to reimburse Agent, as the issuer of
such Letter of Credit, for any amounts payable, paid, or incurred by
Agent, as
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the issuer of such Letter of Credit, with respect to such Letter of
Credit. Each such payment by such Bank shall be considered an Advance
under its Note and shall bear interest at the rates specified in Section 4
hereof. The Borrower hereby conditionally agrees to pay and reimburse the
Agent for its own account and for the account of each Bank providing funds
for the purchase of a participation in such Letter of Credit for the
amount of each demand for payment under any Letter of Credit that is in
substantial compliance with the provisions of any such Letter of Credit at
or prior to the date on which payment is made by the Agent to the
beneficiary thereunder, without presentment, demand, protest or other
formalities of any kind. Upon receipt from any beneficiary of any Letter
of Credit of any demand for payment under such Letter of Credit, the Agent
shall promptly notify the Borrower of the demand and the date upon which
such payment is to be made by the Agent to such beneficiary in respect of
such demand. Forthwith upon receipt of such notice from the Agent,
Borrower shall advise Agent whether or not it intends to borrow hereunder
to finance its obligations to reimburse the Agent, and if so, submit a
Notice of Borrowing as provided in Section 2(c) hereof.
(c) Procedure for Advances on the Revolving Loan. Whenever Borrower
desires an Advance on the Revolving Loan, they shall give Agent
telegraphic, telex, facsimile or telephonic notice ("Notice of Borrowing")
of such requested Advance, which in the case of telephonic notice, shall
be promptly confirmed in writing. Each Notice of Borrowing shall be in the
form of Exhibit "A" attached hereto and shall be received by Agent not
later than 11:00 a.m. Dallas, Texas time, (i) one Business Day prior to
the Borrowing Date in the case of Prime Rate Loans; and (ii) three (3)
Eurodollar Business Days prior to any proposed Borrowing Date in the case
of Eurodollar Loans. Each Notice of Borrowing shall specify (i) the
Borrowing Date (which, if a Prime Rate Loan shall be a Business Day, and
if a Eurodollar Loan, a Eurodollar Business Day), (ii) the principal
amount to be borrowed, (iii) the portion of the borrowing constituting
Prime Rate Loans and/or Eurodollar Loans, (iv) if any portion of the
proposed borrowing is to constitute Eurodollar Loans, the initial Interest
Period selected by Borrower pursuant to Section 4 hereof to be applicable
thereto, and (v) the date upon which disbursement is required. Upon
receipt of such notice, Agent shall advise each Bank thereof. Not later
than 1:00 p.m., Dallas, Texas time, on the date upon which the Advance is
to be made, each Bank shall provide Agent at its office at 1717 Main
Street, Dallas, Texas 75201, in immediately available funds, its pro rata
share of the requested Advance. Not later than 2:00 p.m., Dallas, Texas
time, on the date for which the Advance was requested, Agent shall make
available to Borrower at the same office, in like funds, the aggregate
amount of such requested Advance. Neither Agent nor any Bank shall incur
any liability to Borrower in acting upon any notice referred to above
which Agent or such Bank believes in good faith to have been given by a
duly authorized officer or other person authorized to borrow on behalf of
Borrower or for otherwise acting in good faith under this Section 2(c).
Upon funding of Advances by Banks in accordance with this Agreement
pursuant to any such notice, Borrower shall have effected Advances
hereunder.
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(d) Procedure for Obtaining Letters of Credit. The amount and date
of issuance, renewal, extension or reissuance of a Letter of Credit
pursuant to the Banks' commitment above in Section 2(b) shall be
designated by Borrower's written request delivered to Agent at least three
(3) Business Days prior to the date of such issuance, renewal, extension
or reissuance. Concurrently with or promptly following the delivery of the
request for a Letter of Credit, Borrower shall execute and deliver to the
Agent an application and agreement with respect to the Letters of Credit
on the customary forms of the Agent pertaining to such Letters of Credit.
The Agent shall not be obligated to issue, renew, extend or reissue such
Letters of Credit if (A) the amount thereon when added to the amount of
the outstanding Letters of Credit exceed Ten Million Dollars
($10,000,000.00) or (B) the amount thereof when added to the amount of all
outstanding Letters of Credit and all amounts outstanding under the Notes
would exceed the Revolving Commitment. Borrower agrees to pay the Agent
for the benefit of the Banks commissions for issuing the Letters of Credit
(calculated separately for each Letter of Credit) at the rate of the
greater of (i) 1-1/2% per annum on the maximum face amount of the Letter
of Credit or (ii) $400.00. Such commission shall be payable prior to the
issuance of the Letter of Credit and thereafter on each anniversary date
of such issuance while such Letter of Credit is outstanding.
(e) Several Obligations. The obligations of the Banks under the
Revolving Commitment are several and not joint. The failure of any Bank to
make an Advance required to be made by it shall not relieve any other Bank
of its obligation to make its Advance, and no Bank shall be responsible
for the failure of any other Bank to make the Advance to be made by such
other Bank. No Bank shall ever be required to lend hereunder any amount in
excess of its legal lending limit.
3. Notes Evidencing Loans. The loans described above in Section 2 shall be
evidenced by promissory notes of Borrower as follows:
(a) Form of Revolving Notes. The Revolving Loan shall be evidenced
by two Revolving Notes in the total amount of $100,000,000, one in the
amount of $55,000,000 payable to Bank One and one in the amount of
$45,000,000 payable to Union, each in the form of the Note attached hereto
as Exhibit "B" with appropriate insertions. Notwithstanding the principal
amount of the Revolving Notes, as stated on the face thereof, the actual
principal amount due from Borrower to Banks on account of the Revolving
Notes, as of any date of computation, shall be the sum of Advances then
and theretofore made on account thereof, less all principal payments
actually received by Banks in collected funds with respect thereto.
Interest in respect thereof shall be payable only for the period during
which the Revolving Loan evidenced thereby is outstanding and, although
the stated amount of the Revolving Notes may be higher, the Revolving
Notes shall be enforceable, with respect to Borrower's obligation to pay
the principal amount thereof, only to the extent of the unpaid principal
amount of the Revolving Loan.
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(b) Interest Rates - The unpaid principal balance of the Revolving
Notes shall bear interest from time to time at a rate of interest
determined from time to time depending on the option or options selected
by Borrower pursuant to Section 4(a) hereof.
(c) Payment of Interest - Interest on the Notes shall be payable as
specified in Section 4 hereof.
(d) Payment of Principal - The entire unpaid principal balance of
the Revolving Notes shall be due and payable on the Maturity Date.
(e) Issuance of Additional Notes - At the Effective Date there shall
be outstanding two Revolving Notes, one in the face amount of $55,000,000,
payable to the order of Bank One and one in the face amount of
$45,000,000, payable to the order of Union. From time to time during the
period from the Effective Date to the Maturity Date, additional Notes may
be issued to the Banks and other Banks as such other Banks become parties
to this Agreement. The face amount of each such new Revolving Note shall
be in an amount equal to the Commitment Percentage of such Bank times
$100,000,000. The aggregate face amount of all such Revolving Notes issued
and outstanding as of any date shall never exceed $100,000,000. Upon
request from Agent, the Borrowers shall execute and deliver to Agent any
such new or additional Notes. From time to time as new Notes are issued
the Agent shall require that each Bank exchange their Notes for newly
issued Notes to better reflect the extent of each Bank's commitment
hereunder.
4. Interest Rates.
(a) Options.
(i) Prime Rate Loans. On Prime Rate Loans the Borrower
agrees to pay interest on the Notes calculated on the basis of
the actual days elapsed in a year consisting of 365 or, if
appropriate, 366 days with respect to the unpaid principal
amount of each Prime Rate Loan from the date the proceeds
thereof are made available to Borrower until maturity (whether
by acceleration or otherwise), at a varying rate per annum
equal to the lesser of (i) the Maximum Rate (defined herein),
or (ii) the sum of the Prime Rate plus the Prime Rate Margin.
Subject to the provisions of this Agreement as to prepayment,
the principal of the Notes representing Prime Rate Loans shall
be payable as specified in Section 3(d) hereof, the interest
in respect of each Prime Rate Loan shall be payable on each
Interest Payment Date. Past due principal and, to the extent
permitted by law, past due interest in respect to each Prime
Rate Loan, shall bear interest, payable on demand, at a rate
per annum equal to the Maximum Rate.
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(ii) Eurodollar Loans. On Eurodollar Loans the Borrower
agrees to pay interest calculated on the basis of a year
consisting of 360 days with respect to the unpaid principal
amount of each Eurodollar Loan from the date the proceeds
thereof are made available to Borrower until maturity (whether
by acceleration or otherwise), at a varying rate per annum
equal to the lesser of (i) the Maximum Rate, or (ii) sum of
the Eurodollar Rate plus the Eurodollar Margin. Interest with
respect to each Eurodollar Loan shall be payable on each
Interest Payment Date. Upon three (3) Eurodollar Business
Days' written notice prior to the making by the Banks of any
Eurodollar Loan (in the case of the initial Interest Period
therefor) or the expiration date of each succeeding Interest
Period (in the case of subsequent Interest Periods therefor),
Borrower shall have the option, subject to compliance by
Borrower with all of the provisions of this Agreement, as long
as no Event of Default exists, to specify whether the Interest
Period commencing on any such date shall be a 30, 60, 90, 120
or 180 day period. If Agent shall not have received timely
notice of a designation of such Interest Period as herein
provided, Borrower shall be deemed to have elected to convert
all maturing Eurodollar Loans to Prime Rate Loans.
(b) Interest Rate Determination. The Agent shall determine each
interest rate applicable to the Revolving Loan hereunder. The Agent shall
give prompt notice to the Borrower of each rate of interest so determined
and its determination thereof shall be conclusive absent error.
(c) Conversion Option. Borrower may elect from time to time (i) to
convert all of any part of its Eurodollar Loans to Prime Rate Loans by
giving Agent irrevocable notice of such election in writing prior to 10:00
a.m. (Dallas, Texas time) on the conversion date and such conversion shall
be made on the requested conversion date, provided that any such
conversion of Eurodollar Loan shall only be made on the last day of the
Eurodollar Interest Period with respect thereof, (ii) to convert all or
any part of its Prime Rate Loans to Eurodollar Loans by giving the Agent
irrevocable written notice of such election three (3) Eurodollar Business
Days prior to the proposed conversion and such conversion shall be made on
the requested conversion date or, if such requested conversion date is not
a Eurodollar Business Day or a Business Day, as the case may be, on the
next succeeding Eurodollar Business Day or Business Day, as the case may
be. Any such conversion shall not be deemed to be a prepayment of any of
the loans for purposes of this Agreement on either of the Notes.
(d) Recoupment. If at any time the applicable rate of interest
selected pursuant to Sections 4(a)(i) or 4(a)(ii) above shall exceed the
Maximum Rate, thereby causing the interest on the Notes to be limited to
the Maximum Rate, then any subsequent reduction in
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the interest rate so selected or subsequently selected shall not reduce
the rate of interest on the Notes below the Maximum Rate until the total
amount of interest accrued on the Notes equals the amount of interest
which would have accrued on the Notes if the rate or rates selected
pursuant to Sections 4(a)(i) or 4(a)(ii), as the case may be, had at all
times been in effect.
5. Special Provisions Relating to Eurodollar Loans.
(a) Unavailability of Funds or Inadequacy of Pricing. In the event
that, in connection with any proposed Eurodollar Loan, Agent (i) shall
have determined that U.S. Dollar deposits of the relevant amount and for
the relevant Eurodollar Interest Period for Eurodollar Loans are not
available to Agent in the London interbank market; or (ii) in good faith
determines that the Eurodollar Interest Rate will not adequately reflect
the cost to the Banks of maintaining or funding the Eurodollar Loans for
such Interest Period, the obligations of the Banks to make the Eurodollar
Loans, as the case may be, shall be suspended until such time as Agent in
its sole discretion reasonably exercised determines that the event
resulting in such suspension has ceased to exist. If Agent shall make such
determination it shall promptly notify Borrower in writing and Borrower
shall either repay the outstanding Eurodollar Loans, as the case may be,
owed to Banks, without penalty, on the last day of the current Interest
Period or convert the same to Prime Rate Loans in the case of Eurodollar
Loans on the last day of the then current Interest Period for such
Eurodollar Loan.
(b) Reserve Requirements. In the event of any change in any
applicable law, treaty or regulation or in the interpretation or
administration thereof, or in the event any central bank or other fiscal
monetary or other authority having jurisdiction over the Banks or the
loans contemplated by this Agreement shall impose, modify or deem
applicable any reserve requirement of the Board of Governors of the
Federal Reserve System on any Eurodollar Loan or loans, or any other
reserve, special deposit, or some requirements against assets to, deposits
with or for the account of, or credit extended by, the Banks or shall
impose on the Banks or the London interbank market, as the case may be,
any other condition affecting this Agreement or the Eurodollar Loans and
the result of any of the foregoing is to increase the cost to the Banks in
making or maintaining its Eurodollar Loans or to reduce any amount (or the
effective return on any amount) received by the Banks hereunder, then
Borrower shall pay to the Banks upon demand of the Banks as additional
interest on the Revolving Notes evidencing the Eurodollar Loans such
additional amount or amounts as will reimburse the Banks for such
additional cost or such reduction. The Banks shall give notice to Borrower
upon becoming aware of any such change or imposition which may result in
any such increase or reduction. A certificate of any Bank setting forth
the basis for the determination of such amount necessary to compensate
Banks as aforesaid shall be delivered to Borrower and shall be conclusive
as to such determination and such amount, absent error.
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(c) Taxes. Both principal and interest on the Revolving Notes
evidencing the Eurodollar Loans are payable without withholding or
deduction for or on account of any taxes. If any taxes are levied or
imposed on or with respect to the Revolving Notes evidencing the
Eurodollar Loans or on any payment on the Revolving Notes evidencing the
Eurodollar Loans made to the Banks, then, and in any such event, Borrower
shall pay to the Banks upon demand of the Banks such additional amounts as
may be necessary so that every net payment of principal and interest on
the Revolving Notes evidencing the Eurodollar Loans, after withholding or
deduction for or on account of any such taxes, will not be less than any
amount provided for herein. In addition, if at any time when the
Eurodollar Loans are outstanding any laws enacted or promulgated, or any
court of law or governmental agency interprets or administers any law,
which, in any such case, materially changes the basis of taxation of
payments to the Banks of principal of or interest on the Revolving Notes
evidencing the Eurodollar Loans by reason of subjecting such payments to
double taxation or otherwise (except through an increase in the rate of
tax on the overall net income of Banks) then Borrower will pay the amount
of loss to the extent that such loss is caused by such a change. The Banks
shall give notice to Borrower upon becoming aware of the amount of any
loss incurred by the Banks through enactment or promulgation of any such
lawwhich materially changes the basis of taxation of payments to the
Banks. The Banks shall also give notice on becoming aware of any such
enactment or promulgation which may result in such payments becoming
subject to double taxation or otherwise. A certificate of any Bank setting
forth the basis for the determination of such loss and the computation of
such amounts shall be delivered to Borrower and shall be conclusive of
such determination and such amount, absent error.
(d) Change in Laws. If at any time any new law or any change in
existing laws or in the interpretation of any new or existing laws shall
make it unlawful for the Banks to maintain or fund its Eurodollar Loans
hereunder, then the Banks shall promptly notify Borrower in writing and
Borrower shall either repay the outstanding Eurodollar Loans owed to the
Banks, without penalty, on the last day of the current Interest Periods
(or, if the Banks may not lawfully continue to maintain and fund such
Eurodollar Loans, immediately), or Borrower may convert such Eurodollar
Loans at such appropriate time to Prime Rate Loans.
(e) Option to Fund. The Banks shall have the option if the Borrower
elects a Eurodollar Loan, to purchase one or more deposits in order to
fund or maintain its funding of the principal balance of the Revolving
Notes to which such Eurodollar Loan is applicable during the Interest
Period in question; it being understood that the provisions of this
Agreement relating to such funding are included only for the purpose of
determining the rate of interest to be paid under such Eurodollar Loan and
any amounts owing hereunder and under the Revolving Notes. The Banks shall
be entitled to fund and maintain its funding of all or any part of that
portion of the principal balance of the Revolving Notes in any manner it
sees fit, but all such determinations hereunder shall be made as if the
Banks have actually funded and maintained that portion of the principal
balance of the Revolving Notes to which a Eurodollar Loan is applicable
during the applicable Interest Period through the purchase
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<PAGE>
of deposits in an amount equal to the principal balance of the Revolving
Notes to which such Eurodollar Loan is applicable and having a maturity
corresponding to such Interest Period. The Banks may fund the outstanding
principal balance of the Revolving Notes which is to be subject to any
Eurodollar Loan from any branch or office of the Banks as the Banks may
designate from time to time.
(f) Indemnity. Borrower shall indemnify and hold harmless the Banks
against all reasonable and necessary out-of-pocket costs and expenses
(which costs and expenses are not intended to include, without limitation,
any loss sustained by the Banks in connection with the borrowing or
reemployment of funds with respect to any Eurodollar Loan) which the Banks
may sustain (i) as a result of the making of any loan or loans as a
Eurodollar Loan, or (ii) as a consequence of any default by Borrower under
this Agreement.
6. Collateral Security. To secure the performance by Borrower of its
obligations hereunder, and under the Notes and Security Instruments, whether now
or hereafter incurred, matured or unmatured, direct or contingent, joint or
several, or joint and several, including extensions, modification and renewals
thereof, and substitutions therefore, Borrower has heretofore granted and
assigned to the Agent, for the ratable benefit of the Banks, and shall herewith
and hereafter grant and assign to Agent, for the ratable benefit of the Banks, a
first and prior security interest and lien on the Oil and Gas Properties, the
stock of certain of the Subsidiaries, and the other collateral. Guarantor has
heretofore executed and delivered its guaranty agreement guaranteeing the prompt
payment and performance of Borrower's obligations hereunder and under the Notes.
As security for the performance of its guaranty agreement, Guarantor has
heretofore granted to Agent, for the ratable benefit of the Banks, and shall
herewith and hereafter grant and assign to Agent, for the ratable benefit of
Banks, a first and prior lien on its Oil and Gas Properties. Guarantor shall
execute this Agreement to confirm its consent to (i) the execution of the
Agreement by Borrower, and (ii) the amendments contained therein. All Oil and
Gas Properties, oil and gas related equipment, inventory and receivables, stock,
notes and other collateral in which Borrower or Guarantor has heretofore or
hereafter grants to the Agent, for the ratable benefit of the Banks, a first and
prior lien (to the satisfaction of the Banks) in accordance with this Section 6,
as such properties and interests are from time to time constituted, are
hereinafter collectively called the "Collateral."
The granting and assigning of such security interests and liens by
Borrower shall be pursuant to Security Instruments in form and substance
satisfactory to the Agent. Borrower and Guarantor shall furnish to the Agent the
mortgage and title opinions and other documents satisfactory to Agent with
respect to the title and lien status of its interests in such of the Oil and Gas
Properties covered by the Security Instruments as required in Section 12(n) and
(o) hereof. Borrower and Guarantor will cause to be executed and delivered to
the Agent, for the ratable benefit of the Banks, in the future, additional
Security Instruments if the Agent deems such are necessary to insure perfection
or maintenance of their security interests and liens in the Collateral or any
part thereof.
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7. Borrowing Base.
(a) Initial Borrowing Base. During the period from the date hereof
to the next determination date, the Borrowing Base shall be
$48,000,000.00.
(b) Subsequent Determinations of Borrowing Base.Subsequent
determinations of the Borrowing Base shall be made by Banks at least
semi-annually and the Banks may make a redetermination at any time and
shall make a redetermination if and when requested by Borrower. In
connection with each such determination of the Borrowing Base, the Banks
shall also determine the Monthly Commitment Reduction. Such Borrowing Base
and Monthly Commitment Reduction determinations shall be made on or before
each November 20 and May 20, commencing May 20, 2000, the same to be
effective as of each November 1 and May 1, commencing May 1, 2000, and at
such other dates as determined at the discretion of Majority Banks.
Borrower may likewise request more frequent Borrowing Base
redeterminations and Banks shall make the same if and when requested. In
making such determinations, Banks may utilize such reports and appraisals
as Borrower may furnish to Banks through Agent under other provisions
hereof with respect to the Collateral, including the information required
pursuant to Section 12(a)(iii), (iv), (v) and (vi), together with such
other data as Banks may deem appropriate under the then circumstance,
including, without limitation, cash flow and projections of cash flow,
provided that nothing herein shall be construed to require that Banks or
Agent shall or should obtain and pay for any reports, appraisals or other
data from third parties in connection therewith. Such determinations shall
be made by Banks in accordance with their respective customary practices
and standards for loans in similar amounts to borrowers similarly
situated, at the times and under the circumstances then prevailing which
are considered by each Bank in its discretion, subject only to the
requirement that such determination shall be reasonable and made in good
faith. If the Banks cannot otherwise agree on the Borrowing Base or
Monthly Commitment Reduction, each Bank will submit in writing to the
Agent its proposed Borrowing Base and Monthly Commitment Reduction and the
Borrowing Base and Monthly Commitment Reduction shall be set on the basis
of the lowest Borrowing Base and highest Monthly Commitment Reduction
proposed by any Bank. If at any time any of the Collateral is sold, the
Borrowing Base then in effect shall automatically be reduced by a sum
equal to the amount of prepayment required to be made pursuant to Section
13(e) hereof. If a non-scheduled Borrowing Base redetermination is made,
such non-scheduled redetermined Borrowing Base shall become effective
immediately upon Agent giving notice thereof to the Borrower. Provided,
however, that no Bank shall ever have an obligation to designate a
Borrowing Base in an amount such that such Bank's Commitment Percentage
thereof is in excess of its legal or internal lending limits.
(c) Voluntary Decreases in Borrowing Base. Within ten (10) Business
Days after notification to Borrower of a Borrowing Base redetermination
pursuant to the provisions of this Section 7, Borrower may notify Agent as
to what portion of the Borrowing Base they desire access (the "Elected
Borrowing Limit"). Thereafter, Borrower may obtain Revolving
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Loans which do not exceed the lesser of (i) $100,000,000, or (ii) the
Elected Borrowing Limit until the next Borrowing Base redetermination,
subject to the provisions of Section 9(b) hereof. If no such notification
is received by Agent, the Elected Borrowing Limit shall be the lesser of
$100,000,000 or the Borrowing Base as so determined.
(d) Monthly Commitment Reduction. The Borrowing Base shall be
reduced as of the last day of each month after the Effective Date by an
amount determined by the Banks pursuant to Section 7(b) hereof (the
"Monthly Commitment Reduction"). Beginning November 30, 1999, the Monthly
Commitment Reduction shall be $0 per month until redetermined pursuant to
Section 7(b) hereof.
8. Fees.
(a) Unused Portion Fee. In consideration of the Revolving
Commitment, Borrower shall pay to Agent, for the ratable benefit of Banks,
an Unused Portion Fee (hereinafter referred to as the "Unused Portion
Fee") equivalent to one-quarter of one percent (1/4%) per annum of the
differential between the average Elected Borrowing Limit and the Total
Outstandings for the preceding three months. The Unused Portion Fee shall
be payable in arrears on the last Business Day of each January, April,
July and October, commencing on January 31, 2000. All amounts due under
Section 8(a) of the Sixth Restated Loan Agreement as of the Effective Date
as Unused Portion Fees shall be paid to Agent on the Effective Date. The
final fee payment shall be due on the Maturity Date for any period then
ending for which the Unused Portion Fee shall not have been theretofore
paid. In the event the Revolving Commitment terminates on any date prior
to the end of any such quarterly period, Borrower shall pay to Banks, on
the date of such termination, the prorated portion of the total Unused
Portion Fee due for such of the period in which such termination occurs.
(b) Borrowing Base Increase Fee. Borrower agrees to pay to Agent,
for the ratable benefit of Banks, a Borrowing Base Increase Fee
(hereinafter referred to as the "Borrowing Base Increase Fee") equal to
one-half of one percent (.50%) of the amount of any increase in the
Elected Borrowing Limit from the amount of the Elected Borrowing Limit as
of the preceding determination date, said fee to payable upon notice to
Borrower of such increase.
(c) Letter of Credit Fee. Borrower agrees to pay to Agent, for the
benefit of the issuing Banks, commissions for issuing Letters of Credit in
the amounts and at the rates set forth hereinabove in Section 2(d).
(d) Agency Fee. Borrower agrees to pay to Agent an Agency Fee for
its services as Agent hereunder in an amount negotiated between Borrower
and Agent.
9. Prepayments.
(a) Voluntary Prepayments. Borrower may at any time and from time to
time, without penalty or premium, make voluntary prepayments in whole or
in part on the Notes.
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Each such prepayment shall be made on at least one (1) Business Day's
notice to Agent and shall be in an amount of $100,000 or any larger
multiple thereof plus accrued interest thereon to the date of prepayment.
(b) Mandatory Prepayment. In the event the Total Outstandings ever
exceed the Borrowing Base as determined by the Banks pursuant to Section 7
hereof (a "Borrowing Base Deficiency"), Borrower shall, within thirty (30)
days after notification from Agent either (A) by instruments satisfactory
in form and substance to Banks, provide the Banks with additional
collateral with value and quality satisfactory to Banks in their sole
discretion in order to increase the Borrowing Base by an amount at least
equal to such excess, or (B) prepay, without premium or penalty, the
principal amount of the Notes in an amount at least equal to such excess,
or (C) prepay, without premium or penalty, the amount of such excess in
five (5) equal monthly installments due and payable on the last Business
Day of each of the next five (5) consecutive months, or (D) elect to
convert the entire principal amount of the Notes to a term obligation with
monthly installments of principal and interest due and payable on the last
Business Day of each month from the date of such conversion to the
Maturity Date, each such installment payment to be in the amount of
accrued interest plus an amount of principal equal to the greater of (i)
1/36th of the outstanding balance on the date of conversion or (ii) an
amount determined by dividing the principal amount outstanding on the date
of the conversion by the estimated economic half-life of the Oil and Gas
Properties expressed in terms of months, as determined by the Agent in its
sole and absolute discretion reasonably exercised. Notwithstanding any of
the foregoing, all unpaid principal and interest shall be due and payable
on the Maturity Date. Provided, however, that in the event the Borrower
elects option (C) above, the Borrowing Base Deficiency must be cured at
the end of the installment period specified above or the entire
outstanding principal balance due on the Notes shall immediately convert
to a term loan payable in accordance with the payment provisions set forth
in subsection (D) above. Provided, further, however, that during the five
(5) month prepayment period specified in subsection (C) above, Borrower
may elect at any time to convert to a term loan pursuant to subsection (D)
above. The determination of whether Borrower has cured any such Borrowing
Base Deficiency at the end of the installment period specified in (C)
above, shall be made by the Banks in their sole and absolute discretion
based upon an unscheduled Borrowing Base redetermination made pursuant to
Section 7(b) of this Agreement.
10. Representations and Warranties. In order to induce the Banks to enter
into this Agreement, Borrower hereby represents and warrants to the Banks (which
representations and warranties will survive the delivery of the Notes) that:
(a) Creation and Existence. Borrower and Guarantor are corporations
duly organized and validly existing in good standing under the laws of
their state of incorporation and are duly qualified as a foreign
corporation in all jurisdictions wherein failure to qualify may result in
a Material Adverse Effect. Borrower and Guarantor have all the power and
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authority to own their properties and assets and to transact the business
in which they are engaged.
(b) Power and Authorization. Borrower and Guarantor have the power
and requisite authority, and has taken all action necessary, to execute,
deliver and perform the Loan Documents.
(c) Binding Obligations. This Agreement does, and the Notes and
other Security Instruments upon their creation, issuance, execution and
delivery will, constitute valid and binding obligations of Borrower and
Guarantor, enforceable in accordance with their respective terms (except
that enforcement may be subject to any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws generally affecting the
enforcement of creditors' rights and subject to availability of equitable
remedies).
(d) No Legal Bar or Resultant Lien. The Notes and the Security
Instruments, including this Agreement, do not and will not conflict with
or violate any provisions of the articles of incorporation or bylaws of
Borrower or Guarantor or, except as disclosed to Banks prior to the
Effective Date hereof, any contract, agreement, law, regulation, order,
injunction, judgment, decree or writ to which Borrower or Guarantor is
subject, or result in the creation or imposition of any lien or other
encumbrance upon any assets or properties of Borrower or Guarantor, other
than those contemplated by this Agreement which conflict, violation,
creation or imposition is reasonably expected to have a Material Adverse
Effect.
(e) No Consent. The execution, delivery and performance by Borrower
or Guarantor of the Notes and the Security Instruments, including this
Agreement, does not require the consent or approval of any other person or
entity, including without limitation any regulatory authority or
governmental body of the United States or any state thereof or any
political subdivision of the United States or any state thereof.
(f) Financial Condition. The Financial Statements of the Williams
Consolidated Entities which have been delivered to Banks are complete and
correct in all material respects and fairly present in all material
respects the financial condition and results of the operations of the
Williams Consolidated Entities as of the date or dates and for the period
or periods stated. No change has since occurred in the condition,
financial or otherwise, of the Williams Consolidated Entities which is
reasonably expected to have a Material Adverse Effect, except as disclosed
to the Banks in Exhibit "C" attached hereto. The Financial Statements
which have been delivered to Banks have been prepared substantially in
accordance with GAAP.
(g) Liabilities. Neither Borrower nor Guarantor has any material
(individually or in the aggregate) liability, direct or contingent, except
as disclosed to the Banks in the Financial Statements or in Exhibit "D"
attached hereto. No unusual or unduly burdensome restrictions, restraint,
or hazard exists by contract, law or governmental regulation or
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otherwise relative to the business, assets or properties of Borrower or
Guarantor which is reasonably expected to have a Material Adverse Effect.
(h) Litigation. Except as described in the Financial Statements or
as otherwise disclosed to the Banks in Exhibit "E" attached hereto, there
is no litigation, legal or administrative proceeding, investigation or
other action of any nature pending or, to the knowledge of the officers of
Borrower, threatened against or affecting Borrower or Guarantor which
involves the possibility of any judgment or liability not fully covered by
insurance, and which is reasonably expected to have a Material Adverse
Effect.
(i) Taxes; Governmental Charges. Borrower and Guarantor have filed
all tax returns and reports required to be filed and has paid all taxes,
assessments, fees and other governmental charges levied upon it or its
assets, properties or income which are due and payable, including interest
and penalties, or has provided adequate reserves, if required, in
accordance with GAAP for the payment thereof, except such as are being
contested in good faith by appropriate proceedings and for which adequate
reserves for the payment thereof as required by GAAP have been provided.
(j) Titles, Etc. Borrower and Guarantor have Good and Defensible
title to all of the Collateral pledged or mortgaged by them except for
defects which are not reasonably expected to have a Material Adverse
Effect, free and clear of all liens or other encumbrances, except
Permitted Liens; and Borrower and Guarantor, to the best of their
knowledge after the exercise of such due diligence as a reasonable person
would have done under the same or similar circumstances, have Good and
Defensible Title to their other assets and properties (except for (i)
undeveloped oil and gas properties, and (ii) defects which are not
reasonably expected to have a Material Adverse Effect), free and clear of
all liens or other encumbrances, except Permitted Liens.
(k) Defaults. Neither Borrower nor Guarantor is in default and no
event or circumstance has occurred which, but for the passage of time or
the giving of notice, or both, would constitute a default under any loan
or credit agreement, indenture, mortgage, deed of trust, security
agreement or other agreement or instrument to which Borrower or Guarantor
is a party in any respect that would be reasonably expected to have a
Material Adverse Effect. No Event of Default hereunder has occurred and is
continuing.
(l) Casualties; Taking of Properties. Since the dates of the latest
Financial Statements delivered to Banks, neither the business nor the
assets or properties of Borrower or Guarantor have been affected as a
result of any fire, explosion, earthquake, flood, drought, windstorm,
accident, strike or other labor disturbance, embargo, requisition or
taking of property or cancellation of contracts, permits or concessions by
any domestic or foreign government or any agency thereof, riot, activities
of armed forces or acts of God or of any public enemy that would
reasonably be expected to have a Material Adverse Effect.
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(m) Use of Proceeds; Margin Stock. The proceeds of the loans
hereunder will be used by Borrower for working capital, acquisition,
letters of credit and general corporate purposes. Borrower is not engaged
in the business of extending credit for the purpose of purchasing or
carrying any "margin stock" as defined in Regulation U of the Board of
Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the
purpose of reducing or retiring any indebtedness which was originally
incurred to purchase or carry a margin stock or for any other purpose
which might constitute this transaction a "purpose credit" within the
meaning of said Regulation U. Borrower is not engaged principally, or as
one of its important activities, in the business of extending credit for
the purpose of purchasing or carrying margin stock.
Neither Borrower nor any person or entity acting on behalf of
Borrower has taken or will take any action which might cause the loans
hereunder or any of the Security Instruments, including this Agreement, to
violate Regulation U or any other regulation of the Board of Governors of
the Federal Reserve System or to violate the Securities Exchange Act of
1934 or any rule or regulation thereunder, in each case as now in effect
or as the same may hereafter be in effect.
(n) Location of Business and Offices. The principal place of
business and chief executive offices of Borrower is located at the address
stated in Section 16 hereof.
(o) Compliance with the Law. To the best of Borrower's and
Guarantor's knowledge, they:
(i) are not in violation of any law, judgment, decree, order,
ordinance, or governmental rule or regulation to which Borrower or
Guarantor, or any of their assets or properties are subject; or
(ii) have not failed to obtain any license, permit, franchise
or other governmental authorization necessary to the ownership of
any of its assets or properties or the conduct of their business;
which violation or failure is reasonably expected to have a Material
Adverse Effect.
(p) No Material Misstatements. No information, exhibit or report
furnished by Borrower or Guarantor to the Banks in connection with the
negotiation of this Agreement contained any material misstatement of fact
or omitted to state a material fact necessary to make the statement
contained therein not misleading.
(q) ERISA. Borrower is in compliance in all material respects with
the applicable provisions of ERISA, and no "reportable event", as such
term is defined in Section 4043 of ERISA, has occurred with respect to any
Plan of Borrower.
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(r) Public Utility Holding Company Act. Borrower is not a "holding
company", or "subsidiary company" of a "holding company", or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company", or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(s) Environmental Matters. Except as disclosed on Exhibit "F",
neither Borrower nor Guarantor (i) has received notice or otherwise
learned of any Environmental Liability which would individually or in the
aggregate have a Material Adverse Effect arising in connection with (A)
any non-compliance with or violation of the requirements of any
Environmental Law or (B) the release or threatened release of any toxic or
hazardous waste into the environment, (ii) to the knowledge of Borrower
and Guarantor, have threatened or actual liability in connection with the
release or threatened release of any toxic or hazardous waste into the
environment which would individually or in the aggregate have a Material
Adverse Effect or (iii) have received notice or otherwise learned of any
federal or state investigation evaluating whether any remedial action is
needed to respond to a release or threatened release of any toxic or
hazardous waste into the environment for which Borrower or Guarantor is or
may be liable.
(t) Guarantor. CWE owns one hundred percent (100%) of the issued and
outstanding equity securities of Guarantor.
(u) Year 2000 Compliance. Borrower represents and warrants to Banks
that:
(i) All devices, systems, machinery, information technology,
computer software and hardware, and other date sensitive technology
(jointly and severally the "Systems") necessary for Borrower to
carry on its business as presently conducted and as contemplated to
be conducted in the future are Year 2000 Compliant or will be Year
2000 Compliant within a period of time calculated to result in no
material disruption of any of Borrower's business operations. For
purposes of these provisions, "Year 2000 Compliant" means that such
Systems are designed to be used prior to, during and after the
Gregorian calendar year 2000 A.D. and will operate during each such
time period without error relating to date data, specifically
including any error relating to, or the product of, date data which
represents or references different centuries or more than one
century.
(ii) Borrower has: (A) undertaken an inventory, review, and
assessment of all areas within its business and operations that
could be adversely affected by the failure of Borrower to be Year
2000 Compliant on a timely basis; (B) developed a plan and time line
for becoming Year 2000 Compliant on a timely basis; (C) to date,
implemented that plan in accordance with that timetable in all
material respects.
(iii) Borrower has either made, or will make, written inquiry
of each of its material purchasers of its oil and gas, and has
obtained, or will obtain, in writing
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<PAGE>
confirmations from all such persons, as to whether such persons have
initiated programs to become Year 2000 Compliant and on the basis of
such confirmations. Borrower reasonably believes that all such
persons will be or become so compliant. For purposes hereof,
"material purchasers of oil and gas" refers to those purchasers of
oil and gas from Borrower whose business failure would, with
reasonable probability, result in a material adverse change in the
business, properties, condition (financial or otherwise), or
prospects of Borrower. For purposes of this paragraph, Bank, as a
lender of funds under the terms of this Agreement, confirms to
Borrower that Bank has initiated its own corporate-wide Year 2000
program with respect to its lending activities.
(iv) The fair market value of all Collateral pledged to Bank
to secure the Revolving Loan and the Notes and all of Borrower's
obligation hereunder is not and shall not be less than currently
anticipated or subject to deterioration in value because of the
failure of such Collateral to be Year 2000 Compliant.
11. Conditions of Lending.
(a) The effectiveness of this Agreement and the obligation of the
Banks to make the initial Advance under the Revolving Commitment shall be
subject to the following conditions precedent:
(i) Execution and Delivery. Borrower shall have executed and
delivered to the Agent this Agreement, the Notes, the Security
Instruments and other required documents, and Guarantor shall have
executed and delivered to the Agent its guaranty agreement, all in
form and substance satisfactory to the Banks;
(ii) Corporate Resolutions and Incumbency. The Agent shall
have received appropriate (i) corporate resolutions for each
Borrower and Guarantor, and (ii) incumbency certificates for each
Borrower and Guarantor;
(iii) SEC Filings. The Banks shall have received copies of all
documents filed by Borrower with the Securities and Exchange
Commission prior to the Effective Date;
(iv) No Event of Default. No Event of Default shall have
occurred and be continuing;
(v) No Material Adverse Change. No material adverse change in
the consolidated financial condition of the Borrower shall have
occurred;
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(vi) Other Documents. The Banks shall have received such other
instruments and documents incidental and appropriate to the
transaction provided for herein as the Banks or its counsel may
reasonably request, and all such documents shall be in form and
substance satisfactory to the Banks; and
(vii) Legal Matters Satisfactory. All legal matters incident
to the consummation of the transactions contemplated hereby shall be
satisfactory to special counsel for the Banks retained at the
expense of Borrower.
(b) The obligation of the Banks to make any Advance (including the
initial Advance) or issue any Letter of Credit on the Revolving Commitment
shall be subject to the following additional conditions precedent that, at
the date of making each such Advance and after giving effect thereto:
(i) Representation and Warranties. With respect to any
Advance, the representations and warranties of Borrower and
Guarantor under this Agreement (excluding, however, the
representations and warranties set forth in Sections 10(h) and 10(s)
as to any matter which has theretofore been disclosed in writing by
Borrower to the Banks, but as to which Borrower and Guarantor
represent and warrant as of the date of the requested Advance or
issuance of Letter of Credit that the matters so disclosed are not
reasonably expected to have a Material Adverse Effect) are true and
correct in all material respects as of such date, as if then made
(except to the extent that such representations and warranties
related solely to an earlier date);
(ii) No Event of Default. No Event of Default shall have
occurred and be continuing nor shall any event have occurred or
failed to occur which, with the passage of time or service of
notice, or both, would constitute an Event of Default;
(iii) Other Documents. The Banks shall have received such
other instruments and documents incidental and appropriate to the
transaction provided for herein as the Banks or its counsel may
reasonably request, and all such documents shall be in form and
substance satisfactory to the Banks; and
(iv) Legal Matters Satisfactory. All legal matters incident to
the consummation of the transactions contemplated hereby shall be
satisfactory to special counsel for the Banks retained at the
expense of Borrower.
12. Affirmative Covenants. A deviation from the provisions of this Section
12 shall not constitute an Event of Default under this Agreement if such
deviation is consented to in writing by
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the Banks. Without the prior written consent of the Banks, Borrower and
Guarantor (to the extent applicable thereto) will at all times comply with the
covenants contained in this Section 12 from the date hereof and for so long as
any indebtedness or obligation of Borrower under the Loan Documents is
outstanding or any part of the Revolving Commitment is in existence.
(a) Financial Statements and Reports. Borrower shall promptly
furnish to the Banks from time to time upon request such information
regarding the business and affairs and financial condition of Borrower, as
the Banks may reasonably request, and will furnish to the Banks:
(i) Annual Financial Statements - as soon as available, and in
any event within one hundred and twenty (120) days after the close
of each fiscal year of the Williams Consolidated Entities, the
annual audited Financial Statements of the Williams Consolidated
Entities prepared Arthur Andersen, L.L.P. or by another independent
accounting firm satisfactory to Banks;
(ii) Quarterly Financial Statements - as soon as available,
and in any event sixty (60) days after the end of each calendar
quarter (except the last calendar quarter) of each year, the
quarterly unaudited Financial Statements of the Williams
Consolidated Entities;
(iii) Reserve Reports on Oil and Gas Properties - no later
than November 1 of each year beginning November 1, 2000 and at such
other times as Banks shall request, an internally generated
engineering report covering reserve and income projections for all
Oil and Gas Properties (including those owned by Guarantor), which
reports shall have an effective date of September 30 of each year.
Borrower shall also furnish Banks on or before May 1 of each year
beginning May 1, 2000 reserve reports and income projections for all
Oil and Gas Properties, which reserve reports shall have an
effective date of January 1 of each year and shall be prepared by
Williamson Petroleum Consultants, Inc. (or other reservoir
engineering firm satisfactory to Banks), which January 1 effective
date report shall be accompanied by internally generated information
sufficient to allow such January 1 report and the information
contained therein to be rolled forward to an effective date of March
31. All such engineering reports, shall be in a form acceptable to
Banks and shall utilize oil and gas prices, escalation factors and
discount rates currently then being used by Agent in its general
petroleum lending business;
(iv) Monthly Operating and Production Reports. Borrower shall
furnish Banks, within forty-five (45) days following the close of
each month, oil and gas production reports (inclusive of prices
received thereon), drilling and completion reports for the Williams
Consolidated Entities;
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(v) Budgets and Projections. On each June 1 and December 1
Borrower shall furnish to Banks a budget and Cash Flow forecast for
the Williams Consolidated Entities prepared on a twelve (12) month
rolling forward basis with respect to their operations;
(vi) Monthly Hedging Report. Borrower shall furnish Banks,
within forty-five (45) days following the close of each month, a
report of Hedging Transactions, said information to be provided for
both the subject month and on an aggregate basis for all such
forward sales;
(vii) SEC Reports. As soon as available furnish Banks with
copies of all filings by the Williams Consolidated Entities with the
Securities and Exchange Commission; and
(viii) Additional Information. Promptly upon request of the
Banks from time to time any additional financial information or
other information that the Banks may reasonably request.
All such reports referred to in Subsection 12(a) above shall be in such
detail as the Banks may reasonably request.
(b) Certificates of Compliance. Concurrently with the furnishing of
the annual Financial Statements pursuant to Subsection 12(a)(i) hereof and
each of the quarterly Financial Statements pursuant to Subsection
12(a)(ii) hereof, Borrower will furnish or cause to be furnished to the
Banks a certificate signed by a person duly authorized to execute such a
certificate on behalf of Borrower (i) to the extent requested from time to
time by the Banks, specifically affirming compliance of Borrower in all
material respects with any of its representations or obligations under the
Security Instruments; (ii) setting forth the computation, in reasonable
detail as of the end of each period covered by such certificate, of
compliance with Section 13(c), 13(d) and 13(m) containing or accompanied
by such financial or other details, information and material as the Banks
may reasonably request to evidence such compliance; and (iii) certifying
to the beneficial ownership of at least 20% of Borrower's stock by Clayton
W. Williams Jr., and his affiliates (specifying such affiliates by name
and providing the number of shares owned by each).
(c) Taxes and Other Liens. Borrower and Guarantor will pay and
discharge promptly all taxes, assessments and governmental charges or
levies imposed upon Borrower or Guarantor or upon the income or any assets
or property of Borrower or Guarantor or any Subsidiary as well as all
claims of any kind (including claims for labor, materials, supplies and
rent) which, if unpaid, might become a lien or other encumbrance upon any
or all of the assets or property of Borrower or Guarantor; provided,
however, that neither Borrower nor Guarantor shall be required to pay any
such tax, assessment, charge, levy or claim if the amount, applicability
or validity thereof shall currently be contested in good faith by
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appropriate proceedings diligently conducted and if Borrower or Guarantor
shall have set up adequate reserves therefor, if required, under GAAP.
(d) Compliance with Laws. Borrower and Guarantor will observe and
comply with all applicable laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, orders and
restrictions relating to environmental standards or controls or to energy
regulations of all federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign, where the
violation or failure to observe would be reasonably expected to have a
Material Adverse Effect.
(e) Further Assurances. Borrower will cure promptly any defects in
the creation and issuance of the Notes and the execution and delivery of
the Notes and the Security Instruments, including this Agreement. Borrower
and Guarantor at their sole expense will promptly execute and deliver to
Banks upon request all such other and further documents, agreements and
instruments in compliance with or accomplishment of the covenants and
agreements in this Agreement, or to correct any omissions in the Notes or
more fully to state the obligations set out herein.
(f) Performance of Obligations. Borrower agrees to pay the Notes and
other obligations incurred by it hereunder according to the reading, tenor
and effect thereof and hereof; and Borrower and Guarantor will do and
perform every act and discharge all of the obligations provided to be
performed and discharged by Borrower or Guarantor under the Security
Instruments, including this Agreement, at the time or times and in the
manner specified.
(g) Insurance. Borrower and Guarantor now maintain and will continue
to maintain insurance with financially sound and reputable insurers with
respect to its assets against such liabilities, fires, casualties, risks
and contingencies and in such types and amounts as is customary in the
case of persons engaged in the same or similar businesses and similarly
situated. Upon request of the Agent, Borrower will furnish or cause to be
furnished to the Agent from time to time a summary of the respective
insurance coverage of Borrower and Guarantor in form and substance
satisfactory to the Agent, and, if requested, will furnish the Agent
copies of the applicable policies. Upon demand by Agent any insurance
policies covering any such property shall be endorsed (i) to provide that
such policies may not be cancelled, reduced or affected in any manner for
any reason without fifteen (15) days prior notice to Agent, (ii) to
provide for insurance against fire, casualty and other hazards normally
insured against, in amounts customary in the industry for similarly
situated business and properties, and (iii) to provide for such other
matters as the Banks may reasonably require. Borrower and Guarantor shall
at all times maintain insurance in amounts customary in the industry for
similarly situated business and properties with respect to the Collateral
against their liability for injury to persons or property, which insurance
shall be by financially sound and reputable insurers and shall without
limitation provide the following coverages:
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comprehensive general liability (including coverage for damage to
underground resources and equipment, damage caused by blowouts or
cratering, damage caused by explosion, damage to underground minerals or
resources caused by saline substances, broad form property damage
coverage, broad form coverage for contractually assumed liabilities and
broad form coverage for acts of independent contractors), worker's
compensation and automobile liability. Borrower and Guarantor shall at all
times maintain insurance with respect to the Collateral which shall insure
Borrower and Guarantor against seepage and pollution expense if deemed
economical in the reasonable discretion of Borrower and Guarantor.
Additionally, Borrower shall at all times maintain adequate insurance with
respect to all of their other assets and wells in accordance with prudent
business practices.
(h) Accounts and Records. Borrower and Guarantor will keep books,
records and accounts in which full, true and correct entries will be made
of all dealings or transactions in relation to their business and
activities.
(i) Right of Inspection. Borrower and Guarantor will permit any
officer, employee or agent of the Banks to examine Borrower's or
Guarantor's books, records and accounts, and take copies and extracts
therefrom, all at such reasonable times and as often as the Banks may
reasonably request. Banks will use their best efforts to keep all such
information confidential and will not without prior written consent
disclose or reveal the information or any part thereof to any person other
than the Banks' officers, employees, legal counsel, regulatory authorities
or advisors to whom it is necessary to reveal such information for the
purpose of effectuating the agreements and undertakings specified herein.
(j) Notice of Certain Events. Borrower and Guarantor shall promptly
notify the Banks if Borrower or Guarantor learns of the occurrence of (i)
any event which constitutes, or with the passage of time would constitute,
an Event of Default, together with a detailed statement by Borrower of the
steps being taken to cure the Event of Default; or (ii) any legal,
judicial or regulatory proceedings affecting Borrower, or any of the
assets or properties of Borrower which, if adversely determined, could
reasonably be expected to have a Material Adverse Effect; or (iii) any
dispute between Borrower or Guarantor and any governmental or regulatory
body or any other person or entity which, if adversely determined, might
reasonably be expected to cause a Material Adverse Effect; or (iv) any
other matter which in its reasonable opinion could be expected to have a
Material Adverse Effect.
(k) ERISA Information and Compliance. Borrower will promptly furnish
to the Banks immediately upon becoming aware of the occurrence of any
"reportable event", as such term is defined in Section 4043 of ERISA, or
of any "prohibited transaction", as such term is defined in Section 4975
of the Internal Revenue Code of 1954, as amended, in connection with any
Plan or any trust created thereunder, a written notice specifying the
nature thereof, what action Borrower is taking or proposes to take with
respect thereto, and, when known, any action taken by the Internal Revenue
Service with respect thereto.
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(l) Environmental Reports and Notices. Borrower and Guarantor will
deliver to the Banks (i) promptly upon its becoming available, one copy of
each report sent by Borrower or Guarantor to any court, governmental
agency or instrumentality pursuant to any Environmental Law (excluding,
however, reports filed with the Texas Railroad Commission or any similar
state or federal agency in the ordinary course of conducting Borrower's
business where the report does not disclose, or is not in response to
allegations of, violation by Borrower of an Environmental Law), (ii)
notice, in writing, promptly upon Borrower's or Guarantor's learning that
either of them have received notice or otherwise learned of any claim,
demand, action, event, condition, report or investigation indicating any
potential or actual liability arising in connection with (x) the
non-compliance with or violation of the requirements of any Environmental
Law which reasonably could be expected to have a Material Adverse Effect;
(y) the release or threatened release of any toxic or hazardous waste into
the environment which reasonably could be expected to have a Material
Adverse Effect or which release Borrower or Guarantor would have a duty to
report to any court or government agency or instrumentality, or (z) the
existence of any Environmental Lien on any properties or assets of
Borrower or Guarantor, and Borrower or Guarantor shall immediately deliver
a copy of any such notice to Banks.
(m) Maintenance. Borrower and Guarantor will, to the best of their
ability, act prudently and in accordance with customary applicable
industry standards in managing and operating their assets, properties,
businesses and investments, and Borrower will use their best efforts to
keep in good working order and condition, ordinary wear and tear excepted,
all of Borrower's and Guarantor's assets and properties, including, but
not limited to, the Collateral, except where the failure to do so would
not reasonably be expected to cause a Material Adverse Effect.
(n) Title Matters. Within one hundred twenty (120) days after the
date of this Agreement, Borrower or Guarantor will provide such title
opinions on the Oil and Gas Properties, if any, being pledged to Agent for
the ratable benefit of the Banks pursuant to Security Instruments executed
as of the date of this Agreement as are requested by Agent. As to any Oil
and Gas Properties hereafter pledged to Agent for the ratable benefit of
Banks, Borrower or Guarantor will promptly (but in no event more than one
hundred twenty (120) days following such pledges), furnish Agent with
title opinions reasonably satisfactory to Agent, showing Good and
Defensible Title of Borrower or Guarantor to such Oil and Gas Properties
subject only to Permitted Liens.
(o) Curative Matters. Within ninety (90) days after receipt by
Borrower or Guarantor from Agent or its counsel of written notice of title
defects the Agent reasonably requires to be cured, Borrower or Guarantor
will either (i) provide such curative information, in form and substance
satisfactory to Banks, or (ii) substitute oil and gas properties of value
and quality satisfactory to the Banks for all Oil and Gas Properties for
which such title curative was requested but upon which Borrower or
Guarantor elected not to provide such
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title curative information, and, within sixty (60) days of such
substitution, provide title opinions satisfactory to the Banks covering
the Oil and Gas Properties so substituted.
(p) Additional Collateral. Borrower agrees to regularly monitor
engineering data covering all producing oil and gas properties and
interests acquired by Borrower or Guarantor on or after the date hereof
and to pledge or cause to be pledged such of the same to Agent for the
ratable benefit of the Banks in substantially the form of the Security
Instruments, as applicable, to the extent that the Banks shall at all
times during the existence of the Revolving Commitment be secured by
perfected liens and security interests covering (i) not less than ninety
percent (90%) of the engineered value of all producing oil and gas
properties of Borrower and Guarantor in the aggregate; and (ii) each and
all such properties which have an engineered value of $100,000 or more.
For the purposes of this Section 12(p), "Engineered Value" shall mean
future net revenue discounted at eight percent (8%) per annum utilizing
the set of pricing parameters used in the most current engineering report
required pursuant to Section 12(a)(iii) hereof.
(q) Year 2000 Compatibility. Borrower covenants and agrees with
Banks that it will:
(i) Furnish such additional information, statements and other
reports with respect to Borrower's activities, course of action and
progress towards becoming Year 2000 Compliant as Banks may
reasonably request from time to time;
(ii) In the event of any change in circumstances that causes
or will likely cause any of Borrower's representations and
warranties with respect to its being or becoming Year 2000 Compliant
to no longer be true (hereinafter, referred to as a "Change in
Circumstances") then Borrower shall promptly, and in any event
within ten (10) days of receipt of information regarding a Change in
Circumstances, provide Bank with written notice (the "Notice") that
describes in reasonable detail the Change in Circumstances and how
such Change in Circumstances caused or will likely cause Borrower's
representations and warranties with respect to being or becoming
Year 2000 Compliant no longer to be true. Borrower shall, within ten
(10) days of a request, also provide Banks with any additional
information Banks reasonably request of Borrower in connection with
the Notice and/or a Change in Circumstances;
13. Negative Covenants. A deviation from the provisions of this Section 13
shall not constitute an Event of Default under this Agreement if such deviation
is consented to in writing by the Banks. Without the prior written consent of
the Banks, Borrower and Guarantor (to the extent applicable thereto) will at all
times comply with the covenants contained in this Section 13 from the date
hereof and for so long as any indebtedness or obligation of Borrower under the
Loan Documents is outstanding or any part of the Revolving Commitment is in
existence.
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(a) Liens. Neither Borrower nor Guarantor will create, incur, assume
or permit to exist any lien, security interest or other encumbrance on any
of its assets or properties except Permitted Liens.
(b) Debts, Guaranties and Other Obligations. Neither Borrower nor
any of its Subsidiaries (including Guarantor) will incur, create, assume
or in any manner become or be liable in respect of any indebtedness, issue
any preferred or other quasi-equity stock which requires the payment of a
dividend thereon or the mandatory redemption thereof, or guarantee or
otherwise in any manner become or be liable in respect of any
indebtedness, liabilities or other obligations of any other person or
entity, whether by agreement to purchase the indebtedness of any other
person or entity or agreement for the furnishing of funds to any other
person or entity through the purchase or lease of goods, supplies or
services (or by way of stock purchase, capital contribution, advance or
loan) for the purpose of paying or discharging the indebtedness of any
other person or entity, or otherwise, except that the foregoing
restrictions shall not apply to:
(i) the Notes, or other indebtedness or guarantees of Borrower
disclosed in Exhibit "D" hereto;
(ii) taxes, assessments or other government charges which are
not yet due or are being contested in good faith by appropriate
action promptly initiated and diligently conducted, if such reserve
as shall be required by GAAP shall have been made therefor;
(iii) indebtedness incurred in the ordinary course of
business, including, but not limited to, drilling, completing,
leasing and reworking oil and gas wells;
(iv) Hedging Transactions;
(v) indebtedness owed by Non-Borrower Subsidiaries to Borrower
which is permitted hereunder;
(vi) Vendor Financing not to exceed $10,000,000 in the
aggregate at any one time outstanding;
(vii) guarantees by CWE of Vendor Financings of its
Subsidiaries, which guarantees shall never exceed $10,000,000 in the
aggregate at any one time outstanding;
(viii) intercompany indebtedness among Borrower and Guarantor;
or
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(ix) guarantees by CWE of loans made by third parties to CWE
employees, which loans may be extended for the sole purpose of
allowing CWE employees to exercise options to purchase CWE common
stock and/or to pay federal income tax liabilities relating from
such exercise; provided, however, that such guarantees may not
exceed $1,000,000 in the aggregate outstanding at any one time.
(c) Current Ratio. The Borrower will not allow the Williams
Consolidated Entities' ratio of Current Assets to Current Liabilities to
ever be less than 1.0 to 1.0 as of the end of any calendar quarter.
(d) Ratio of Cash Flow to Debt Service. The Borrower will not allow
the Williams Consolidated Entities' ratio of Net Cash Flow (less cash
distributions paid pursuant to Section 13(j) hereof) to Debt Service to
ever be less than 1.10 to 1.0 as of the end of any calendar quarter.
(e) Limitation on Sale of Collateral. Neither Borrower nor Guarantor
will sell, assign or discount any of the Collateral or Negative Pledge
Property other than (i) sales of oil and gas production in the ordinary
course of business, and (ii) sales or other disposition of obsolete
equipment which are no longer needed for the ordinary business of Borrower
or Guarantor or which are being replaced by equipment of at least
comparable value and utility. If and as any of such Collateral or Negative
Pledge Properties and interests are sold, conveyed or assigned during the
term of the Revolving Commitment, Borrower or Guarantor will prepay
against the Notes or Guarantor's obligation under its guaranty agreement,
as the case may be, 100% of the Release Price. The term "Release Price" as
used herein shall mean the loan value of the Collateral or the Negative
Pledge Property being sold as determined by the Agent. Any such prepayment
of principal on the Notes required by this Section 13(e) shall not be in
lieu of, but shall be in addition to, any Monthly Commitment Reduction or
any mandatory prepayment of principal required to be made pursuant to
Section 9(b) hereof. Any such prepayment shall be applied pro rata to the
principal due on the Revolving Notes until such Revolving Notes are paid
in full, principal, interest and other amounts. Provided, however, that
the Borrower and Guarantor may, without consent of Banks and Agent and
without prepaying the Notes, sell Negative Pledge Properties where the
sales proceeds from any such sale do not exceed $500,000 on an annual
basis.
(f) Mergers and Consolidations. Neither Borrower nor Guarantor will
merge or consolidate with any other entity or sell, assign, transfer or
otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of their assets or properties to
any person or entity.
(g) Use of Proceeds. Borrower shall not use any of the proceeds of
the loans to be made hereunder for the purpose of purchasing or carrying
margin stock as defined in Regulation U of the Board of Governors of the
Federal Reserve System.
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(h) Loans or Advances. Neither Borrower nor any Subsidiary shall
make or permit to remain outstanding any loans or advances other than (i)
normal and customary advances to employees, which shall not exceed
$250,000 in the aggregate at any point in time, (ii) intercompany loans
and advances among Borrower and Guarantor, or (iii) loans and advances by
CWE to Subsidiaries provided that such loans and advances shall be treated
as investments for the purposes of Section 13(k)(iv) or (v) hereof.
(i) Hedging Transactions. The Williams Consolidated Entities shall
not enter into any Hedging Transactions (i) in amounts which exceed, in
the aggregate, 100% of the Williams Consolidated Entities' estimated
production from proved producing reserves existing as of the date of the
execution of such Hedging Transactions, or (ii) the terms and provisions
of which could require margin calls; or (iii) which are secured by any of
the Collateral or the Negative Pledge Property.
(j) Dividends. Borrower will not declare or pay any cash dividend,
purchase, redeem or otherwise acquire for value any of its stock now or
hereafter outstanding, return any capital to stock owners, or make any
distribution of its assets to its stockholders as such, except (i)
repurchase or redemption of its stock in an amount not to exceed
$3,000,000 in the aggregate (excluding commissions) and (ii) cash
dividends paid on the stock of Borrower which shall not exceed, in any
fiscal year, an amount equal to 50% of Borrower's net income for such
fiscal year determined in accordance with GAAP, provided that immediately
before and after giving effect thereto no (x) default or Event of Default
or (y) Borrowing Base Deficiency, shall exist.
(k) Investments. Neither Borrower nor Guarantor shall make any
investments in any person or entity, except that the foregoing restriction
shall not apply to:
(i) investments and direct obligations of the United States of
America or any agency thereof;
(ii) investments in certificates of deposit issued by the
Agent or certificates of deposit with maturities of less than one
year issued by other commercial banks in the United States having
capital and surplus in excess of $500,000,000 and have a rating of
(A) 50 or above by Sheshunoff and (B) "B" or above by Keef-Bruett;
(iii) investments such as insured money market funds,
Eurodollar investment accounts and other similar accounts with the
Agent or such investments with maturities of less than ninety (90)
days at other commercial banks in the United States having capital
and surplus in excess of $500,000,000 and having a rating of (A) 50
or above by Sheshunoff and (B) "B" or above by Keef-Bruett;
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(iv) investments in the Subsidiaries (other than Guarantor)
existing on the Effective Date;
(v) Borrower's investments in Guarantor;
(vi) the repurchase of Borrower's stock as permitted by
Section 13(j) hereof; and
(vii) Guarantor's initial investment of $425,000 in Clayton
Williams Acquisition Partnership, Ltd. ("Acquisition") and
additional investments in Acquisition equal to one percent (1%) of
all capital contributions made to Acquisition by its general and
limited partners, but only to the extent such contributions are
required by the partnership agreement of Acquisition, provided that
immediately before and after giving effect to such additional
investments no default or Event of Default shall exist.
(l) Change of Control. Borrower will not permit Clayton W. Williams,
Jr. and his affiliates, in the aggregate, to ever own, of record or
beneficially, less than 20% of the outstanding voting securities of CWE.
Failure to comply with this covenant shall (i) immediately relieve the
Banks of any further commitment to advance funds under the Revolving
Commitment, and (ii) result in the entire amount of principal and interest
due on the Notes to be accelerated so that the entire balance thereof
shall be due and payable on or before one hundred twenty (120) days after
the date the Agent first receives notice that such a change of control has
occurred.
(m) Minimum Tangible Net Worth. For each calendar quarter hereafter
during the remaining term of the Revolving Commitment, the Williams
Consolidated Entities' Tangible Net Worth shall never be less than
$40,000,000 plus an amount equal to 50% of the Williams Consolidated
Entities' Net Income (without reduction for losses) for each calendar
quarter ending after December 31, 1998 on a cumulative basis.
14. Events of Default. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
(a) Borrower shall fail to pay when due or declared due the
principal of or interest on the Notes or any fee or any other indebtedness
of Borrower incurred pursuant to this Agreement or any other Security
Instrument (but Borrower shall have a grace period of three (3) days
following an applicable due date during which to correct a delinquency in
payment); or
(b) Any representation or warranty made by Borrower or Guarantor
under this Agreement, or in any certificate or statement furnished or made
to any Bank pursuant hereto,
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or in connection herewith, or in connection with any document furnished
hereunder, shall prove to be untrue in any material respect as of the date
on which such representation or warranty is made (or deemed made), or any
representation, statement (including financial statements), certificate,
report or other data furnished or to be furnished or made by Borrower or
Guarantor under any Security Instrument, including this Agreement, proves
to have been untrue in any material respect, as of the date as of which
the facts therein set forth were stated or certified, and such default
shall continue for more than ten (10) days after notice from Agent;
(c) Default shall be made in the due observance or performance of
any of the covenants or agreements of Borrower or Guarantor contained in
the Security Instruments, including this Agreement, and such default shall
continue for more than ten (10) days after notice from Agent; provided,
however, that a default under Section 13(l) of this Agreement shall not
become an Event of Default under this Section 14 unless Borrower fails to
pay the outstanding balance on the Notes within the 120 day period
specified therein; or
(d) Default shall be made in respect of any obligation for borrowed
money owed by Borrower or Guarantor in excess of $1,000,000, other than
the Notes, (directly, by assumption, as guarantor or otherwise), or any
obligations in excess of $1,000,000 secured by any mortgage, pledge or
other security interest, lien, charge or encumbrance with respect thereto,
on any asset or property of Borrower or Guarantor or in respect of any
agreement relating to any such obligations, and such default shall
continue beyond the applicable grace period, if any; or
(e) Borrower or Guarantor shall commence a voluntary case or other
proceedings seeking liquidation, reorganization or other relief with
respect to either of them or their debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking an appointment
of a trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of their property, or shall consent to any such
relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against either of
them, or shall make a general assignment for the benefit of creditors, or
shall fail generally to pay their debts as they become due, or shall take
any corporate action authorizing the foregoing; or
(f) An involuntary case or other proceeding, shall be commenced
against Borrower or Guarantor seeking liquidation, reorganization or other
relief with respect to either of them or their debts under any bankruptcy,
insolvency or similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of either of them or any substantial part of their property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of thirty (30) days; or an order for relief shall be
entered against Borrower or Guarantor under the federal bankruptcy laws as
now or hereinafter in effect; or
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(g) A final judgment or order for the payment of money in excess of
$1,000,000.00 (or judgments or orders aggregating in excess of
$1,000,000.00) shall be rendered against Borrower or Guarantor and such
judgments or orders shall continue unsatisfied and unstayed for a period
of thirty (30) days; or
(h) In the event the aggregate principal amount outstanding under
the Notes shall at any time exceed the Borrowing Base established for the
Notes, Borrower shall fail to provide such additional Collateral or prepay
the principal of such Notes in compliance with the provisions of Section
9(b) hereof.
Upon occurrence of any Event of Default specified in Subsections 14(e) and
(f) hereof, the Revolving Commitment shall terminate and the entire principal
amount due under the Notes and all interest then accrued thereon, and any other
liabilities of Borrower hereunder, shall become immediately due and payable all
without notice and without presentment, demand, protest, notice of protest or
dishonor or any other notice of default of any kind, all of which are hereby
expressly waived by Borrower. In any other Event of Default, the Majority Banks
may by notice from Agent to Borrower, terminate the Revolving Commitment and
declare the principal of, and all interest then accrued on, the Notes and any
other liabilities hereunder to be forthwith due and payable, whereupon the same
shall forthwith become due and payable without presentment, demand, protest or
other notice of any kind, all of which Borrower hereby expressly waives,
anything contained herein or in the Notes to the contrary notwithstanding.
Nothing contained in this Section 14 shall be construed to limit or amend in any
way the Events of Default enumerated in the Notes, or any other document
executed in connection with the transaction contemplated herein.
Upon the occurrence and during the continuance of any Event of Default,
the Banks are hereby authorized at any time and from time to time, without
notice to Borrower (any such notice being expressly waived by Borrower), to
set-off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Banks to or for the credit or the account of Borrower against any and all
of the indebtedness of Borrower under the Notes and the Security Instrument,
including this Agreement, irrespective of whether or not the Banks shall have
made any demand under the Security Instrument, including this Agreement or the
Notes. Any amount set-off by either of the Banks shall be applied against the
indebtedness owed the Banks by Borrower pursuant to the provisions of Section 16
of this Agreement. The Banks agree promptly to notify Borrower after any such
set-off and application, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Banks
under this Section 14 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which the Banks may have.
15. Exercise of Rights. No failure to exercise, and no delay in
exercising, on the part of the Banks, any right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right. The rights
of the Banks hereunder shall be in addition to all other rights provided by law.
No modification or waiver of any provision of the Security Instruments,
including this Agreement, or
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the Notes nor consent to departure therefrom, shall be effective unless in
writing, and no such consent or waiver shall extend beyond the particular case
and purpose involved. No notice or demand given in any case shall constitute a
waiver of the right to take other action in the same, similar or other
circumstances without such notice or demand.
16. Notices. Any notices or other communications required or permitted to
be given by this Agreement or any of the other Loan Documents and instruments
referred to herein must be given in writing and must be delivered or mailed by
prepaid certified or registered mail or by facsimile to the party to whom such
notice or communication is directed at the address of such party as follows: (a)
BORROWER AND GUARANTOR: c/o Clayton Williams Energy, Inc., Six Desta Drive,
Suite 6500, Midland, Texas 79705, Attention: Paul Latham, Executive Vice
President, Facsimile No. (915) 688-3247; (b) AGENT: BANK ONE, TEXAS, N.A., 1717
Main Street, Dallas, Texas 75201, Attention: Wm. Mark Cranmer, Vice President,
Facsimile No. (214) 290-2332; and (c) UNION: Union Bank of California, N.A., 500
N. Akard Street, Suite 4200, Dallas, Texas 75201, Attention: John L. Clark, Vice
President, Facsimile No. (214) 920-4209. Any such notice or other communication
shall be deemed to have been given (whether actually received or not) on the day
it is delivered as aforesaid or, if mailed, on the fifth day after it is mailed
as aforesaid. Any party may change its address for purposes of this Agreement by
giving notice of such change to the other parties pursuant to this Section 16.
Upon receipt by Agent of any such notice, Agent shall promptly provide copies of
such notice or notices to the Banks.
17. The Agent and the Banks.
(a) Appointment and Authorization. Each Bank hereby irrevocably
appoints and authorizes Agent to take such action on its behalf and to
exercise such powers under the Loan Documents as are delegated to Agent by
the terms thereof, together with such powers as are reasonably incidental
thereto. With respect to its commitments hereunder and the Notes issued to
it, Bank One and any successor Agent shall have the same rights under the
Loan Documents as any other Bank and may exercise the same as though it
were not the Agent; and the term "Bank" or "Banks" shall, unless otherwise
expressly indicated, include Bank One and any successor Agent in its
capacity as a Bank. Bank One and any successor Agent and its affiliates
may accept deposits from, lend money to, act as trustee under indentures
of and generally engage in any kind of business with Borrower, and any
person which may do business with Borrower, all as if Bank One and any
successor Agent were not Agent hereunder and without any duty to account
therefor to the Banks. Each Bank shall disclose to all other Banks all
indebtedness and liabilities, direct and contingent, of Borrower to Banks
from time to time.
(b) Note Holders. Agent may treat the payee of any Note as the
holder thereof until written notice of transfer has been filed with it,
signed by such payee and in form satisfactory to Agent.
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<PAGE>
(c) Consultation with Counsel. Banks agree that Agent may consult
with legal counsel selected by it and shall not be liable for any action
taken or suffered in good faith by it in accordance with the advice of
such counsel.
(d) Documents. Agent shall not be under a duty to examine or pass
upon the validity, effectiveness, enforceability, genuineness or value of
any of the Collateral or any of the Loan Documents or any other instrument
or document furnished pursuant thereto or in connection therewith, and
Agent shall be entitled to assume that the same are valid, effective,
enforceable and genuine and what they purport to be.
(e) Resignation or Removal of Agent. Subject to the appointment and
acceptance of a successor Agent as provided below, Agent may resign at any
time by giving written notice thereof to Banks and Borrower, and Agent may
be removed at any time with or without cause by Majority Banks. If no
successor Agent has been so appointed by all Banks (and approved by
Borrower) and has accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or removal of the
retiring Agent, then the retiring Agent may, on behalf of Banks, appoint a
successor Agent, which appointment shall require the approval of Borrower
only if a party other than one of the other Banks is so appointed. Upon
the acceptance of any appointment as Agent hereunder by a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all
the rights and duties of the retiring Agent, and the retiring Agent shall
be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, (i) the
provisions of this Section 17 shall continue in effect for its benefit in
respect to any actions take or omitted to be taken by it while it was
acting as Agent, and (ii) any Collateral held in possession of the
retiring Agent shall be delivered to the successor Agent.
(f) Responsibility of Agent. It is expressly understood and agreed
that the obligations of Agent under the Loan Documents are only those
expressly set forth in the Loan Documents and that Agent shall be entitled
to assume that no default or Event of Default has occurred and is
continuing, unless Agent has actual knowledge of such fact or has received
notice from a Bank that such Bank considers that a default or an Event of
Default has occurred and is continuing and specifying the nature thereof.
Neither Agent nor any of its directors, officers or employees shall be
liable for any action taken or omitted to be taken by it under or in
connection with the Loan Documents, except for its or their own gross
negligence or willful misconduct. Agent shall incur no liability under or
in respect of any of the Loan Documents by acting upon any notice,
consent, certificate, warranty or other paper or instrument believed by it
to be genuine or authentic or to be signed by the proper party or parties,
or with respect to anything which it may do or refrain from doing in the
reasonable exercise of its judgment, or which may seem to it to be
necessary or desirable.
Agent shall not be responsible to Banks for any recitals,
statements, representations or warranties contained in any of the Loan
Documents, or in any certificate or other
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document referred to or provided for in, or received by any Bank under,
the Loan Documents, or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of any of the Collateral or any
of the Loan Documents or for any failure by Borrower to perform any of
their obligations hereunder or thereunder. Agent may employ agents and
attorneys-in-fact and shall not be answerable, except as to money or
securities received by it or its authorized agents, for the negligence or
misconduct of any such agents or attorneys-in-fact selected by it with
reasonable care.
The relationship between Agent and each Bank is only that of agent
and principal and has no fiduciary aspects. Nothing in the Loan Documents
or elsewhere shall be construed to impose on Agent any duties or
responsibilities other than those for which express provision is therein
made. In performing its duties and functions hereunder, Agent does not
assume and shall not be deemed to have assumed, and hereby expressly
disclaims, any obligation or responsibility toward or any relationship of
agency or trust with or for Borrower or any of their shareholders or other
creditors. As to any matters not expressly provided for by the Loan
Documents (including, without limitation, enforcement or collection of the
Notes), Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall
be fully protected in so acting or refraining from acting) upon the
instructions of all Banks and such instructions shall be binding upon all
Banks and all holders of Notes; provided, however, that Agent shall not be
required to take any action which is contrary to the Loan Documents or
applicable law.
Agent shall have the right to exercise or refrain from exercising,
without notice or liability to the Banks, any and all rights afforded to
Agent by the Loan Documents or which Agent may have as a matter of law;
provided, however, that Agent shall not (A) without the consent of all
Banks (i) amend the Loan Documents to (x) change the method of computing
interest so as to decrease the interest payable on the Notes, (y) increase
or decrease the principal amount of the Notes, (z) extend the Maturity
Date; or (ii) waive any default under the Loan Documents; or (iii) make a
redetermination of the Borrowing Base; or (iv) defer the date for payment
of principal interest or any fee; or (v) make any changes in the fees
payable hereunder (except the Agency fee which does not require the
consent of the Banks other than the Agent); or (vi) release any guaranty;
or (vii) make any change in the definition of Majority Banks; or (viii)
make any change in the number of Banks required to take any action under
this Agreement; or (ix) make any change in Sections 7(b), 13(e) or 13(n)
of this Agreement; and (B) without the consent of Majority Banks (i) make
any other amendment to the Loan Documents; or (ii) accelerate the
outstanding balance due on the Notes. Agent shall have the right and
authority without necessity of notice or liability to the Banks to release
Collateral, if 100% of the net proceeds from the sale of such Collateral,
after payment of superior lien indebtedness and taxes relating thereto, is
paid to Agent for the ratable benefit of the Banks as a prepayment of the
Notes; provided, however, that Agent's right to release Collateral
hereunder shall be limited to releases of Collateral the net sale proceeds
of which shall not exceed, in the aggregate, on an annual basis,
$5,000,000.00. For purposes
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of this paragraph, a Bank shall be deemed to have consented to any such
action by the Agent upon the passage of ten (10) Business Days after
written notice thereof is given to such Bank in accordance with Section 16
hereof, unless such Bank shall have previously given Agent notice,
complying with the provision of Section 16 hereof, to the contrary. Agent
shall have no liability to Banks for failure or delay in exercising any
right or power possessed by Agent pursuant to the Loan Documents or
otherwise unless such failure or delay is caused by the gross negligence
of the Agent.
(g) Independent Investigation. Each Bank severally represents and
warrants to Agent that it has made its own independent investigation and
assessment of the financial condition and affairs of Borrower in
connection with the making and continuation of its participation hereunder
and has not relied exclusively on any information provided to such Bank by
Agent in connection herewith, and each Bank represents, warrants and
undertakes to Agent that it shall continue to make its own independent
appraisal of the credit worthiness of Borrower while the Notes is
outstanding or its commitments hereunder are in force. Agent shall not be
required to keep itself informed as to the performance or observance by
Borrower of this Agreement or any other document referred to or provided
for herein or to inspect the properties or books of Borrower. Other than
as provided in this Agreement, Agent shall have no duty, responsibility or
liability to provide any Bank with any credit or other information
concerning the affairs, financial condition or business of Borrower which
may come into the possession of Agent.
(h) Indemnification. Banks agree to indemnify Agent (to the extent
not reimbursed by Borrower), ratably according to their Commitment
Percentage, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on,
incurred by or asserted against Agent in any way relating to or arising
out of the Loan Documents or any action taken or omitted by Agent under
the Loan Documents, provided that no Bank shall be liable for any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's
gross negligence or willful misconduct. The parties intend the provisions
of this paragraph to apply to and protect the Bank from the consequences
of its own negligence, whether or not such negligence is the sole,
contributing or concurring cause of any such loss, cost, liability, damage
or expense indemnified against in this paragraph.
(i) Benefit of Section 17. The agreements contained in this Section
17 are solely for the benefit of Agent and the Banks and are not for the
benefit of, or to be relied upon by, Borrower, any affiliate of Borrower
or any other person.
(j) Pro Rata Treatment. Subject to the provisions of this Agreement,
each payment (including each prepayment) by Borrower and collections by
Banks (including offsets) on account of the principal of and interest on
the Notes and fees payable by
42
<PAGE>
Borrower shall be made pro rata to Banks according to the then ownership
interest of each Bank in loans to Borrower under this Agreement. Upon
receipt of a request for disbursement by Borrower under the Revolving
Commitment, Agent shall notify Banks of such request or draft and the
requested disbursement date or payment date, whereupon each Bank shall
fund to Agent its pro rata share of the loan requested by Borrower at such
time and in such manner as to reasonably permit the disbursement by Agent
to Borrower on the disbursement date requested.
(k) Interests of Banks. Nothing in this Agreement shall be construed
to create a partnership or joint venture between Banks for any purpose.
Agent, Banks and Borrower each recognize that the respective obligations
of Banks under the Revolving Commitment shall be several and not joint and
that neither Agent nor any of Banks shall be responsible or liable to
perform any of the obligations of the other under this Agreement. Each
Bank is deemed to be the owner of an undivided interest in and to all
rights, titles, benefits and interests belonging and accruing to Agent
under this Agreement, including, without limitation, the Notes, liens and
security interests in the Collateral, fees and payments of principal and
interest by Borrower under the Revolving Commitment in the proportion that
each Banks' Commitment Percentage bears to the total of all of such loan
commitments of all Banks taken in the aggregate. Each Bank shall perform
all duties and obligations of Banks under this Agreement in the same
proportion as its ownership interest.
(l) Failure By Any Bank to Provide Funds to Agent.
(i) Unless a Bank has determined that in accordance with the
provisions of this Agreement it is not obligated to fund its share
of a borrowing hereunder prior to 1:00 p.m., Dallas, Texas time, on
the requested date of disbursement, Agent may assume that each Bank
has made its pro rata share of the Borrowing available to Agent on
such date and Agent may, in reliance upon such assumption (but shall
not be required to) make available to Borrower a corresponding
amount. If Agent has made such amount available to Borrower and if
such corresponding amount is not in fact made available to Agent by
any such Bank, Agent shall be entitled on demand to receive such
amount from such Bank (or if such Bank fails to pay such amount
forthwith upon demand, to recover such amount from Borrower)
together with interest thereon in respect of each day during the
period commencing on the date such amount was made available to
Borrower and ending on (but excluding) the date Agent recovers such
amount at the Prime Rate.
(ii) If any Bank shall fail or refuse to fund its pro rata
share of a requested disbursement for any reason (hereinafter called
the "Under-Funded Bank(s)") and other Bank or Banks fund their own
pro rata shares of such requested disbursement (hereinafter called
the "Fully-Funded Bank(s)") so
43
<PAGE>
that Banks are out-of-balance to the extent of the unfunded share of
a requested advance (hereinafter called the "Out-of-Balance"), if
the refusal to fund by Under Funded Banks was:
(1) in accordance with the provisions of this Agreement,
then in lieu of the pro rata distribution of payments
thereafter received and collections thereafter made as
specified in Section 17(j) hereof, Agent is authorized and
directed by Banks to thereafter make distributions of such
payments and collections on account of the principal of and
interest on the Notes and fees paid by Borrower to Banks pro
rata on the basis of principal sums funded by each Bank under
the Revolving Commitment.
(2) not in accordance with the provisions of this
Agreement, then notwithstanding the provisions of Section
17(j) hereof and in addition to any other rights and remedies
which the Fully-Funded Bank(s) may have as against the
Under-Funded Bank(s), Agent shall as to subsequent payments or
recoveries (whether voluntary, involuntary, by application of
offset or otherwise) on account of principal of or interest on
the Notes, distribute first to the Fully-Funded Bank(s) (pro
rata if more than one Fully-Funded Bank) until any such
Out-of-Balance is discharged, then pro rata among all Banks in
accordance with Section 17(j).
18. Expenses. Borrower shall pay (i) all reasonable and necessary
out-of-pocket expenses of the Agent, including fees and disbursements of special
counsel for the Agent, in connection with the preparation of this Agreement, any
waiver or consent hereunder or any amendment hereof or any default or Event of
Default or alleged default or Event of Default hereunder, and (ii) if a default
or an Event of Default occurs, all reasonable and necessary out-of-pocket
expenses incurred by the Banks, including fees and disbursements of counsel, in
connection with such default and Event of Default and collection and other
enforcement proceedings resulting therefrom. Borrower shall indemnify the Banks
against any transfer taxes, document taxes, assessments or charges made by any
governmental authority by reason of the execution and delivery of this Agreement
or the Notes.
19. Indemnity. The Borrowers agree to indemnify and hold harmless the
Banks and their respective officers, employees, agents, attorneys and
representatives (singularly, an "Indemnified Party", and collectively, the
"Indemnified Parties") from and against any loss, cost, liability, damage or
expense (including the reasonable fees and out-of-pocket expenses of counsel to
the Banks, including all local counsel hired by such counsel) ("Claim") incurred
by the Banks in investigating or preparing for, defending against, or providing
evidence, producing documents or taking any other action in respect of any
commenced or threatened litigation, administrative proceeding or investigation
under any federal securities law, federal or state environmental law, or any
other statute
44
<PAGE>
of any jurisdiction, or any regulation, or at common law or otherwise, which is
alleged to arise out of or is based upon any acts, practices or omissions or
alleged acts, practices or omissions of the Borrower or their agents or arises
in connection with the duties, obligations or performance of the Indemnified
Parties in negotiating, preparing, executing, accepting, keeping, completing,
countersigning, issuing, selling, delivering, releasing, assigning, handling,
certifying, processing or receiving or taking any other action with respect to
the Loan Documents and all documents, items and materials contemplated thereby
even if any of the foregoing arises out of an Indemnified Party's ordinary
negligence. The indemnity set forth herein shall be in addition to any other
obligations or liabilities of the Borrowers to the Banks hereunder or at common
law or otherwise, and shall survive any termination of this Agreement, the
expiration of the Loan and the payment of all indebtedness of the Borrowers to
the Banks hereunder and under the Notes, provided that the Borrowers shall have
no obligation under this Section 19 to the Bank with respect to any of the
foregoing arising out of the gross negligence or willful misconduct of the
Banks. If any Claim is asserted against any Indemnified Party, the Indemnified
Party shall endeavor to notify the Borrowers of such Claim (but failure to do so
shall not affect the indemnification herein made except to the extent of the
actual harm caused by such failure). The Indemnified Party shall have the right
to employ, at the Borrowers' expense, counsel of the Indemnified Parties'
choosing and to control the defense of the Claim. The Borrowers may at their own
expense also participate in the defense of any Claim. Each Indemnified Party may
employ separate counsel in connection with any Claim to the extent such
Indemnified Party believes it reasonably prudent to protect such Indemnified
Party.
THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION 19 TO APPLY TO AND
PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE,
WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF
ANY CLAIM.
20. Governing Law. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN DALLAS, TEXAS, AND THE SUBSTANTIVE LAWS OF TEXAS
SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
AGREEMENT AND ALL OTHER DOCUMENTS AND INSTRUMENTS REFERRED TO HEREIN, UNLESS
OTHERWISE SPECIFIED THEREIN OR UNLESS THE LAWS OF ANOTHER STATE REQUIRE THE
APPLICATION OF THE LAWS OF SUCH STATE.
21. Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, such provisions shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
45
<PAGE>
22. Maximum Interest Rate. Regardless of any provisions contained in this
Agreement or in any other documents and instruments referred to herein, the
Banks shall never be deemed to have contracted for or be entitled to receive,
collect or apply as interest on the Notes any amount in excess of the Maximum
Rate and in the event the Banks ever receive, collect or apply as interest any
such excess, or if an acceleration of the maturity of the Notes or if any
prepayment by Borrower results in Borrower having paid any interest in excess of
the Maximum Rate, such amount which would be excessive interest shall be applied
to the reduction of the unpaid principal balance of the Notes for which such
excess was received, collected or applied, and, if the principal balance of such
Notes is paid in full, any remaining excess shall forthwith be paid to Borrower.
All sums paid or agreed to be paid to the Banks for the use, forbearance or
detention of the indebtedness evidenced by the Notes and/or this Agreement
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such indebtedness until payment
in full so that the rate or amount of interest on account of such indebtedness
does not exceed the Maximum Rate. In determining whether or not the interest
paid or payable under any specific contingency exceeds the Maximum Rate,
Borrower and the Banks shall, to the maximum extent permitted under applicable
law, (i) characterize any non-principal payment as an expense, fee or premium,
rather than as interest; and (ii) exclude voluntary prepayments and the effect
thereof; and (iii) compare the total amount of interest contracted for, charged
or received with the total amount of interest which could be contracted for,
charged or received throughout the entire contemplated term of the Notes at the
Maximum Rate.
23. Amendments. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
24. Multiple Counterparts. This Agreement may be executed in a number of
identical separate counterparts, each of which for all purposes is to be deemed
an original, but all of which shall constitute, collectively, one agreement. No
party to this Agreement shall be bound hereby until a counterpart of this
Agreement has been executed by all parties hereto.
25. Conflict. In the event any term or provision hereof is inconsistent
with or conflicts with any provision of the Security Instruments, the terms or
provisions contained in this Agreement shall be controlling.
26. Survival. All covenants, agreements, undertakings, representations and
warranties made in the Security Instrument, including this Agreement, the Notes
or other documents and instruments referred to herein shall survive all closings
hereunder and shall not be affected by any investigation made by any party.
27. Parties Bound. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates, provided, however, that Borrower may not,
without the prior written consent of the Banks, assign any rights, powers,
duties or obligations hereunder.
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28. Assignments and Participations.
(a) Each Bank shall have the right to sell, assign or transfer all
or any part of its Note or Notes, its Revolving Commitment and its rights
and obligations hereunder to one or more Affiliates, Banks, financial
institutions, pension plans, insurance companies, investment funds, or
similar Persons who are Eligible Assignees or to a Federal Reserve Bank;
provided, that in connection with each sale, assignment or transfer (other
than to an Affiliate, a Bank or a Federal Reserve Bank), but each such
sale, assignment, or transfer (other than to an Affiliate, a Bank or a
Federal Reserve Bank), shall require the consent of both the Borrower and
Agent, which consent, in either case, will not be unreasonably withheld,
and the assignee, transferee or recipient shall have, to the extent of
such sale, assignment, or transfer, the same rights, benefits and
obligations as it would if it were such Bank and a holder of such Note,
Revolving Commitment and rights and obligations, including, without
limitation, the right to vote on decisions requiring consent or approval
of all Banks or Majority Banks and the obligation to fund its Revolving
Commitment; provided, further, that (1) each such sale, assignment, or
transfer (other than to an Affiliate, a Bank or a Federal Reserve Bank)
shall be in an aggregate principal amount not less than $5,000,000, (2)
each remaining Bank shall at all times maintain Revolving Commitment then
outstanding in an aggregate principal amount at least equal to $5,000,000;
(3) each such sale, assignment or transfer shall be of a Pro Rata portion
of such Bank's Revolving Commitment, (4) no Bank may offer to sell its
Note or Notes, Revolving Commitment, rights and obligations or interests
therein in violation of any securities laws; and (5) no such assignments
(other than to a Federal Reserve Bank) shall become effective until the
assigning Bank and its assignee delivers to Agent and Borrowers an
Assignment and Acceptance and the Note or Notes subject to such assignment
and other documents evidencing any such assignment. An assignment fee in
the amount of $5,000 for each such assignment (other than to an Affiliate,
a Bank or the Federal Reserve Bank) will be payable to Agent by assignor
or assignee. Within five (5) Business Days after its receipt of copies of
the Assignment and Acceptance and the other documents relating thereto and
the Note or Notes, the Borrowers shall execute and deliver to Agent (for
delivery to the relevant assignee) a new Note or Notes evidencing such
assignee's assigned Revolving Commitment and if the assignor Bank has
retained a portion of its Revolving Commitment, a replacement Note in the
principal amount of the Revolving Commitment retained by the assignor
(except as provided in the last sentence of this paragraph (a) such Note
or Notes to be in exchange for, but not in payment of, the Note or Notes
held by such Bank). On and after the effective date of an assignment
hereunder, the assignee shall for all purposes be a Bank, party to this
Agreement and any other Loan Document executed by the Banks and shall have
all the rights and obligations of a Bank under the Loan Documents, to the
same extent as if it were an original party thereto, and no further
consent or action by Borrowers, Banks or the Agent shall be required to
release the transferor Bank with respect to its Revolving Commitment
assigned to such assignee and the transferor Bank shall henceforth be so
released.
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<PAGE>
(b) Each Bank shall have the right to grant participations in all or
any part of such Bank's Notes and Revolving Commitment hereunder to one or
more pension plans, investment funds, insurance companies, financial
institutions or other Persons, provided, that:
(i) each Bank granting a participation shall retain the right
to vote hereunder, and no participant shall be entitled to vote
hereunder on decisions requiring consent or approval of Bank or
Majority Banks (except as set forth in (iii) below);
(ii) in the event any Bank grants a participation hereunder,
such Bank's obligations under the Loan Documents shall remain
unchanged, such Bank shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Bank
shall remain the holder of any such Note or Notes for all purposes
under the Loan Documents, and Agent, each Bank and Borrowers shall
be entitled to deal with the Bank granting a participation in the
same manner as if no participation had been granted; and
(iii) no participant shall ever have any right by reason of
its participation to exercise any of the rights of Banks hereunder,
except that any Bank may agree with any participant that such Bank
will not, without the consent of such participant (which consent may
not be unreasonably withheld) consent to any amendment or waiver
requiring approval of all Banks.
(c) It is understood and agreed that any Bank may provide to
assignees and participants and prospective assignees and participants
financial information and reports and data concerning Borrowers'
properties and operations which was provided to such Bank pursuant to this
Agreement.
(d) Upon the reasonable request of either Agent or Borrowers, each
Bank will identify those to whom it has assigned or participated any part
of its Notes and Commitment, and provide the amounts so assigned or
participated.
29. Waiver of Jury Trial. THE BORROWER, THE AGENT AND THE BANKS (BY THEIR
ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND
UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG THE
BORROWER, THE AGENT AND THE BANKS, ARISING OUT OF OR IN ANY WAY RELATED TO THIS
DOCUMENT, ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN THE AGENT, THE
BANKS AND THE BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE AGENT AND
THE BANKS TO PROVIDE THE FINANCING DESCRIBED HEREIN.
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<PAGE>
30. Other Agreements. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
31. Written Consent. The Guarantor is executing this Seventh Restated Loan
Agreement in its capacity as Guarantor for the purpose of acknowledging the
existence of the Seventh Restated Loan Agreement, consenting to the execution
thereof by the Borrower and reaffirming its guaranty of the obligations of
Borrower to Banks.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
BORROWER:
CLAYTON WILLIAMS ENERGY, INC.
By: /s/ L. Paul Latham
----------------------------------------
L. Paul Latham, Executive Vice President
WARRIOR GAS CO.
By: /s/ L. Paul Latham
----------------------------------------
L. Paul Latham, Executive Vice President
GUARANTOR:
CWEI ACQUISITIONS, INC.
By: /s/ L. Paul Latham
----------------------------------------
L. Paul Latham, Executive Vice President
49
<PAGE>
BANKS:
BANK ONE, TEXAS, N.A.,
a national banking association
By: /s/ Wm. Mark Cranmer
----------------------------------------
Wm. Mark Cranmer, Vice President
UNION BANK OF CALIFORNIA, N.A.
a national banking association
By:
----------------------------------------
John A. Clark, Vice President
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
AGENT:
BANK ONE, TEXAS, N.A.,
a national banking association
By: /s/ Wm. Mark Cranmer
----------------------------------------
Wm. Mark Cranmer, Vice President
50
<PAGE>
BANKS:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
----------------------------------------
Wm. Mark Cranmer, Vice President
UNION BANK OF CALIFORNIA, N.A.
a national banking association
By: /s/ John A. Clark
----------------------------------------
John A. Clark, Vice President
By: /s/ Gary Shakerjian
----------------------------------------
Name: Gary Shakerjian
Title: Assistant Vice President
AGENT:
BANK ONE, TEXAS, N.A.,
a national banking association
By:
----------------------------------------
Wm. Mark Cranmer, Vice President
50
<PAGE>
EXHIBIT "A"
NOTICE OF BORROWING
The undersigned hereby certifies that he is the ____________________ of
_________________, a ________________ corporation ("Borrower"), and that as such
he is authorized to executed this Notice of Borrowing on behalf of Borrower.
With reference to that certain Seventh Restated Loan Agreement, dated December
1, 1999, (as same may be amended, modified, increased, supplemented and/or
restated from time to time, the "Agreement") entered into among Borrower, Bank
One, Texas, N.A. and Union Bank of California, N.A. ("Banks"), and Bank One,
Texas, N.A. as Agent ("Agent"), the undersigned further certifies, represents
and warrants on behalf of Borrower that to his best knowledge and belief after
reasonable and due investigation and review, all of the following statements are
true and correct (each capitalized term used herein having the same meaning
given to it in the Agreement unless otherwise specified):
(a) Borrower requests that the Banks advance Borrower the aggregate
sum of $_____________________ by no later than _______________________,
19___. Immediately following such Advance, the aggregate outstanding
balance of Advances shall equal $____________________________.
(b) Type of Advance: [Prime Rate or Eurodollar Loan].
(c) Eurodollar Loan - Interest Period of _________ days.
(d) As of the date hereof, and as a result of the making of the
requested Advance, there does not and will not exist any Event of Default.
(e) Borrower has performed and complied with all agreements and
conditions contained in the Loan Documents which are required to be
performed or complied with by Borrower before or on the date hereof.
(f) The representations and warranties contained in the Agreement
and in the other Loan Documents (excluding, however, the representations
and warranties set forth in Sections 10(h) and 10(s) as to any matter
which has theretofore been disclosed in writing by Borrowers to Banks, but
as to which Borrower and Guarantor hereby represent and warrant that as of
the date hereof the matters so disclosed are not reasonably expected to
have a Material Adverse Effect) are true and correct in all material
respects as of the date hereof and shall be true and correct upon the
making of the Advance, with the same force and effect as though made on
and as of the date hereof and thereof.
<PAGE>
EXECUTED AND DELIVERED this _______ day of ___________________,
19___.
[Borrower]
-----------------------------------------
By: _____________________________________
Name: ___________________________________
Title: __________________________________
-2-
<PAGE>
EXHIBIT "B"
RENEWAL REVOLVING NOTE
$_____________ Dallas, Texas December 1, 1999
FOR VALUE RECEIVED, the undersigned, Clayton Williams Energy, Inc., a
Delaware corporation and Warrior Gas Co., a Texas corporation (the "Borrowers")
hereby jointly and severally promise to pay to the order of ________________
(the "Payee"), at the offices of the Agent at 1717 Main Street, Dallas, Texas
75201, or at such other place as the holder hereof may direct, in lawful money
of the United States of America, the principal amount of ____________________
AND 00/100 DOLLARS ($_____________), or, if less than such amount, the aggregate
unpaid principal amount of all Advances made by Payee to Borrowers hereunder in
accordance with the terms of that certain Seventh Restated Loan Agreement, dated
as of even date herewith, entered into among Borrowers, Bank One, Texas, N.A.
("Bank One"), Union Bank of California, N.A. ("Union") and Bank One, as Agent
(as same may be amended, modified, increased, supplemented and/or restated from
time to time, the "Agreement"), and Borrowers further promise to pay interest to
Payee at such office or other place, in like money, from the date hereof on the
unpaid principal amount hereof from time to time outstanding at the rates stated
in the Agreement. All terms defined in the Agreement shall have the same meaning
when used herein.
1. Payment Terms. The principal of, and all accrued interest upon, this
Note shall be due and payable in the amounts and at the times stated in the
Agreement as follows:
(a) Interest shall be due and payable as provided in the Agreement;
(b) The entire unpaid principal amount of this Note shall be due and
payable on the Maturity Date.
2. Disbursement and Prepayment. Payee may disburse the principal of this
Note to Borrowers in one or more Advances from time to time in accordance with
the Agreement. Borrowers shall be entitled and in certain instances may be
required to prepay the principal of this Note from time to time in accordance
with the Agreement. Borrowers may borrow, repay and reborrow under this Note in
accordance with the terms of the Agreement. It is contemplated that by reason of
prepayments hereon there may be times when no indebtedness is owing hereunder;
but notwithstanding such occurrences, this Note shall remain valid and shall be
in full force and effect as to Advances made pursuant to the Agreement
subsequent to each such occurrence.
3. Benefits. This Note is the Note referred to in the Agreement, and Agent
and the holder(s) hereof are entitled to the benefits thereof and may enforce
the agreements contained therein and exercise the rights provided for thereby or
otherwise in respect thereof. Reference to the Agreement shall not affect or
impair the absolute unconditional obligation of Borrowers to
<PAGE>
pay the principal of, interest on and any additional payment in connection
with this Note when due.
4. Security. The payment of this Note is secured by Collateral more
particularly described in the Agreement.
5. Acceleration of Maturity. Upon the occurrence of an Event of Default
under the Agreement, Banks may (i) declare the principal of, and all interest
then accrued on, this Note, to be forthwith due and payable, whereupon the same
shall forthwith become due and payable without presentment, demand, protest, or
notice of any kind, all of which Borrowers hereby expressly waive, and/or (ii)
exercise of any other right provided in the Loan Documents, or at law or in
equity. Reference is hereby made to the Agreement for a statement of the events
upon which the maturity of this Note may be accelerated automatically. Borrowers
grant to each Bank the right to set off against this Note, and the right of
recoupment from, any and all deposit and other liabilities of each Bank to
Borrowers and all money or property in the possession of any Bank held for or
owed to Borrowers.
6. Waiver. Except as otherwise expressly provided herein or in the other
Loan Documents, Borrowers and all sureties, endorsers and guarantors of this
Note (i) waive demand, presentment for payment, notice of intention to
accelerate, notice of acceleration, protest, notice of protest, notice of
default and all other notices, filing of suit and diligence in collecting this
Note or enforcing any of the security herefor, (ii) agree to any substitution,
exchange or release of any such security or the release of any person or entity
primarily or secondarily liable herefor, (iii) agree that it will not be
necessary for Agent or any holder hereof, in order to enforce payment of this
Note by Agent or such holder, to first institute suit or exhaust its rights
against Borrowers or others liable herefor, or to enforce its rights against any
security herefor, and (iv) consent to any and all extensions for any period,
renewals or postponements of time of payment of this Note or any other
indulgences with respect hereto, without notice thereof to any of them.
7. Attorneys' Fees. If this Note is collected by legal proceedings or in
or through a bankruptcy court, or is placed in the hands of an attorney for
collection after maturity, no matter how maturity is brought about, Borrowers
agree to pay reasonable attorneys fees and all other collection costs incurred
by Agent and the holder(s) of this Note.
8. GOVERNING LAW AND VENUE. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW
AND SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS, OR AT SUCH OTHER PLACE AS MAY
BE DESIGNATED IN WRITING BY THE HOLDER HEREOF.
9. Headings. The headings of the sections of this Note are inserted for
convenience only and shall not be deemed to constitute a part hereof.
-2-
<PAGE>
IN WITNESS WHEREOF, Borrowers have executed this Note as of the date and
year first herein written.
BORROWERS:
CLAYTON WILLIAMS ENERGY, INC.
By:________________________________________
L. Paul Latham, Executive Vice President
WARRIOR GAS CO.
By:________________________________________
L. Paul Latham, Executive Vice President
-3-
<PAGE>
EXHIBIT "C"
FINANCIAL CONDITION
NONE
-1-
<PAGE>
EXHIBIT "D"
LIABILITIES
NONE
-2-
<PAGE>
EXHIBIT "E"
LITIGATION
NONE
-3-
<PAGE>
EXHIBIT "F"
ENVIRONMENTAL MATTERS
NONE
-4-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 File Numbers 33-68320, 33-68318, 33-68316,
33-69688, and 33-92834.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 28, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ENGINEERS
As independent engineering consultants, we hereby consent to the use of
our report entitled "Evaluation of Oil and Gas Reserves to the Interests of
Clayton Williams Energy, Inc. in Domestic Oil and Gas Properties and to the
Interests of Warrior Gas Company in the Gataga Gas Unit No. 5A, Vermejo
(Ellenburger) Field, Loving County, Texas, Effective December 31, 1999, for
Disclosure to the Securities and Exchange Commission, Utilizing Aries Software,
Williamson Project 9.8770" dated February 24, 2000 and data extracted therefrom
(and all references to our Firm) included in or made a part of this Form 10-K
Annual Report to be filed on or about March 30, 2000 and to the incorporation by
reference of this Form 10-K Annual Report (including the use of our report and
references to our Firm herein) into those certain Registration Statements on
Form S-8 filed by Clayton Williams Energy, Inc. with the Securities and Exchange
Commission, file numbers 33-68320, 33-68318, 33-68316, 33-69688, and 33-92834
covering the Bonus Incentive Plan of Clayton Williams Energy, Inc., 1993 Stock
Compensation Plan of Clayton Williams Energy, Inc., Outside Directors Stock
Option Plan of Clayton Williams Energy, Inc., Clayton Williams Energy, Inc.
401(k) Plan & Trust, and the Executive Incentive Stock Compensation Plan of
Clayton Williams Energy, Inc., respectively.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
March 27, 2000
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned, being Officers and
Directors of Clayton Williams Energy, Inc. (the "Company"), a Delaware
corporation, do hereby constitute and appoint Mel G. Riggs and L. Paul Latham,
or either of them, with full power of substitution, our true and lawful
attorneys and agents, to do any and all acts and things in our names in the
capacities indicated which Mel G. Riggs and L. Paul Latham, or either of them,
may deem necessary or advisable to enable the Company to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with the
Company's Annual Report on Form 10-K for the year ended December 31, 1999,
including specifically, but not limited to, the power and authority to sign such
Form 10-K for us, or any of us, in our names in the capacities indicated, and
any and all amendments thereto; and we do hereby ratify and confirm all that Mel
G. Riggs and L. Paul Latham or either of them, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this twenty-second day of
March, 2000.
<TABLE>
<S> <C>
/s/ Clayton W. Williams /s/ L. Paul Latham
- ------------------------------------------------- ----------------------------------------------
CLAYTON W. WILLIAMS L. PAUL LATHAM
President, Chairman of the Board, Executive Vice President, Chief Operating
Chief Executive Officer and a Director Officer and a Director
/s/ Mel G. Riggs /s/ Jerry F. Groner
- ------------------------------------------------- ----------------------------------------------
MEL G. RIGGS JERRY F. GRONER
Senior Vice President - Finance, Secretary, Vice President - Land and Lease Administration
Treasurer, Chief Financial Officer and a Director and a Director
(Principal Financial and Accounting Officer)
/s/ William P. Clements /s/ Robert L. Parker
- ------------------------------------------------- ----------------------------------------------
WILLIAM P. CLEMENTS ROBERT L. PARKER
Director Director
/s/ Stanley S. Beard
- -------------------------------------------------
STANLEY S. BEARD
Director
</TABLE>
<PAGE>
Exhibit 24.2
CERTIFICATE OF RESOLUTION
I, Mel G. Riggs, Secretary of Clayton Williams Energy, Inc., a Delaware
corporation, do hereby certify that the Board of Directors of Clayton Williams
Energy, Inc. duly adopted the following resolutions on March 22, 2000.
WHEREAS, the directors and officers of the Company wish to execute
and deliver a Power of Attorney to MEL G. RIGGS, and L. PAUL LATHAM,
allowing Mr. Riggs and/or Mr. Latham, jointly or severally, to act on
behalf of such directors and officers with respect to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, including
without limitation the execution of the Form 10-K and all necessary and
appropriate matters related thereto.
NOW, THEREFORE BE IT RESOLVED, that the Directors and proper
officers of this corporation be and they are hereby authorized and
directed to execute and deliver a Power of Attorney to MEL G. RIGGS and L.
PAUL LATHAM in the following form:
KNOW ALL MEN BY THESE PRESENTS, the undersigned being Officers
and Directors of Clayton Williams Energy, Inc. (the
"Company"), a Delaware Corporation, do hereby constitute and
appoint Mel G. Riggs and L. Paul Latham, or either of them,
with full power of substitution, our true and lawful attorneys
and agents, to do any and all acts and things in our names in
the capacities indicated which Mel G. Riggs and L. Paul
Latham, or either of them, may deem necessary or advisable to
enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in
connection with the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, including specifically, but
not limited to, the power and authority to sign such Form 10-K
for us, and any of us, in our names in the capacities
indicated, and any and all amendments thereto; and we do
hereby ratify and confirm all that Mel G. Riggs and L. Paul
Latham or either of them, shall do or cause to be done by
virtue hereof.
RESOLVED FURTHER, that the proper officers of this corporation be
and they are hereby authorized and directed to take all such other action
as they may deem advisable in order to carry out the intent and purposes
of the foregoing resolution.
IN WITNESS WHEREOF, I have hereunto set my hand on behalf of this
corporation on this twenty-second day of March, 2000.
/s/ Mel G. Riggs
--------------------------------------
MEL G. RIGGS, Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,634
<SECURITIES> 0
<RECEIVABLES> 13,236
<ALLOWANCES> 0
<INVENTORY> 717
<CURRENT-ASSETS> 15,900
<PP&E> 456,991
<DEPRECIATION> 363,985
<TOTAL-ASSETS> 109,166
<CURRENT-LIABILITIES> 22,549
<BONDS> 30,500
0
0
<COMMON> 917
<OTHER-SE> 55,200
<TOTAL-LIABILITY-AND-EQUITY> 109,166
<SALES> 44,366
<TOTAL-REVENUES> 48,050
<CGS> 11,222
<TOTAL-COSTS> 45,803
<OTHER-EXPENSES> (11,400)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,893
<INCOME-PRETAX> 10,754
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,754
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,754
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.18
</TABLE>
