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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-12074
STONE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
State of incorporation: Delaware I.R.S. Employer Identification No. 72-1235413
625 E. Kaliste Saloom Road
Lafayette, Louisiana 70508
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 237-0410
Securities registered pursuant to Section 12(b) of
the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, Par Value $.01 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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.
[x] Yes [ ] 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 the 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. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $408,812,885 as of March 11, 1998 (based on
the last reported sale price of such stock on the New York Stock Exchange
Composite Tape).
As of March 11, 1998, the registrant had outstanding 15,062,408 shares
of Common Stock, par value $.01 per share.
Document incorporated by reference: Proxy Statement of Stone Energy
Corporation relating to the Annual Meeting of Stockholders to be held on May 14,
1998, which is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS
Page No.
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 11
Item 3. Legal Proceedings............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 4A. Executive Officers of the Registrant.......................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 16
Item 6. Selected Financial and Operating Data......................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................... 18
Item 8. Financial Statements and Supplementary Data................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant............ 24
Item 11. Executive Compensation........................................ 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 24
Item 13. Certain Relationships and Related Transactions................ 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................... 25
Index to Financial Statements................................ F-1
Glossary of Certain Industry Terms........................... G-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
Stone Energy Corporation is an independent oil and gas company engaged in
the acquisition, exploration, development and operation of oil and gas
properties onshore and offshore in the Gulf Coast Basin. The Company and its
predecessors have been active in the Gulf Coast Basin since 1973, which gives
the Company extensive geophysical, technical and operational expertise in this
area. As of December 31, 1997, the Company had estimated proved reserves of
approximately 189.2 Bcf of natural gas and 17.8 MMBbls of oil, or an aggregate
of approximately 49.3 MMBOE, with a present value of estimated pre-tax future
net cash flows of $367.9 million (based upon prices in December 1997).
The Company's business strategy is to increase production, cash flow and
reserves through the acquisition and development of mature properties located in
the Gulf Coast Basin. The Company seeks properties that have an established
production history, proved undeveloped reserves and multiple prospective
reservoirs that provide significant development opportunities and an attractive
price due to low current production levels and properties in which the Company
would have the ability to control operations. Prior to acquiring a property, the
Company performs a thorough geological, geophysical and engineering analysis of
the property to formulate a comprehensive development plan. Through development
activities, the Company seeks to increase cash flow from existing proved
reserves and to establish additional proved reserves. These activities typically
involve the drilling of new wells, workovers and recompletions of existing
wells, and the application of other techniques designed to increase production.
Since 1993, the Company has increased the number of properties in which it
has an interest from five to 15, and serves as operator of 14 of these
properties. In addition, the Company has substantially expanded its technical
database, including 3-D seismic data relating to its properties and potential
acquisitions. As a result, the Company has been able to significantly increase
its development activities. For the year ending December 31, 1998, the Company
has budgeted capital expenditures of $130.5 million which includes $12.5 million
for the recently acquired East Cameron Block 64 field and $118.0 million for
development operations, which includes plans to drill 27 new wells, conduct
eight workovers/recompletions on existing wells and, depending upon the success
of specific development activities, install two new offshore production
platforms. The Company's capital expenditures for 1997 totaled $148.8 million,
of which $37.0 million was for the acquisition of interests in producing
properties.
The Company completed its initial public offering of common stock in July
1993 (the "Initial Public Offering"), and its shares are listed on the New York
Stock Exchange. A secondary offering of common stock was completed in November
1996, and the Company had a total of 15,062,408 shares outstanding at March 11,
1998. In September 1997, the Company completed an offering of $100 million
principal amount of its 8-3/4% Senior Subordinated Notes. Stone Energy is
headquartered in Lafayette, Louisiana, with additional offices in New Orleans
and Houston.
As used herein, the "Company" or "Stone Energy" refers to Stone Energy
Corporation and its consolidated subsidiaries, unless the context requires
otherwise. Certain terms relating to the oil and gas industry are defined in
"Glossary of Certain Industry Terms", which begins on page G-1 of this Form
10-K.
OIL AND GAS MARKETING
All of the Company's natural gas is sold at current market prices. The
Company's oil and natural gas condensate production is sold at current market
prices, either under short-term contracts providing for variable or market
sensitive prices or under various long-term contracts that dedicate the oil and
natural gas condensate from a property or well to a single purchaser for an
extended period of time, but which still involve variable, market sensitive
pricing. From time to time, the Company may enter into transactions hedging the
price of oil, natural gas and natural gas condensate. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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COMPETITION AND MARKETS
Competition in the Gulf Coast Basin is intense, particularly with respect to
the acquisition of producing properties and proved undeveloped acreage. The
Company competes with the major oil companies and other independent producers of
varying sizes, all of which are engaged in the acquisition of properties and the
exploration and development of such properties. Many of the Company's
competitors have financial resources and exploration and development budgets
that are substantially greater than those of the Company, which may adversely
affect the Company's ability to compete, particularly in regions outside of the
Gulf Coast Basin. See "Risk Factors-Competition."
The availability of a ready market for and the price of any hydrocarbons
produced will depend on many factors beyond the control of the Company,
including the extent of domestic production and imports of foreign oil, the
marketing of competitive fuels, the proximity and capacity of natural gas
pipelines, the availability of transportation and other market facilities, the
demand for hydrocarbons, the effect of federal and state regulation of allowable
rates of production, taxation and the conduct of drilling operations and federal
regulation of natural gas. In addition, the restructuring of the natural gas
pipeline industry virtually eliminated the gas purchasing activity of
traditional interstate gas transmission pipeline buyers. See "Regulation-Federal
Regulation of Sales and Transportation of Natural Gas." Producers of natural gas
have therefore been required to develop new markets among gas marketing
companies, end users of natural gas and local distribution companies. All of
these factors, together with economic factors in the marketing area, generally
may affect the supply and/or demand for oil and gas and thus the prices
available for sales of oil and gas.
REGULATION
REGULATION OF PRODUCTION. In all areas where the Company conducts
activities, there are statutory provisions regulating the production of oil and
natural gas under which administrative agencies may promulgate rules in
connection with the operation and production of both oil and gas wells,
determine the reasonable market demand for oil and gas, and establish allowable
rates of production. Such regulatory orders may restrict the rate at which the
Company's wells produce oil or gas below the rate at which such wells would be
produced in the absence of such regulatory orders, with the result that the
amount or timing of the Company's revenues could be adversely affected.
FEDERAL LEASES. The Company has oil and gas leases in the Gulf of Mexico,
which were granted by the federal government and are administered by the United
States Department of the Interior Minerals Management Service (the "MMS"). For
offshore operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers and the United States Environmental Protection
Agency (the "EPA")), lessees must obtain a permit from the MMS prior to the
commencement of drilling. The MMS has promulgated regulations requiring offshore
production facilities located on the Outer Continental Shelf ("OCS") to meet
stringent engineering and construction specifications. The MMS proposed
additional safety-related regulations concerning the design and operating
procedures for OCS production platforms and pipelines. These proposed
regulations were withdrawn pending further discussions among interested federal
agencies. The MMS also has regulations restricting the flaring or venting of
natural gas, and recently amended such regulations to prohibit the flaring of
liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has
promulgated other regulations governing the plugging and abandoning of wells
located offshore and the removal of all production facilities. With respect to
any Company operations conducted on offshore federal leases, liability may
generally be imposed under the Outer Continental Shelf Lands Act (the "OCSLA")
for costs of clean-up and damages caused by pollution resulting from such
operations, other than damages caused by acts of war or the negligence of third
parties. To cover the various obligations of lessees on the OCS, the MMS
generally requires that lessees post substantial bonds or other acceptable
assurances that such obligations will be met. The cost of such bonds or other
surety can be substantial and there is no assurance that bonds or other surety
can be obtained in all cases.
Since November 26, 1993, new levels of lease and areawide bonds have been
required of lessees taking certain actions with regard to OCS leases. Operators
in the OCS waters of the Gulf of Mexico, including the Company, have been or may
be required to increase their areawide bonds and individual lease bonds to $3
million and $1 million, respectively, unless exemptions or reduced amounts are
allowed by the MMS. The Company currently has an areawide pipeline bond of $0.3
million and areawide lease bonds totaling $3.0 million issued in favor of the
MMS for its existing
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offshore properties. The MMS also has discretionary authority to require
supplemental bonding in addition to the foregoing required bonding amounts but
this authority is only exercised on a case-by-case basis at the time of filing
an assignment of record title interest for MMS approval. Based upon certain
financial parameters, the Company has been granted exempt status by the MMS,
which exempts the Company from the supplemental bonding requirements. Under
certain circumstances, the MMS may require any Company operations on federal
leases to be suspended or terminated. Any such suspension or termination could
materially and adversely affect the Company's financial condition and
operations.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments. These proposed changes
have established an alternative market-based method to calculate royalties on
certain natural gas sold to affiliates or pursuant to non-arm's length sales
contracts. In addition, the MMS has recently issued a notice of proposed
rulemaking in which it proposes to amend it regulations governing the
calculation of royalties and the valuation of crude oil produced from federal
leases. This proposed rule would modify the valuation procedures for both
arm's-length and non-arm's-length crude oil transactions to decrease reliance on
crude oil posted prices and assign a value to crude oil that better reflects
market value, establish a new MMS form for collecting value differential data
and amend the valuation procedure for the sale of federal royalty oil. Recently,
the MMS has issued a final rule to clarify the types of costs that are
deductible transportation costs for purposes of royalty valuation of production
sold off the lease. In particular, under the rule, the MMS will not allow
deduction of costs associated with marketer fees, cash out and other pipeline
imbalance penalties, or long-term storage fees. The Company cannot predict what
action the MMS will take on these matters, nor can it predict at this stage of
the rulemaking proceeding how the Company might be affected by amendments to the
regulations.
OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil, condensate
and gas liquids by the Company are not currently regulated and are made at
negotiated prices. Effective as of January 1, 1995, the Federal Energy
Regulatory Commission (the "FERC") implemented regulations establishing an
indexing system for transportation rates for oil that could increase the cost of
transporting oil to the purchaser. The Company is not able to predict what
effect, if any, this order will have on it, but it may tend to increase
transportation costs or reduce wellhead prices for crude oil.
FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. Historically,
the transportation and sale for resale of natural gas in interstate commerce
have been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the
Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated
thereunder by the FERC. In the past, the Federal government has regulated the
prices at which gas could be sold. While sales by producers of natural gas can
currently be made at uncontrolled market prices, Congress could reenact price
controls in the future. Deregulation of wellhead natural gas sales began with
the enactment of the NGPA. In 1989, Congress enacted the Natural Gas Wellhead
Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA and NGPA
price and non-price controls affecting wellhead sales of natural gas effective
January 1, 1993.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B, and
636-C (collectively, "Order No. 636"), which require interstate pipelines to
provide transportation separate, or "unbundled," from the pipelines' sales of
gas. Also, Order No. 636 requires pipelines to provide open-access
transportation on a basis that is equal for all gas suppliers. Although Order
No. 636 does not directly regulate the Company's activities, the FERC has stated
that it intends for Order No. 636 to foster increased competition within all
phases of the natural gas industry. It is unclear what impact, if any, increased
competition within the natural gas industry under Order No. 636 will have on the
Company's activities. Although, Order No. 636, assuming it is upheld in its
entirety, could provide the Company with additional market access and more
fairly applied transportation service rates, Order No. 636, could also subject
the Company to more restrictive pipeline imbalance tolerances and greater
penalties for violation of those tolerances. The FERC has issued final orders in
all Order No. 636 pipeline restructuring proceedings. The United States Court of
Appeals for the District of Columbia Circuit ("D.C. Circuit") has generally
affirmed Order No. 636 and remanded certain issues for further explanation or
clarification. The issues remanded for further action do not appear to
materially affect the Company. Proceedings on the remanded issues are currently
ongoing before the FERC following its issuance of Order No. 636-C in February
1997. Numerous petitions for review of the individual pipeline restructuring
orders are currently pending in that court. Although it is difficult to predict
when all appeals of pipeline restructuring orders will be completed or their
impact on the Company, the Company does not believe that it will be affected by
the restructuring rule and orders any differently than other natural gas
producers and marketers with which it competes.
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The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in which
interstate pipelines release capacity under Order No. 636 and, more recently,
the price that shippers can charge for their released capacity. In addition, in
1995, the FERC issued a policy statement on how interstate natural gas pipelines
can recover the costs of new pipeline facilities. In January 1996, the FERC
issued a policy statement and a request for comments concerning alternatives to
its traditional cost-of-service ratemaking methodology. A number of pipelines
have obtained FERC authorization to charge negotiated rates as one such
alternative. In February 1997, the FERC announced a broad inquiry into issues
facing the natural gas industry to assist the FERC in establishing regulatory
goals and priorities in the post-Order No. 636 environment. In November 1997,
the FERC issued a proposed rulemaking to further standardize pipeline
transportation tariffs that, if implemented as proposed, could adversely affect
the reliability of scheduled interruptible transportation service. In December
1997, the FERC requested comments on the financial outlook of the natural gas
pipeline industry, including among other matters, whether the FERC's current
rate making policies are suitable in the current industry environment. While any
additional FERC action on these matters would affect the Company only
indirectly, any new rules and policy statements may have the effect of enhancing
competition in natural gas markets by, among other things, encouraging
non-producer natural gas marketers to engage in certain purchase and sale
transactions. The Company cannot predict what action the FERC will take on these
matters, nor can it accurately predict whether the FERC's actions will achieve
the goal of increasing competition in markets in which the Company's natural gas
is sold. However, the Company does not believe that it will be affected by any
action taken materially differently than other natural gas producers and
marketers with which it competes.
The OCSLA requires that all pipelines operating on or across the OCS provide
open-access, non-discriminatory service. Although the FERC has opted not to
impose the regulations of Order No. 509, in which the FERC implemented the
OCSLA, on gatherers and other non-jurisdictional entities, the FERC has retained
the authority to exercise jurisdiction over those entities if necessary to
permit non-discriminatory access to service on the OCS. If the FERC were to
apply Order No. 509 to gatherers in the OCS, and eliminate the exemption of
gathering lines, then these acts could result in a reduction in available
pipeline space for existing shippers in the Gulf of Mexico, such as the Company.
Commencing in May 1994, the FERC issued a series of orders in individual
cases that delineate its new gathering policy. Among other matters, the FERC
slightly narrowed its statutory tests for establishing gathering status and
reaffirmed that, except in situations in which the gatherer acts in concert with
an interstate pipeline affiliate to frustrate the FERC's transportation
policies, it does not generally have jurisdiction over natural gas gathering
facilities and services, and that such facilities and services located in state
jurisdictions are properly regulated by state authorities. This FERC action may
further encourage regulatory scrutiny of natural gas gathering by state
agencies. In addition, the FERC has approved several transfers by interstate
pipelines of gathering facilities to unregulated independent or affiliated
gathering companies, subject to the transferee providing service for two years
from the date of transfer to the pipeline's existing customers pursuant to a
default contract or pursuant to mutually agreeable terms. In August 1996, the
D.C. Circuit largely upheld the FERC's new gathering policy, but remanded the
FERC's default contract condition. The Company does not believe that it will be
affected by the FERC's new gathering policy any differently than other
producers, gatherers and marketers with which it competes.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC and the courts. The natural gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue.
ENVIRONMENTAL REGULATIONS. The Company's operations are subject to numerous
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. These laws and regulations
may require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Legislation has been proposed
in Congress from time to time that would reclassify certain oil and gas
exploration and production wastes as "hazardous wastes," which would make the
reclassified wastes subject to much more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the operating costs of the
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Company, as well as the oil and gas industry in general. Initiatives to further
regulate the disposal of oil and gas wastes are also pending in certain states,
and these various initiatives could have a similar impact on the Company.
Management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on the Company.
The Oil Pollution Act ("OPA") and regulations thereunder impose a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. A
"responsible party" includes the owner or operator of a facility or vessel, or
the lessee or permittee of the area in which an offshore facility is located.
OPA assigns liability to each responsible party for oil cleanup costs and a
variety of public and private damages. While liability limits apply in some
circumstances, a party cannot take advantage of liability limits if the spill
was caused by gross negligence or willful misconduct or resulted from violation
of a federal safety, construction or operating regulation. If the party fails to
report a spill or to cooperate fully in the cleanup, liability limits likewise
do not apply. Even if applicable, the liability limits for offshore facilities
require the responsible party to pay all removal costs, plus up to $75 million
in other damages. Few defenses exist to the liability imposed by OPA.
OPA imposes ongoing requirements on a responsible party, including the
preparation of oil spill response plans and proof of financial responsibility to
cover environmental cleanup and restoration costs that could be incurred in
connection with an oil spill. As amended by the Coast Guard Authorization Act of
1996, OPA requires responsible parties for offshore facilities to provide
financial assurance in the amount of $35 million to cover potential OPA
liabilities. This amount can be increased up to $150 million if a formal risk
assessment indicates that an amount higher than $35 million should be required.
The Company does not anticipate that it will experience any difficulty in
satisfying the MMS's requirements for demonstrating financial responsibility
under OPA.
In 1996, the American Institute of Certified Public Accountants issued its
Statement of Position 96-1 ("SOP 96-1"), which provides guidance on accounting
for environmental remediation liabilities. SOP 96-1 interprets existing
Financial Accounting Standards Board standards applicable to public companies.
The Company adopted SOP 96-1 effective January 1, 1997, with no material effect.
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 be responsible for the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances found at the site. Persons
who are or were responsible for releases of hazardous substances under CERCLA
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment.
The EPA has indicated that the Company may be potentially responsible for
costs and liabilities associated with alleged releases of hazardous substances
at one site. See "Item 3. Legal Proceedings-Environmental."
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. Permits must be obtained to discharge pollutants
to waters and to conduct construction activities in waters and wetlands. The
FWPCA and similar state laws provide for civil, criminal and administrative
penalties for any unauthorized discharges of pollutants and unauthorized
discharges of reportable quantities of oil and other hazardous substances. Many
state discharge regulations and the Federal National Pollutant Discharge
Elimination System general permits prohibit the discharge of produced water and
sand, drilling fluids, drill cuttings and certain other substances related to
the oil and gas industry to coastal waters. Although the costs to comply with
recently-enacted zero discharge mandates under federal or state law may be
significant, the entire industry is expected to experience similar costs and the
Company believes that these costs will not have a material adverse impact on the
Company's results of operations or financial position. In 1992, the EPA adopted
regulations requiring certain oil and gas exploration and production facilities
to obtain permits for storm water discharges. Costs
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may be associated with the treatment of wastewater or developing and
implementing storm water pollution prevention plans.
OPERATIONAL RISKS AND INSURANCE
The Company's operations are subject to the usual hazards incident to the
drilling of oil and gas wells, such as cratering, explosions, uncontrollable
flows of oil, gas or well fluids, fires, pollution and other environmental
risks. The Company's activities are also subject to perils peculiar to marine
operations, such as capsizing, collision, and damage or loss from severe
weather. 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 operations.
The Company maintains insurance of various types to cover its operations,
including maritime employer's liability and comprehensive general liability.
Amounts in excess of base coverages are provided by primary and excess umbrella
liability policies with ultimate limits of $50 million. In addition, the Company
maintains up to $50 million in operator's extra expense coverage, which provides
coverage for the care, custody and control of wells drilled and/or completed
plus redrill and pollution coverage. The exact amount of coverage for each well
is dependent upon its depth and location.
The occurrence of a significant event not fully insured or indemnified
against could materially and adversely affect the Company's financial condition
and operations. Moreover, no assurance can be given that the Company will be
able to maintain adequate insurance in the future at rates it considers
reasonable.
During late 1997, production commenced from the D platform at the Company's
South Pelto Block 23 Field. Production from the D platform accounted for
approximately 34% of the Company's total oil and gas production for the first
two months of 1998.
EMPLOYEES
At March 11, 1998, the Company had 90 full time employees. The Company
believes that its relationships with its employees are satisfactory. None of the
Company's employees are covered by a collective bargaining agreement. From time
to time the Company utilizes the services of independent contractors to perform
various field and other services.
FORWARD-LOOKING STATEMENTS
Certain of the statements under this Item and elsewhere in this Form 10-K
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
facts included in this Form 10-K, including without limitation statements under
"Item 1. Business", "Item 2. Properties" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding
budgeted capital expenditures, increases in oil and gas production, the
Company's financial position, oil and gas reserve estimates, business strategy
and other plans and objectives for future operations, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. There are numerous
uncertainties inherent in estimating quantities of proved oil and natural gas
reserves and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way, and the accuracy of
any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary from one another. In addition, results of
drilling, testing and production subsequent to the date of an estimate may
justify revisions of such estimate and such revisions, if significant, would
change the schedule of any further production and development drilling.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered. Additional important factors
that could cause actual results to differ materially from the Company's
expectations are disclosed under "Risk Factors" and elsewhere in this Form 10-K.
Should one or more of these risks or uncertainties occur, or should underlying
assumptions prove incorrect, the Company's actual results and plans for 1998 and
beyond could differ materially from those
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expressed in forward-looking statements. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such factors.
RISK FACTORS
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION. The Company's
revenue, profitability and future rate of growth are substantially dependent
upon the prevailing prices of, and demand for, oil and natural gas. Prices for
oil and natural gas have been volatile and are likely to continue to be subject
to wide fluctuation in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond the control of the Company. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in the Middle East, the foreign supply of oil and natural
gas, the price of oil and gas imports and overall economic conditions. From time
to time, oil and gas prices have been depressed by excess domestic and imported
supplies. There can be no assurance that current price levels will be sustained.
It is impossible to predict future oil and natural gas price movements with any
certainty. However, since December 31, 1997, prices for oil have declined.
Declines in oil and natural gas prices may adversely affect the Company's
financial condition, liquidity and results of operations and may reduce the
amount of the Company's oil and natural gas that can be produced economically.
Additionally, substantially all the Company's sales of oil and natural gas are
made in the spot market or pursuant to contracts based on spot market prices and
not pursuant to long-term fixed price contracts. With the objective of reducing
price risk, the Company may from time to time enter into hedging transactions
with respect to a portion of its expected future production. See "-- Risks of
Hedging Transactions." There can be no assurance that such hedging transactions
will reduce risk or mitigate the effect of any substantial or extended decline
in oil or natural gas prices. Any substantial or extended decline in the prices
of oil or natural gas would have a material adverse effect on the Company's
financial condition and results of operations.
In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. The unavailability or lack of capacity thereof could result in the
shut-in of producing wells or the delay or discontinuance of development plans
for properties. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES. This Form 10-K contains
estimates of the Company's proved oil and gas reserves and the estimated future
net revenues therefrom based upon the Company's own estimates or on Reserve
Reports that rely 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 from those estimated by the Company or contained
in the Reserve Reports. Any significant variance in these assumptions could
materially affect the estimated quantity and value of reserves set forth in this
Form 10-K. The Company's properties may also be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties. In addition,
the Company's proved reserves may be subject to downward or upward revision
based upon production history, results of future exploration and development,
prevailing oil and gas prices, mechanical difficulties, government regulation
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 23% of the Company's total proved reserves at December 31,
1997 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The Company's reserve data assume that substantial capital
expenditures by the Company will be required
7
<PAGE>
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. See "Item 2. Properties -- Oil and Gas Reserves."
The present value of future net revenues referred to in this Form 10-K
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 estimated discounted future net cash flows
from proved reserves are 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 cash flows also will be affected by increases in
consumption by gas and oil purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows 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 cash flows 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.
SUBSTANTIAL CAPITAL REQUIREMENTS. The Company makes, and will continue to
make, substantial expenditures for the development, exploration, acquisition and
production of oil and gas reserves. The Company made capital expenditures of
$149 million in 1997, $79 million during 1996 and $46 million during 1995. The
Company plans to make capital expenditures of $130.5 million in 1998 (which
includes $12.5 million for acquisition costs already incurred in 1998).
Management believes that the cash provided by operating activities and
borrowings under the bank credit facility will be sufficient to fund planned
capital expenditures in 1998. However, if revenues or cash flows from operations
decrease as a result of lower oil and natural gas prices, operating difficulties
or other factors, many of which are beyond the control of the Company, the
Company may be limited in its ability to expend the capital necessary to
undertake or complete its drilling program, or it may be forced to raise
additional debt or equity proceeds to fund such expenditures. There can be no
assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
NEED FOR ACQUISITION AND DEVELOPMENT OF ADDITIONAL RESERVES. The Company's
future success, as is generally the case in the industry, depends upon its
ability to find, develop or acquire additional oil and gas reserves that are
economically recoverable. Unless the Company acquires additional properties
containing proved reserves or conducts successful development and exploitation
activities on properties it currently owns, the Company's proved reserves will
decline resulting in lower revenues and cash flow from operations. The
successful acquisition of producing properties requires an assessment of
recoverable reserves, future oil and gas prices and operating costs, potential
environmental and other liabilities, title issues and other factors. Such
assessments are necessarily inexact and their accuracy is inherently uncertain.
In addition, any such assessment will not reveal all existing or potential
problems, nor will it permit the Company to become sufficiently familiar with
the properties to assess fully their deficiencies and capabilities. The
inventory of oil and gas properties offered for sale has declined over the last
several years. This reduced availability of properties, combined with the
emergence during the same period of a number of well-capitalized independent oil
and gas companies, has caused an increase in the prices paid for properties. See
"-- Competition and Markets" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company's strategy includes increasing its production and reserves by
the implementation of a carefully designed field-wide development plan that is
formulated prior to acquisition of a property. There can be no assurance,
however, that the Company's development projects will result in significant
additional reserves or that the Company will have success drilling productive
wells at economically viable costs. Furthermore, while the Company's revenues
may increase if prevailing oil and gas prices increase, the Company's finding
costs for additional reserves could also increase. The Company's strategy
includes a significant increase in development activities and related capital
expenditures due to, among other things, its significant acquisitions in 1996
and 1997. There can be no assurance that the Company can effectively manage this
increased activity.
8
<PAGE>
DRILLING RISKS; OPERATING DELAYS. Drilling involves numerous risks,
including the risk that no commercially productive oil or gas reservoirs will be
encountered. The cost of drilling and completing wells is often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, many of which are beyond the Company's control, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, weather conditions, and shortages or delays in
the delivery of equipment. Demand for drilling rigs, production equipment and
related services increased significantly during 1997, and the costs associated
with these items are higher than in 1996. The Company has experienced delays in
obtaining such equipment and services, and in some instances the costs incurred
are higher than originally budgeted. There can be no assurance as to the success
of the Company's future drilling activities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OPERATING HAZARDS. The oil and gas business involves a variety of operating
risks, including the risk of fire, explosions, blowouts, pipe failure,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which
could result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties, and suspension of operations. In addition to the
foregoing, the Company's offshore operations are subject to the additional
hazards of marine operations, such as capsizing, collision and adverse weather
and sea conditions. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance obtained by the Company will be
adequate to cover any losses or liabilities. The Company cannot predict the
continued availability of insurance or the availability of insurance at premium
levels that justify its purchase.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Oil and gas operations are subject
to various federal, state and local governmental regulations which may be
changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling operations,
drilling and abandonment bonds or other financial responsibility requirements,
reports concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. The production, handling, storage, transportation and disposal
of oil and gas, by-products thereof and other substances and materials produced
or used in connection with oil and gas operations are subject to regulation
under federal, state and local laws and regulations primarily relating to
protection of human health and the environment. See "--Regulation" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Regulatory and Litigation
Issues."
EFFECTS OF LEVERAGE. As of December 31, 1997, the Company's long-term debt
totaled approximately $132 million and the Company had $18.5 million of
additional available borrowing capacity under the Company's bank credit
facility. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources."
The Company's level of indebtedness will have several important effects on
its operations, including (i) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of interest on its indebtedness
and will not be available for other purposes, (ii) the covenants contained in
its indenture and the bank credit facility limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in business conditions,
(iii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures (including acquisitions), general
corporate purposes or other purposes may be impaired, (iv) the Company's
leveraged financial position may make the Company more vulnerable to economic
downturns and may limit its ability to withstand competitive pressures, (v) to
the extent that the Company incurs any indebtedness under the bank credit
facility, which indebtedness will be at variable rates, the Company may be
vulnerable to increases in interest rates and (vi) the Company's flexibility in
planning for or reacting to changes in market conditions may be limited.
Moreover, future acquisition or development activities may require the Company
to alter its capitalization significantly. These changes in capitalization may
significantly increase the leverage of the Company. The Company's ability to
meet its debt service obligations and to reduce its total indebtedness will be
dependent upon
9
<PAGE>
the Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. If the Company is unable
to generate sufficient cash flow from operations in the future to service its
indebtedness and to meet its other commitments, the Company will be required to
adopt one or more alternatives, such as refinancing or restructuring its
indebtedness, selling material assets or operations or seeking to raise
additional debt or equity capital. There can be no assurance that any of these
actions could be effected on a timely basis or on satisfactory terms or that
these actions would enable the Company to continue to satisfy its capital
requirements. The terms of the Company's indebtedness, including the bank credit
facility and the indenture, also may prohibit the Company from taking such
actions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RELIANCE ON KEY PERSONNEL. The Company's operations are dependent upon a
relatively small group of key management and technical personnel. There can be
no assurance that such individuals will remain with the Company for the
immediate or foreseeable future. The unexpected loss of the services of one or
more of these individuals could have a detrimental effect on the Company. See
"Item 4A. Executive Officers of the Registrant."
RISKS OF HEDGING TRANSACTIONS. In order to manage its exposure to price
risks in the marketing of its oil and gas, the Company has in the past and
expects to continue to enter into oil and gas price hedging arrangements with
respect to a portion of its expected production. The Company's hedging policy
provides that, without the prior approval of the Board of Directors, generally
not more than 50% of its production quantities can be hedged, and that any such
hedges shall not be longer than one year in duration. These arrangements may
include futures contracts on the New York Mercantile Exchange ("NYMEX"). While
intended to reduce the effects of volatility of the price of oil and gas, such
transactions may limit potential gains by the Company if oil and gas prices were
to rise substantially over the price established by the hedge. In addition, such
transactions may expose the Company to the risk of financial loss in certain
circumstances, including instances in which (i) production is less than
expected, (ii) there is a widening of price differentials between delivery
points for the Company's production and the delivery point assumed in the hedge
arrangement, (iii) the counterparties to the Company's future contracts fail to
perform the contract or (iv) a sudden, unexpected event materially impacts oil
or gas prices. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
CONFLICTS OF INTEREST. Certain employees of the Company, including James H.
Stone, the Company's Chairman of the Board and Chief Executive Officer, own
working interests in certain of the Company's oil and gas properties acquired
prior to 1995 and will have the opportunity to participate as working interest
owners in certain of the Company's future drilling activities on such
properties. In addition, certain officers of the Company were granted net
profits interests in certain of the oil and gas properties of the Company
acquired prior to the Company's initial public offering in 1993. The recipients
of the net profits interests are not required to pay capital costs incurred on
the properties burdened by such interests. Therefore, a conflict of interest may
exist between the Company and such employees and officers with respect to the
drilling of additional wells or other development operations. The Company and
James H. Stone also continue to manage programs formed prior to 1993, and James
H. Stone continues to individually participate in various oil and gas operations
and ventures. It is possible, as a result of these activities, that conflicts of
interest could arise.
CONTROL BY MANAGEMENT. Executive officers and directors of the Company
beneficially own approximately 26.8% of the outstanding Common Stock of the
Company (the "Common Stock"). This percentage ownership is based on the number
of shares of Common Stock outstanding at March 11, 1998 and the beneficial
ownership of such persons at such date. As a result, these persons may be in a
position to control the Company through their ability to determine the outcome
of elections of the Company's directors and certain other matters requiring the
vote or consent of the Company's stockholders.
COMPETITION. The Company operates in a highly competitive environment. The
Company competes with major and independent oil and gas companies for the
acquisition of desirable oil and gas properties, as well as for the equipment
and labor required to develop and operate such properties. Many of these
competitors have financial, technical and other resources substantially greater
than those of the Company. See "Competition and Markets."
10
<PAGE>
ITEM 2. PROPERTIES
The Company has grown principally through the acquisition and subsequent
development and exploitation of properties purchased from major oil companies.
The Company's proved oil and gas reserves at December 31, 1997 were attributable
to 14 properties, eight of which are in the Gulf of Mexico offshore Louisiana,
and six of which are onshore Louisiana. The Company currently manages four
partnerships formed prior to its Initial Public Offering, and less than 5% of
the Company's assets are owned through these entities.
OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves of
the Company and the present value of estimated future pre-tax net cash flows
related to such reserves as of December 31, 1997. All information in this Form
10-K relating to estimated oil and gas reserves and the estimated future net
cash flows attributable thereto is based upon the reserve reports (the "Reserve
Reports") prepared by Atwater Consultants, Ltd. and Cawley, Gillespie &
Associates, Inc., both independent petroleum engineers, as of December 31, 1997.
Using the information contained in the Reserve Reports, the average product
prices for all of the Company's properties were $17.00 per Bbl of oil and $2.64
per Mcf of gas. All product pricing and cost estimates used in the Reserve
Reports are in accordance with the rules and regulations of the Securities and
Exchange Commission, and, except as otherwise indicated, the reported amounts
give no effect to federal or state income taxes otherwise attributable to
estimated future cash flows from the sale of oil and gas. The present value of
estimated future net cash flows has been calculated using a discount factor of
10%.
<TABLE>
<CAPTION>
Proved Proved Total
Developed Undeveloped Proved
--------------- ---------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Oil (MBbls).......................................... 14,485 3,278 17,763
Gas (MMcf)........................................... 141,424 47,815 189,239
Total oil and gas (MBOE)............................. 38,056 11,247 49,303
Estimated future net revenues before
income taxes..................................... $619,514 $181,103 $800,617
Present value of estimated future
pre-tax net cash flows........................... $326,654 $41,262 $367,916
</TABLE>
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment and the existence of
development plans. As a result, estimates of reserves made by different
engineers for the same property will often vary. Results of drilling, testing
and production subsequent to the date of an estimate may justify a revision of
such estimates. Accordingly, reserve estimates are generally different from the
quantities of oil and gas that are ultimately produced. Further, the estimated
future net revenues from proved reserves and the present value thereof are based
upon certain assumptions, including geological success, prices, future
production levels and costs that may not prove to be correct. Predictions about
prices and future production levels are subject to great uncertainty, and the
meaningfulness of such estimates depends on the accuracy of the assumptions upon
which they are based.
As an operator of domestic oil and gas properties, the Company has filed
Department of Energy Form EIA-23, "Annual Survey of Oil and Gas Reserves," as
required by Public Law 93-275. There are differences between the reserves as
reported on Form EIA-23 and as reported herein. The differences are attributable
to the fact that Form EIA-23 requires that an operator report on the total
reserves attributable to wells which are operated by it, without regard to
ownership (i.e., reserves are reported on a gross operated basis, rather than on
a net interest basis).
11
<PAGE>
ACQUISITION, PRODUCTION AND DRILLING ACTIVITY
ACQUISITION AND DEVELOPMENT COSTS. The following table sets forth certain
information regarding the costs incurred by the Company in its development and
acquisition activities during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Acquisition costs.................................... $43,791 $26,650 $ 8,074
Development costs.................................... 43,762 24,090 27,383
Exploratory costs.................................... 57,770 26,339 8,261
------------- ------------- -------------
Subtotal........................................... 145,323 77,079 43,718
Capitalized general and administrative costs and
interest, net of fees and reimbursements...........
3,457 2,325 1,790
------------- ------------- -------------
Total costs incurred................................. $148,780 $79,404 $45,508
============= ============= =============
</TABLE>
PRODUCTIVE WELL AND ACREAGE DATA. The following table sets forth certain
statistics for the Company regarding the number of productive wells and
developed and undeveloped acreage as of December 31, 1997.
Gross Net
------------- --------------
Productive Wells:
Oil (1).......................... 47.00 36.61
Gas (2)........................... 47.00 33.45
------------- --------------
Total......................... 94.00 70.06
============= ==============
Developed Acres:
Onshore Louisiana................. 2,093.41 1,668.67
Offshore Louisiana................ 13,018.12 9,394.52
------------- --------------
Total......................... 15,111.53 11,063.19
============= ==============
Undeveloped Acres (3):
Onshore Louisiana................. 16,556.13 14,311.89
Offshore Louisiana................ 43,016.39 30,315.64
------------- --------------
Total......................... 59,572.52 44,627.53
============= ==============
(1) 4 gross wells each have dual completions.
(2) 8 gross wells each have dual completions.
(3) Leases covering approximately 1.24% of the Company's undeveloped acreage
will expire in 1998, 0.12% in 1999, 7.39% in 2000, 4.00% in 2001 and
0.44% in 2002. Leases covering the remainder of the Company's
undeveloped gross acreage (86.81%) are held by production.
12
<PAGE>
DRILLING ACTIVITY. The following table sets forth the Company's drilling
activity for the periods indicated.
Gross Net
------------ -------------
Wells drilled during the years ended December 31:
1997:
Exploratory........................ 10.00 8.70
Development........................ 2.00 1.26
1996:
Exploratory........................ 4.00 3.73
Development........................ 5.00 4.50
1995:
Exploratory........................ 3.00 2.94
Development........................ 6.00 4.40
All wells drilled were productive except for three gross exploratory wells (2.75
net) and one gross development well (0.76 net) drilled in 1996 and two gross
exploratory wells (1.94 net) and one gross development well (0.38 net) drilled
in 1995.
TITLE TO PROPERTIES
The Company believes it has satisfactory title on substantially all of its
producing properties in accordance with standards generally accepted in the oil
and gas industry. The Company's properties are subject to customary royalty
interests, 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. The title investigation performed by the Company prior to acquiring
undeveloped properties is thorough but less vigorous than that conducted prior
to drilling, consistent with standard practice in the oil and gas industry.
Prior to the commencement of drilling operations, a thorough title examination
is conducted and curative work is performed with respect to significant defects
before proceeding with operations. A thorough title examination has been
performed with respect to substantially all producing properties owned by the
Company.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL
In August 1989, the Company was advised by the EPA that it believed the
Company to be a potentially responsible party (a "PRP") for the cleanup of an
oil field waste disposal facility located near Abbeville, Louisiana, which was
included on CERCLA's National Priority List (the "Superfund List") by the EPA in
March 1989. In addition to the Company, approximately 370 other companies have
been named as being potentially responsible for the cleanup of the site. While
the Company's records do not indicate that any drilling wastes generated by the
Company were disposed of at this site, it is possible that one or more waste
haulers contracted by the Company may have disposed of wastes at this site.
Given the extremely large number of PRPs at this site, management does not
believe that any liability for this site would materially adversely affect the
financial condition of the Company.
13
<PAGE>
OTHER PROCEEDINGS
In December 1995, Goodrich Leasehold L.L.C. and Goodrich Drillers L.L.C.
filed a civil action (No. 95-61313) in the 333rd Judicial District Court, Harris
County, Texas, against the Company in an attempt to set aside a farmout
agreement affecting portions of the West Flank of the Weeks Island Field in
Iberia Parish, Louisiana. This case was tried in Harris County, Texas, and on
March 12, 1998, the jury found in favor of the Company. The Company does not
anticipate an appeal by either party.
The Company is also named as a defendant in certain lawsuits and is a party
to certain regulatory proceedings arising in the ordinary course of business.
Management does not expect these matters, individually or in the aggregate, to
have a material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the names and ages of
(as of March 11, 1998) and positions held by each of the Company's executive
officers. The Company's executive officers serve at the discretion of the Board
of Directors.
<TABLE>
<CAPTION>
Name Age Position
------ --- --------
<S> <C> <C>
James H. Stone.................................. 72 Chairman of the Board and Chief Executive
Officer
Joe R. Klutts................................... 63 Vice Chairman of the Board
D. Peter Canty.................................. 51 President, Chief Operating Officer and
Director
Michael L. Finch................................ 42 Executive Vice President, Chief Financial
Officer and Director
Phillip T. Lalande.............................. 48 Vice President - Engineering
James H. Prince................................. 55 Vice President, Chief Accounting Officer and
Controller
Andrew L. Gates, III............................ 50 Vice President - Legal, Secretary and General
Counsel
E. J. Louviere.................................. 49 Vice President - Land
Craig L. Glassinger............................. 50 Vice President - Acquisitions
</TABLE>
The following biographies describe the business experience of the executive
officers of the Company for at least the past five years. The Company was formed
in March 1993 to become a holding company for The Stone Petroleum Corporation
("TSPC") and its subsidiaries.
James H. Stone has served as Chairman of the Board and Chief Executive
Officer of the Company since March 1993, and as Chairman of the Board of TSPC
since 1981 and served as President of TSPC from September 1992 to July 1993. Mr.
Stone is currently a director of Hibernia Corporation and Newpark Resources,
Inc., and is a member of the Advisory Committee of the St. Louis Rams Football
Company.
Joe R. Klutts has served as Vice Chairman of the Board since March 1994 and
as a Director since March 1993. He has also served as a Director of TSPC since
1981. He served as President of the Company from March 1993 to February 1994,
and as Executive Vice President - Exploration and President of TSPC from 1981 to
1993 and from July 1993 to May 1994, respectively.
14
<PAGE>
D. Peter Canty served as an Executive Vice President of the Company from
March 1993 to March 1994, when he was named President of the Company. He has
also served as Chief Operating Officer and as a Director of the Company since
March 1993. Mr. Canty was a Vice President and the Chief Geologist of TSPC from
1987 to May 1994, when he was named President of TSPC.
Michael L. Finch has served as Executive Vice President, Chief Financial
Officer and Director since March 1993. From 1988 through July 1993, he was a
partner in the firm of Finch & Pierret, CPAs, which performed a substantial
amount of financial reporting, tax compliance and financial advisory services
for TSPC and its affiliates.
Phillip T. Lalande has served as Vice President - Engineering of the Company
since March 1995. He served as the Company's Operations Manager from July 1993
to March 1995, and as a consulting engineer to TSPC from 1988 to July 1993.
James H. Prince has served as Vice President, Chief Accounting Officer and
Controller of the Company since March 1993 and as Vice President and Controller
of TSPC since 1981, as Treasurer since 1989, as Secretary from 1989 to 1991 and
as Assistant Secretary since 1992.
Andrew L. Gates, III has served as Vice President - Legal, Secretary and
General Counsel of the Company since August 1995. Prior to joining Stone Energy
in 1995, he was a partner in the law firm of Ottinger, Gates, Hebert & Sikes
from 1987 to August 1995.
E. J. Louviere has served as Vice President - Land since June 1995. He
served as the Land Manager of TSPC and the Company from July 1981 to June 1995.
Craig L. Glassinger has served as Vice President - Acquisitions of the
Company since December 1995. He served TSPC and Stone Energy from October 1992
to December 1995 as Acquisitions Manager. Prior to joining TSPC, he was a
division geologist for Forest Oil Corporation for approximately ten years.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since July 9, 1993, the Common Stock has been listed on the New York Stock
Exchange under the symbol "SGY." The following table sets forth, for the periods
indicated, the high and low closing prices per share for the Common Stock.
High Low
------------- -------------
1996
First Quarter..................... $17 1/4 $13 1/4
Second Quarter.................... 20 1/8 15 5/8
Third Quarter..................... 23 1/2 17 3/4
Fourth Quarter.................... 30 18 1/8
1997
First Quarter..................... $29 1/4 $22
Second Quarter.................... 29 3/8 22 3/4
Third Quarter..................... 34 1/2 25 1/16
Fourth Quarter.................... 37 28 9/16
1998
First Quarter (through March 11, 1998)....$37 $28 9/16
On March 11, 1998, the last reported sales price on the New York Stock
Exchange Composite Tape was $36.50 per share. As of that date there were
approximately 159 holders of record of the Common Stock.
The Company has not in the past, and does not intend to pay cash dividends
on its Common Stock in the foreseeable future. The Company currently intends to
retain earnings, if any, for the future operation and development of its
business. The Company has entered into a credit facility that contains
provisions that may have the effect of limiting or prohibiting the payment of
dividends. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
SELECTED HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share amounts)
The following table sets forth a summary of selected historical financial
information for the five years ended December 31, 1997 for the Company. This
information is derived from the consolidated financial statements of the Company
and the notes thereto. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data."
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
<S> ------ ------ ------ ------ ------
Statement of Operations Data:
Operating revenue: <C> <C> <C> <C> <C>
Oil production revenue................................... $31,082 $27,788 $24,775 $18,482 $17,752
Gas production revenue................................... 37,997 28,051 13,918 12,697 10,718
Other revenue............................................ 1,908 2,126 1,858 1,708 1,252
------ ------ ------ ------ ------
Total revenue.......................................... 70,987 57,965 40,551 32,887 29,722
------ ------ ------ ------ ------
Expenses:
Normal lease operating expenses.......................... 10,123 8,625 6,294 5,312 4,326
Major maintenance expenses............................... 1,844 427 446 1,834 822
Production taxes......................................... 2,215 3,399 3,057 2,303 2,000
Depreciation, depletion and amortization................. 28,739 19,564 15,719 11,569 8,028
Interest expense......................................... 4,916 3,574 2,191 982 1,499
Other expense ........................................... - - - - 245
General and administrative costs......................... 3,903 3,509 3,298 3,099 2,248
Incentive compensation plan.............................. 833 928 85 1,358 -
Exchange offer expenses.................................. - - - - 780
------ ------- ------ ------ ------
Total expenses......................................... 52,573 40,026 31,090 26,457 19,948
------ ------- ------ ------ ------
Net income before income taxes............................ 18,414 17,939 9,461 6,430 9,774
------ ------- ------ ------ ------
Provision for income taxes:
Current.................................................. - 208 131 - -
Deferred................................................. 6,495 6,698 3,514 2,410 943
------ ------- ------ ------ ------
Total income taxes..................................... 6,495 6,906 3,645 2,410 943
------ ------- ------ ------ ------
Net income................................................. $11,919 $11,033 $5,816 $4,020 $8,831
======= ======= ====== ====== ======
Earnings and dividends per common share:
Basic net income per common share (2).................... $0.79 $0.90 $0.49 $0.34 $0.88
===== ===== ===== ===== =====
Diluted net income per common share (2).................. $0.78 $0.90 $0.49 $0.34 $0.88
===== ===== ===== ===== =====
Cash dividends declared.................................. - - - - -
Cash Flow Data:
Net cash provided by operating
activities (before working capital changes).............. $47,153 $37,295 $25,049 $17,911 $17,852
Net cash provided by operating
activities............................................... 32,679 32,751 27,650 9,609 13,857
Balance Sheet Data (at end of period):
Working capital ........................................... $8,328 $6,683 $5,379 $4,437 $18,421
Oil and gas properties, net................................ 291,420 171,396 111,248 81,291 60,097
Total assets (1)........................................... 354,144 209,406 139,460 109,956 98,770
Long-term debt, less current portion....................... 132,024 26,172 47,754 22,725 21,620
Stockholders' equity (1)................................... 156,637 144,441 66,927 61,045 56,997
</TABLE>
(1) Total assets and stockholders' equity at December 31, 1993 have been
restated for an adjustment of the cumulative effect of the adoption in 1992
of SFAS No. 109.
(2) Earnings per share for the years ended December 31, 1997, 1996 and 1995
have been restated to reflect the adoption of SFAS No. 128.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for each year of the
three-year period ended December 31, 1997. The Company's financial statements
and the notes thereto contain detailed information that should be referred to in
conjunction with the following discussion.
See "Item 8. Financial Statements and Supplementary Data."
FORMATION OF STONE ENERGY
The Company was formed in March 1993 to become a holding company for TSPC,
its subsidiaries and certain partnership interests, and approximately 8.1
million shares of Common Stock were issued to holders of interests in those
entities. In July 1993, the Company also sold approximately 3.7 million shares
of newly issued Common Stock in the Initial Public Offering. In November 1996,
the Company completed a secondary offering of an additional 3.2 million shares
of Common Stock.
OPERATING ENVIRONMENT
During late 1997, the oil and gas industry began to experience declines in
natural gas and crude oil prices. The decline in natural gas prices have been
attributable to a milder-than-normal 1997-98 winter, while oil prices, which are
more subject to global economic forces, have declined because of higher world
supplies coupled with an anticipated decrease in future demand. Even though the
near-term outlook for oil and gas prices remains below 1997 and 1996 levels, the
Company's growth plans and budgets for 1998 have not been materially impacted
because of the Company's relatively high operating margin.
At present, the Company does not expect that changes in the rates of overall
economic growth or inflation will significantly impact product prices in the
short-term. Furthermore, because all of the factors that affect the prices that
the Company receives for its production are beyond its control, the Company's
marketing efforts are devoted to achieving the best price available in each
geographic location and entering into a limited amount of fixed price sales and
hedging transactions to take advantage of short-term prices it believes to be
attractive.
Demand for drilling rigs and related products and services continued to
increase during 1997, and the costs associated with these items are higher than
one year ago. The Company has experienced delays in obtaining drilling rigs and
certain other services, and in some instances the costs incurred are higher than
originally budgeted. Despite these changes in the market for drilling supplies
and services, the Company does not expect these current conditions to have a
material impact on the timing or long-term profitability of its planned
activities.
The inventory of oil and gas properties offered for sale has declined over
the last several years. This reduced availability of properties, combined with
the emergence during the same period of a number of well-capitalized independent
oil and gas companies, has caused an increase in the prices paid for properties.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information with respect to
the oil and gas operations of the Company and summary information with respect
to the Company's estimated proved oil and gas reserves. See "Item 2.
Properties-Oil and Gas Reserves."
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
<S> -------------- ------------- -------------
Production: <C> <C> <C>
Oil (MBbls)................................................... 1,585 1,356 1,400
Gas (MMcf).................................................... 14,183 11,331 8,399
Oil and gas (MBOE)............................................ 3,949 3,245 2,800
Sales data (in thousands):
Total oil sales............................................... $31,082 $27,788 $24,775
Total gas sales............................................... 37,997 28,051 13,918
Average sales prices:
Oil (per Bbl)................................................. $19.61 $20.49 $17.70
Gas (per Mcf)................................................. 2.68 2.48 1.66
Per BOE....................................................... 17.49 17.21 13.82
Average costs (per BOE):
Normal operating costs........................................ $2.56 $2.66 $2.25
General and administrative.................................... 0.99 1.08 1.18
Depreciation, depletion and amortization...................... 7.12 5.93 5.57
Reserves at December 31:
Oil (MBbls)................................................... 17,763 12,772 7,985
Gas (MMcf).................................................... 189,239 144,316 81,179
Oil and gas (MBOE)............................................ 49,303 36,825 21,515
Present value of estimated pre-tax future
net cash flows (in thousands)............................... $367,916 $448,895 $179,725
</TABLE>
1997 COMPARED TO 1996. Net income for the year ended December 31, 1997
totaled $11.9 million, an increase of 8.0% from 1996 net income of $11.0
million. However, because of the secondary public offering of the Company's
common stock in late-1996 which issued approximately 3.2 million shares, the
Company's earnings per share during 1997 declined to $0.79 per share, compared
to $0.90 per share during 1996.
During 1997, the Company implemented a significantly expanded capital
expenditures program. As a result of the success of this program, the Company
experienced a 22% increase in production volumes, on a MBOE basis, over 1996
production levels. Production volumes of both oil and gas during 1997, compared
to 1996, rose 17% and 25%, respectively, totaling 1.6 MMBbls of oil and 14.2 Bcf
of gas. This growth in production volumes resulted in 1997 oil and gas revenues
rising to $69.1 million, a 24% increase from 1996 oil and gas revenues of $55.8
million. The average prices received for oil and gas during 1997 were $19.61 per
barrel and $2.68 per Mcf as compared to $20.49 per barrel and $2.48 per Mcf
during 1996.
Normal operating costs increased during 1997 to $10.1 million compared to
$8.6 million in 1996. The increase was attributable to property acquisitions,
higher production rates, as well as generally higher costs of services during
1997. However, on a unit basis, these costs declined during 1997 to $2.56 per
BOE from $2.66 per BOE in 1996.
Major maintenance expenses during 1997 totaled $1.8 million compared to $0.4
million during 1996. The increase was due to one major, non-recurring workover
project during 1997 which cost $1.2 million.
19
<PAGE>
Total depreciation, depletion and amortization ("DD&A") expense attributable
to oil and gas properties increased during 1997 because of higher production
rates and increased investment in the properties. DD&A increased to $28.1
million or $7.12 per BOE in 1997 from $19.3 million or $5.93 per BOE in 1996.
During 1997, the Company borrowed funds pursuant to its bank credit facility
and completed a $100 million public offering of its 8-3/4% Senior Subordinated
Notes to finance a portion of its 1997 capital expenditures program. As a
result, interest expense increased to $4.9 million during 1997 compared to $3.6
million in 1996. Because of the overall increase in the Company's operations
during 1997, general and administrative costs increased in total to $3.9
million. However, on a unit basis, general and administrative costs declined to
$0.99 per BOE, compared with $1.08 per BOE, in 1996.
In addition to increasing production volumes, the 1997 capital expenditures
program also increased the Company's year-end 1997 reserve levels. At December
31, 1997, the Company's reserves totaled 49.3 MMBOE, a 34% increase from
December 31, 1996 reserves of 36.8 MMBOE. Oil reserves increased to 17.8 MMBbls
at the end of 1997 from 12.8 MMBbls at the beginning of the year, and gas
reserves grew to 189.2 Bcf at December 31, 1997 compared to 144.3 Bcf at
year-end 1996.
Pre-tax income increased to $18.4 million in 1997 from $17.9 million in
1996. The 1997 tax provision, however, decreased to $6.5 million from $6.9
million in 1996 because of an adjustment to the Company's annual tax rate during
1997.
1996 COMPARED TO 1995. Net income for the year ended December 31, 1996 was
$11.0 million, an increase of 90% from 1995 earnings of $5.8 million. Earnings
per share rose to $0.89 in 1996, as compared to $0.49 per share in 1995. Net
income for the three months ended December 31, 1996, was $2.9 million or $0.21
per share, an increase from the $1.8 million and $0.15 per share reported for
the fourth quarter of 1995.
For 1996, oil and gas revenues were $55.8 million as compared to $38.7
million in 1995, a 44% increase. Proceeds from sales of production in 1996 were
50% oil and 50% gas, as compared to 64% and 36%, respectively, for 1995.
Production volumes for 1996 were 1.4 MMBbls of oil and 11.3 Bcf of gas. Oil
production for 1996 was essentially the same as 1995, and gas deliveries
increased 35% from the 1995 amount of 8.4 Bcf of gas.
The increase in 1996's oil and gas revenues resulted from overall production
growth of 16% for the year and a 25% increase in the average price received per
BOE. The average gas price per Mcf increased 49% to $2.48 in 1996 from the 1995
amount of $1.66, and the average oil price per barrel climbed 16%, from $17.70
in 1995 to $20.49 in 1996. For the fourth quarter of 1996, oil and gas revenues
were 37% higher than for the comparable 1995 period due to overall increases,
stated in equivalent barrels, in production of 8% and prices of 27%.
Normal operating costs for 1996 increased in total to $8.6 million from $6.3
million in 1995 due to an increased number of properties and higher production
rates. The primary reason for the increase in such costs on a unit of production
basis ($2.66 per BOE in 1996 versus $2.25 per BOE in 1995) was certain
nonrecurring repairs and generally higher costs of services, although the 1996
unit amount was within the Company's budgeted range for these costs.
DD&A expense attributable to oil and gas properties increased because of
higher production rates and investments in the properties. This non-cash expense
increased to $19.3 million or $5.93 per BOE in 1996 from $15.6 million or $5.57
per BOE in 1995.
During 1996, the Company borrowed funds pursuant to its bank credit facility
to finance a portion of its capital expenditures budget, and as a result
interest expense increased to $3.6 million in 1996 from $2.2 million in 1995.
General and administrative costs also increased in total to $3.5 million in 1996
from $3.3 million in 1995, but on a unit basis declined 9% to $1.08 per BOE in
1996 from $1.18 per BOE in 1995. Due to higher bonus awards during the year, the
Company's incentive compensation program expenses increased to $0.9 million in
1996 from $0.1 million in 1995.
Pre-tax income increased to $17.9 million in 1996 from $9.5 million in 1995,
and therefore the tax provision increased to $6.9 million in 1996 from $3.6
million in 1995. Except for an estimated minimum tax liability of $0.2 million,
the remainder of the tax provision is deferred and does not require current
funding.
20
<PAGE>
The Company's reserves at December 31, 1996 were 36.8 MMBOE and
represented an increase of 71% from the comparable 1995 amount of 21.5 MMBOE.
Oil reserves increased to 12.8 MMBbls at the end of 1996 from 8.0 MMBbls at the
beginning of the year, and gas reserves rose to 144.3 Bcf at December 31, 1996
from 81.2 Bcf at December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed an offering of $100 million
principal amount of its 8-3/4% Senior Subordinated Notes. The net proceeds from
the offering were used to retire the Term Loan and for other general corporate
purposes. See "Liquidity and Capital Resources - Historical Financing Sources."
The Company believes that its existing working capital, combined with expected
cash flow from operations and borrowings under its bank credit facility, will be
sufficient to fund its operations and development activities through the end of
1998.
WORKING CAPITAL AND CASH FLOW. Working capital at December 31, 1997 was $8.3
million. Net cash flow from operations before working capital changes for 1997
was $47.2 million, which represents a 26% increase from the 1996 amount of $37.3
million. On a per share basis, net cash flow from operations before working
capital changes was $3.14 per share in 1997 as compared to $3.05 per share in
1996.
During 1997, the Company invested $148.8 million in its oil and gas
properties, which included $3.5 million of net capitalized general and
administrative and interest costs. These investments were financed from cash
flow from operations, proceeds from the Company's Notes offering and borrowings
under the Company's bank credit facility. As a result of these investments, the
Company's average net daily production rate for the first two months of 1998
increased to 21.3 MMBOE, as compared to the 1997 average net daily rate of 10.8
MMBOE.
The Company's production is sold on month-to-month contracts at prevailing
prices. From time to time, however, the Company has entered into hedging
transactions or fixed price sales contracts for its oil and gas production. The
purpose of these transactions is to reduce the Company's exposure to future oil
and gas price declines. This hedging policy provides that, unless prices change
by more than 25%, not more than one-half of the Company's production quantities
can be hedged without the consent of the Company's Board of Directors. Such swap
agreements typically provide for monthly payments by (if prices rise) or to (if
prices decline) the Company based on the difference between the strike price and
the average closing price of the near month NYMEX futures contract for each
month of the agreement. Because its properties are located in the Gulf Coast
Basin, the Company believes that fluctuations in the NYMEX futures prices will
closely match changes in the market prices for its production.
The Company's net loss from hedging transactions for 1997 was $0.6 million.
Swap contracts totaled 237.7 MBbls of oil and 4,395 BBtus of gas, which
represented approximately 15% and 33%, respectively, of the Company's oil and
gas production for the year. As of March 11, 1998, the Company had hedged oil
and gas prices for certain periods in 1998, and the applicable periods,
quantities and average prices are as follows:
<TABLE>
<CAPTION>
Oil Gas
----------------------------------- ------------------------------------
Volumes Price Volumes Price
Period (MBbls) ($/Bbl) (BBtus) ($/MMBtu)
---------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
First quarter 1998..................... 108 $21.58 1,800 $2.940
Second quarter 1998.................... 36 21.15 300 2.427
</TABLE>
The Company's net loss from hedging transactions for 1996 was $3.8 million.
Swap contracts totaled 493.9 MBbls of oil and 4,880 BBtus of gas, which
represented 36% and 43%, respectively, of the Company's oil and gas production
for the year.
HISTORICAL FINANCING SOURCES. Since the Company's Initial Public Offering in
July 1993, the Company has financed its activities with both debt and equity
offering proceeds, cash flow from operations, borrowings under its bank credit
facility and investments by two partnerships formed before the Initial Public
Offering which had uncommitted funds.
21
<PAGE>
These partnerships were provided the option of participating for a combined
interest of 25%, subject to the amount of available funds, in all new properties
acquired by the Company that met their investment criteria. As of December 1994,
all funds of these partnerships were committed and the Company is not required
to offer participation in subsequently acquired properties to these entities,
unless such acquisitions represent additional interests in properties already
owned by the partnerships.
On September 16, 1997, the Company completed an offering of $100 million
principal amount of its 8-3/4% Senior Subordinated Notes (the "Notes") due
September 15, 2007 with interest payable semiannually commencing March 15, 1998.
The Notes were sold at a discount for an aggregate price of $99.3 million and
the net proceeds from the offering were used to repay amounts outstanding under
the Company's bank credit facility and for other general corporate purposes.
There are no sinking fund requirements on the Notes and they are redeemable at
the option of the Company, in whole or in part, at 104.375% of their principal
amount beginning September 15, 2002, and thereafter at prices declining annually
to 100% on and after 2005. Provisions of the Notes include, without limitation,
restrictions on liens, indebtedness, asset sales and other restricted payments.
On July 30, 1997, the Company executed its Third Amended and Restated Credit
Agreement with NationsBank of Texas, N.A., as agent for a group of banks. The
agreement provided for a total facility of $150 million and was comprised of a
three-year revolving credit facility (the "Revolver") and a one-year term loan
(the "Term Loan"). The Term Loan of $50 million, which was established to
finance the closing of the largest acquisition in the Company's history, the
Vermilion Block 255 Field, and certain development costs, was retired in
September 1997 with proceeds generated from the Company's notes offering.
Additionally, the borrowing base of its $100 million revolving credit facility
was reduced to $55 million subsequent to the offering of the Notes. The Company
anticipates that the borrowing base will be increased on or before March 31,
1998.
At December 31, 1997, the Revolver had an outstanding principal balance of
$29.0 million with a weighted average interest rate of 6.9% per annum, and
letters of credit totaling $7.5 million had been issued pursuant to the
facility. The principal balance of the Revolver is due on July 30, 2000. The
credit agreement provides for certain covenants, including restrictions or
requirements with respect to working capital, net worth, disposition of
properties, incurrence of additional debt, change of ownership and reporting
responsibilities. Such covenants may result in the limitation or prohibition of
the payment of cash dividends by the Company. A facility fee of $150,000 was
paid by the Company on July 30, 1997, and a portion of the fee was expensed in
the third quarter of 1997 upon the retirement of the Term Loan.
On November 30, 1995, the Company executed a term loan agreement with FNBC
in the original principal amount of $3.3 million for the purchase of the
RiverStone office building, a portion of which is used by the Company for its
Lafayette office. The loan has a five year term bearing interest at a rate of
7.45% over the entire term of the loan. Principal and interest are payable
monthly and are based upon a 20 year amortization period. The indebtedness under
the agreement is collateralized by the building. This loan agreement contains
covenants and restrictions that are similar to the NationsBank credit facility.
LONG-TERM FINANCING. The Company's 1998 capital expenditures budget totals
$130.5 million and includes development expenditures of $118.0 million and $12.5
million for the acquisition of the East Cameron Block 64 Field which occurred in
January 1998. Initially, the development budget has been allocated to the
Company's property base and would be funded by a combination of cash flow from
operations and borrowings available under its bank credit facility. A number of
proposals for property acquisitions are currently outstanding, and evaluations
of a number of other properties for potential purchase or joint venture are
continuing, although no offers have been accepted and no future acquisitions can
be assured. The Company may seek additional capital to finance future
acquisitions or development activities beyond its current plans. In addition to
the public markets, the Company would also consider new private financing
sources and joint venture or partnership structures to fund such additional
investments.
REGULATORY AND LITIGATION ISSUES. In December 1995, Goodrich Leasehold
L.L.C. and Goodrich Drillers L.L.C. filed a civil action against the Company in
an attempt to set aside a Farmout Agreement affecting portions of the West Flank
of the Weeks Island Field in Iberia Parish, Louisiana. This case was tried in
Harris County, Texas, and on March 12, 1998, the jury found in favor of the
Company. The Company does not anticipate an appeal by either party.
22
<PAGE>
The Company is also named as a defendant in certain lawsuits and is a
party to certain regulatory proceedings arising in the ordinary course of
business. The regulatory proceedings include one instance in which the EPA has
indicated that it believes that the Company is a PRP for the cleanup of oil
field waste facilities. Management does not expect these matters, individually
or in the aggregate, to have a material adverse effect on the financial
condition of the Company.
Since November 26, 1993, new levels of lease and area wide bonds have been
required of lessees taking certain actions with regard to OCS leases. Operators
in the OCS waters of the Gulf of Mexico, including the Company, have been or may
be required to increase their area wide bonds and individual lease bonds to $3
million and $1 million, respectively, unless exemptions or reduced amounts are
allowed by the MMS. The Company currently has an area wide pipeline bond of $0.3
million and area wide lease bonds totaling $3.0 million issued in favor of the
MMS for its existing offshore properties. The MMS also has discretionary
authority to require supplemental bonding in addition to the foregoing required
bonding amounts but this authority is only exercised on a case-by-case basis at
the time of filing an assignment of record title interest for MMS approval.
Based upon certain financial parameters, the Company has been granted exempt
status by the MMS, which exempts the Company from the supplemental bonding
requirements. Under certain circumstances, the MMS may require any Company
operations on federal leases to be suspended or terminated. Any such suspension
or termination could materially and adversely affect the Company's financial
condition and operations.
As amended by the Coast Guard Authorization Act of 1996, OPA requires
responsible parties for offshore facilities to provide financial assurance in
the amount of $35 million to cover potential OPA liabilities. This amount can be
increased up to $150 million if a formal risk assessment indicates that an
amount higher than $35 million should be required. The Company does not
anticipate that it will experience any difficulty in satisfying the MMS's
requirements for demonstrating financial responsibility under OPA.
In 1996, the American Institute of Certified Public Accountants issued
its Statement of Position 96-1 ("SOP 96-1"), which provides guidance on
accounting for environmental remediation liabilities. SOP 96-1 interprets
existing Financial Accounting Standards Board standards applicable to public
companies. The Company adopted SOP 96-1 effective January 1, 1997, with no
material effect.
The Company operates under numerous state and federal laws enacted for the
protection of the environment. In the ordinary course of business, the Company
conducts an ongoing review of the effects of these various environmental laws on
its business and operations. The estimated cost of continued compliance with
current environmental laws, based upon the information currently available, is
not material to the Company's results of operations or financial position. It is
impossible to determine whether and to what extent the Company's future
performance may be affected by environmental laws; however, management believes
that such laws will not have a material adverse effect on the Company's results
of operations or financial position.
The Company is currently in the process of evaluating its information
technology for Year 2000 compliance. The Company's primary information systems
are currently scheduled for replacement or modification to fully-compliant new
systems. These modifications and replacements are expected to be completed by
the first quarter of 1999.
The Company does not expect that the cost to modify and replace its
information technology to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company has not incurred
significant costs related to Year 2000 compliance prior to December 31, 1997
other than internal costs to evaluate the extent of compliance.
The costs of these projects and the date on which the Company plans to
complete modifications and replacements are based on managements' best
estimates, which were derived utilizing assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans. The
Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance.
23
<PAGE>
The Company does not currently have any information concerning the Year 2000
compliance of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, the Company does not believe its business or
operations would be adversely affected.
FORWARD-LOOKING STATEMENTS
Certain of the statements set forth under this Item and elsewhere in this
Form 10-K are forward-looking and are based upon assumptions and anticipated
results that are subject to numerous risks and uncertainties. See "Item 1.
Business --Forward Looking Statements" and " --Risk Factors."
ACCOUNTING MATTERS
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its proportionate share of certain partnerships,
TSPC and TSPC's proportionate share of certain partnerships. All intercompany
balances and transactions are eliminated.
FULL COST METHOD. The Company uses the full cost method of accounting for
its oil and gas properties. Under this method, all acquisition and development
costs, including certain related employee costs and general and administrative
costs (less any reimbursements for such costs) incurred for the purpose of
acquiring and finding oil and gas are capitalized. The net employee, general and
administrative costs that were capitalized were $3.5 million, $2.3 million and
$1.8 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company amortizes its investment in oil and gas properties using the future
gross revenue method.
DEFERRED INCOME TAXES. Deferred income taxes have been determined in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes." TSPC recorded a deferred tax asset on January 1,
1992, based on the estimated value to be derived from the utilization of the tax
attribute carryovers of TSPC and its subsidiaries. As of December 31, 1997, the
Company had a deferred tax liability of $18.7 million which was calculated with
the assumption that the Company will have sufficient taxable income in future
years to utilize certain tax attribute carryforwards. The achievement of these
levels of taxable income, however, is subject to a number of factors beyond the
control of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information concerning this Item begins on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
For information concerning Item 10. Directors and Executive Officers of the
Registrant, Item 11. Executive Compensation, Item 12. Security Ownership of
Certain Beneficial Owners and Management and Item 13. Certain Relationships and
Related Transactions, see the definitive Proxy Statement of Stone Energy
Corporation relating to the Annual Meeting of Stockholders to be held on May 14,
1998, which will be filed with the Securities and Exchange Commission and is
incorporated herein by reference. For information concerning Item 10, see Part I
- - - Item 4A. Executive Officers of Registrant.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
The following financial statements of the Company and the Report of the
Company's Independent Public Accountants thereon are included on pages F-1
through F-22 of this Form 10-K.
Report of Independent Public Accountants
Consolidated Balance Sheet as of December 31, 1997 and 1996
Consolidated Statement of Operations for the three years in the period
ended December 31, 1997
Consolidated Statement of Cash Flows for the three years in the period ended
December 31, 1997
Consolidated Statement of Changes in Equity for the three years in the
period ended December 31, 1997
Notes to the Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because the required information is inapplicable
or the information is presented in the Financial Statements or the notes
thereto.
3. EXHIBITS:
3.1 -- Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-62362)).
3.2 -- Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-62362)).
+10.1 -- Stone Energy Corporation 1993 Nonemployee Directors' Stock Option
Plan (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-62362)).
+10.2 -- Deferred Compensation and Disability Agreements between TSPC
and D. Peter Canty dated July 16, 1981, and between TSPC and Joe
R. Klutts and James H. Prince dated August 23, 1981 and September
20, 1981, respectively (incorporated by reference to Exhibit 10.8
to the Registrant's Registration Statement on Form S-1
(Registration No. 33-62362)).
+10.3 -- Conveyances of Net Profits Interests in certain properties to
D. Peter Canty and James H. Prince (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-62362)).
+10.4 -- Stone Energy Corporation 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-62362)).
+10.5 -- Stone Energy Corporation Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
(File No. 011-12074)).
25
<PAGE>
*10.6 -- Third Amended and Restated Credit Agreement between the
Registrant, the financial institutions named therein and
NationsBank of Texas, N.A., as Agent, dated as of July 30,
1997.
+10.7 -- Deferred Compensation and Disability Agreement between TSPC and
E. J. Louviere dated July 16, 1981 (incorporated by reference to
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 011-12074)).
10.8 -- Term Loan Agreement, dated November 30, 1995, between the
Registrant and First National Bank of Commerce (incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 (File No.
011-12074)).
*+10.9 -- Stone Energy Corporation 1993 Stock Option Plan, As Amended and
Restated Effective as of May 15, 1997.
21.1 -- Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Atwater Consultants, Ltd.
*23.3 -- Consent of Cawley, Gillespie & Associates, Inc.
*27.1 -- Financial Data Schedule
*27.2 -- Financial Data Schedule-Restated
*27.3 -- Financial Data Schedule-Restated
*27.4 -- Financial Data Schedule-Restated
- - ------------
* Filed herewith.
+ Identifies management contracts and compensatory plans or arrangements.
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K and on Form 8-K/A under
Items 2 and 7 dated August 15, 1997 that discussed the Company's acquisition of
the Vermilion Block 255 Field.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, as
amended, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Lafayette,
State of Louisiana, on the 20th day of March, 1998.
STONE ENERGY CORPORATION
By: /s/ JAMES H. STONE
--------------------------
James H. Stone
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act, this Form 10-K
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ------
<S> <C> <C>
/s/ JAMES H. STONE Chief Executive Officer and March 20, 1998
----------------------------------------- Chairman of the Board
James H. Stone (Principal Executive Officer)
/s/ D. PETER CANTY President, Chief Operating Officer March 20, 1998
----------------------------------------- and Director
D. Peter Canty
/s/ MICHAEL L. FINCH Executive Vice President, Chief March 20, 1998
----------------------------------------- Financial Officer and Director
Michael L. Finch (Principal Financial Officer)
/s/ JAMES H. PRINCE Vice President, Chief Accounting March 20, 1998
----------------------------------------- Officer and Controller
James H. Prince (Principal Accounting Officer)
/s/ JOE R. KLUTTS Director and Vice Chairman of March 20, 1998
----------------------------------------- the Board
Joe R. Klutts
/s/ DAVID R. VOELKER Director March 20, 1998
-----------------------------------------
David R. Voelker
/s/ JOHN P. LABORDE Director March 20, 1998
-----------------------------------------
John P. Laborde
/s/ ROBERT A. BERNHARD Director March 20, 1998
-----------------------------------------
Robert A. Bernhard
/s/ RAYMOND B. GARY Director March 20, 1998
-----------------------------------------
Raymond B. Gary
/s/ B. J. DUPLANTIS Director March 20, 1998
-----------------------------------------
B. J. Duplantis
</TABLE>
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheet of Stone Energy Corporation as of
December 31, 1997 and 1996........................................... F-3
Consolidated Statement of Operations of Stone Energy Corporation
for the years ended December 31, 1997, 1996 and 1995................. F-4
Consolidated Statement of Cash Flows of Stone Energy Corporation
for the years ended December 31, 1997, 1996 and 1995................. F-5
Consolidated Statement of Changes in Equity of Stone Energy Corporation
for the years ended December 31, 1997, 1996 and 1995................. F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Stone Energy Corporation:
We have audited the accompanying consolidated balance sheets of Stone Energy
Corporation (a Delaware corporation) and subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stone Energy Corporation and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
March 2, 1998
F-2
<PAGE>
STONE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
ASSETS 1997 1996
<S> ------ ------------- -------------
Current assets: <C> <C>
Cash and cash equivalents...................................................... $10,304 $9,864
Marketable securities, at market............................................... 19,940 10,331
Accounts receivable............................................................ 22,202 12,466
Unbilled accounts receivable................................................... 529 470
Other current assets........................................................... 176 94
------------- -------------
Total current assets......................................................... 53,151 33,225
Oil and gas properties--full cost method of accounting:
Proved, net of accumulated depreciation, depletion and
amortization of $154,289 and $125,533, respectively.......................... 274,116 167,562
Unevaluated.................................................................... 17,304 3,834
Building and land, net of accumulated depreciation of $166 and
$79, respectively............................................................ 3,538 3,390
Other assets, net of accumulated depreciation and amortization
of $2,542 and $2,058, respectively............................................. 6,035 1,395
------------- -------------
Total assets................................................................. $354,144 $209,406
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term loans............................................. $81 $76
Advance payments............................................................... 239 354
Accounts payable to vendors.................................................... 32,793 17,651
Undistributed oil and gas proceeds............................................. 6,447 4,567
Other accrued liabilities...................................................... 5,263 3,894
------------- -------------
Total current liabilities.................................................... 44,823 26,542
Long-term loans.................................................................... 132,024 26,172
Deferred tax liability............................................................. 18,659 12,112
Other long-term liabilities........................................................ 2,001 139
------------- -------------
Total liabilities............................................................ 197,507 64,965
------------- -------------
Commitments and Contingencies (see Note 9)
Common Stock, $.01 par value; authorized 25,000,000 shares;
issued and outstanding 15,045,408 and 15,015,408 shares, respectively.......... 150 150
Paid-in capital.................................................................... 118,883 118,606
Retained earnings.................................................................. 37,604 25,685
------------- -------------
Total stockholders' equity................................................... 156,637 144,441
------------- -------------
Total liabilities and stockholders' equity................................... $354,144 $209,406
============= =============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
STONE ENERGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
<S> ------------ ----------- ------------
Revenues: <C> <C> <C>
Oil and gas production............................................. $69,079 $55,839 $38,693
Overhead reimbursements and management fees........................ 531 814 522
Other income....................................................... 1,377 1,312 1,336
------------ ----------- ------------
Total revenues................................................... 70,987 57,965 40,551
------------ ----------- ------------
Expenses:
Normal lease operating expenses.................................... 10,123 8,625 6,294
Major maintenance expenses......................................... 1,844 427 446
Production taxes................................................... 2,215 3,399 3,057
Depreciation, depletion and amortization........................... 28,739 19,564 15,719
Interest........................................................... 4,916 3,574 2,191
Salaries and other employee costs.................................. 2,329 2,062 1,663
Incentive compensation plan........................................ 833 928 85
General and administrative costs................................... 1,574 1,447 1,635
------------ ----------- ------------
Total expenses................................................... 52,573 40,026 31,090
------------ ----------- ------------
Net income before income taxes ........................................ 18,414 17,939 9,461
------------ ----------- ------------
Provision for income taxes:
Current............................................................ - 208 131
Deferred........................................................... 6,495 6,698 3,514
------------ ----------- ------------
Total income taxes............................................... 6,495 6,906 3,645
------------ ----------- ------------
Net income............................................................. $11,919 $11,033 $5,816
============ =========== ============
Earnings per common share (see Note 1):
Basic earnings per share .......................................... $0.79 $0.90 $0.49
============ =========== ============
Diluted earnings per share ........................................ $0.78 $0.90 $0.49
============ =========== ============
Average shares outstanding......................................... 15,024 12,208 11,790
============ =========== ============
Average shares outstanding assuming dilution....................... 15,230 12,300 11,807
============ =========== ============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE>
STONE ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
<S> -------------- ------------ ------------
Cash flows from operating activities: <C> <C> <C>
Net income......................................................... $11,919 $11,033 $5,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization...................... 28,739 19,564 15,719
Provision for deferred income taxes........................... 6,495 6,698 3,514
-------------- ------------ ------------
47,153 37,295 25,049
(Increase) decrease in marketable securities.................. (9,609) (99) 4,964
(Increase) decrease in accounts receivable.................... (9,795) (5,600) 426
(Increase) decrease in other current assets................... (116) 518 (370)
Increase (decrease) in accrued liabilities.................... 3,133 777 (2,260)
Other......................................................... 1,913 (140) (159)
-------------- ------------ ------------
Net cash provided by operating activities.............................. 32,679 32,751 27,650
-------------- ------------ ------------
Cash flows from investing activities:
Investment in oil and gas properties............................... (133,638) (72,733) (48,122)
Sale of reserves in place.......................................... 623 -- --
Purchase of building and land, building additions
and renovations.................................................. (235) (185) (3,284)
Other asset additions.............................................. (1,830) (743) (101)
-------------- ------------ ------------
Net cash used in investing activities.................................. (135,080) (73,661) (51,507)
-------------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings........................................... 112,000 49,000 30,098
Repayment of debt.................................................. (106,143) (70,575) (5,000)
Proceeds from issuance of 8-3/4% Notes............................. 100,000 -- --
Deferred financing costs........................................... (3,293) (418) (151)
Sale of common stock............................................... -- 66,446 --
Expenses from common stock offering................................ (111) -- --
Exercise of stock options.......................................... 388 35 66
-------------- ------------ ------------
Net cash provided by financing activities.............................. 102,841 44,488 25,013
-------------- ------------ ------------
Net increase in cash and cash equivalents.............................. 440 3,578 1,156
Cash and cash equivalents, beginning of year........................... 9,864 6,286 5,130
-------------- ------------ ------------
Cash and cash equivalents, end of year................................. $10,304 $9,864 $6,286
============== ============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest (net of amount capitalized)............................. $2,606 $3,672 $1,927
Income taxes..................................................... 100 145 216
-------------- ------------ ------------
$2,706 $3,817 $2,143
============== ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE>
STONE ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Common Paid-In Retained
Stock Capital Earnings
-------------- --------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1994............................................. $ 118 $ 52,091 $ 8,836
Net income........................................................... -- -- 5,816
Exercise of stock options............................................ -- 66 --
-------------- --------------- -------------
Balance, December 31, 1995............................................. 118 52,157 14,652
Net income........................................................... -- -- 11,033
Sale of common stock................................................. 32 66,414 --
Exercise of stock options............................................ -- 35 --
-------------- --------------- -------------
Balance, December 31, 1996............................................. 150 118,606 25,685
Net income........................................................... -- -- 11,919
Exercise of stock options............................................ -- 388 --
Expenses from common stock offering.................................. -- (111) --
-------------- --------------- -------------
Balance, December 31, 1997............................................. $ 150 $118,883 $37,604
============== =============== =============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share amounts)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Stone Energy Corporation (the "Company" or "Stone Energy") is an independent
oil and gas company primarily engaged in the acquisition, exploration,
development and operation of oil and gas properties located in the Gulf Coast
Basin. The Company's business strategy is focused on the acquisition of mature
properties with established production history that have significant
exploitation and development potential. Since implementing its present business
strategy in 1989, Stone Energy has acquired 15 properties that comprise its
asset base - nine offshore and six onshore Louisiana. The Company is
headquartered in Lafayette, Louisiana, with additional offices in New Orleans
and Houston.
A summary of significant accounting policies followed in the preparation of
the accompanying consolidated financial statements is set forth below:
CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its proportionate interest in certain partnerships; TSPC, a wholly-owned
subsidiary organized in June 1981 and TSPC's proportionate share of managed
limited partnerships. In December 1996, TSPC adopted a plan of dissolution
whereby a majority of its assets were transferred to the Company. Any assets
necessary to satisfy any known liabilities remain in TSPC. All intercompany
balances and transactions are eliminated. Certain prior year amounts have been
reclassified to conform to current year presentation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used primarily when accounting for depreciation, depletion and amortization,
taxes and contingencies.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value of cash, cash equivalents, net accounts receivable, accounts
payable, bank debt and the Company's 8-3/4% Notes approximates book value at
December 31, 1997.
F-7
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 1 --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued)
OIL AND GAS PROPERTIES:
The Company follows the full cost method of accounting for oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including certain related employee costs and general and administrative
costs (less any reimbursements for such costs), incurred for the purpose of
finding oil and gas are capitalized. Such amounts include the cost of drilling
and equipping productive wells, dry hole costs, lease acquisition costs, delay
rentals and other costs related to such activities. Employee, general and
administrative costs that are capitalized include salaries and all related
fringe benefits paid to employees directly engaged in the acquisition,
exploration and development of oil and gas properties, as well as all other
directly identifiable general and administrative costs associated with such
activities, such as rentals, utilities and insurance. Fees received from managed
partnerships for providing such services are accounted for as a reduction of
capitalized costs. Employee, general and administrative costs associated with
production operations and general corporate activities are expensed in the
period incurred.
The Company amortizes its investment in oil and gas properties using the
future gross revenue method, a unit of production method, whereby the annual
provision for depreciation, depletion and amortization is computed by dividing
revenue produced during the period by future gross revenues at the beginning of
the period, and applying the resulting rate to the cost of oil and gas
properties, including estimated future development, restoration, dismantlement
and abandonment costs. Additionally, the capitalized costs of oil and gas
properties cannot exceed the present value of the estimated net cash flow from
its proved reserves, together with the lower of cost or estimated fair value of
its unevaluated properties (the full cost ceiling). Transactions involving sales
of reserves in place, unless extraordinarily large portions of reserves are
involved, are recorded as adjustments to the reserves for accumulated
depreciation, depletion and amortization.
Oil and gas properties include $17,304 and $3,834 of unevaluated properties
and related costs that are not being amortized at December 31, 1997 and 1996,
respectively. These costs are associated with the acquisition and evaluation of
unproved properties and major development projects expected to entail
significant costs to ascertain quantities of proved reserves. The unevaluated
costs at December 31, 1997 relate to acquisition and development costs incurred
during late 1996 and throughout 1997, and costs at December 31, 1996 relate to
acquisition costs incurred in 1996. The Company currently believes that the
unevaluated properties at December 31, 1997 will be evaluated within one to 24
months. The excluded costs and related proved reserves will be included in the
amortization base as the properties are evaluated and proved reserves are
established or impairment is determined. Interest capitalized on unevaluated
properties during the years ended December 31, 1997 and 1996 was $144 and $90,
respectively.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
be Disposed of." The Company adopted SFAS No. 121 in 1996 with no material
effect.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments in overnight securities
through its commercial bank accounts, which result in available funds on the
next business day, to be cash and cash equivalents.
F-8
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 1 --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued)
MARKETABLE SECURITIES:
The Company has retained a third-party investment firm to manage its
portfolio of short-term marketable securities, which are actively and frequently
bought and sold with the primary objective of generating profits on the
short-term differences in prices. Thus, the related security investments are
classified as trading securities, which are marked to market in accordance with
SFAS No. 115. All realized and unrealized gains and losses are included in
current operating results. The net unrealized gain on the portfolio for the year
ended December 31, 1997 was immaterial. The securities included in the portfolio
are primarily U.S. Treasury obligations and mortgage-backed securities with an
average maturity of not more than 180 days.
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109.
Provisions for income taxes include deferred taxes resulting primarily from
temporary differences due to different reporting methods for oil and gas
properties for financial reporting purposes and income tax purposes. For
financial reporting purposes, all exploratory and development expenditures are
capitalized and depreciated, depleted and amortized on the future gross revenue
method. For income tax purposes, only the equipment and leasehold costs relative
to successful wells are capitalized and recovered through depreciation or
depletion. Generally, most other exploratory and development costs are charged
to expense as incurred; however, the Company uses certain provisions of the
Internal Revenue Code which allow capitalization of intangible drilling costs
where management deems appropriate. Other financial and income tax reporting
differences occur as a result of statutory depletion, different reporting
methods for sales of oil and gas reserves in place, and different reporting
periods used in accounting for income and costs arising from oil and gas
operations conducted through tax partnerships.
GAS PRODUCTION REVENUES:
The Company records as revenue only that portion of gas production sold and
allocable to its ownership interest in the related well. Any gas production
proceeds received in excess of its ownership interest are reflected as a
liability in the accompanying consolidated financial statements. Revenues
relating to gas production to which the Company is entitled but for which the
Company has not received payment are not recorded in the consolidated financial
statements until compensation is received.
Amounts related to net underdelivered production positions at December 31,
1997 and 1996 are immaterial.
EARNINGS PER COMMON SHARE:
In February 1997, the FASB issued SFAS 128, "Earnings Per Share," which
simplifies the computation of earnings per share ("EPS"). The Company adopted
SFAS 128 in the fourth quarter of 1997 and restated prior years' EPS data as
required by SFAS 128. All EPS data in the financial statements and accompanying
footnotes reflects the adoption of SFAS 128.
Basic net income per share of common stock was calculated by dividing net
income applicable to common stock by the weighted-average number of common
shares outstanding during the year. Diluted net income per share of common stock
was calculated by dividing net income applicable to common stock by the
weighted-average number of common shares outstanding during the year plus the
weighted-average number of dilutive stock options granted to outside directors
and certain employees totaling approximately 200,000 shares in 1997, 90,000
shares in 1996 and 17,000 shares in 1995. There were no options which were
considered antidilutive as a result of the exercise price of the options
exceeding the average price for the applicable period during 1996 or 1995 and
antidilutive options were immaterial for 1997.
F-9
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 1 --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:(Continued)
BUILDING AND LAND:
The Company records building and land at cost. The Company's office building
is being depreciated for financial statement purposes on the straight-line
method over its estimated useful life.
OTHER ASSETS:
Other assets at December 31, 1997 includes approximately $3,293 of deferred
financing costs related to the sale of the 8-3/4% Notes (Note 5). These costs
are being amortized over the life of the Notes using the effective interest
method.
HEDGING ACTIVITIES:
From time to time, the Company utilizes futures and hedging activities in
order to reduce the effect of product price volatility. The resulting gains or
losses on hedging contracts are accounted for as revenues from oil and gas
production in the financial statements.
NOTE 2 -- ACCOUNTS RECEIVABLE AND ADVANCE PAYMENTS:
In its capacity as operator, manager and/or sponsor for its partners and
other co-venturers, the Company incurs drilling and other costs and receives
payment for advance billings for drilling, all of which are billed to the
respective parties.
Accounts receivable and advance payments were comprised of the following
amounts:
December 31,
------------------------------------------
1997 1996
------------------ -----------------
Accounts Receivable:
Managed partnerships............. $ 1,485 $ 1,687
Other co-venturers............... 5,025 1,136
Trade............................ 15,639 9,637
Officers and employees........... 53 6
------------------ -----------------
$ 22,202 $ 12,466
================== =================
Advance Payments:
Other co-venturers............... $ 239 $ 256
Trade............................ -- 98
------------------ -----------------
$ 239 $ 354
================== =================
Costs incurred but not yet billed to the managed partnerships and other
co-venturers at December 31, 1997 and 1996 amounted to $529 and $470,
respectively.
F-10
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 3--INVESTMENT IN OIL AND GAS PROPERTIES:
The following table discloses certain financial data relative to the
Company's oil and gas producing activities, which are located onshore and
offshore the continental United States:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
--------------- --------------- -------------
<S> <C> <C> <C>
Costs incurred during year:
Capitalized--
Acquisition costs:
Proved................................................... $39,619 $24,522 $8,104
Unevaluated.............................................. 4,172 2,065 --
Investments posted as performance bonds.................... -- 63 (30)
Exploratory drilling:
Proved................................................... 46,750 26,339 8,261
Unevaluated.............................................. 11,020 -- --
Development drilling:
Proved................................................... 43,715 22,321 27,383
Unevaluated.............................................. 47 1,769 --
General and administrative costs......................... 4,494 3,238 2,743
Less: overhead reimbursements, management fees
and repromotion income................................... (1,037) (913) (953)
--------------- --------------- -------------
$148,780 $79,404 $45,508
=============== =============== =============
Charged to expenses--
Operating costs:
Normal lease operating expenses.......................... $10,123 $8,625 $6,294
Major maintenance expenses............................... 1,844 427 446
--------------- --------------- -------------
Total operating costs...................................... 11,967 9,052 6,740
Production taxes........................................... 2,215 3,399 3,057
--------------- --------------- -------------
$14,182 $12,451 $9,797
=============== =============== =============
Depreciation, depletion and amortization......................... $28,133 $19,256 $15,551
=============== =============== =============
Oil and gas properties--
Balance, beginning of year................................... $296,929 $217,525 $172,017
Additions.................................................... 148,780 79,404 45,508
--------------- --------------- -------------
Balance, end of year......................................... 445,709 296,929 217,525
--------------- --------------- -------------
Accumulated depreciation, depletion
and amortization--
Balance, beginning of year............................... (125,533) (106,277) (90,726)
Provision for depreciation, depletion and amortization... (28,133) ( 19,256) (15,551)
Sale of reserves......................................... (623) -- --
--------------- --------------- -------------
Balance, end of year......................................... (154,289) (125,533) (106,277)
--------------- --------------- -------------
Net capitalized costs (proved and unevaluated)................... $291,420 $171,396 $111,248
=============== =============== =============
</TABLE>
F-11
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 4--INCOME TAXES:
The Company follows the provisions of SFAS No. 109, "Accounting For Income
Taxes," which provides for recognition of a deferred tax asset for deductible
temporary timing differences, operating loss carryforwards, statutory depletion
carryforwards and tax credit carryforwards net of a "valuation allowance." An
analysis of the Company's deferred tax liability follows:
December 31,
----------------------------------
1997 1996
-------------- ------------
Net operating loss carryforwards.............. $3,658 $ 1,224
Statutory depletion carryforward.............. 3,826 4,463
Investment tax credit carryforward............ 158 887
Alternative minimum tax credit................ 396 447
Temporary differences:
Oil and gas properties--full cost....... (25,035) (18,794)
Other................................... (1,662) (339)
-------------- ------------
(18,659) (12,112)
Valuation allowance........................... -- --
-------------- ------------
($18,659) ($12,112)
============== ============
For tax reporting purposes, the Company had operating loss carryforwards
of $10,290 and investment tax credit carryforwards of $158 at December 31, 1997.
If not utilized, such carryforwards would begin expiring in 2001 and would
completely expire by the year 2007. Because of tax rules relating to changes in
corporate ownership and computations required to be made on a separate entity
basis, the utilization by the Company of these benefit carryforwards in reducing
its tax liability is restricted. Additionally, the Company had available for tax
reporting purposes $10,761 in statutory depletion deductions that may be carried
forward indefinitely. Recognition of a deferred tax asset associated with these
carryforwards is dependent upon the Company's evaluation that it is more likely
than not that the asset will ultimately be realized.
The Company's provision for income taxes during 1997 decreased because of
an adjustment to the Company's annual tax rate. Reconciliations between the
statutory federal income tax expense rate and the Company's effective income tax
expense rate as a percentage of income before income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Income taxes computed at the statutory federal income tax rate.... 35% 35% 35%
State tax and other............................................... -- 4 4
----------- ---------- ----------
Effective income tax rate......................................... 35% 39% 39%
=========== ========== ==========
</TABLE>
F-12
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 5--LONG-TERM LOANS:
Long-term loans consisted of the following at:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
8-3/4% Senior Subordinated Notes due 2007............................... $100,000 $--
Unsecured revolving credit facility with NationsBank
of Texas, N.A. ("NationsBank") (described below)...................... 29,000 23,073
Term Loan Agreement with First National Bank of
Commerce ("FNBC") with interest at 7.45%.............................. 3,105 3,175
Less: portion due within one year...................................... (81) (76)
-------------- -------------
Total long-term loans................................................... $132,024 $26,172
============== =============
</TABLE>
Aggregate minimum principal payments at December 31, 1997 for the next five
years are as follows: 1998-$81, 1999-$88, 2000-$29,094, 2001-$2,842 and 2002-$0.
On September 16, 1997, the Company completed an offering of $100,000
principal amount of its 8-3/4% Senior Subordinated Notes (the "Notes") due
September 15, 2007 with interest payable semiannually commencing March 15, 1998.
At December 31, 1997, $2,565 had been accrued in connection with the March 1998
interest payment. The Notes were sold at a discount for an aggregate price of
$99,283 and the net proceeds from the offering were used to repay amounts
outstanding under the Company's bank credit facility and for other general
corporate purposes. There are no sinking fund requirements on the Notes and they
are redeemable at the option of the Company, in whole or in part, at 104.375% of
their principal amount beginning September 15, 2002, and thereafter at prices
declining annually to 100% on and after 2005. Provisions of the Notes include,
without limitation, restrictions on liens, indebtedness, asset sales and other
restricted payments.
On July 30, 1997, the Company executed its Third Amended and Restated Credit
Agreement with NationsBank as agent for a group of banks. The agreement provided
for a total facility of $150,000 and was comprised of a three-year revolving
credit facility and a one-year term loan. The term loan of $50,000, which was
established to finance the acquisition of the Vermilion Block 255 Field and
certain development costs, was retired in September 1997 with proceeds from the
Company's notes offering. Additionally, the borrowing base of its $100,000
revolver was reduced to $55,000 subsequent to the offering of the Notes.
Interest under the revolver is payable quarterly and at December 31, 1997, the
weighted average interest rate of the facility was 6.9% per annum and letters of
credit totaling $7,522 had been issued pursuant to the facility.
On November 30, 1995, the Company executed a term loan agreement with FNBC
in the original principal amount of $3,250 to finance the purchase of the
Company's office building (see Note 6). The loan has a five-year term bearing
interest at the rate of 7.45% over the entire term of the loan. Payments of $26
are due monthly and are based upon a 20-year amortization period. The
indebtedness under the agreement is collateralized by the building.
The terms of the NationsBank and FNBC agreements contain, among other
provisions, requirements for maintaining defined levels of working capital and
tangible net worth.
F-13
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 6--TRANSACTIONS WITH RELATED PARTIES:
The Company receives certain fees as a result of its function as managing
partner of certain partnerships. For the years ended December 31, 1997, 1996 and
1995, the Company generated management fees and overhead reimbursements from
partnerships amounting to $1,098, $744 and $851, respectively, the majority of
which was treated as a reduction of the investment in oil and gas properties.
The Company collects and distributes production revenues as managing partner
for the partnerships' interests in oil and gas properties. At December 31, 1995,
$858 was included in undistributed oil and gas proceeds that was identified as
distributable to partners in the partnerships.
TSPC leased office space in a building owned by RiverStone Associates, an
affiliate, from 1982 through November 30, 1995, on which date the building and
related land were purchased by the Company. The entire purchase price of $3,250
was paid to the holder of the first mortgage on the property. RiverStone
Associates and its partners did not receive any of the sales proceeds, nor were
any such parties relieved of any personal liability as a result of the sale.
James H. Stone and Joe R. Klutts, each an officer and director of the Company,
are partners in RiverStone Associates. The sale was approved by the
disinterested members of the Board of Directors. The Company and TSPC incurred
net rent expense of $633 for the year ended December 31, 1995.
The Company's interests in certain oil and gas properties are burdened by
various net profit interests granted at the time of acquisition to certain
officers and other employees of the Company. Such net profit interest owners do
not receive any cash distributions until the Company has recovered all of its
acquisition, development, financing and operating costs. Management believes the
estimated value of such interests at the time of acquisition is not material to
the Company's financial position or results of operations.
Certain officers and directors and their affiliates are working interest
owners in properties operated by the Company and are billed and pay their
proportionate share of drilling and operating costs in the normal course of
business.
NOTE 7--HEDGING ACTIVITIES:
The Company engages in futures contracts with certain of its production
through master swap agreements ("Swap Agreements"). The Company considers these
futures contracts to be hedging activities and, as such, monthly settlements on
these contracts are reflected in revenues from oil and gas production. In order
to consider these futures contracts as hedges, (i) the Company must designate
the futures contract as a hedge of future production and (ii) the contract must
reduce the Company's exposure to the risk of changes in prices. Changes in the
market value of futures contracts treated as hedges are not recognized in income
until the hedged item is also recognized in income. If the above criteria are
not met, the Company will record the market value of the contract at the end of
each month and recognize a related gain or loss. Proceeds received or paid
relating to terminated contracts or contracts that have been sold are amortized
over the original contract period and reflected in revenues from oil and gas
production. The Company enters into hedging transactions for the purpose of
securing a price for a portion of future production that is acceptable at the
time the transaction is entered into. The primary objective of these activities
is to reduce the Company's exposure to the possibility of declining oil and gas
prices during the term of the hedge.
F-14
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 7--HEDGING ACTIVITIES: (Continued)
The crude oil contracts are tied to the price of NYMEX light sweet crude
oil futures and are settled monthly based on the differences between contract
prices and the average NYMEX closing prices for that month applied to the
related contract volumes. Settlement for gas swap contracts is based on the
average closing prices of either the last three days or last full month of
trading on the NYMEX for each month of the swap.
As of February 27, 1998, the Company's forward sales position was as
follows:
<TABLE>
<CAPTION>
Oil Gas
---------------------------------- --------------------------------------
Average Average
Price Price
Mbbls ($/Bbl) BBtu ($/MMBtu)
------------ -------------- ------------- -----------------
<S> <C> <C> <C> <C>
1998...................... 144 $21.47 2,100 $2.87
</TABLE>
The fair market value of the hedging contracts totaled $1,317 and ($434) at
December 31, 1997 and 1996, respectively. For the years ended December 31, 1997
and 1996, the Company incurred net oil and gas hedging losses of $569 and
$3,801, respectively, which were treated as a reduction of revenues from oil and
gas production.
NOTE 8--COMMON STOCK:
On November 19, 1996, the Company completed an underwritten public offering
of 3,680,000 shares of Common Stock at a price to the public of $21.75 per
share. The shares offered included 3,221,159 shares sold by the Company (480,000
shares of which represented the exercise of the underwriters' over-allotment
option) and 458,841 shares sold by certain selling stockholders. This offering
resulted in the receipt by the Company of cash proceeds (net of $217 of offering
costs) totaling approximately $66,446. The Company used a portion of the
proceeds to retire a term loan incurred to finance the cost of acquisitions and
certain development projects performed in the third quarter of 1996, and the
remainder was used to repay a portion of the outstanding indebtedness under its
revolving bank credit facility.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities in New Orleans, Louisiana under the
terms of a long-term non-cancelable lease expiring on April 4, 2003. Office
facilities in Lafayette, Louisiana were leased through November 30, 1995, on
which date the Company purchased the building (see Note 6). Additionally, the
Company leases automobiles under terms of non-cancelable leases expiring at
various dates through 2000. The minimum net annual commitments under all leases,
subleases and contracts noted above at December 31, 1997 are as follows:
1998.................................................................. $102
1999.................................................................. 93
2000.................................................................. 73
2001.................................................................. 70
2002.................................................................. 70
Thereafter............................................................ 18
F-15
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 9--COMMITMENTS AND CONTINGENCIES: (Continued)
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $118, $114 and $727, respectively.
The Company is the managing general partner of four partnerships and is
contingently liable for any recourse debts and other liabilities that result
from their operations. Management currently is not aware of the existence of any
such liabilities that would have a material impact on the future operations of
the Company.
In August 1989, the Company was advised by the EPA that it believed the
Company to be a potentially responsible party (a "PRP") for the cleanup of an
oil field waste disposal facility located near Abbeville, Louisiana, which was
included on CERCLA's National Priority List (the "Superfund List") by the EPA in
March 1989. In addition to the Company, approximately 370 other companies have
been named as being potentially responsible for the cleanup of the site. While
the Company's records do not indicate that any drilling wastes generated by the
Company were disposed of at this site, it is possible that one or more waste
haulers contracted by the Company may have disposed of wastes at this site.
Given the extremely large number of PRPs at this site, management does not
believe that any liability for this site would materially adversely affect the
financial condition of the Company.
In December 1995, Goodrich Leasehold L.L.C. and Goodrich Drillers L.L.C.
filed a civil action in the 333rd Judicial District Court, Harris County, Texas,
against the Company in an attempt to set aside a Farmout Agreement affecting
portions of the West Flank of the Weeks Island field in Iberia Parish,
Louisiana. This case was tried in Harris County, Texas, and on March 12, 1998,
the jury found in favor of the Company. The Company does not anticipate an
appeal by either party.
The Company is contingently liable to a surety insurance company in the
aggregate amount of $14,774 relative to bonds issued on its behalf to the MMS
and certain third parties from which it purchased oil and gas working interests.
The bonds represent guarantees by the surety insurance company that the Company
will operate offshore in accordance with MMS rules and regulations and perform
certain plugging and abandonment obligations as specified by the applicable
working interest purchase and sale contracts.
The Company is also named as a defendant in certain lawsuits and is a party
to certain regulatory proceedings arising in the ordinary course of business.
Management does not expect these matters, individually or in the aggregate, to
have a material adverse effect on the financial condition of the Company.
OPA imposes ongoing requirements on a responsible party, including the
preparation of oil spill response plans and proof of financial responsibility to
cover environmental cleanup and restoration costs that could be incurred in
connection with an oil spill. As amended by the Coast Guard Authorization Act of
1996, OPA requires responsible parties for offshore facilities to provide
financial assurance in the amount of $35,000 to cover potential OPA liabilities.
This amount can be increased up to $150,000 if a formal risk assessment
indicates that an amount higher than $35,000 should be required. The Company
does not anticipate that it will experience any difficulty in satisfying the
MMS's requirements for demonstrative financial responsibility under OPA.
In 1996, the American Institute of Certified Public Accountants issued its
Statement of Position 96-1 ("SOP 96-1"), which provides guidance on accounting
for environmental remediation liabilities. SOP 96-1 interprets existing FASB
standards applicable to public companies. The Company adopted SOP 96-1 effective
January 1, 1997, with no material effect.
F-16
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 10--EMPLOYEE BENEFIT PLANS:
The Company entered into deferred compensation and disability agreements
with certain of its employees whereby the Company has purchased split-dollar
life insurance policies to provide certain retirement and death benefits for the
employees and death benefits payable to the Company. The aggregate death benefit
of the policies is $3,195 at December 31, 1997, of which $1,975 is payable to
employees or their beneficiaries and $1,220 is payable to the Company. Total
cash surrender value of the policies, net of related surrender charges at
December 31, 1997, was approximately $948. Additionally, the benefits under the
deferred compensation agreements vest after certain periods of employment, and
at December 31, 1997, the liability for such vested benefits was approximately
$760. The difference between the actuarial determined liability for retirement
benefits or the vested amounts, where applicable, and the net cash surrender
value has been recorded as an other long-term liability and is being amortized
over the remaining term of the various deferred compensation agreements.
The Company has adopted a series of incentive compensation plans designed to
align the interests of the executives and employees with those of its
stockholders. The following is a brief description of each of the plans:
i. The Annual Incentive Compensation Program provides for an annual
incentive bonus that ties incentives to the annual return on the
Company's Common Stock and also a comparison of the price performance
of the Common Stock to the average annual return on the shares of stock
of a peer group of companies with which the Company competes and to the
growth in net earnings, net cash flow and net asset value of the
Company. Incentive bonuses are awarded to participants based upon
individual performance factors.
ii. The Nonemployee Directors' Stock Option Plan provides for the issuance
of up to 250,000 shares of Common Stock upon the exercise of such
options granted pursuant to such plan. Generally, options outstanding
under the Nonemployee Directors' Stock Option Plan: (a) are granted at
prices that equate to the fair market value of the Common Stock on date
of grant, (b) vest ratably over a three year service vesting period,
and (c) expire five years subsequent to award.
iii. The Company's 1993 Stock Option Plan (as amended and restated) provides
for 1,170,000 shares of Common Stock to be reserved for issuance
pursuant to such plan. Under this plan, the Company may grant both
incentive stock options qualifying under Section 422 of the Internal
Revenue Code and options that are not qualified as incentive stock
options. All such options: (a) must have an exercise price of not less
than the fair market value of the Common Stock on the date of grant,
(b) vest ratably over a five year service vesting period, and (c)
expire ten years subsequent to award.
iv. The 401(k) Profit Sharing Plan provides eligible employees with the
option to defer receipt of a portion of their compensation and the
Company may, at its discretion, match a portion or all of the
employee's deferral. The amounts held under the plan are invested in
various investment funds maintained by a third party in accordance with
the directions of each employee. An employee is 20% vested in the
Company's matching contributions (if any) for each year of service and
is fully vested upon five years of service with the Company. For the
years ended December 31, 1997, 1996 and 1995, the Company contributed
$207, $169 and $168, respectively, to the plan.
F-17
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 10--EMPLOYEE BENEFIT PLANS: (Continued)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective with respect to the Company in 1996. Under
SFAS No. 123, companies can either record expense based on the fair value of
stock-based compensation upon issuance or elect to remain under the current
Accounting Principles Board Opinion No. 25 ("APB 25") method whereby no
compensation cost is recognized upon grant if certain requirements are met. The
Company is continuing to account for its stock-based compensation under APB 25.
However, pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS No. 123 are presented below.
If the compensation cost for the Company's 1997, 1996 and 1995 grants for
stock-based compensation plans had been determined consistent with SFAS No. 123,
the Company's 1997, 1996 and 1995 net income and earnings per common share would
have approximated the pro forma amounts below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ---------------------------
As Pro As Pro As Pro
Reported forma Reported forma Reported forma
----------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income......................... $11,919 $10,966 $11,033 $10,639 $ 5,816 $ 5,749
Earnings per common share:
Basic ........................ $0.79 $0.73 $0.90 $0.87 $0.49 $0.49
Diluted....................... $0.78 $0.72 $0.90 $0.87 $0.49 $0.49
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to grants prior to
1995, and additional awards in the future are anticipated.
F-18
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 10--EMPLOYEE BENEFIT PLANS: (Continued)
A summary of the Company's stock options as of December 31, 1997, 1996 and
1995 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- -------------------------
Wgtd. Wgtd. Wgtd.
Number Avg. Number Avg. Number Avg.
of Exer. of Exer. of Exer.
Options Price Options Price Options Price
------------ ---------- ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 735,000 $15.76 420,000 $12.33 248,000 $12.24
Granted 245,000 28.26 317,000 20.27 195,000 12.45
Expired -- -- -- -- (18,000) 12.38
Exercised (30,000) 12.95 (2,000) 12.38 (5,000) 12.38
------------ ------------ --------------
Outstanding at end of year 950,000 $19.07 735,000 $15.76 420,000 $12.33
Options exercisable at year-end 309,400 $13.93 180,667 $12.29 86,997 $12.23
Options available for future grant 413,000 338,000 655,000
Weighted average fair value of
options granted during the year $17.05 $12.95 $7.83
</TABLE>
The fair value of each option granted during the periods presented is
estimated on the date of grant using the Black- Scholes option-pricing model
with the following assumptions: (a) dividend yield of 0%, (b) expected
volatility of 41.20%, 42.83% and 46.86% in the years 1997, 1996 and 1995,
respectively, (c) risk-free interest rate of 6.04 %, 6.41% and 5.55% in the
years 1997, 1996 and 1995, respectively, and (d) expected life of 10 years for
employee options and five years for director options.
The following table summarizes information regarding stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Range of Number Wgtd. Avg. Wgtd. Avg. Number Wgtd. Avg.
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
------ ---------------- ----------------- --------- ---------------- --------------
$11-$15 390,000 9.3 years $12.32 246,334 $12.32
15 - 19 25,000 5.0 years 17.81 6,666 17.81
19 - 24 290,000 10.0 years 20.48 56,400 20.49
27 - 34 245,000 10.0 years 28.26 -- --
---------------- ----------------
950,000 9.6 years 19.07 309,400 13.93
================ ================
</TABLE>
F-19
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 11--OIL AND GAS RESERVE INFORMATION - UNAUDITED
A majority of the Company's net proved oil and gas reserves at December 31,
1997 have been estimated by independent petroleum consultants in accordance with
guidelines established by the Securities and Exchange Commission ("SEC").
Accordingly, the following reserve estimates are based upon existing economic
and operating conditions at the respective dates.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in providing the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. In addition, the present values
should not be construed as the current market value of the Company's oil and gas
properties or the cost that would be incurred to obtain equivalent reserves.
The following table sets forth an analysis of the Company's estimated
quantities of net proved and proved developed oil (including condensate) and
gas, all located onshore and offshore the continental United States:
<TABLE>
<CAPTION>
Natural
Oil in Gas in
MBbls MMcf
--------------- ---------------
<S> <C> <C>
Proved reserves as of December 31, 1994....................................... 6,455 68,285
Revisions of previous estimates........................................... 476 1,208
Extensions, discoveries and other additions............................... 399 13,478
Purchase of producing properties.......................................... 2,054 6,607
Production................................................................ (1,399) (8,399)
--------------- ---------------
Proved reserves as of December 31, 1995....................................... 7,985 81,179
Revisions of previous estimates........................................... (783) (4,025)
Extensions, discoveries and other additions............................... 5,526 37,175
Purchase of producing properties.......................................... 1,400 41,318
Production................................................................ (1,356) (11,331)
--------------- ---------------
Proved reserves as of December 31, 1996....................................... 12,772 144,316
Revisions of previous estimates........................................... 1,673 (12,252)
Extensions, discoveries and other additions............................... 2,675 45,276
Purchase of producing properties.......................................... 2,302 26,409
Sale of reserves.......................................................... (74) (327)
Production.................................................................. (1,585) (14,183)
--------------- ---------------
Proved reserves as of December 31, 1997....................................... 17,763 189,239
=============== ===============
Proved developed reserves:
as of December 31, 1995................................................... 7,055 67,797
=============== ===============
as of December 31, 1996................................................... 9,260 109,628
=============== ===============
as of December 31, 1997................................................... 14,485 141,424
=============== ===============
</TABLE>
The following tables present the standardized measure of future net cash
flows related to proved oil and gas reserves together with changes therein, as
defined by the FASB. The oil, condensate and gas price structure utilized to
project future net cash flows reflects current prices at each year end and has
been escalated only where known and determinable price changes are provided by
contracts and law. Future production and development costs are based on current
costs
F-20
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 11--OIL AND GAS RESERVE INFORMATION - UNAUDITED (Continued)
with no escalations. Estimated future cash flows net of future income taxes have
been discounted to their present values based on a 10% annual discount rate.
<TABLE>
<CAPTION>
Standardized Measure
December 31,
--------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Future cash flows................................................. $801,647 $894,418 $347,796
Future production and development costs........................... (268,641) (187,715) (89,739)
Future income taxes............................................... (104,521) (198,637) (56,146)
------------- ------------- -------------
Future net cash flows............................................. 428,485 508,066 201,911
10% annual discount............................................... (132,145) (178,728) (57,121)
------------- ------------- -------------
Standardized measure of discounted future net cash flows.......... $296,340 $329,338 $144,790
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Changes in Standardized Measure
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Standardized measure at beginning of year......................... $329,338 $144,790 $83,068
Sales and transfers of oil and gas produced, net of
production costs.............................................. (54,898) (43,389) (28,897)
Changes in price, net of future production costs.................. (186,615) 81,428 39,592
Extensions and discoveries, net of future production
and development costs......................................... 87,491 156,804 25,927
Changes in estimated future development costs, net of
development costs incurred during the period.................. 26,738 (13,214) 6,717
Revisions of quantity estimates................................... (3,502) (19,372) 5,867
Accretion of discount............................................. 32,934 17,837 9,739
Net change in income taxes........................................ 52,338 (80,443) (19,257)
Purchase of reserves in place..................................... 21,725 105,035 22,039
Sale of reserves in place......................................... 420 -- --
Changes in production rates (timing) and other.................... (9,629) (20,138) (5)
------------- ------------- -------------
Standardized measure at end of year............................... $296,340 $329,338 $144,790
============= ============= =============
</TABLE>
F-21
<PAGE>
STONE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share amounts)
NOTE 12--SUMMARIZED QUARTERLY FINANCIAL INFORMATION - UNAUDITED:
<TABLE>
<CAPTION>
Basic Diluted
Net Earnings Earnings
Revenues Expenses Income Per Share Per Share
------------- ------------- -------------- --------------- --------------
<S>
1997 <C> <C> <C> <C> <C>
First Quarter.............. $16,237 $12,641 $3,596 $0.24 $0.24
Second Quarter............. 13,662 12,065 1,597 0.11 0.11
Third Quarter.............. 15,958 13,463 2,495 0.17 0.16
Fourth Quarter............. 25,130 20,899 4,231 0.28 0.28
------------- ------------- -------------- --------------- --------------
$70,987 $59,068 $11,919 $0.79 $0.78
============= ============= ============== =============== ==============
1996
First Quarter.............. $15,093 $11,831 $3,262 $0.28 $0.28
Second Quarter............. 14,403 11,548 2,855 0.24 0.24
Third Quarter.............. 13,251 11,230 2,021 0.17 0.17
Fourth Quarter............. 15,218 12,323 2,895 0.22 0.21
------------- ------------- -------------- --------------- --------------
$57,965 $46,932 $11,033 $0.90 $0.90
============= ============= ============== =============== ==============
</TABLE>
F-22
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Form 10-K. All volumes of natural gas referred to herein are stated at
the legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
BBtu. One billion Btus.
Bcf. Billion cubic feet of gas.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Exploratory well. A well drilled to find and produce oil or gas reserves not
classified as proved, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
Farmin or farmout. An agreement whereunder the owner of a working interest
in an oil and gas lease assigns the working interest or a portion thereof to
another party who desires to drill on the leased acreage. Generally, the
assignee is required to drill one or more wells in order to earn its interest in
the acreage. The assignor usually retains a royalty or reversionary interest in
the lease. The interest received by an assignee is a "farmin" while the interest
transferred by the assignor is a "farmout."
Finding costs. Costs associated with acquiring and developing proved oil and
gas reserves which are capitalized by the Company pursuant to generally accepted
accounting principles, excluding any capitalized general and administrative
expenses.
Gross acreage or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
MBOE. One thousand barrels of oil equivalent.
MBOE/d. One thousand barrels of oil equivalent per day.
Mcf. One thousand cubic feet of gas.
Mcf/d. One thousand cubic feet of gas per day.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million barrels of oil equivalent.
MMBtu. One million Btus.
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GLOSSARY OF CERTAIN INDUSTRY TERMS--(Continued)
Mmcf. One million cubic feet of gas.
MMcf/d. One million cubic feet of gas per day.
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Present value. When used with respect to oil and gas reserves, present value
means the estimated future gross revenue to be generated from the production of
proved reserves, net of estimated production and future development costs, using
prices and costs in effect as of the date of the report or estimate, without
giving effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed reserves. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered from
new wells on developed acreage where the subject reserves cannot be recovered
without drilling additional wells.
Royalty interest. An interest in an oil and gas property entitling the owner
to a share of oil or gas production free of costs of production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
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EXHIBIT INDEX
Exhibit
Number Description
3.1 -- Certificate of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (Registration No. 33-62362)).
3.2 -- Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-62362)).
+10.1 -- Stone Energy Corporation 1993 Nonemployee Directors' Stock Option
Plan (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (Registration
No. 33-62362)).
+10.2 -- Deferred Compensation and Disability Agreements between TSPC
and D. Peter Canty dated July 16, 1981, and between TSPC and Joe
R. Klutts and James H. Prince dated August 23, 1981 and September
20, 1981, respectively (incorporated by reference to Exhibit 10.8
to the Registrant's Registration Statement on Form S-1
(Registration No. 33-62362)).
+10.3 -- Conveyances of Net Profits Interests in certain properties to
D. Peter Canty and James H. Prince (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-62362)).
+10.4 -- Stone Energy Corporation 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-62362)).
+10.5 -- Stone Energy Corporation Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993
(File No. 011- 12074)).
*10.6 -- Third Amended and Restated Credit Agreement between the
Registrant, the financial institutions named therein and
NationsBank of Texas, N.A., as Agent, dated as of July 30,
1997.
+10.7 -- Deferred Compensation and Disability Agreement between TSPC and
E.J. Louviere dated July 16, 1981 (incorporated by reference to
Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 011-12074)).
10.8 -- Term Loan Agreement, dated November 30, 1995, between the
Registrant and First National Bank of Commerce (incorporated by
reference to Exhibit 10.11 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 (File No.
011-12074)).
*+10.9 -- Stone Energy Corporation 1993 Stock Option Plan, As Amended and
Restated Effective as of May 15, 1997.
21.1 -- Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
*23.1 -- Consent of Arthur Andersen LLP.
*23.2 -- Consent of Atwater Consultants, Ltd.
*23.3 -- Consent of Cawley, Gillespie & Associates, Inc.
*27.1 -- Financial Data Schedule
*27.2 -- Financial Data Schedule-Restated
*27.3 -- Financial Data Schedule-Restated
*27.4 -- Financial Data Schedule-Restated
------------
* Filed herewith.
+ Identifies management contracts and compensatory plans or arrangements.
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Exhibit 10.6
$150,000,000.00
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Among
STONE ENERGY CORPORATION
as Borrower,
THE FINANCIAL INSTITUTIONS
NAMED IN THIS CREDIT AGREEMENT
as Banks,
and
NATIONSBANK OF TEXAS, N.A.
as Agent
July 30, 1997
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TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms...............................1
Section 1.02. Computation of Time Periods........................16
Section 1.03. Accounting Terms; Changes in GAAP..................16
Section 1.04. Types of Advances..................................17
Section 1.05. Miscellaneous......................................17
ARTICLE II
CREDIT FACILITIES
Section 2.01. Commitment for Advances............................17
Section 2.02. Borrowing Base.....................................19
Section 2.03. Method of Borrowing................................20
Section 2.04. Prepayment of Advances.............................23
Section 2.05. Repayment of Advances..............................26
Section 2.06. Letters of Credit..................................26
Section 2.07. Fees...............................................30
Section 2.08. Interest...........................................31
Section 2.09. Payments and Computations..........................32
Section 2.10. Sharing of Payments, Etc...........................33
Section 2.11. Breakage Costs.....................................34
Section 2.12. Increased Costs....................................34
Section 2.13. Taxes..............................................35
ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Amendment and Restatement..38
Section 3.02. Condition to Initial Term Advances.................39
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Section 3.03. Conditions Precedent to All Borrowings.............39
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Corporate Existence; Subsidiaries..................40
Section 4.02. Corporate Power....................................40
Section 4.03. Authorization and Approvals........................40
Section 4.04. Enforceable Obligations............................41
Section 4.05. Financial Statements...............................41
Section 4.06. True and Complete Disclosure.......................41
Section 4.07. Litigation.........................................42
Section 4.08. Use of Proceeds....................................42
Section 4.09. Investment Company Act.............................42
Section 4.10. Public Utility Holding Company Act.................42
Section 4.11. Taxes..............................................42
Section 4.12. Pension Plans......................................43
Section 4.13. Condition of Property; Casualties..................43
Section 4.14. No Burdensome Restrictions; No Defaults............44
Section 4.15. Environmental Condition............................44
Section 4.16. Permits, Licenses, Etc.............................45
Section 4.17. Gas Contracts......................................45
ARTICLE V
AFFIRMATIVE COVENANTS
Section 5.01. Compliance with Laws, Etc..........................45
Section 5.02. Maintenance of Insurance...........................46
Section 5.03. Preservation of Corporate Existence, Etc...........46
Section 5.04. Payment of Taxes, Etc..............................46
Section 5.05. Visitation Rights..................................46
Section 5.06. Reporting Requirements.............................47
Section 5.07. Maintenance of Property............................50
Section 5.08. New Subsidiaries...................................50
Section 5.09. Collateral.........................................51
Section 5.10. Hedging Transactions...............................51
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ARTICLE VI
NEGATIVE COVENANTS
Section 6.01. Liens, Etc.........................................52
Section 6.02. Debts, Guaranties, and Other Obligations...........53
Section 6.03. Agreements Restricting Liens and Distributions.....53
Section 6.04. Merger or Consolidation; Asset Sales...............54
Section 6.05. Restricted Payments................................54
Section 6.06. Investments........................................54
Section 6.07. Limitation on Speculative Hedging..................55
Section 6.08. Affiliate Transactions.............................55
Section 6.09. Compliance with ERISA..............................55
Section 6.10. Maintenance of Ownership of Subsidiaries...........56
Section 6.11 Sale-and-Leaseback.................................56
Section 6.12. Change of Business.................................56
Section 6.13. Current Ratio......................................56
Section 6.14. Tangible Net Worth.................................56
ARTICLE VII
REMEDIES
Section 7.01. Events of Default..................................57
Section 7.02. Optional Acceleration of Maturity..................59
Section 7.03. Automatic Acceleration of Maturity.................60
Section 7.04. Right of Set-off...................................60
Section 7.05. Actions Under Credit Documents.....................61
Section 7.06. Non-exclusivity of Remedies........................61
ARTICLE VIII
THE AGENT AND THE ISSUING BANK
Section 8.01. Authorization and Action...........................61
Section 8.02. Agent's Reliance, Etc..............................62
Section 8.03. The Agent and Its Affiliates.......................62
Section 8.04. Bank Credit Decision...............................62
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Section 8.05. Indemnification....................................63
Section 8.06. Successor Agent and Issuing Bank...................63
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc....................................64
Section 9.02. Notices, Etc.......................................65
Section 9.03. No Waiver; Remedies................................65
Section 9.04. Costs and Expenses.................................65
Section 9.05. Binding Effect.....................................65
Section 9.06. Bank Assignments and Participations................66
Section 9.07. Indemnification....................................68
Section 9.08. Execution in Counterparts..........................68
Section 9.09. Survival of Representations, Etc...................68
Section 9.10. Severability.......................................69
Section 9.11. Business Loans.....................................69
Section 9.12. Governing Law......................................69
EXHIBITS:
Exhibit A - Form of Assignment and Acceptance
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Guaranty
Exhibit D-1 - Form of Revolving Note
Exhibit D-2 - Form of Term Note
Exhibit E - Form of Notice of Borrowing
Exhibit F - Form of Notice of Conversion or
Continuation
Exhibit G - Form of Letter of Credit Application
Exhibit H-1 - Form of Borrower's General Counsel
Opinion
Exhibit H-2 - Form of Agent's Counsel Opinion
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SCHEDULES:
Schedule 1 - Borrower, Agent, and Bank Information
Schedule 4.07 - Existing Litigation
Schedule 4.15(a) - Existing Environmental Concerns
Schedule 4.15(b) - Designated Environmental Sites
Schedule 6.01 - Permitted Existing Liens
Schedule 6.02 - Permitted Existing Debt
Schedule 6.08 - Affiliated Transactions
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THIRD AMENDED AND RESTATED CREDIT AGREEMENT
This Third Amended and Restated Credit Agreement dated as of July 30,
1997 is among Stone Energy Corporation, a Delaware corporation, the Banks (as
defined below), and NationsBank of Texas, N.A., as Agent for the Banks.
The Borrower, the Banks, and the Agent agree as follows:
INTRODUCTION
A. The Borrower, the Agent, and the Banks are parties to the Second
Amended and Restated Credit Agreement dated as of September 26, 1996 (as the
same has been amended, supplemented, or otherwise modified from time to time,
the "Existing Credit Agreement").
B. The Borrower, the Agent, and the Banks have agreed to amend and
restate the Existing Credit Agreement by entering into this Agreement.
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (unless otherwise indicated,
such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"Acceptable Security Interest" means a Lien which (a) exists in favor
of the Agent for the benefit of the Agent and the Banks and (b) is superior to
all Liens or rights of any other Person in the Property encumbered thereby,
except to the extent that the rights of another Person are permitted hereunder.
"Adjusted Base Rate" means, for any day, the fluctuating rate per annum
of interest equal to the greater of (a) the Base Rate in effect on such day and
(b) the Federal Funds Rate in effect on such day plus 1.00%.
"Advance" means any Revolving Advance or Term Advance.
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"Affiliate" means, as to any Person, any other Person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person or any Subsidiary of such Person. The
term "control" (including the terms "controlled by" or "under common control
with") means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of Voting Securities, by contract, or otherwise.
"Agent" means NationsBank of Texas, N.A., in its capacity as an agent
pursuant to Article VIII and any successor agent pursuant to Section 8.06.
"Agent's Fee Letter" has the meaning specified in Section 2.07(b).
"Agreement" means this Third Amended and Restated Credit Agreement, as
the same may be amended, supplemented, and otherwise modified from time to time.
"Applicable Lending Office" means, with respect to each Bank, such
Bank's Domestic Lending Office in the case of a Base Rate Advance and such
Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
"Applicable Margin" means, for any day:
(a) so long as there is any principal amount outstanding under any Term
Advance, the following percentages during the following periods during which
such day falls:
Applicable Margin Applicable Margin
Base Rate Advances Eurodollar Rate Advances
Through March 31, 1998 0.00% 1.50%
From April 1, 1998 through
June 30, 1998 0.50% 2.00%
From July 1, 1998 through
January 1, 1999 1.00% 2.50%
(b) after the outstanding principal amount of all Term Advances has
been repaid in full, the following percentages based upon the ratio of (i) the
aggregate outstanding amount of Revolving Advances plus the Letter of Credit
Exposure to (ii) the Borrowing Base, as of such day:
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Ratio of Outstanding
Revolving Advances to Applicable Margin Applicable Margin
Borrowing Base Base Rate Advances Eurodollar Rate Advances
< .60 0.00% 0.75%
>= .60 and < .80 0.00% 1.00%
>=.80 0.00% 1.25%
"Assignment and Acceptance" means an assignment and acceptance entered
into by a Bank and an Eligible Assignee, and accepted by the Agent, in
substantially the form of the attached Exhibit A.
"Banks" means the lenders listed on the signature pages of this
Agreement and each Eligible Assignee that shall become a party to this Agreement
pursuant to Section 9.06.
"Base Rate" means a fluctuating interest rate per annum as shall be in
effect from time to time equal to the rate of interest publicly announced by
NationsBank of Texas, N.A., as its base rate, whether or not the Borrower has
notice thereof.
"Base Rate Advance" means an Advance which bears interest as provided
in Section 2.08(a).
"Borrower" means Stone Energy Corporation, a Delaware corporation.
"Borrowing" means any Revolving Borrowing or Term Borrowing.
"Borrowing Base" means, for any date of its determination by the
Majority Banks or all of the Banks, as the case may be, in accordance with
Section 2.02, the lending value of the Borrower's and its Subsidiaries' Oil and
Gas Properties as of such date.
"Business Day" means a day of the year on which banks are not required
or authorized to close in Dallas, Texas and, if the applicable Business Day
relates to any Eurodollar Rate Advances, on which dealings are carried on by
banks in the London interbank market.
"Capital Leases" means, as applied to any Person, any lease of any
Property by such Person as lessee which would, in accordance with GAAP, be
required to be classified and accounted for as a capital lease on the balance
sheet of such Person.
"Cash Collateral Account" means a special interest bearing cash
collateral account pledged to the Agent for the ratable benefit of the Banks
containing cash deposited pursuant
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to Sections 2.04(b) or (c), 7.02(b), or 7.03(b) to be maintained at the Agent's
office in accordance with Section 2.06(g) and bear interest or be invested in
the Agent's reasonable discretion.
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, state and local analogs, and all rules
and regulations and requirements thereunder in each case as now or hereafter in
effect.
"Class" has the meaning set forth in Section 1.04.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Commitments" means, as to any Bank, its Revolving Commitment and its
Term Commitment.
"Compliance Certificate" means a compliance certificate in the form of
the attached Exhibit B signed by a Responsible Officer of the Borrower.
"Controlled Group" means all members of a controlled group of
corporations and all trades (whether or not incorporated) under common control
which, together with the Borrower, are treated as a single employer under
Section 414 of the Code.
"Convert," "Conversion," and "Converted" each refers to a conversion of
Advances of one Type into Advances of another Type pursuant to Section 2.03(b).
"Credit Documents" means this Agreement, the Notes, the Letter of
Credit Documents, the Guaranties, the Security Documents, and each other
agreement, instrument, or document executed at any time in connection with this
Agreement.
"Debt," for any Person, means without duplication:
(a) indebtedness of such Person for borrowed money, including, without
limitation, obligations under letters of credit and agreements relating to the
issuance of letters of credit or acceptance financing;
(b) obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments;
(c) obligations of such Person to pay the deferred purchase price
of property or services;
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(d) obligations of such Person as lessee under Capital Leases;
(e) obligations of such Person under direct or indirect guaranties in
respect of, and obligations (contingent or otherwise) of such Person to purchase
or otherwise acquire, or otherwise to assure a creditor against loss in respect
of, indebtedness or obligations of others of the kinds referred to in clauses
(a) through (d) above;
(f) indebtedness or obligations of others of the kinds referred to in
clauses (a) through (e) secured by any Lien on or in respect of any Property of
such Person; and
(g) all liabilities of such Person in respect of unfunded vested
benefits under any Plan.
"Debt Issuance" means the issuance of any convertible or subordinated
debt permitted by Section 6.02(f).
"Default" means (a) an Event of Default or (b) any event or condition
which with notice or lapse of time or both would, unless cured or waived, become
an Event of Default.
"Dollar Equivalent" means for all purposes of this Agreement, the
equivalent in another currency of an amount in Dollars to be determined by
reference to the rate of exchange quoted by NationsBank of Texas, N.A., at 10:00
a.m. (Dallas, Texas, time) on the date of determination, for the spot purchase
in the foreign exchange market of such amount of Dollars with such other
currency.
"Dollars" and "$" means lawful money of the United States of America.
"Domestic Lending Office" means, with respect to any Bank, the office
of such Bank specified as its "Domestic Lending Office" opposite its name on
Schedule 1 or such other office of such Bank as such Bank may from time to time
specify to the Borrower and the Agent.
"Effective Date" means the date on which each of the conditions
precedent in Section 3.01 have been met or waived.
"Eligible Assignee" means any commercial bank organized under the laws
of any country which is a member of the Organization for Economic Cooperation
and Development and having primary capital (or its equivalent) of not less than
$250,000,000.00 (or its Dollar Equivalent) and approved by the Agent in its sole
discretion and the Borrower, which approval by the Borrower will not be
unreasonably withheld.
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"Environment" or "Environmental" shall have the meanings set forth in
43 U.S.C. ss. 9601(8) (1988).
"Environmental Claim" means any third party (including governmental
agencies and employees) action, lawsuit, claim, demand, regulatory action or
proceeding, order, decree, consent agreement or notice of potential or actual
responsibility or violation (including claims or proceedings under the
Occupational Safety and Health Acts or similar laws or requirements relating to
health or safety of employees) which seeks to impose liability under any
Environmental Law.
"Environmental Law" means all Legal Requirements arising from, relating
to, or in connection with the Environment, health, or safety, including without
limitation CERCLA, relating to (a) pollution, contamination, injury,
destruction, loss, protection, cleanup, reclamation or restoration of the air,
surface water, groundwater, land surface or subsurface strata, or other natural
resources; (b) solid, gaseous or liquid waste generation, treatment, processing,
recycling, reclamation, cleanup, storage, disposal or transportation; (c)
exposure to pollutants, contaminants, hazardous, or toxic substances, materials
or wastes; (d) the safety or health of employees; or (e) the manufacture,
processing, handling, transportation, distribution in commerce, use, storage or
disposal of hazardous, or toxic substances, materials or wastes.
"Environmental Permit" means any permit, license, order, approval or
other authorization under Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Federal Reserve Board (or any successor), as in effect from
time to time.
"Eurodollar Lending Office" means, with respect to any Bank, the office
of such Bank specified as its "Eurodollar Lending Office" opposite its name on
Schedule 1 (or, if no such office is specified, its Domestic Lending Office) or
such other office of such Bank as such Bank may from time to time specify to the
Borrower and the Agent.
"Eurodollar Rate"means, for the Interest Period for each Eurodollar
Rate Advance, the interest rate per annum (rounded upward to the nearest 1/100
of 1% per annum) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days before the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "Eurodollar Rate" shall mean, for the
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Interest Period for each Eurodollar Rate Advance, the interest rate per annum
(rounded upward to the nearest 1/100 of 1% per annum) appearing on Reuters
Screen LIBO page as the London interbank offered rate for deposits in Dollars at
approximately 11:00 a.m. (London time) two Business Days before the first day of
such Interest Period for a term comparable to such Interest Period; provided,
however, if more than one rate is specified on Reuters Screen LIBO page, the
applicable rate shall be the arithmetic mean of all such rates.
"Eurodollar Rate Advance" means an Advance which bears interest as
provided in Section 2.08(b).
"Eurodollar Rate Reserve Percentage" of any Bank for the Interest
Period for any Eurodollar Rate Advance means the reserve percentage applicable
during such Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any such percentage shall be so applicable) under
regulations issued from time to time by the Federal Reserve Board for
determining the maximum reserve requirement (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) for such Bank
with respect to liabilities or assets consisting of or including Eurocurrency
Liabilities having a term equal to such Interest Period.
"Event of Default" has the meaning specified in Section 7.01.
"Existing Letters of Credit" means the letters of credit outstanding on
the date of this Agreement issued for the account of the Borrower or its
Subsidiaries which are described in the attached Schedule 6.02, as the same may
be amended, supplemented, and otherwise modified from time to time.
"Existing Letter of Credit Exposure" means at any time, the sum of (a)
the aggregate undrawn maximum face amount of each Existing Letter of Credit at
such time, plus (b) the aggregate unpaid amount of all reimbursement obligations
for payments made under Existing Letters of Credit at such time.
"Expiration Date" means, with respect to any Letter of Credit, the date
on which such Letter of Credit will expire or terminate in accordance with its
terms.
"Federal Funds Rate" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for any such
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day on such transactions received by the Agent from three Federal funds brokers
of recognized standing selected by it.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any of its successors.
"Financial Statements" means the balance sheet and statements of
income, retained earnings and cash flow dated December 31, 1996 referred to in
Section 4.05, copies of which have been delivered to the Agent and the Banks.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time, applied on a basis consistent with the requirements
of Section 1.03.
"Governmental Authority" means any foreign governmental authority, the
United States of America, any state of the United States of America and any
subdivision of any of the foregoing, and any agency, department, commission,
board, authority or instrumentality, bureau or court having jurisdiction over
any Bank, the Borrower, or the Borrower's Subsidiaries or any of their
respective Properties.
"Guaranties" means each Guaranty in favor of the Agent for the ratable
benefit of the Banks in the form of the attached Exhibit C executed by a
Guarantor as required by Section 5.09, as the same may be amended, supplemented,
or otherwise modified from time to time.
"Guarantors" means each of the Borrower's Subsidiaries who hereafter
executes a Guaranty under Section 5.09.
"Hazardous Substance" means the substances identified as such pursuant
to CERCLA and those regulated under any other Environmental Law, including
without limitation pollutants, contaminants, petroleum, petroleum products,
radionuclides, radioactive materials, and medical and infectious waste.
"Hazardous Waste" means the substances regulated as such pursuant to
any Environmental Law.
"Interest Period" means, for each Eurodollar Rate Advance comprising
part of the same Borrowing, the period commencing on the date of such Advance or
the date of the Conversion of any Base Rate Advance into such an Advance and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below or by Section 2.03 and, thereafter, each subsequent period
commencing on the last day of the immediately preceding Interest Period and
ending on the last day of the period selected by the Borrower pursuant to the
provisions below or by Section 2.03. The duration of each such Interest Period
shall
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be one, two, three, or six months, in each case as the Borrower may, upon notice
received by the Agent not later than 10:00 a.m. (Dallas, Texas, time) on, the
third Business Day prior to the first day of such Interest Period select;
provided, however, that:
(a) the Borrower may not select any Interest Period for any Revolving
Advance which ends after the Revolving Maturity Date and any Term Advance which
ends after the Term Maturity Date;
(b) Interest Periods commencing on the same date for Advances
comprising part of the same Borrowing shall be of the same duration;
(c) whenever the last day of any Interest Period would otherwise occur
on a day other than a Business Day, the last day of such Interest Period shall
be extended to occur on the next succeeding Business Day, provided that if such
extension would cause the last day of such Interest Period to occur in the next
following calendar month, the last day of such Interest Period shall occur on
the next preceding Business Day; and
(d) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall end on the last
Business Day of the calendar month in which it would have ended if there were a
numerically corresponding day in such calendar month.
"Interim Financial Statements" means the unaudited balance sheet and
statements of income and cash flow dated as of March 31, 1997, referred to in
Section 4.05.
"Issuing Bank" means NationsBank of Texas, N.A., and any successor
issuing bank pursuant to Section 8.06.
"Legal Requirement" means any law, statute, ordinance, decree,
requirement, order, judgment, rule, regulation (or official interpretation of
any of the foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority, including, but not limited to, Regulations G, T, U, and
X.
"Letter of Credit" means, individually, any letter of credit issued by
the Issuing Bank which is subject to this Agreement and "Letters of Credit"
means all such letters of credit collectively, provided that the Existing
Letters of Credit shall not be Letters of Credit hereunder until made Letters of
Credit under this Agreement by the Issuing Bank at the time such Existing
Letters of Credit are replaced or rolled over.
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"Letter of Credit Application" means the Issuing Bank's standard form
letter of credit application for either a commercial or standby letter of
credit, as the case may be, which has been executed by the Borrower and accepted
by the Issuing Bank in connection with the issuance of a Letter of Credit, which
form or forms as of the date of this Agreement are in the form of the attached
Exhibit G, as the same may be amended, supplemented, and otherwise modified from
time to time.
"Letter of Credit Documents" means all Letters of Credit, Letter of
Credit Applications, and agreements, documents, and instruments entered into in
connection with or relating thereto.
"Letter of Credit Exposure" means, at any time, the sum of (a) the
aggregate undrawn maximum face amount of each Letter of Credit at such time,
plus (b) the aggregate unpaid amount of all Reimbursement Obligations at such
time.
"Letter of Credit Obligations" means any obligations of the Borrower
under this Agreement in connection with the Letters of Credit, including the
Reimbursement Obligations.
"Lien" means any mortgage, lien, pledge, charge, deed of trust,
security interest, or encumbrance to secure or provide for the payment of any
obligation of any Person, whether arising by contract, operation of law, or
otherwise (including, without limitation, the interest of a vendor or lessor
under any conditional sale agreement, Capital Lease, or other title retention
agreement).
"Lien Grant Documents" means the following documents duly executed by
all parties thereto, in form and substance satisfactory to the Agent:
(a) mortgages, deeds of trust, financing statements, or other security
instruments granting an Acceptable Security Interest in the Borrower's and its
Subsidiaries' Oil and Gas Properties with a loan value of at least 80% of the
most recent Borrowing Base determined by the Majority Banks or all of the Banks,
as the case may be;
(b) title opinions prepared by counsel approved by the Agent in form
and substance satisfactory to the Agent evidencing that the Borrower's and its
Subsidiaries' Oil and Gas Properties with a loan value of at least 80% of the
most recent Borrowing Base determined by the Majority Banks or all of the Banks,
as the case may be, are unencumbered except for title exceptions approved by the
Agent;
(c) favorable opinions of the Borrower's general counsel and such other
counsel of the Borrower as the Agent may reasonably request covering the
authorization and
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enforceability of the Credit Documents and such other matters as any Bank
through the Agent may reasonably request;
(d) a certificate of the Secretary or an Assistant Secretary of the
Borrower certifying the existence of the Borrower, a certificate of good
standing for the Borrower, the certificate of incorporation of the Borrower, the
bylaws of the Borrower, the resolutions of the Board of Directors of the
Borrower authorizing the execution of the Credit Documents and related
transactions, and the incumbency and signatures of the officers of the Borrower
authorized to execute the Credit Documents and related documents; and
(e) such other documents, certificates, letters in lieu of transfer
orders, opinions of Borrower's counsel, agreements, lien searches as the Agent
may reasonably request.
"Liquid Investments" means:
(a) debt securities issued or directly and fully guaranteed or insured
by the United States government or any agency or instrumentality thereof, with
maturities of no more than two years from the date of acquisition;
(b) commercial paper of a domestic issuer rated at the date of
acquisition not less than P1 by Moody's Investor Service, Inc., or A1 by
Standard & Poor's Corporation;
(c) certificates of deposit, demand deposits, Eurodollar time deposits,
overnight bank deposits, and bankers' acceptances, with maturities of no more
than two years from the date of acquisition, issued by any Bank or any bank or
trust company organized under the laws of the United States or any state thereof
whose deposits are insured by the Federal Deposit Insurance Corporation, and
having capital and surplus aggregating at least $100,000,000.00;
(d) corporate bonds, mortgaged-backed securities, and municipal bonds
of a domestic issuer rated at the date of acquisition Aaa by Moody's Investor
Service, Inc., or AAA by Standard & Poor's Corporation, with maturities of no
more than two years from the date of acquisition;
(e) repurchase agreements secured by debt securities of the type
described in part (a) above, the market value of which, including accrued
interest, is not less than 100% of the amount of the repurchase agreement, with
maturities of no more than two years from the date of acquisition, issued by or
acquired from or through any Bank or any bank or trust company organized under
the laws of the United States or any state thereof and having capital and
surplus aggregating at least $100,000,000.00; and
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(f) money market funds;
provided that (i) investments in any one issuer, excluding the United States
government or any agency or instrumentality thereof, shall not exceed 20% of
total fixed-income Liquid Investments based on market value at the time of
acquisition, (ii) fixed-income holdings shall not exceed 5% of all Investments
at any time, and (iii) certificates of deposit, commercial paper, corporate
bonds, mortgaged-backed securities, or municipal bonds issued by any one issuer
shall not exceed 5% of all Liquid Investments at any time.
"Majority Banks" means, at any time, Banks holding at least 66-2/3% of
the then aggregate unpaid principal amount of the Notes held by the Banks and
the Letter of Credit Exposure of the Banks at such time, but in no event less
than two Banks at any time when there are three or more Banks; provided that if
no such principal amount or Letter of Credit Exposure is then outstanding,
"Majority Banks" shall mean Banks having at least 66-2/3% of the aggregate
amount of the Revolving Commitments at such time, but in no event less than two
Banks at any time when there are three or more Banks.
"Material Adverse Change" means (a) a material adverse change in the
business, financial condition, or results of operations of the Borrower or any
of its Subsidiaries, or (b) the occurrence and continuance of any event or
circumstance which could reasonably be expected (i) to have a material adverse
effect on the Borrower's or any Guarantor's ability to perform its obligations
under this Agreement, any Note, any Guaranty, or any other Credit Document or
(ii) to cause a Default.
"Maximum Rate" means the maximum nonusurious interest rate under
applicable law.
"Mortgages" means any mortgages, deeds of trust, or other security
instruments granting or purporting to grant Acceptable Security Interests in the
Oil and Gas Properties of the Borrower and its Subsidiaries, as the same may be
amended, supplemented, or otherwise modified from time to time.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA.
"Net Income" means, for any Person and for any period of its
determination, the net income of such Person determined in accordance with GAAP
consistently applied, but excluding any gains and losses on sales and
retirements of assets and any noncash write-down of assets.
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"Net Worth" means, for any Person that is a corporation and as of any
date of its determination, the consolidated total assets of such Person less the
total liabilities of such Person, determined in accordance with GAAP
consistently applied.
"Note" means a Revolving Note or a Term Note.
"Notice of Borrowing" means a notice of borrowing in the form of the
attached Exhibit E signed by a Responsible Officer of the Borrower.
"Notice of Conversion or Continuation" means a notice of conversion or
continuation in the form of the attached Exhibit F signed by a Responsible
Officer of the Borrower.
"Obligations" means all principal, interest, fees, reimbursements,
indemnifications, and other amounts payable by the Borrower to the Agent or the
Banks under the Credit Documents.
"Oil and Gas Properties" means fee, leasehold or other interests in or
under mineral estates or oil, gas, and other liquid or gaseous hydrocarbon
leases with respect to Properties situated in the United States or offshore from
any state of the United States, including overriding royalty and royalty
interests, leasehold estate interests, net profits interests, production payment
interests and mineral fee interests, together with contracts executed in
connection therewith and incidental rights belonging thereto.
"Oil and Gas Reserve Report" means each engineering report covering the
Borrower's consolidated Oil and Gas Properties provided to the Agent pursuant to
Section 5.06(c).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means the Liens permitted to exist pursuant to
Section 6.01.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, limited liability corporation or company,
limited liability partnership, trust, unincorporated association, joint venture
or other entity, or a government or any political subdivision or agency thereof
or any trustee, receiver, custodian or similar official.
"Plan" means an employee benefit plan (other than a Multiemployer Plan)
maintained for employees of the Borrower or any member of the Controlled Group
and covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code.
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"Property" of any Person means any property or assets (whether real,
personal, or mixed, tangible or intangible) of such Person.
"Pro Rata Share" means, with respect to any Bank, either (a) the ratio
(expressed as a percentage) of such Bank's Commitments at such time to the
aggregate Commitments at such time or (b) if the Revolving Commitments have been
terminated, the ratio (expressed as a percentage) of such Bank's aggregate
outstanding Advances and Letter of Credit Exposure at such time to the aggregate
outstanding Advances and Letter of Credit Exposure of all the Banks at such
time.
"Register" has the meaning set forth in paragraph (c) of Section 9.06.
"Regulations G, T, U, and X" mean Regulations G, T, U, and X of the
Federal Reserve Board, as the same is from time to time in effect, and all
official rulings and interpretations thereunder or thereof.
"Reimbursement Obligations" means all of the obligations of the
Borrower to reimburse the Issuing Bank for amounts paid by the Issuing Bank
under Letters of Credit as established by the Letter of Credit Applications and
Section 2.06(d).
"Release" shall have the meaning set forth in CERCLA or under any other
Environmental Law.
"Response" shall have the meaning set forth in CERCLA or under any
other Environmental Law.
"Responsible Officer" means, with respect to any Person, such Person's
Chief Executive Officer, President, Chief Financial Officer, Chief Accounting
Officer, and Vice Presidents.
"Restricted Payment" means, with respect to any Person, any dividends
or other distributions (in cash, property, or otherwise) on, or any payment for
the purchase, redemption, or other acquisition of, any shares of any capital
stock of such Person, other than dividends payable in such Person's stock.
"Revolving Advance" means any advance by a Bank to the Borrower as part
of a Revolving Borrowing and refers to a Base Rate Advance or a Eurodollar Rate
Advance.
"Revolving Borrowing" means, subject to Sections 2.03(c)(ii) and
2.04(e), a borrowing consisting of simultaneous Revolving Advances of the same
Type made by each Bank pursuant to Section 2.03(a), continued by each Bank
pursuant to Section 2.03(b), or
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Converted by each Bank to Revolving Advances of a different Type pursuant to
Section 2.03(b).
"Revolving Commitment" means, for any Bank, the amount set opposite
such Bank's name on the signature pages hereof as its Revolving Commitment, or
if such Bank has entered into any Assignment and Acceptance, as set forth for
such Bank as its Revolving Commitment in the Register maintained by the Agent
pursuant to Section 9.06(c), as such amount may be reduced or terminated
pursuant to Article VII.
"Revolving Maturity Date" means the earlier of (a) July 30, 2000 or (b)
the earlier termination in whole of the Revolving Commitments pursuant to
Section 2.01(c) or Article VII.
"Revolving Note" means a promissory note of the Borrower payable to the
order of any Bank, in substantially the form of the attached Exhibit D-1,
evidencing indebtedness of the Borrower to such Bank resulting from Revolving
Advances owing to such Bank.
"Security Documents" means the Mortgages and any other documents
creating or purporting to create Liens in favor of the Agent securing the
repayment of the Obligations.
"Subsidiary" of a Person means any corporation or other entity of which
more than 50% of the outstanding capital stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
similar governing body of such corporation or other entity (irrespective of
whether at such time capital stock or other ownership interests of any other
class or classes of such corporation or other entity shall or might have voting
power upon the occurrence of any contingency) is at the time directly or
indirectly owned by such Person, by such Person and one or more Subsidiaries of
such Person or by one or more Subsidiaries of such Person.
"Tangible Net Worth" means, for any Person that is a corporation and as
of the date of its determination, the consolidated Net Worth of such Person,
excluding all consolidated intangible assets of such Person, as determined in
accordance with GAAP consistently applied.
"Term Advance" means any advance by a Bank to the Borrower as part of a
Term Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance.
"Term Borrowing" means, subject to Sections 2.03(c)(ii) and 2.04(d), a
borrowing consisting of simultaneous Term Advances of the same Type made by each
Bank pursuant to Section 2.03(a), continued by each Bank pursuant to Section
2.03(b), or Converted by each Bank to Term Advances of a different Type pursuant
to Section 2.03(b).
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"Term Commitment" means, for each Bank, the amount set opposite such
Bank's name on the signature pages of this Agreement as its Term Commitment or,
if such Bank has entered into any Assignment and Acceptance after the Effective
Date, set forth for such Bank as its Term Commitment in the Register maintained
by the Agent pursuant to Section 9.06(c); provided, however, that after December
31, 1997, the Term Commitment for such Bank shall be zero.
"Term Maturity Date" means January 1, 1999.
"Term Note" means a promissory note of the Borrower payable to the
order of any Bank in substantially the form of the attached Exhibit D-2,
evidencing indebtedness of the Borrower to such Bank resulting from any Term
Advance to such Bank.
"Termination Event" means (a) a Reportable Event described in Section
4043 of ERISA and the regulations issued thereunder (other than a Reportable
Event not subject to the provision for 30-day notice to the PBGC under such
regulations), (b) the withdrawal of the Borrower or any of its Affiliates from a
Plan during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a
Plan or the treatment of a Plan amendment as a termination under Section 4041 of
ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or
(e) any other event or condition which constitutes grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
Plan.
"Type" has the meaning set forth in Section 1.04.
"Voting Securities" means with respect to any corporation, capital
stock of the corporation having general voting power under ordinary
circumstances to elect directors of such corporation (irrespective of whether at
the time stock of any other class or classes shall have or might have special
voting power or rights by reason of the happening of any contingency).
Section 1.02. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding".
Section 1.03. Accounting Terms; Changes in GAAP.
(a) All accounting terms not specifically defined in this Agreement
shall be construed in accordance with GAAP applied on a consistent basis with
those applied in the preparation of the Financial Statements.
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(b) Unless otherwise indicated, all financial statements of the
Borrower, all calculations for compliance with covenants in this Agreement and
all calculations of any amounts to be calculated under the definitions in
Section 1.01 shall be based upon the consolidated accounts of the Borrower and
its Subsidiaries in accordance with GAAP (or in compliance with the regulations
promulgated by the United States Securities and Exchange Commission regarding
financial reporting) and consistent with the principles applied in preparing the
Financial Statements.
Section 1.04. Types of Advances. Advances are distinguished by "Type."
The "Type" of an Advance refers to the determination whether such Advance is a
Eurodollar Rate Advance or Base Rate Advance. Borrowings and Advances are also
distinguished by "Class." The "Class" of a Borrowing or an Advance refers to the
determination whether such Borrowing or Advance is a Revolving Borrowing or a
Term Borrowing or a Revolving Advance or a Term Advance, as applicable.
Section 1.05. Miscellaneous. Article, Section, Schedule, and Exhibit
references are to Articles and Sections of and Schedules and Exhibits to this
Agreement, unless otherwise specified.
ARTICLE II
CREDIT FACILITIES
Section 2.01. Commitment for Advances.
(a) Revolving Advances. Each Bank severally agrees, on the terms and
conditions set forth in this Agreement, to make Revolving Advances to the
Borrower from time to time on any Business Day during the period from the date
of this Agreement until the Revolving Maturity Date in an aggregate outstanding
amount up to but not to exceed an amount equal to (i) the lesser of such Bank's
Revolving Commitment or such Bank's Pro Rata Share of the Borrowing Base less
(ii) the sum of (A) such Bank's Pro Rata Share of the Letter of Credit Exposure,
and (B) such Bank's Pro Rata Share of the Existing Letter of Credit Exposure
provided that the sum of (1) the outstanding amount of all Revolving Advances
made by such Bank, (2) such Bank's Pro Rata Share of the Letter of Credit
Exposure, and (3) such Bank's Pro Rata Share of the Existing Letter of Credit
Exposure shall not exceed such Bank's Revolving Commitment. Each Revolving
Borrowing shall, in the case of Revolving Borrowings consisting of Base Rate
Advances, be in an aggregate amount not less than $500,000.00 and in integral
multiples of $100,000.00 in excess thereof, and in the case of Revolving
Borrowings consisting of Eurodollar Rate Advances, be in an aggregate amount not
less than $2,000,000.00 or in integral multiples of $1,000,000.00 in
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excess thereof, and in each case shall consist of Revolving Advances of the same
Type made on the same day by the Banks ratably according to their respective
Revolving Commitments. Within the limits of each Bank's Revolving Commitment,
and subject to the terms of this Agreement, the Borrower may from time to time
borrow, prepay, and reborrow Revolving Advances.
(b) Term Advances. Each Bank severally agrees, on the terms and
conditions set forth in this Agreement, to make Term Advances to the Borrower
from time to time on any Business Day during the period from the date of this
Agreement until December 31, 1997 in an amount equal to such Bank's Term
Commitment. Each Term Borrowing shall, in the case of Term Borrowings consisting
of Base Rate Advances, be in an aggregate amount not less than $500,000.00 and
in integral multiples of $100,000.00 in excess thereof, and in the case of Term
Borrowings consisting of Eurodollar Rate Advances, be in an aggregate amount not
less than $1,000,000.00 or in integral multiples of $1,000,000.00 in excess
thereof, and in each case shall consist of Term Advances of the same Type made
on the same day by the Banks ratably according to their respective Term
Commitments. No amount of any Term Borrowing that has been repaid may be
reborrowed.
(c) Reduction of Revolving Commitment. The Borrower shall have the
right, upon at least three Business Days' irrevocable notice to the Agent, to
terminate in whole or reduce ratably in part the unused portion of the Revolving
Commitments; provided that each partial reduction of the Revolving Commitments
shall be in the aggregate amount of $5,000,000.00 or in integral multiples of
$1,000,000.00 in excess thereof. Any reduction or termination of the Revolving
Commitments pursuant to this Section 2.01(c) shall be permanent, with no
obligation of the Banks to reinstate such Revolving Commitments and the
commitment fees provided for in Section 2.07(a) shall thereafter be computed on
the basis of the Revolving Commitments, as so reduced.
(d) Notes. The indebtedness of the Borrower to each Bank resulting from
the Revolving Advances owing to such Bank shall be evidenced by a Revolving Note
of the Borrower in the maximum principal amount of such Bank's Revolving
Commitment. The Borrower shall deliver to each Bank in exchange for such Bank's
existing Revolving Note a new Revolving Note in the maximum principal amount
required by the previous sentence on the date of the repayment in full of the
Term Advances. The indebtedness of the Borrower to each Bank resulting from the
Term Advances owing to such Bank shall be evidenced by a Term Note of the
Borrower in the maximum principal amount of such Bank's Term Commitment payable
to the order of such Bank.
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Section 2.02. Borrowing Base.
(a) The Borrowing Base as of the date of this Agreement has been set by
the Majority Banks and acknowledged by the Borrower as $80,000,000.00.
(b)(i) From the date hereof through the Revolving Maturity Date and
subject to the further provisions of this Section 2.02, the Borrowing
Base shall be redetermined by the Majority Banks within 30 days after
the receipt of each Oil and Gas Reserve Report scheduled to be provided
to the Agent pursuant to Sections 5.06(c)(i) and (c)(ii) on the basis
of information, including such Oil and Gas Reserve Reports, supplied by
Borrower in compliance with the provisions of this Agreement, including
such additional data concerning pricing, quantities of production,
purchasers of production, and other information and engineering and
geological data with respect thereto as the Agent or any Bank may
reasonably request, together with all other information then available
to the Agent and the Banks. Notwithstanding the foregoing, the Majority
Banks may, in the exercise of their good faith discretion, make
redeterminations of the Borrowing Base (A) from time to time on the
basis of information then available to the Agent and the Banks
regarding the Borrower's Oil and Gas Properties, and (B) from time to
time upon the occurrence of any Material Adverse Change.
(ii) The Majority Banks may also redetermine the Borrowing Base
after receiving notice of a proposed Debt Issuance based upon
information available to the Banks from the most recent Borrowing Base
redetermination. The Borrower shall give the Banks such notice at least
15 days before the closing of any Debt Issuance. Such redetermination
shall be effective upon the date such Debt Issuance closes.
(c) The Borrower may request the Majority Banks to redetermine the
Borrowing Base by providing a written request to the Agent, but only two such
requests may be made during any fiscal year of the Borrower. In connection with
any such request, the Borrower shall provide the Agent and the Banks with an
interim reserve report prepared by the Borrower together with such other
information, including additional data concerning pricing, quantities of
production, purchasers of production, and other information and engineering and
geological data, as the Agent or any Bank may reasonably request. Within 30 days
following the receipt of such interim reserve report and other information, the
Majority Banks shall make a redetermination of the Borrowing Base.
(d) Notwithstanding the foregoing paragraphs (b) and (c), at any time
that any Term Advances are outstanding, the Borrowing Base may only be increased
by agreement of all of the Banks. Additionally, if any Term Advances are
outstanding on March 1, 1998, all of the Banks shall redetermine the Borrowing
Base on or before March 15, 1998 based
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on information then available to the Banks and the outstanding amount of the
Term Advances. The Borrowing Base so determined shall be in effect until the
next Borrowing Base redetermination under the other provisions of this Section
2.02.
(e) Upon its redetermination of the Borrowing Base, each Bank shall
notify the Agent in writing the Borrowing Base it has approved, and the Agent
shall in turn notify the Borrower of such redetermination. Until the Borrower
receives such notification from the Agent, the Borrowing Base most recently
established shall remain in effect, and thereafter the new Borrowing Base as set
forth in such notification shall be in effect.
(f) The Borrowing Base shall represent the determination by the
Majority Banks or, if paragraph (d) above applies, all of the Banks in their
sole discretion, of the loan value of the Borrower's and its Subsidiaries
unencumbered Oil and Gas Properties, but the Majority Banks or all of the Banks,
as the case may be, shall make their determination in accordance with the
applicable definitions and provisions herein contained, each such Bank's
standard policies regarding energy lending, industry lending practices,
consultation with the Agent and the other Banks (but without requiring the
approval thereof), and consideration for the nature of the facilities
established hereunder. The Borrower acknowledges that the determination of the
Borrowing Base contains an equity cushion (market value in excess of loan
value), which is acknowledged by Borrower to be essential for the adequate
protection of the Agent and the Banks.
(g) The Borrower shall also have the right to reduce the Borrowing Base
once during the period from October 1 to March 31 and once during the period
from April 1 to September 30 during each year by providing the Agent 30 days
advance written of such reduction. The Agent shall promptly send to each Bank a
copy of such notice and such reduction shall be effective on the date of the
Agent's receipt of such notice.
(h) As of the date of this Agreement, the Agent has provided the
Borrower with the Agent's standard policies regarding energy lending. The Agent,
but not any other Bank, agrees to provide the Borrower with written notice of
any changes to such policies.
Section 2.03. Method of Borrowing.
(a) Notice. Each Borrowing shall be made pursuant to a Notice of
Borrowing (or by telephone notice promptly confirmed in writing by a Notice of
Borrowing), given not later than 10:00 a.m. (Dallas, Texas, time) (i) on the
third Business Day before the date of the proposed Borrowing, in the case of a
Eurodollar Rate Borrowing or (ii) on the Business Day of the proposed Borrowing,
in the case of a Base Rate Borrowing, by the Borrower to the Agent, which shall
in turn give to each Bank prompt notice of such proposed Borrowing by telecopier
or telex. Each Notice of a Borrowing shall be given by telecopier or telex,
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confirmed immediately in writing specifying the information required therein. In
the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the
Agent shall promptly notify each Bank of the applicable interest rate under
Section 2.08(b). Each Bank shall, before 10:00 a.m. (Dallas, Texas, time) on the
date of such Borrowing, make available for the account of its Applicable Lending
Office to the Agent at its address referred to in Section 9.02, or such other
location as the Agent may specify by notice to the Banks, in same day funds,
such Bank's Pro Rata Share of such Borrowing. After the Agent's receipt of such
funds and upon fulfillment of the applicable conditions set forth in Article
III, the Agent shall make such funds available to the Borrower at its account
with the Agent.
(b) Conversions and Continuations. The Borrower may elect to Convert or
continue any Borrowing under this Section 2.03 by delivering an irrevocable
Notice of Conversion or Continuation to the Agent at the Agent's office no later
than 10:00 a.m. (Dallas, Texas, time) (i) on the date which is at least three
Business Days in advance of the proposed Conversion or continuation date in the
case of a Conversion to or a continuation of a Borrowing of the same Class
comprised of Eurodollar Rate Advances and (ii) on the Business Day of the
proposed conversion date in the case of a Conversion to a Borrowing of the same
Class comprised of Base Rate Advances. Each such Notice of Conversion or
Continuation shall be in writing or by telex or telecopier confirmed immediately
in writing specifying the information required therein. Promptly after receipt
of a Notice of Conversion or Continuation under this Section, the Agent shall
provide each Bank with a copy thereof and, in the case of a Conversion to or a
Continuation of a Borrowing comprised of Eurodollar Rate Advances, notify each
Bank of the applicable interest rate under Section 2.08(b).
(c) Certain Limitations. Notwithstanding anything in paragraphs
(a) and (b) above:
(i) at no time shall there be more than eight Interest Periods
applicable to outstanding Eurodollar Rate Advances;
(ii) if any Bank shall, at least one Business Day before the date
of any requested Borrowing, Conversion, or continuation, notify the
Agent that the introduction of or any change in or in the
interpretation of any law or regulation makes it unlawful, or that any
central bank or other Governmental Authority asserts that it is
unlawful, for such Bank or its Eurodollar Lending Office to perform its
obligations under this Agreement to make Eurodollar Rate Advances or to
fund or maintain Eurodollar Rate Advances, the right of the Borrower to
select Eurodollar Rate Advances from such Bank shall be suspended until
such Bank shall notify the Agent that the circumstances causing such
suspension no longer exist, and the
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Advance made by such Bank in respect of such Borrowing, Conversion, or
continuation shall be a Base Rate Advance;
(iii) if the Agent is unable to determine the Eurodollar Rate for
Eurodollar Rate Advances comprising any requested Borrowing, the right
of the Borrower to select Eurodollar Rate Advances for such Borrowing
or for any subsequent Borrowing shall be suspended until the Agent
shall notify the Borrower and the Banks that the circumstances causing
such suspension no longer exist, and each Advance comprising such
Borrowing shall be a Base Rate Advance;
(iv) if the Majority Banks shall, at least one Business Day
before the date of any requested Borrowing, notify the Agent that the
Eurodollar Rate for Eurodollar Rate Advances comprising such Borrowing
will not adequately reflect the cost to such Banks of making or funding
their respective Eurodollar Rate Advances, as the case may be, for such
Borrowing, the right of the Borrower to select Eurodollar Rate Advances
for such Borrowing or for any subsequent Borrowing shall be suspended
until the Agent shall notify the Borrower and the Banks that the
circumstances causing such suspension no longer exist, and each Advance
comprising such Borrowing shall be a Base Rate Advance; and
(v) if the Borrower shall fail to select the duration or
continuation of any Interest Period for any Eurodollar Rate Advances in
accordance with the provisions contained in the definition of "Interest
Period" in Section 1.01 and paragraph (b) above, the Agent shall
forthwith so notify the Borrower and the Banks and such Advances shall
be made available to the Borrower on the date of such Borrowing as Base
Rate Advances or, if an existing Advance, Convert into Base Rate
Advances.
(d) Notices Irrevocable. Each Notice of Borrowing and Notice of
Conversion or Continuation shall be irrevocable and binding on the Borrower. In
the case of any Borrowing which the related Notice of Borrowing specifies is to
be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Bank
against any loss, out-of-pocket cost, or expense incurred by such Bank as a
result of any failure by the Borrower to fulfill on or before the date specified
in such Notice of Borrowing for such Borrowing the applicable conditions set
forth in Article III including, without limitation, any loss (including any loss
of anticipated profits), cost, or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by such Bank to fund the
Advance to be made by such Bank as part of such Borrowing when such Advance, as
a result of such failure, is not made on such date.
(e) Agent Reliance. Unless the Agent shall have received notice from a
Bank before the date of any Borrowing that such Bank shall not make available to
the Agent such
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Bank's Pro Rata Share of such Borrowing, the Agent may assume that such Bank has
made its Pro Rata Share of such Borrowing available to the Agent on the date of
such Borrowing in accordance with paragraph (a) of this Section 2.03 and the
Agent may, in reliance upon such assumption, make available to the Borrower on
such date a corresponding amount. If and to the extent that such Bank shall not
have so made its Pro Rata Share of such Borrowing available to the Agent, such
Bank and the Borrower severally agree to immediately repay to the Agent on
demand such corresponding amount, together with interest on such amount, for
each day from the date such amount is made available to the Borrower until the
date such amount is repaid to the Agent, at (i) in the case of the Borrower, the
interest rate applicable on such day to Advances comprising such Borrowing and
(ii) in the case of such Bank, the Federal Funds Rate for such day. If such Bank
shall repay to the Agent such corresponding amount and interest as provided
above, such corresponding amount so repaid shall constitute such Bank's Advance
as part of such Borrowing for purposes of this Agreement even though not made on
the same day as the other Advances comprising such Borrowing.
(f) Bank Obligations Several. The failure of any Bank to make the
Advance to be made by it as part of any Borrowing shall not relieve any other
Bank of its obligation, if any, to make its Advance on the date of such
Borrowing. No Bank shall be responsible for the failure of any other Bank to
make the Advance to be made by such other Bank on the date of any Borrowing.
Section 2.04. Prepayment of Advances.
(a) Optional. The Borrower may prepay Advances, after giving by 10:00
a.m. (Dallas, Texas, time) (i) in the case of Eurodollar Rate Advances, at least
two Business Days' or (ii) in case of Base Rate Advances, same Business Day's,
irrevocable prior written notice to the Agent stating the proposed date and
aggregate principal amount of such prepayment. If any such notice is given, the
Borrower shall prepay Advances comprising part of the same Borrowing in whole or
ratably in part in an aggregate principal amount equal to the amount specified
in such notice, together with accrued interest to the date of such prepayment on
the principal amount prepaid and amounts, if any, required to be paid pursuant
to Section 2.11 as a result of such prepayment being made on such date;
provided, however, that each partial prepayment with respect to: (A) any
Borrowing comprised of Base Rate Advances shall be made in $100,000.00 multiples
and in an aggregate principal amount such that after giving effect thereto such
Borrowing shall have a principal amount outstanding of at least $500,000.00 and
(B) any Borrowing comprised of Eurodollar Rate Advances shall be made in
$1,000,000.00 multiples and in an aggregate principal amount such that after
giving effect thereto such Borrowing shall have a principal amount outstanding
of at least $2,000,000.00. Full prepayments of any Borrowing are permitted
without restriction of amounts.
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(b) Borrowing Base Deficiency. If the aggregate outstanding amount of
Revolving Advances plus the Letter of Credit Exposure plus the Existing Letter
of Credit Exposure ever exceeds the Borrowing Base, the Borrower shall, within
ten days after receipt of written notice of such condition from the Agent elect
by written notice to the Agent to take one or more of the following actions to
remedy the Borrowing Base deficiency:
(i) prepay Revolving Advances and, if the Advances have been
repaid in full, make deposits into the Cash Collateral Account to
provide cash collateral for the Letter of Credit Exposure, such that
the Borrowing Base deficiency is cured within ten days after the
Borrower's written election;
(ii) add additional Oil and Gas Properties acceptable to the
Majority Banks to the Borrowing Base such that the Borrowing Base
deficiency is cured within 30 days after the Borrower's written
election and, if any Oil and Gas Properties are so added to the
Borrowing Base after March 31, 1998 and the Term Advances have not been
repaid in full, provide the Agent for the benefit of the Banks an
Acceptable Security Interest in at least 80% of the total Borrowing
Base value of the Oil and Gas Properties included in the Borrowing Base
most recently determined after such addition and deliver Lien Grant
Documents for such Oil and Gas Properties; or
(iii) pay the deficiency in monthly installments in amounts
satisfactory to the Majority Banks for the prepayment of Revolving
Advances and, if the Revolving Advances have been repaid in full, make
deposits into the Cash Collateral Account to provide cash collateral
for the Letter of Credit Exposure such that the Borrowing Base
deficiency is eliminated in a period satisfactory to the Majority
Banks, but in no event to exceed six months, by irrevocably dedicating
an amount of the monthly cash flow from the Borrower's and its
Subsidiaries' Oil and Gas Properties to the prepayment of Revolving
Advances and cash collateralization of the Letter of Credit Exposure;
Each prepayment pursuant to this Section 2.04(b) shall be accompanied by accrued
interest on the amount prepaid to the date of such prepayment and amounts, if
any, required to be paid pursuant to Section 2.11 as a result of such prepayment
being made on such date.
(c) Reduction of Revolving Commitments. On the date of each reduction
of the aggregate Revolving Commitments pursuant to Section 2.01(c), the Borrower
agrees to make a prepayment in respect of the outstanding amount of the
Revolving Advances and the Letter of Credit Exposure to the extent, if any, that
the aggregate unpaid principal amount of all Revolving Advances plus the sum of
the Letter of Credit Exposure and the Existing Letter of Credit Exposure exceeds
the Revolving Commitments, as so reduced. Any amount paid
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under the preceding sentence in respect of Letter of Credit Exposure and
Existing Letter of Credit Exposure shall be held as cash collateral under
Section 2.06(g). Each prepayment pursuant to this Section 2.04(c) shall be
accompanied by accrued interest on the amount prepaid to the date of such
prepayment and amounts, if any, required to be paid pursuant to Section 2.11 as
a result of such prepayment being made on such date.
(d) Term Advances. The Borrower shall repay the Term Advances by an
amount equal to the net cash proceeds received by the Borrower from the sale of
any of the Borrower's capital stock (other than any common stock sold in
connection with sales to its employees or directors pursuant to any employee or
director stock option plan, employee compensation arrangement, or other employee
benefit plan) or from any Debt Issuance, upon receipt of such proceeds, whether
at closing of such sale or Debt Issuance or thereafter. Each prepayment pursuant
to this Section 2.04(d) shall be accompanied by accrued interest on the amount
prepaid to the date of such prepayment and amounts, if any, required to be paid
pursuant to Section 2.11 as a result of such prepayment being made on such date.
(e) Illegality. If any Bank shall notify the Agent and the Borrower
that the introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or that any central bank or other governmental
authority asserts that it is unlawful for such Bank or its Eurodollar Lending
Office to perform its obligations under this Agreement to maintain any
Eurodollar Rate Advances of such Bank then outstanding hereunder, (i) the
Borrower shall, no later than 10:00 a.m. (Dallas, Texas, time) (A) if not
prohibited by law, on the last day of the Interest Period for each outstanding
Eurodollar Rate Advance made by such Bank or (B) if required by such notice, on
the second Business Day following its receipt of such notice prepay all of the
Eurodollar Rate Advances made by such Bank then outstanding, together with
accrued interest on the principal amount prepaid to the date of such prepayment
and amounts, if any, required to be paid pursuant to Section 2.11 as a result of
such prepayment being made on such date, (ii) such Bank shall simultaneously
make a Base Rate Advance to the Borrower on such date in an amount equal to the
aggregate principal amount of the Eurodollar Rate Advances prepaid to such Bank,
and (iii) the right of the Borrower to select Eurodollar Rate Advances from such
Bank for any subsequent Borrowing shall be suspended until such Bank gives
notice referred to above shall notify the Agent that the circumstances causing
such suspension no longer exist.
(f) No Additional Right; Ratable Prepayment. The Borrower shall have no
right to prepay any principal amount of any Advance except as provided in this
Section 2.04, and all notices given pursuant to this Section 2.04 shall be
irrevocable and binding upon the Borrower. Each payment of any Advance pursuant
to this Section 2.04 shall be made in a manner such that all Advances comprising
part of the same Borrowing are paid in whole or ratably in part.
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Section 2.05. Repayment of Advances.
(a) The Borrower shall repay to the Agent for the ratable benefit of
the Banks the outstanding principal amount of each Revolving Advance on the
Revolving Maturity Date.
(b) The Borrower shall repay to the Agent for the ratable benefit of
the Banks the outstanding principal amount of the Term Advances on the Term
Maturity Date.
Section 2.06. Letters of Credit.
(a) Commitment. From time to time from the date of this Agreement until
the Revolving Maturity Date, at the request of the Borrower, the Issuing Bank
shall, on the terms and conditions hereinafter set forth, issue, increase, or
extend the expiration date of Letters of Credit for the account of the Borrower
on any Business Day or convert an Existing Letter of Credit to a Letter of
Credit upon its renewal. No Letter of Credit shall be issued, increased, or
extended and no Existing Letters of Credit shall convert to Letters of Credit:
(i) unless such issuance, increase, extension or conversion
would not cause the Letter of Credit Exposure plus the Existing Letter
of Credit Exposure to exceed the lesser of (A) $30,000,000.00 or (B)
the lesser of (1) the aggregate Revolving Commitments less the
aggregate outstanding principal amount of all Revolving Advances or (2)
the Borrowing Base less the aggregate outstanding principal amount of
all Revolving Advances;
(ii) unless such Letter of Credit has an Expiration Date not
later than the earlier of (A) 12 months after the date of issuance
thereof (or, if extendable beyond such period, unless such Letter of
Credit is cancelable upon at least 30 days' notice given by the Issuing
Bank to the beneficiary of such Letter of Credit) or (B) the Revolving
Maturity Date;
(iii) unless such Letter of Credit Documents are in form and
substance acceptable to the Issuing Bank in its sole discretion;
(iv) unless such Letter of Credit is a standby letter of credit
not supporting the repayment of indebtedness for borrowed money of any
Person; and
(v) unless the Borrower has delivered to the Issuing Bank a
completed and executed Letter of Credit Application.
(b) Participations. Upon the date of the issuance or increase of a
Letter of Credit or the conversion of an Existing Letter of Credit to a Letter
of Credit, the Issuing Bank shall
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be deemed to have sold to each other Bank and each other Bank shall have been
deemed to have purchased from the Issuing Bank a participation in the related
Letter of Credit Obligations equal to such Bank's Pro Rata Share at such date
and such sale and purchase shall otherwise be in accordance with the terms of
this Agreement. The Issuing Bank shall promptly notify each such participant
Bank by telex, telephone, or telecopy of each Letter of Credit issued,
increased, or extended or converted and the actual dollar amount of such Bank's
participation in such Letter of Credit.
(c) Issuing. Each Letter of Credit shall be issued, increased, or
extended or converted from an Existing Letter of Credit pursuant to a Letter of
Credit Application (or by telephone notice promptly confirmed in writing by a
Letter of Credit Application), given not later than 10:00 a.m. (Dallas, Texas,
time) on the fifth Business Day before the date of the proposed issuance,
increase, or extension of the Letter of Credit or conversion of the Existing
Letter of Credit, and the Agent shall give to each Bank prompt notice of thereof
by telex, telephone, or telecopy. Each Letter of Credit Application shall be
given by telecopier or telex, confirmed immediately in writing, specifying the
information required therein. After the Agent's receipt of such Letter of Credit
Application and upon fulfillment of the applicable conditions set forth in
Article III, the Agent shall issue, increase, or extend such Letter of Credit or
convert such Existing Letter of Credit for the account of the Borrower. Each
Letter of Credit Application shall be irrevocable and binding on the Borrower.
(d) Reimbursement. The Borrower hereby agrees to pay on demand to the
Issuing Bank an amount equal to any amount paid by the Issuing Bank under any
Letter of Credit. In the event the Issuing Bank makes a payment pursuant to a
request for draw presented under a Letter of Credit and such payment is not
promptly reimbursed by the Borrower upon demand, the Issuing Bank shall give the
Agent notice of the Borrower's failure to make such reimbursement and the Agent
shall promptly notify each Bank of the amount necessary to reimburse the Issuing
Bank. Upon such notice from the Agent, each Bank shall promptly reimburse the
Issuing Bank for such Bank's Pro Rata Share of such amount, and such
reimbursement shall be deemed for all purposes of this Agreement to be a
Revolving Advance to the Borrower transferred at the Borrower's request to the
Issuing Bank. If such reimbursement is not made by any Bank to the Issuing Bank
on the same day on which the Agent notifies such Bank to make reimbursement to
the Issuing Bank hereunder, such Bank shall pay interest on its Pro Rata Share
thereof to the Issuing Bank at a rate per annum equal to the Federal Funds Rate.
The Borrower hereby unconditionally and irrevocably authorizes, empowers, and
directs the Agent and the Banks to record and otherwise treat such
reimbursements to the Issuing Bank as Base Rate Advances under a Revolving
Borrowing requested by the Borrower to reimburse the Issuing Bank which have
been transferred to the Issuing Bank at the Borrower's request.
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(e) Obligations Unconditional. The obligations of the Borrower under
this Agreement in respect of each Letter of Credit shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including, without limitation, the following
circumstances:
(i) any lack of validity or enforceability of any Letter
of Credit Documents;
(ii) any amendment or waiver of, or any consent to, departure
from any Letter of Credit Documents;
(iii) the existence of any claim, set-off, defense, or other right
which the Borrower may have at any time against any beneficiary or
transferee of such Letter of Credit (or any Persons for whom any such
beneficiary or any such transferee may be acting), the Issuing Bank, or
any other person or entity, whether in connection with this Agreement,
the transactions contemplated in this Agreement or in any Letter of
Credit Documents, or any unrelated transaction;
(iv) any statement or any other document presented under such
Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect to the extent the Issuing Bank would not be
liable therefor pursuant to the following paragraph (f); or
(v) payment by the Issuing Bank under such Letter of Credit
against presentation of a draft or certificate which does not comply
with the terms of such Letter of Credit;
provided, however, that nothing contained in this paragraph (e) shall be deemed
to constitute a waiver of any remedies of the Borrower in connection with the
Letters of Credit or the Borrower's rights under Section 2.06(f) below.
(f) Liability of Issuing Bank. The Borrower assumes all risks of the
acts or omissions of any beneficiary or transferee of any Letter of Credit with
respect to its use of such Letter of Credit. Neither the Issuing Bank nor any of
its officers or directors shall be liable or responsible for:
(i) the use which may be made of any Letter of Credit or
any acts or omissions of any beneficiary or transferee in connection therewith;
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(ii) the validity, sufficiency, or genuineness of documents, or
of any endorsement thereon, even if such documents should prove to be
in any or all respects invalid, insufficient, fraudulent, or forged;
(iii) payment by the Issuing Bank against presentation of
documents which do not comply with the terms of a Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to the relevant Letter of Credit; or
(iv) any other circumstances whatsoever in making or failing to
make payment under any Letter of Credit (INCLUDING THE ISSUING BANK'S
OWN NEGLIGENCE),
except that the Borrower shall have a claim against the Issuing Bank, and the
Issuing Bank shall be liable to the Borrower, to the extent of any direct, as
opposed to consequential, damages suffered by the Borrower which the Borrower
proves were caused by (A) the Issuing Bank's willful misconduct or gross
negligence in determining whether documents presented under a Letter of Credit
comply with the terms of such Letter of Credit or (B) the Issuing Bank's willful
failure to make lawful payment under any Letter of Credit after the presentation
to it of a draft and certificate strictly complying with the terms and
conditions of such Letter of Credit. In furtherance and not in limitation of the
foregoing, the Issuing Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
(g) Cash Collateral Account.
(i) If the Borrower is required to deposit funds in the Cash
Collateral Account pursuant to Sections 2.04(b) or (c), 7.02(b), or
7.03(b), then the Borrower and the Agent shall establish the Cash
Collateral Account and the Borrower shall execute any documents and
agreements, including the Agent's standard form assignment of deposit
accounts, that the Agent requests in connection therewith to establish
the Cash Collateral Account and grant the Agent a first priority
security interest in such account and the funds therein. The Borrower
hereby pledges to the Agent and grants the Agent a security interest in
the Cash Collateral Account, whenever established, all funds held in
the Cash Collateral Account from time to time, and all proceeds thereof
as security for the payment of the Obligations.
(ii) So long as no Event of Default exists, (A) the Agent may
apply the funds held in the Cash Collateral Account only to the
reimbursement of any Letter of Credit Obligations, and (B) the Agent
shall release to the Borrower at the Borrower's written request any
funds held in the Cash Collateral Account in an
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amount up to but not exceeding the excess, if any (immediately prior to
the release of any such funds), of the total amount of funds held in
the Cash Collateral Account over the Letter of Credit Exposure. During
the existence of any Event of Default, the Agent may apply any funds
held in the Cash Collateral Account to the Obligations in any order
determined by the Agent, regardless of any Letter of Credit Exposure
which may remain outstanding. The Agent may in its sole discretion at
any time release to the Borrower any funds held in the Cash Collateral
Account.
(iii) The Agent shall exercise reasonable care in the custody and
preservation of any funds held in the Cash Collateral Account and shall
be deemed to have exercised such care if such funds are accorded
treatment substantially equivalent to that which the Agent accords its
own property, it being understood that the Agent shall not have any
responsibility for taking any necessary steps to preserve rights
against any parties with respect to any such funds.
Section 2.07. Fees.
(a) Commitment Fees.
(i) The Borrower agrees to pay to the Agent for the account of
each Bank a commitment fee of .375% per annum on the average daily
amount by which such Bank's Pro Rata Share of the Borrowing Base
exceeds the sum of such Bank's outstanding Revolving Advances and such
Bank's Pro Rata Share of the Letter of Credit Exposure, from the date
of this Agreement until the Revolving Maturity Date.
(ii) The commitment fees shall be due and payable quarterly in
arrears on the last day of each March, June, September, and December
during the term of this Agreement and on the Revolving Maturity Date.
(b) Agent Fees. The Borrower agrees to pay to the Agent for the benefit
of the Agent the fees described in the letter dated July 30, 1997, from the
Agent to the Borrower (the "Agent's Fee Letter").
(c) Bank Fees. The Borrower agrees to pay to the Agent for the ratable
benefit of the Banks (i) on the Effective Date, a $75,000.00 facility fee and
(ii) on March 31, 1998 if any Term Advances remain outstanding on such date, a
$150,000.00 facility fee.
(d) Letter of Credit Fees. The Borrower agrees to pay to the Agent for
the pro rata benefit of the Banks a fee for each Letter of Credit issued
hereunder equal to 1.00% per annum on the face amount of such Letter of Credit,
but with minimum annual fee of $750.00 on each Letter of Credit. Each such fee
shall be payable annually in advance on the date of
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the issuance, increase or extension of the Letter of Credit, but, in the case of
an increase or extension only, on the amount of such increase or for the period
of such extension.
Section 2.08. Interest. The Borrower shall pay interest on the unpaid
principal amount of each Advance made by each Bank from the date of such Advance
until such principal amount shall be paid in full, at the following rates per
annum:
(a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate
per annum equal at all times to the Adjusted Base Rate in effect from time to
time plus the Applicable Margin in effect from time to time, payable in arrears
on the last day of March, June, September, and December and on the date such
Base Rate Advance shall be paid in full, provided that any amount of principal
which is not paid when due (whether at stated maturity, by acceleration, or
otherwise) shall bear interest from the date on which such amount is due until
such amount is paid in full, payable on demand, at a rate per annum equal at all
times to the Adjusted Base Rate in effect from time to time plus the Applicable
Margin plus 3.00% per annum.
(b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate
Advance, a rate per annum equal at all times during the Interest Period for such
Advance to the Eurodollar Rate for such Interest Period plus the Applicable
Margin in effect from time to time, payable on the last day of such Interest
Period, and, in the case of six-month Interest Periods, on the day which occurs
during such Interest Period three months from the first day of such Interest
Period, provided that any amount of principal which is not paid when due
(whether at stated maturity, by acceleration, or otherwise) shall bear interest
from the date on which such amount is due until such amount is paid in full,
payable on demand, at a rate per annum equal at all times to the Adjusted Base
Rate in effect from time to time plus the Applicable Margin plus 3.00% per
annum.
(c) Additional Interest on Eurodollar Rate Advances. The Borrower shall
pay to each Bank, so long as any such Bank shall be required under regulations
of the Federal Reserve Board to maintain reserves with respect to liabilities or
assets consisting of or including Eurocurrency Liabilities, additional interest
on the unpaid principal amount of each Eurodollar Rate Advance of such Bank,
from the effective date of such Advance until such principal amount is paid in
full, at an interest rate per annum equal at all times to the remainder obtained
by subtracting (A) the Eurodollar Rate for the Interest Period for such Advance
from (B) the rate obtained by dividing such Eurodollar Rate by a percentage
equal to 100% minus the Eurodollar Rate Reserve Percentage of such Bank for such
Interest Period, payable on each date on which interest is payable on such
Advance. Such additional interest payable to any Bank shall be determined by
such Bank and notified to the Borrower through the Agent (such notice to include
the calculation of such additional interest, which calculation shall be
conclusive in the absence of manifest error).
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(d) Usury.
(i) If, with respect to any Bank, the effective rate of interest
contracted for under the Credit Documents, including the stated rates
of interest and fees contracted for hereunder and any other amounts
contracted for under the Credit Documents which are deemed to be
interest, at any time exceeds the Maximum Rate, then the outstanding
principal amount of the loans made by such Bank hereunder shall bear
interest at a rate which would make the effective rate of interest for
such Bank under the Credit Documents equal the Maximum Rate until the
difference between the amounts which would have been due at the stated
rates and the amounts which were due at the Maximum Rate (the "Lost
Interest") has been recaptured by such Bank.
(ii) If, when the loans made hereunder are repaid in full, the
Lost Interest has not been fully recaptured by such Bank pursuant to
the preceding paragraph, then, to the extent permitted by law, for the
loans made hereunder by such Bank the interest rates charged under
Section 2.08 hereunder shall be retroactively increased such that the
effective rate of interest under the Credit Documents was at the
Maximum Rate since the effectiveness of this Agreement to the extent
necessary to recapture the Lost Interest not recaptured pursuant to the
preceding sentence and, to the extent allowed by law, the Borrower
shall pay to such Bank the amount of the Lost Interest remaining to be
recaptured by such Bank.
(iii) NOTWITHSTANDING the foregoing or any other term in this
Agreement and the Credit Documents to the contrary, it is the intention
of each Bank and the Borrower to conform strictly to any applicable
usury laws. Accordingly, if any Bank contracts for, charges, or
receives any consideration which constitutes interest in excess of the
Maximum Rate, then any such excess shall be canceled automatically and,
if previously paid, shall at such Bank's option be applied to the
outstanding amount of the loans made hereunder by such Bank or be
refunded to the Borrower.
Section 2.09. Payments and Computations.
(a) Payment Procedures. The Borrower shall make each payment under this
Agreement and under the Notes not later than 10:00 a.m. (Dallas, Texas, time) on
the day when due in Dollars to the Agent at 901 Main Street, 49th Floor, Dallas,
Texas 75202 (or such other location as the Agent shall designate in writing to
the Borrower), in same day funds. The Agent shall promptly thereafter cause to
be distributed like funds relating to the payment of principal, interest or fees
ratably (other than amounts payable solely to the Agent, the Issuing Bank, or a
specific Bank pursuant to Section 2.07(b), 2.08(c), 2.11, 2.12, 2.13,
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8.05, or 9.07, but after taking into account payments effected pursuant to
Section 9.04) to the Banks for the account of their respective Applicable
Lending Offices, and like funds relating to the payment of any other amount
payable to any Bank or the Issuing Bank to such Bank for the account of its
Applicable Lending Office, in each case to be applied in accordance with the
terms of this Agreement.
(b) Computations. All computations of interest based on the Base Rate
shall be made by the Agent on the basis of a year of 365 or 366 days, as the
case may be, and all computations of interest based on the Eurodollar Rate and
the Federal Funds Rate and of fees shall be made by the Agent, on the basis of a
year of 360 days, in each case for the actual number of days (including the
first day, but excluding the last day) occurring in the period for which such
interest or fees are payable. Each determination by the Agent of an interest
rate or fee shall be conclusive and binding for all purposes, absent manifest
error.
(c) Non-Business Day Payments. Whenever any payment shall be stated to
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest or fees, as the case may be;
provided, however, that if such extension would cause payment of interest on or
principal of Eurodollar Rate Advances to be made in the next following calendar
month, such payment shall be made on the next preceding Business Day.
(d) Agent Reliance. Unless the Agent shall have received written notice
from the Borrower prior to the date on which any payment is due to the Banks
that the Borrower shall not make such payment in full, the Agent may assume that
the Borrower has made such payment in full to the Agent on such date and the
Agent may, in reliance upon such assumption, cause to be distributed to each
Bank on such date an amount equal to the amount then due such Bank. If and to
the extent the Borrower shall not have so made such payment in full to the
Agent, each Bank shall repay to the Agent forthwith on demand such amount
distributed to such Bank, together with interest, for each day from the date
such amount is distributed to such Bank until the date such Bank repays such
amount to the Agent, at the Federal Funds Rate for such day.
Section 2.10. Sharing of Payments, Etc. If any Bank shall obtain any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) on account of the Advances or Letter of Credit
Obligations made by it in excess of its Pro Rata Share of payments on account of
the Advances or Letter of Credit Obligations obtained by all the Banks, such
Bank shall notify the Agent and forthwith purchase from the other Banks such
participations in the Advances made by them or Letter of Credit Obligations held
by them as shall be necessary to cause such purchasing Bank to share the excess
payment ratably with each of them; provided, however, that if all or any portion
of such excess
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payment is thereafter recovered from such purchasing Bank, such purchase from
each Bank shall be rescinded and such Bank shall repay to the purchasing Bank
the purchase price to the extent of such Bank's ratable share (according to the
proportion of (a) the amount of the participation sold by such Bank to the
purchasing Bank as a result of such excess payment to (b) the total amount of
such excess payment) of such recovery, together with an amount equal to such
Bank's ratable share (according to the proportion of (a) the amount of such
Bank's required repayment to the purchasing Bank to (b) the total amount of all
such required repayments to the purchasing Bank) of any interest or other amount
paid or payable by the purchasing Bank in respect of the total amount so
recovered. The Borrower agrees that any Bank so purchasing a participation from
another Bank pursuant to this Section 2.10 may, to the fullest extent permitted
by law, exercise all its rights of payment (including the right of set-off) with
respect to such participation as fully as if such Bank were the direct creditor
of the Borrower in the amount of such participation.
Section 2.11. Breakage Costs. If (a) any payment of principal of any
Eurodollar Rate Advance is made other than on the last day of the Interest
Period for such Advance, whether as a result of any payment pursuant to Section
2.04, the acceleration of the maturity of the Notes pursuant to Article VII, or
otherwise, or (b) the Borrower fails to make a principal or interest payment
with respect to any Eurodollar Rate Advance on the date such payment is due and
payable, the Borrower shall, within 10 days of any written demand sent by any
Bank to the Borrower through the Agent, pay to the Agent for the account of such
Bank any amounts required to compensate such Bank for any additional losses,
out-of-pocket costs or expenses which it may reasonably incur as a result of
such payment or nonpayment, including, without limitation, any loss (including
loss of anticipated profits), cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by any Bank to
fund or maintain such Advance.
Section 2.12. Increased Costs.
(a) Eurodollar Rate Advances. If, due to either (i) the introduction of
or any change (other than any change by way of imposition or increase of reserve
requirements included in the Eurodollar Rate Reserve Percentage) in or in the
interpretation of any law or regulation or (ii) the compliance with any
guideline or request from any central bank or other Governmental Authority
(whether or not having the force of law), there shall be any increase in the
cost to any Bank of agreeing to make or making, funding, or maintaining
Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand
by such Bank (with a copy of such demand to the Agent), immediately pay to the
Agent for the account of such Bank additional amounts sufficient to compensate
such Bank for such increased cost. A certificate as to the amount of such
increased cost and detailing the calculation of such cost submitted to the
Borrower and the Agent by such Bank shall be conclusive and binding for all
purposes, absent manifest error.
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(b) Capital Adequacy. If any Bank or the Issuing Bank determines in
good faith that compliance with any law or regulation or any guideline or
request from any central bank or other governmental authority (whether or not
having the force of law) affects or would affect the amount of capital required
or expected to be maintained by such Bank or the Issuing Bank or any corporation
controlling such Bank or the Issuing Bank and that the amount of such capital is
increased by or based upon the existence of such Bank's commitment to lend or
the Issuing Bank's commitment to issue the Letters of Credit and other
commitments of this type, then, upon 30 days' prior written notice by such Bank
or the Issuing Bank (with a copy of any such demand to the Agent), the Borrower
shall immediately pay to the Agent for the account of such Bank or to the
Issuing Bank, as the case may be, from time to time as specified by such Bank or
the Issuing Bank, additional amounts sufficient to compensate such Bank or the
Issuing Bank, in light of such circumstances, (i) with respect to such Bank, to
the extent that such Bank reasonably determines such increase in capital to be
allocable to the existence of such Bank's commitment to lend under this
Agreement and (ii) with respect to the Issuing Bank, to the extent that the
Issuing Bank reasonably determines such increase in capital to be allocable to
the issuance or maintenance of the Letters of Credit. A certificate as to such
amounts and detailing the calculation of such amounts submitted to the Borrower
by such Bank or the Issuing Bank shall be conclusive and binding for all
purposes, absent manifest error.
(c) Letters of Credit. If any change in any law or regulation or in the
interpretation thereof by any court or administrative or Governmental Authority
charged with the administration thereof shall either (i) impose, modify, or deem
applicable any reserve, special deposit, or similar requirement against letters
of credit issued by, or assets held by, or deposits in or for the account of,
the Issuing Bank or (ii) impose on the Issuing Bank any other condition
regarding the provisions of this Agreement relating to the Letters of Credit or
any Letter of Credit Obligations, and the result of any event referred to in the
preceding clause (i) or (ii) shall be to increase the cost to the Issuing Bank
of issuing or maintaining any Letter of Credit (which increase in cost shall be
determined by the Issuing Bank's reasonable allocation of the aggregate of such
cost increases resulting from such event), then, upon demand by the Issuing
Bank, the Borrower shall pay to the Issuing Bank, from time to time as specified
by the Issuing Bank, additional amounts which shall be sufficient to compensate
the Issuing Bank for such increased cost. A certificate as to such increased
cost incurred by the Issuing Bank, as a result of any event mentioned in clause
(i) or (ii) above, and detailing the calculation of such increased costs
submitted by the Issuing Bank to the Borrower, shall be conclusive and binding
for all purposes, absent manifest error.
Section 2.13. Taxes.
(a) No Deduction for Certain Taxes. Any and all payments by the
Borrower shall be made, in accordance with Section 2.09, free and clear of and
without deduction for any
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and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the case
of each Bank, the Issuing Bank, and the Agent, taxes imposed on its income, and
franchise taxes imposed on it, by the jurisdiction under the laws of which such
Bank, the Issuing Bank, or the Agent (as the case may be) is organized or any
political subdivision of the jurisdiction (all such non-excluded taxes, levies,
imposts, deductions, charges, withholdings and liabilities being hereinafter
referred to as "Taxes") and, in the case of each Bank and the Issuing Bank,
Taxes by the jurisdiction of such Bank's Applicable Lending Office or any
political subdivision of such jurisdiction. If the Borrower shall be required by
law to deduct any Taxes from or in respect of any sum payable to any Bank, the
Issuing Bank, or the Agent, (i) the sum payable shall be increased as may be
necessary so that, after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.13), such Bank, the
Issuing Bank, or the Agent (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made; provided, however,
that if the Borrower's obligation to deduct or withhold Taxes is caused solely
by such Bank's, the Issuing Bank's, or the Agent's failure to provide the forms
described in paragraph (d) of this Section 2.13 and such Bank, the Issuing Bank,
or the Agent could have provided such forms, no such increase shall be required;
(ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay
the full amount deducted to the relevant taxation authority or other authority
in accordance with applicable law.
(b) Other Taxes. In addition, the Borrower agrees to pay any present or
future stamp or documentary taxes or any other excise or property taxes, charges
or similar levies which arise from any payment made or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, the
Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes").
(c) Indemnification. THE BORROWER INDEMNIFIES EACH BANK, THE ISSUING
BANK, AND THE AGENT FOR THE FULL AMOUNT OF TAXES OR OTHER TAXES (INCLUDING,
WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED BY ANY JURISDICTION ON
AMOUNTS PAYABLE UNDER THIS SECTION 2.13) PAID BY SUCH BANK, THE ISSUING BANK, OR
THE AGENT (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING INTEREST AND
EXPENSES) ARISING THEREFROM OR WITH RESPECT THERETO, WHETHER OR NOT SUCH TAXES
OR OTHER TAXES WERE CORRECTLY OR LEGALLY ASSERTED. EACH PAYMENT REQUIRED TO BE
MADE BY THE BORROWER IN RESPECT OF THIS INDEMNIFICATION SHALL BE MADE TO THE
AGENT FOR THE BENEFIT OF ANY PARTY CLAIMING SUCH INDEMNIFICATION WITHIN 30 DAYS
FROM THE DATE THE BORROWER RECEIVES WRITTEN DEMAND THEREFOR FROM THE AGENT ON
BEHALF OF ITSELF AS AGENT, THE ISSUING BANK, OR ANY SUCH
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BANK. IF ANY BANK, THE AGENT, OR THE ISSUING BANK RECEIVES A REFUND IN RESPECT
OF ANY TAXES PAID BY THE BORROWER UNDER THIS PARAGRAPH (C), SUCH BANK, THE
AGENT, OR THE ISSUING BANK, AS THE CASE MAY BE, SHALL PROMPTLY PAY TO THE
BORROWER THE BORROWER'S SHARE OF SUCH REFUND.
(d) Foreign Bank Withholding Exemption. Each Bank and Issuing Bank that
is not incorporated under the laws of the United States of America or a state
thereof agrees that it shall deliver to the Borrower and the Agent (i) two duly
completed copies of United States Internal Revenue Service Form 1001 or 4224 or
successor applicable form, as the case may be, certifying in each case that such
Bank is entitled to receive payments under this Agreement and the Notes payable
to it, without deduction or withholding of any United States federal income
taxes, (ii) if applicable, an Internal Revenue Service Form W-8 or W-9 or
successor applicable form, as the case may be, to establish an exemption from
United States backup withholding tax, and (iii) any other governmental forms
which are necessary or required under an applicable tax treaty or otherwise by
law to reduce or eliminate any withholding tax, which have been reasonably
requested by the Borrower. Each Bank which delivers to the Borrower and the
Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the next preceding
sentence further undertakes to deliver to the Borrower and the Agent two further
copies of the said letter and Form 1001 or 4224 and Form W-8 or W-9, or
successor applicable forms, or other manner of certification, as the case may
be, on or before the date that any such letter or form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent letter and form previously delivered by it to the Borrower and the Agent,
and such extensions or renewals thereof as may reasonably be requested by the
Borrower and the Agent certifying in the case of a Form 1001 or 4224 that such
Bank is entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes. If an event (including
without limitation any change in treaty, law or regulation) has occurred prior
to the date on which any delivery required by the preceding sentence would
otherwise be required which renders all such forms inapplicable or which would
prevent any Bank from duly completing and delivering any such letter or form
with respect to it and such Bank advises the Borrower and the Agent that it is
not capable of receiving payments without any deduction or withholding of United
States federal income tax, and in the case of a Form W-8 or W-9, establishing an
exemption from United States backup withholding tax, such Bank shall not be
required to deliver such letter or forms. The Borrower shall withhold tax at the
rate and in the manner required by the laws of the United States with respect to
payments made to a Bank failing to timely provide the requisite Internal Revenue
Service forms.
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ARTICLE III
CONDITIONS OF LENDING
Section 3.01. Conditions Precedent to Amendment and Restatement. This
Agreement shall be effective and the Existing Credit Agreement shall be amended
and restated as provided in this Agreement on the date the following conditions
precedent are met.
(a) Documentation. On or before the day on which the initial Borrowing
is made or the initial Letters of Credit are issued, the Agent shall have
received the following duly executed by all the parties thereto, in form and
substance satisfactory to the Agent and the Banks, and, where applicable, in
sufficient copies for each Bank:
(i) This Agreement and the Notes;
(ii) A favorable opinion of the Borrower's general counsel, dated
as of July 30, 1997, and substantially in the form of the attached
Exhibit H-1 covering the matters discussed in such Exhibit and such
other matters as any Bank through the Agent may reasonably request;
(iii) A favorable opinion of Bracewell & Patterson, L.L.P.,
counsel to the Agent, dated as of July 30, 1997, and substantially in
the form of the attached Exhibit H-2;
(iv) A certificate of the Secretary or an Assistant Secretary of
the Borrower certifying the existence of the Borrower, a certificate of
good standing for the Borrower, the certificate of incorporation of the
Borrower, the bylaws of the Borrower, the resolutions of the Board of
Directors of the Borrower authorizing this Agreement and related
transactions, and the incumbency and signatures of the officers of the
Borrower authorized to execute this Agreement and related documents;
and
(v) Such other documents, governmental certificates, agreements,
and lien searches as the Agent or any Bank may reasonably request.
(b) Payment of Fees. On the date of this Agreement, the Borrower shall
have paid the fees required by Section 2.07(b) and (c) and all costs and
expenses which have been invoiced and are payable pursuant to Section 9.04.
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Section 3.02. Condition to Initial Term Advances. As a condition to the
making of the initial Term Advances only, the Borrower shall have delivered, in
a form satisfactory to the Agent, evidence that the purchase of the properties
provided for under the Purchase and Sale Agreement dated as of July 2, 1997
among Total Minatome Corporation, Forest Oil Corporation, and Aviara Energy
Corporation, as sellers, and the Borrower, as buyer, was consummated
contemporaneously with the making of such Term Advances.
Section 3.03. Conditions Precedent to All Borrowings. The obligation of
each Bank to make an Advance on the occasion of each Borrowing and of the
Issuing Bank to issue, increase, or extend any Letter of Credit or to convert an
Existing Letter of Credit to a Letter of Credit shall be subject to the further
conditions precedent that on the date of such Borrowing or the issuance,
increase, or extension of such Letter of Credit or conversion of such Existing
Letter of Credit:
(a) the following statements shall be true (and each of the giving of
the applicable Notice of Borrowing or Letter of Credit Application and the
acceptance by the Borrower of the proceeds of such Borrowing or the issuance,
increase, or extension of such Letter of Credit or the conversion of such
Existing Letter of Credit shall constitute a representation and warranty by the
Borrower that on the date of such Borrowing, the issuance, increase, or
extension of such Letter of Credit or the conversion of such Existing Letter of
Credit, such statements are true):
(i) the representations and warranties contained in Article IV,
the Security Documents, and the Guaranties are correct in all material
respects on and as of the date of such Borrowing or the date of the
issuance, increase, or extension of such Letter of Credit or the
conversion of such Existing Letter of Credit, before and after giving
effect to such Borrowing or to the issuance, increase, or extension of
such Letter of Credit or the conversion of such Existing Letter of
Credit and to the application of the proceeds from such Borrowing, as
though made on and as of such date and
(ii) no Default has occurred and is continuing or would result
from such Borrowing or from the application of the proceeds therefrom,
from the issuance, increase, or extension of such Letter of Credit or
from the conversion of such Existing Letter of Credit; and
(b) the Agent shall have received such other approvals, opinions, or
documents reasonably deemed necessary or desirable by any Bank as a result of
circumstances occurring after the date of this Agreement, as any Bank through
the Agent may reasonably request.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants as follows:
Section 4.01. Corporate Existence; Subsidiaries. The Borrower is a
corporation duly organized, validly existing, and in good standing under the
laws of Delaware and in good standing and qualified to do business in each
jurisdiction where its ownership or lease of property or conduct of its business
requires such qualification and where a failure to be qualified could reasonably
be expected to cause a Material Adverse Change. Each Guarantor is a corporation
duly organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation and in good standing and qualified to do business
in each jurisdiction where its ownership or lease of property or conduct of its
business requires such qualification and where a failure to be qualified could
reasonably be expected to cause a Material Adverse Change. The Borrower has no
Subsidiaries other than The Stone Petroleum Corporation or Subsidiaries which
have executed a Guaranty in compliance with Section 5.09. The Stone Petroleum
Corporation has transferred substantially all of its assets to the Borrower and
has adopted a plan of liquidation which has been substantially completed.
Section 4.02. Corporate Power. The execution, delivery, and performance
by the Borrower of this Agreement, the Notes, and the other Credit Documents to
which it is a party and by the Guarantors of the Guaranties and the consummation
of the transactions contemplated hereby and thereby (a) are within the
Borrower's and the Guarantor's corporate powers, (b) have been duly authorized
by all necessary corporate action, (c) do not contravene (i) the Borrower's or
any Guarantor's certificate or articles, as the case may be, of incorporation or
by-laws or (ii) any law or any contractual restriction binding on or affecting
the Borrower or any Guarantor, and (d) will not result in or require the
creation or imposition of any Lien prohibited by this Agreement. At the time of
each Borrowing, such Borrowing and the use of the proceeds of such Borrowing
will be within the Borrower's corporate powers, will have been duly authorized
by all necessary corporate action, (a) will not contravene (i) the Borrower's
certificate of incorporation or by-laws or (ii) any law or any contractual
restriction binding on or affecting the Borrower and (b) will not result in or
require the creation or imposition of any Lien prohibited by this Agreement.
Section 4.03. Authorization and Approvals. No authorization or approval
or other action by, and no notice to or filing with, any Governmental Authority
is required for the due execution, delivery, and performance by the Borrower of
this Agreement, the Notes, or the other Credit Documents to which the Borrower
is a party or by each Guarantor of its
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Guaranty or the consummation of the transactions contemplated thereby. At the
time of each Borrowing, no authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority will be required for such
Borrowing or the use of the proceeds of such Borrowing.
Section 4.04. Enforceable Obligations. This Agreement, the Notes, and
the other Credit Documents to which the Borrower is a party have been duly
executed and delivered by the Borrower and the Guaranties have been duly
executed and delivered by the Guarantors. Each Credit Document is the legal,
valid, and binding obligation of the Borrower and each Guarantor which is a
party to it enforceable against the Borrower and each such Guarantor in
accordance with its terms, except as such enforceability may be limited by any
applicable bankruptcy, insolvency, reorganization, moratorium, or similar law
affecting creditors' rights generally and by general principles of equity.
Section 4.05. Financial Statements. The audited consolidated balance
sheet of the Borrower and its Subsidiaries as at December 31, 1996, and the
related audited consolidated statements of income, cash flow, and retained
earnings of the Borrower and its Subsidiaries for the fiscal year then ended,
copies of which have been furnished to each Bank, and the consolidated balance
sheet of the Borrower and its Subsidiaries as at March 31, 1997, and the related
consolidated statements of income and cash flow of the Borrower and its
Subsidiaries for the three months then ended, copies of which have been
furnished to the Agent, fairly present, subject, in the case of the balance
sheet as at March 31, 1997, and said statements of income and cash flow for the
three months then ended, to year-end audit adjustments, the consolidated
financial condition of the Borrower and its Subsidiaries as at such dates and
the consolidated results of the operations of the Borrower and its Subsidiaries
for the periods ended on such dates, and such consolidated balance sheets and
consolidated statements of income, cash flow, and retained earnings were
prepared in accordance with GAAP (or in compliance with the regulations
promulgated by the United States Securities and Exchange Commission). Since the
date of the Financial Statements, no Material Adverse Change has occurred.
Section 4.06. True and Complete Disclosure. All factual information
(excluding estimates) heretofore or contemporaneously furnished by or on behalf
of the Borrower or any of its Subsidiaries in writing to any Bank or the Agent
for purposes of or in connection with this Agreement, any other Credit Document
or any transaction contemplated hereby or thereby is (taken as a whole) true and
accurate in all material respects on the date as of which such information is
dated or certified and does not contain any untrue statement of a material fact
or omit to state any material fact necessary to make the statements contained
therein not misleading as of the date of this Agreement. All projections,
estimates, and pro forma financial information furnished by the Borrower were
prepared on the basis of assumptions,
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data, information, tests, or conditions believed to be reasonable at the time
such projections, estimates, and pro forma financial information were furnished.
Section 4.07. Litigation. Set forth on Schedule 4.07 is an accurate
description of all of the Borrower's and its Subsidiaries' pending litigation
existing on the date of this Agreement which could reasonably be expected to
cause a Material Adverse Change. There is no pending or, to the best knowledge
of the Borrower, threatened action or proceeding affecting the Borrower or any
of its Subsidiaries before any court, Governmental Agency or arbitrator, which
could reasonably be expected to cause a Material Adverse Change or which
purports to affect the legality, validity, binding effect, or enforceability of
this Agreement, any Note, or any other Credit Document.
Section 4.08. Use of Proceeds. All Advances and Letters of Credit shall
be used to finance the acquisition of oil and gas reserves and for general
corporate purposes of the Borrower and its Subsidiaries, but in no event for the
payment of dividends or other distributions or advances to the shareholders of
the Borrower. The Borrower is not engaged in the business of extending credit
for the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U). No proceeds of any Advance will be used to purchase or carry any
margin stock in violation of Regulation G, T, U or X.
Section 4.09. Investment Company Act. Neither the Borrower nor any
of its Subsidiaries is an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Section 4.10. Public Utility Holding Company Act. Neither the Borrower
nor any of its Subsidiaries is a "holding company," or a "Subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"Subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 4.11. Taxes. Proper and accurate (in all material respects)
federal, state, local, and foreign tax returns, reports and statements required
to be filed (after giving effect to any extension granted in the time of filing)
by or on behalf of the Borrower, its Subsidiaries, or any member of the
Controlled Group (hereafter collectively called the "Tax Group") have been duly
filed on a timely basis or appropriate extensions have been obtained with
appropriate governmental agencies in all jurisdictions in which such returns,
reports, and statements are required to be filed, except where the failure to so
file would not be reasonably expected to cause a Material Adverse Change; and
all taxes (which are material in amount) and other impositions due and payable
have been timely paid prior to the date on which any fine, penalty, interest,
late charge, or loss may be added thereto for non-payment thereof, except where
contested in good faith by appropriate proceedings. The reserves for
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accrued taxes reflected in the financial statements delivered to the Banks under
this Agreement are adequate in the aggregate for the payment of all unpaid
taxes, whether or not disputed, for the period ended as of the date thereof and
for any period prior thereto, and for which the Tax Group may be liable in its
own right, as withholding agent or as a transferee of the assets of, or
successor to, any Person, except for such taxes or reserves therefor, the
failure to pay or provide for which does not and could not cause a Material
Adverse Change. Timely payment of all material sales and use taxes required by
applicable law has been made by the Borrower and all other members of the Tax
Group.
Section 4.12. Pension Plans. All Plans are in compliance in all
material respects with all applicable provisions of ERISA. No Termination Event
has occurred with respect to any Plan, and each Plan has complied with and been
administered in all material respects with applicable provisions of ERISA and
the Code. No "accumulated funding deficiency" (as defined in Section 302 of
ERISA) has occurred and there has been no excise tax imposed under Section 4971
of the Code. No Reportable Event has occurred with respect to any Multiemployer
Plan, and each Multiemployer Plan has complied with and been administered in all
material respects with applicable provisions of ERISA and the Code. The present
value of all benefits vested under each Plan (based on the assumptions used to
fund such Plan) did not, as of the last annual valuation date applicable
thereto, exceed the value of the assets of such Plan allocable to such vested
benefits. Neither the Borrower nor any member of the Controlled Group has had a
complete or partial withdrawal from any Multiemployer Plan for which there is
any withdrawal liability. As of the most recent valuation date applicable
thereto, neither the Borrower nor any member of the Controlled Group would
become subject to any liability under ERISA if the Borrower or any member of the
Controlled Group has received notice that any Multiemployer Plan is insolvent or
in reorganization. Based upon GAAP existing as of the date of this Agreement and
current factual circumstances, the Borrower has no reason to believe that the
annual cost during the term of this Agreement to the Borrower or any member of
the Controlled Group for post-retirement benefits to be provided to the current
and former employees of the Borrower or any member of the Controlled Group under
Plans that are welfare benefit plans (as defined in Section 3(a) of ERISA)
could, in the aggregate, reasonably be expected to cause a Material Adverse
Change.
Section 4.13. Condition of Property; Casualties. The Borrower and each
of the Guarantors has good and indefeasible title to all of its Properties as is
customary in the oil and gas industry in all material respects, free and clear
of all Liens except for Permitted Liens. The material Properties used or to be
used in the continuing operations of the Borrower and each of its Subsidiaries
are in good repair, working order and condition. Since the date of the Financial
Statements, neither the business nor the material properties of the Borrower and
each of its Subsidiaries, taken as a whole, has been materially and adversely
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
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of contracts, permits, or concessions by a Governmental Authority, riot,
activities of armed forces, or acts of God or of any public enemy.
Section 4.14. No Burdensome Restrictions; No Defaults. Neither the
Borrower nor any of its Subsidiaries is a party to any indenture, loan, or
credit agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction or provision of applicable law or governmental
regulation which could reasonably be expected to cause a Material Adverse
Change. The Borrower and the Guarantors are not in default under or with respect
to any contract, agreement, lease, or other instrument to which the Borrower or
any Guarantor is a party and which could reasonably be expected to cause a
Material Adverse Change. Neither the Borrower nor any Guarantor has received any
notice of default under any material contract, agreement, lease, or other
instrument to which the Borrower or such Guarantor is a party. No Default has
occurred and is continuing.
Section 4.15.Environmental Condition.
(a) Permits, Etc. Except as set forth on Schedule 4.15(a), the Borrower
and its Subsidiaries (i) have obtained all Environmental Permits necessary for
the ownership and operation of their respective Properties and the conduct of
their respective businesses; (ii) have been and are in material compliance with
all terms and conditions of such Environmental Permits and with all other
material requirements of applicable Environmental Laws; (iii) have not received
notice of any material violation or alleged violation of any Environmental Law
or Environmental Permit; and (iv) are not subject to any actual or contingent
Environmental Claim, which could reasonably be expected to cause a Material
Adverse Change.
(b) Certain Liabilities. Except as set forth on Schedule 4.15(b), to
the Borrower's actual knowledge, none of the present or previously owned or
operated Property of the Borrower or of any of its present or former
Subsidiaries, wherever located, (i) has been placed on or proposed to be placed
on the National Priorities List, the Comprehensive Environmental Response
Compensation Liability Information System list, or their state or local analogs,
or have been otherwise investigated, designated, listed, or identified as a
potential site for removal, remediation, cleanup, closure, restoration,
reclamation, or other response activity under any Environmental Laws; (ii) is
subject to a Lien, arising under or in connection with any Environmental Laws,
that attaches to any revenues or to any Property owned or operated by the
Borrower or any of its Subsidiaries, wherever located, which could reasonably be
expected to cause a Material Adverse Change; or (iii) has been the site of any
Release of Hazardous Substances or Hazardous Wastes from present or past
operations which has caused at the site or at any third-party site any condition
that has resulted in or could reasonably be expected to result in the need for
Response that would cause a Material Adverse Change.
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(c) Certain Actions. Without limiting the foregoing, (i) all necessary
notices have been properly filed, and no further action is required under
current Environmental Law as to each Response or other restoration or remedial
project undertaken by the Borrower, or its present or former Subsidiaries on any
of their presently or formerly owned or operated Property and (ii) the present
and, to the Borrower's best knowledge, future liability, if any, of the Borrower
and its Subsidiaries which could reasonably be expected to arise in connection
with requirements under Environmental Laws will not result in a Material Adverse
Change.
Section 4.16. Permits, Licenses, Etc. The Borrower and its Subsidiaries
possess all permits, licenses, patents, patent rights or licenses, trademarks,
trademark rights, trade names rights and copyrights which are material to the
conduct of its business. The Borrower and its Subsidiaries manage and operate
their business in all material respects in accordance with all applicable Legal
Requirements and good industry practices.
Section 4.17. Gas Contracts. Neither the Borrower nor any of its
Subsidiaries, as of the date hereof, (a) is obligated in any material respect by
virtue of any prepayment made under any contract containing a "take-or-pay" or
"prepayment" provision or under any similar agreement to deliver hydrocarbons
produced from or allocated to any of the Borrower's consolidated Oil and Gas
Properties at some future date without receiving full payment therefor at the
time of delivery, or (b) has produced gas, in any material amount, subject to,
and none of the Borrower's consolidated Oil and Gas Properties is subject to,
balancing rights of third parties or subject to balancing duties under
governmental requirements, except as to such matters for which the Borrower or
its relevant Subsidiary has established monetary reserves adequate in amount in
accordance with GAAP to satisfy such obligations and has segregated such
reserves from its other accounts.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as any Note or any amount under any Credit Document shall
remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall
have any Commitment hereunder, the Borrower agrees, unless the Majority Banks
shall otherwise consent in writing, to comply with the following covenants.
Section 5.01.Compliance with Laws, Etc. The Borrower shall comply, and
cause each of its Subsidiaries to comply, in all material respects with all
Legal Requirements. Without limiting the generality and coverage of the
foregoing, the Borrower shall comply, and shall cause each of its Subsidiaries
to comply, in all material respects, with all
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Environmental Laws and all laws, regulations, or directives with respect to
equal employment opportunity and employee safety in all jurisdictions in which
the Borrower, or any of its Subsidiaries do business; provided, however, that
this Section 5.01 shall not prevent the Borrower, or any of its Subsidiaries
from, in good faith and with reasonable diligence, contesting the validity or
application of any such laws or regulations by appropriate legal proceedings.
Section 5.02. Maintenance of Insurance. The Borrower shall maintain,
and cause each of its Subsidiaries to maintain, insurance with responsible and
reputable insurance companies or associations in such amounts and covering such
risks as are usually carried by companies engaged in similar businesses and
owning similar properties in the same general areas in which the Borrower or
such Subsidiary operates, provided that the Borrower or such Subsidiary may
self-insure to the extent and in the manner normal for similarly situated
companies of like size, type and financial condition that are part of a group of
companies under common control.
Section 5.03. Preservation of Corporate Existence, Etc. The Borrower
shall preserve and maintain, and cause each of its Subsidiaries to preserve and
maintain, its corporate existence, rights, franchises, and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified, and cause
each such Subsidiary to qualify and remain qualified, as a foreign corporation
in each jurisdiction in which qualification is necessary or desirable in view of
its business and operations or the ownership of its properties, and, in each
case, where failure to qualify or preserve and maintain its rights and
franchises could reasonably be expected to cause a Material Adverse Change;
provided, however, that nothing herein contained shall prevent any transaction
permitted by Section 6.04.
Section 5.04. Payment of Taxes, Etc. The Borrower shall pay and
discharge, and cause each of its Subsidiaries to pay and discharge, before the
same shall become delinquent, (a) all taxes, assessments, and governmental
charges or levies imposed upon it or upon its income or profits or Property that
are material in amount, prior to the date on which penalties attach thereto and
(b) all lawful claims that are material in amount which, if unpaid, might by law
become a Lien upon its Property; provided, however, that neither the Borrower
nor any such Subsidiary shall be required to pay or discharge any such tax,
assessment, charge, levy, or claim which is being contested in good faith and by
appropriate proceedings, and with respect to which reserves in conformity with
GAAP have been provided.
Section 5.05. Visitation Rights. At any reasonable time and from time
to time, upon reasonable notice, the Borrower shall, and shall cause its
Subsidiaries to, permit the Agent and any Bank or any of its agents or
representatives thereof, to (a) examine and make copies of and abstracts from
the records and books of account of, and visit and inspect at its reasonable
discretion the properties of, the Borrower and any such Subsidiary, and
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(b) discuss the affairs, finances and accounts of the Borrower and any such
Subsidiary with any of their respective officers or directors; provided however,
the Agent or the Bank for whose benefit such inspection and visitation is made
assumes sole responsibility for the condition of any property of the Borrower or
its Subsidiaries so visited and inspected, the access and egress thereto
(including, but not limited to wharves, docks, and helicopter landing areas),
and any vice or defect therein or thereon, and assumes all responsibility for
and hereby releases and indemnifies the Borrower, its Affiliates, and their
officers, directors, employees, and agents against any claim for damage or
injury to or by the Agent or such Bank (or the representatives thereof) or to
the Borrower's or its Subsidiaries' property which may be occasioned by such
inspection and visitation of the Borrower's or its Subsidiaries' property.
Section 5.06.Reporting Requirements.The Borrower shall furnish to the
Agent and each Bank:
(a) Annual Financials. As soon as available and in any event not later
than 120 days after the end of each fiscal year of the Borrower, a copy of the
annual audit report for such year for the Borrower and its Subsidiaries,
including therein consolidated balance sheet of the Borrower and its
Subsidiaries as of the end of such fiscal year and consolidated statements of
income, cash flows, and retained earnings of the Borrower and its Subsidiaries
for such fiscal year, in each case certified by Arthur Andersen & Co. or other
independent certified public accountants of national standing and including any
management letters delivered by such accountants to the Borrower in connection
with such audit together with a certificate of such accounting firm to the Agent
and the Banks stating that, in the course of the regular audit of the business
of the Borrower and its Subsidiaries, which audit was conducted by such
accounting firm in accordance with generally accepted auditing standards, such
accounting firm has obtained no knowledge that a Default has occurred and is
continuing, or if, in the opinion of such accounting firm, a Default has
occurred and is continuing, a statement as to the nature thereof, together with
a Compliance Certificate executed by the Chief Financial Officer or Chief
Accounting Officer of the Borrower;
(b) Quarterly Financials. As soon as available and in any event not
later than 90 days after the end of each of the first three quarters of each
fiscal year of the Borrower, the unaudited consolidated balance sheet of
Borrower and its Subsidiaries as of the end of such quarter and the consolidated
statements of income and cash flows of the Borrower and its Subsidiaries for the
period commencing at the end of the previous year and ending with the end of
such quarter, all in reasonable detail and duly certified with respect to such
consolidated statements (subject to year-end audit adjustments) by the Chief
Financial Officer or Chief Accounting Officer of the Borrower as having been
prepared in accordance with GAAP (or in compliance with the regulations
promulgated by the United States
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Securities and Exchange Commission), together with a Compliance Certificate
executed by the Chief Financial Officer or Chief Accounting Officer of the
Borrower;
(c) Oil and Gas Reserve Reports.
(i) As soon as available but in any event on or before March 31
of each year, an engineering report in form and substance meeting the
requirements of the Securities and Exchange Commission for financial
reporting purposes, certified by Atwater Consultants, Ltd., Cawley,
Gillespie and Associates, Inc., or other firm of independent consulting
petroleum engineers approved by the Agent, as fairly setting forth (A)
the proved and producing, shut in, behind pipe, and undeveloped oil and
gas reserves (separately classified as such) attributable to the
Borrower's consolidated Oil and Gas Properties as of the last day of
the previous year, (B) the aggregate present value, determined on the
basis of stated pricing assumptions, of the future net income with
respect to such Oil and Gas Properties, discounted at a stated per
annum discount rate, and (C) projections of the annual rate of
production, gross income, and net income with respect to such Oil and
Gas Properties.
(ii) As soon as available but in any event on or before September
30 of each year beginning with September 30, 1998, an internal
engineering report in form and substance satisfactory to the Agent
setting forth (A) the proved and producing, shut in, behind pipe, and
undeveloped oil and gas reserves (separately classified as such)
attributable to the Borrower's consolidated Oil and Gas Properties as
of June 30 of such year (B) the aggregate present value, determined on
the basis of stated pricing assumptions, of the future net income with
respect to such Oil and Gas Properties, discounted at a stated per
annum discount rate and (C) projections of the annual rate of
production, gross income, and net income with respect to such Oil and
Gas Properties.
(iii) The Agent and the Banks acknowledge that the Oil and Gas
Reserve Reports contain certain proprietary information including
geological and geophysical data, maps, models, and interpretations
necessary for determining the Borrowing Base and the creditworthiness
of the Borrower and the Guarantors. The Agent and the Banks agree to
maintain the confidentiality of such information except as required by
law. The Agent and the Banks may share such information with potential
transferees of their interests under this Agreement if such transferees
agree to maintain the confidentiality of such information.
(d) Defaults. As soon as possible and in any event within five days
after the occurrence of each Default known to a Responsible Officer of the
Borrower or any of its Subsidiaries which is continuing on the date of such
statement, a statement of the Chief
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Financial Officer of the Borrower setting forth the details of such Default and
the actions which the Borrower has taken and proposes to take with respect
thereto;
(e) Securities Law Filings. Except as provided in paragraphs (a) and
(b) above, promptly and in any event within 15 days after the sending or filing
thereof, copies of all proxy material, reports and other information which the
Borrower or any of its Subsidiary sends to or files with the United States
Securities and Exchange Commission or sends to any shareholder of the Borrower;
(f) Termination Events. As soon as possible and in any event (i) within
30 days after the Borrower or any member of the Controlled Group knows or has
reason to know that any Termination Event described in clause (a) of the
definition of Termination Event with respect to any Plan has occurred, and (ii)
within 10 days after the Borrower or any of its Affiliates knows or has reason
to know that any other Termination Event with respect to any Plan has occurred,
a statement of the Chief Financial Officer of the Borrower describing such
Termination Event and the action, if any, which the Borrower or such Affiliate
proposes to take with respect thereto;
(g) Termination of Plans. Promptly and in any event within two Business
Days after receipt thereof by the Borrower or any member of the Controlled Group
from the PBGC, copies of each notice received by the Borrower or any such member
of the Controlled Group of the PBGC's intention to terminate any Plan or to have
a trustee appointed to administer any Plan;
(h) Other ERISA Notices. Promptly and in any event within five Business
Days after receipt thereof by the Borrower or any member of the Controlled Group
from a Multiemployer Plan sponsor, a copy of each notice received by the
Borrower or any member of the Controlled Group concerning the imposition or
amount of withdrawal liability pursuant to Section 4202 of ERISA;
(i) Environmental Notices. Promptly upon the receipt thereof by the
Borrower or any of its Subsidiaries, a copy of any form of notice, summons or
citation received from the EPA, or any other Governmental Authority, concerning
(i) violations or alleged violations of Environmental Laws, which seeks to
impose liability therefor, (ii) any action or omission on the part of the
Borrower or any of its present or former Subsidiaries in connection with
Hazardous Waste or Hazardous Substances which could reasonably result in the
imposition of liability therefor, including without limitation any notice of
potential responsibility under CERCLA, or (iii) concerning the filing of a Lien
upon, against or in connection with the Borrower, its present or former
Subsidiaries, or any of their leased or owned Property, wherever located;
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(j) Other Governmental Notices. Promptly and in any event within five
Business Days after receipt thereof by the Borrower or any Subsidiary, a copy of
any notice, summons, citation, or proceeding seeking to modify in any material
respect, revoke, or suspend any material contract, license, or Agreement with
any Governmental Authority;
(k) Material Changes. Prompt written notice of any condition or event
of which the Borrower has knowledge, which condition or event has resulted or
may reasonably be expected to result in (i) a Material Adverse Change or (ii) a
breach of or noncompliance with any material term, condition, or covenant of any
material contract to which the Borrower or any of its Subsidiaries is a party or
by which they or their properties may be bound;
(l) Disputes, Etc. Prompt written notice of any claims, proceedings, or
disputes, or to the knowledge of the Borrower threatened, or affecting the
Borrower, or any of its Subsidiaries which, if adversely determined, could
reasonably be expected to cause a Material Adverse Change, or any material labor
controversy of which the Borrower or any of its Subsidiaries has knowledge
resulting in or reasonably considered to be likely to result in a strike against
the Borrower or any of its Subsidiaries; and
(m) Other Information. Such other information respecting the business
or Properties, or the condition or operations, financial or otherwise, of the
Borrower, or any of its Subsidiaries, as any Bank through the Agent may from
time to time reasonably request. The Agent agrees to provide the Banks with
copies of any material notices and information delivered solely to the Agent
pursuant to the terms of this Agreement.
Section 5.07. Maintenance of Property. Borrower shall, and shall cause
each of its Subsidiaries to, maintain their owned, leased, or operated property,
equipment, buildings, and fixtures in good condition and repair; and shall
abstain, and cause each of its Subsidiaries to abstain from, and not knowingly
or willfully permit the commission of waste or other injury, destruction, or
loss of natural resources, or the occurrence of pollution, contamination, or any
other condition in, on or about the owned or operated property involving the
Environment that could reasonably be expected to result in Response activities
the costs of which would exceed the accrual established by Borrower or by any of
its Subsidiaries for those purposes.
Section 5.08. New Subsidiaries. Upon the creation of any Subsidiary
after the date of this Agreement, the Borrower shall cause such Subsidiary to
execute and deliver to the Agent (a) a Guaranty with such changes as the Agent
may reasonably request and (b) evidence of corporate authority to enter into
such Guaranty as the Agent may reasonably request, including, without
limitation, a legal opinion regarding the enforceability of such Guaranty.
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Section 5.09. Collateral.
(a) If any Term Advances are outstanding on March 15, 1998, the
Borrower shall deliver Lien Grant Documents to the Agent so that the Agent will
have for the benefit of the Banks an Acceptable Security Interest in at least
80% of the Borrowing Base value of the Borrower and its Subsidiaries' Oil and
Gas Properties included in the Borrowing Base most recently determined upon the
filing of any of the Security Documents included in such Lien Grant Documents.
The Agent agrees that it shall not record or file any of the Security Documents
delivered to the Agent pursuant to this paragraph unless any Term Advances are
outstanding on March 31, 1998.
(b) If at any time after March 31, 1998 the Term Advances have not been
repaid in full and the Agent for the benefit of the Banks does not have an
Acceptable Security Interest in at least 80% of the Borrowing Base value of the
Borrower's and its Subsidiaries' Oil and Gas Properties included in the
Borrowing Base most recently determined, the Borrower shall grant the Agent an
Acceptable Security Interest in at least 80% of the Borrowing Base value of the
Borrower's and its Subsidiaries' Oil and Gas Properties included in the
Borrowing Base most recently determined.
(c) If at any time after March 31, 1998 the Term Advances have not been
repaid in full and the Agent for the benefit of the Banks does not have an
Acceptable Security Interest in at least 80% of the Borrowing Base value of the
Borrower's and its Subsidiaries' Oil and Gas Properties, the Borrower shall,
upon the Majority Bank's request, grant the Agent an Acceptable Security
Interest in at least 80% of the Borrowing Base value of the Borrower's and its
Subsidiaries' Oil and Gas Properties.
(d) The Borrower agrees that, at any time after the Agent is permitted
to record or file the Security Documents, it shall promptly execute and deliver
all further agreements, and take all further action, that may be necessary or
that the Agent may reasonably request, in order to obtain an Acceptable Security
Interest under the Security Documents.
Section 5.10. Hedging Transactions. If any Term Advances are
outstanding on March 31, 1998, the Borrower shall enter into hedging
transactions as reasonably agreed upon by the Agent and the Borrower within 30
days of such date with respect to up to 75% of the production from Oil and Gas
Properties included in the Borrowing Base.
ARTICLE VI
NEGATIVE COVENANTS
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So long as any Note or any amount under any Credit Document shall
remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall
have any Commitment, the Borrower agrees, unless the Majority Banks otherwise
consent in writing, to comply with the following covenants.
Section 6.01. Liens, Etc. The Borrower shall not create, assume, incur,
or suffer to exist, or permit any of its Subsidiaries to create, assume, incur,
or suffer to exist, any Lien on or in respect of any of its Property whether now
owned or hereafter acquired, or assign any right to receive income, except that
the Borrower and its Subsidiaries may create, incur, assume, or suffer to exist:
(a) Liens securing the Obligations;
(b) Liens specified in the attached Schedule 6.01 on the Property owned
by the Borrower and its Subsidiaries which is specified therein securing only
the Debt disclosed to be secured by such Liens therein;
(c) Liens securing purchase money indebtedness permitted under Section
6.02(c), provided that each such Lien encumbers only the property acquired in
connection with the creation of any such purchase money indebtedness;
(d) Liens for taxes, assessments, or other governmental charges or
levies not yet due or that (provided foreclosure, distraint, sale, or other
similar proceedings shall not have been initiated) are being contested in good
faith by appropriate proceedings, and such reserve as may be required by GAAP
shall have been made therefor;
(e) Liens in favor of vendors, carriers, warehousemen, repairmen,
mechanics, workmen, materialmen, construction, or similar Liens arising by
operation of law in the ordinary course of business in respect of obligations
that are not yet due or that are being contested in good faith by appropriate
proceedings, provided such reserve as may be required by GAAP shall have been
made therefor;
(f) Liens to operators and non-operators under joint operating
agreements arising in the ordinary course of the business of the Borrower or the
relevant Subsidiary to secure amounts owing, which amounts are not yet due or
are being contested in good faith by appropriate proceedings, if such reserve as
may be required by GAAP shall have been made therefor;
(g) easements, rights-of-way, restrictions, and other similar
encumbrances, and minor defects in the chain of title that are customarily
accepted in the oil and gas financing industry, none of which interfere with the
ordinary conduct of the business of Borrower or
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the relevant Subsidiary or materially detract from the value or use of the
Property to which they apply; and
(h) Liens of record under terms and provisions of the leases, unit
agreements, assignments, and other transfer of title documents in the chain of
title under which the Borrower or the relevant Subsidiary acquired the Property,
which have been disclosed to the Agent.
Section 6.02.Debts, Guaranties, and Other Obligations. The Borrower shall
not, and shall not permit any of its Subsidiaries to, create, assume, suffer to
exist, or in any manner become or be liable in respect of, any Debt except:
(a) Debt of the Borrower and its Subsidiaries under the Credit
Documents;
(b) Debt of the Borrower existing on the date of this Agreement and
disclosed in the attached Schedule 6.02 and any extensions, rearrangements, and
modifications thereof which do not increase the principal amount thereof or the
interest rate charged thereon above a market rate of interest;
(c) Debt existing in connection with Property or assets acquired by the
Borrower after date of this Agreement not to exceed $2,500,000.00 in outstanding
principal amount (excluding gas balancing liabilities assumed in the acquisition
of Oil and Gas Properties) and in connection with the purchase of the Borrower's
office building located at 625 E. Kaliste Saloom Rd., Lafayette, LA 70508 not to
exceed $3,250,000.00 in outstanding principal amount;
(d) Debt for borrowed money owed by any Subsidiary of the Borrower
to the Borrower;
(e) Debt in the form of obligations for the deferred purchase price of
property or services incurred in the ordinary course of business which are not
yet due and payable or are being contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP have been
established; and
(f) up to $125,000,000.00 of unsecured convertible or subordinated Debt
with terms no more restrictive than the terms contained in this Agreement, a
final maturity of no earlier than July 30, 2001, and other terms acceptable to
the Agent and the Majority Banks.
Section 6.03. Agreements Restricting Liens and Distributions. The Borrower
shall not, nor shall it permit any of its Subsidiaries to, enter into any
agreement (other than a Credit Document) which (a) except with respect to
specific Property encumbered to secure
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payment of Debt related to such Property, imposes restrictions upon the creation
or assumption of any Lien upon its Properties, revenues or assets, whether now
owned or hereafter acquired or (b) limits Restricted Payments to or any advance
by any of the Borrower's Subsidiaries to the Borrower.
Section 6.04. Merger or Consolidation; Asset Sales. The Borrower shall not,
and shall not permit any of its Subsidiaries to:
(a) merge or consolidate with or into any other Person, except that the
Borrower may merge with any of its wholly-owned Subsidiaries and any of the
Borrower's wholly-owned Subsidiaries may merge with another of the Borrower's
wholly-owned Subsidiaries, provided that immediately after giving effect to any
such proposed transaction no Default would exist and, in the case of any such
merger to which the Borrower is a party, the Borrower is the surviving
corporation; or
(b) sell, lease, transfer, or otherwise dispose of any of its Property
outside of the ordinary course of business, except (i) sales of assets outside
the ordinary course of business in an aggregate amount for any fiscal year not
to exceed $1,000,000.00 and (ii) sales of assets outside the ordinary course of
business which the Borrower has provided the Agent and the Banks with 10 days'
advance notice of, provided that such proposed sales will not in the judgment of
the Majority Banks cause the aggregate outstanding amount of the Revolving
Advances plus the sum of the Letter of Credit Exposure and the Existing Letter
of Credit Exposure to exceed the Borrowing Base, after removing such assets from
the Borrowing Base by subtracting from the Borrowing Base the value of the
assets proposed to be sold as determined from the most recent information
compiled by the Agent and the Banks in connection with the most recent
redetermination of the Borrowing Base, and the Borrower agrees that immediately
following any such sale the Majority Banks will redetermine the Borrowing Base
by so subtracting the value of such assets sold from the Borrowing Base.
Section 6.05. Restricted Payments. The Borrower shall not, and shall not
permit any of its Subsidiaries to, make or pay any Restricted Payment other than
Restricted Payments from a Subsidiary of the Borrower to the Borrower.
Section 6.06. Investments. The Borrower shall not, and shall not permit
any of its Subsidiaries to, make or permit to exist any loans, advances, or
capital contributions to, or make any investment in, or purchase or commit to
purchase any stock or other securities or evidences of indebtedness of or
interests in any Person, except:
(a) Liquid Investments;
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(b) trade and customer accounts receivable which are for goods
furnished or services rendered in the ordinary course of business and are
payable in accordance with customary trade terms;
(c) ordinary course of business contributions, loans, or advances to,
or investments in, (i) a directly or indirectly wholly-owned Subsidiary of the
Borrower, or (ii) the Borrower;
(d) oil and gas farm-ins, oil and gas development joint ventures and
limited partnerships, and similar transactions, in each case in the ordinary
course of business; and
(e) investments not covered by clauses (a) through (d) above in an
aggregate outstanding amount not to exceed $2,000,000.00.
Section 6.07. Limitation on Speculative Hedging. The Borrower shall
not, and shall not permit any of its Subsidiaries to, purchase, assume, or hold
a speculative position in any commodities market or futures market. Borrower may
continue its current production swap hedging program policy to reduce price risk
on quantities less than its total production.
Section 6.08. Affiliate Transactions. Except as expressly permitted
elsewhere in this Agreement or otherwise approved in writing by the Agent, and
except as required or contemplated under the partnership agreements existing on
the date of this Agreement between the Borrower and its Subsidiaries and their
Affiliates as described in Schedule 6.08, the Borrower shall not, and shall not
permit any of its Subsidiaries to, make, directly or indirectly: (a) any
investment in any Affiliate (other than a wholly-owned Subsidiary of the
Borrower); (b) any transfer, sale, lease, assignment, or other disposal of any
assets to any such Affiliate or any purchase or acquisition of assets from any
such Affiliate; or (c) any arrangement or other transaction directly or
indirectly with or for the benefit of any such Affiliate (including without
limitation, guaranties and assumptions of obligations of an Affiliate); provided
that the Borrower and its Subsidiaries may enter into any arrangement or other
transaction with any such Affiliate providing for the leasing of property, the
rendering or receipt of services or the purchase or sale of inventory and other
assets in the ordinary course of business if the monetary or business
consideration arising therefrom would be substantially as advantageous to the
Borrower and its Subsidiaries as the monetary or business consideration which it
would obtain in a comparable arm's length transaction with a Person not such an
Affiliate.
Section 6.09. Compliance with ERISA. The Borrower shall not, and shall
not permit any of its Subsidiaries to, (a) terminate, or permit any Affiliate to
terminate, any Plan so as to result in any material (in the opinion of the
Majority Banks) liability of the Borrower or any of its Affiliates to the PBGC
or (b) permit to exist any occurrence of any Reportable
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Event (as defined in Title IV of ERISA), or any other event or condition, which
presents a material (in the opinion of the Majority Banks) risk of such a
termination by the PBGC of any Plan.
Section 6.10. Maintenance of Ownership of Subsidiaries. Except as
permitted by Section 6.04, the Borrower shall not, and shall not permit any of
its Subsidiaries to, sell or otherwise dispose of any shares of capital stock of
any of the Borrower's Subsidiaries or permit any Subsidiary to issue, sell, or
otherwise dispose of any shares of its capital stock or the capital stock of any
of the Borrower's Subsidiaries.
Section 6.11 Sale-and-Leaseback. The Borrower shall not, nor shall it
permit any of its Subsidiaries to, sell or transfer to a Person (other than the
Borrower or a Subsidiary of the Borrower) any property, whether now owned or
hereafter acquired, if at the time or thereafter the Borrower or a Subsidiary of
the Borrower shall lease as lessee such property or any part thereof or other
property which the Borrower or a Subsidiary of the Borrower intends to use for
substantially the same purpose as the property sold or transferred except such
transactions (a) incident to transactions permitted by Section 6.04(b), and (b)
from which arise lease obligations and other rental obligations not exceeding
$1,000,000.00 during any fiscal year of the Borrower.
Section 6.12. Change of Business. The Borrower shall not, nor shall it
permit any of its Subsidiaries to, materially change the character of their
business as presently and normally conducted or engage in any type of business
not related to their business as presently and normally conducted.
Section 6.13. Current Ratio. The Borrower shall not permit the ratio of the
Borrower's consolidated current assets to the Borrower's consolidated current
liabilities to be less than 1.00 to 1.00 as of the last day of any fiscal
quarter.
Section 6.14. Tangible Net Worth. The Borrower shall not permit the
consolidated Tangible Net Worth of the Borrower to be less than the sum of (a)
$55,000,000.00, plus (b) an amount equal to 50% of the cumulative consolidated
quarterly Net Income of the Borrower from June 30, 1994, through the end of the
Borrower's most recently ended fiscal quarter, but excluding consolidated Net
Income for any fiscal quarter in which consolidated Net Income is not positive,
plus (c) an amount equal to 100% of the net cash proceeds from any sale of stock
or other equity interests in the Borrower since June 30, 1994.
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ARTICLE VII
REMEDIES
Section 7.01. Events of Default. The occurrence of any of the following
events shall constitute an "Event of Default" under any Credit Document:
(a) Payment. The Borrower shall fail to pay when due (i) any interest
or fees payable hereunder or under the Notes within five days after the same
becomes due and payable or (ii) any principal, reimbursements, indemnifications,
or other amounts (other than interest and fees described in clause (i)) payable
hereunder or under any other Credit Document;
(b) Representation and Warranties. Any representation or warranty made
or deemed to be made (i) by the Borrower in this Agreement or in any other
Credit Document, (ii) by the Borrower (or any of its officers) in connection
with this Agreement or any other Credit Document, or (iii) by any Subsidiary of
the Borrower in any Credit Document shall prove to have been incorrect in any
material respect when made or deemed to be made;
(c) Covenant Breaches. (i)The Borrower shall (A) fail to perform or
observe any covenant contained in Section 5.01, 5.02, 5.05, 5.06, 5.07, 5.08,
5.09 or Article VI of this Agreement or (B) fail to perform or observe any other
term or covenant set forth in this Agreement or in any other Credit Document
which is not covered by clause (i)(A) above or any other provision of this
Section 7.01 if such failure shall remain unremedied for 30 days after the
earlier of written notice of such default shall have been given to such Person
by the Agent or any Bank or such Person's actual knowledge of such default or
(ii) any Guarantor shall fail to perform or observe any covenant contained in
its Guaranty;
(d) Cross-Defaults. (i) The Borrower or any its Subsidiaries shall fail
to pay any principal of or premium or interest on its Debt which is outstanding
in a principal amount of at least $500,000.00 individually or when aggregated
with all such Debt of the Borrower or its Subsidiaries so in default (but
excluding Debt evidenced by the Notes) when the same becomes due and payable
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise), and such failure shall continue after the applicable grace period,
if any, specified in the agreement or instrument relating to such Debt; (ii) any
other event shall occur or condition shall exist under any agreement or
instrument relating to Debt which is outstanding in a principal amount of at
least $500,000.00 individually or when aggregated with all such Debt of the
Borrower and its Subsidiaries so in default, and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such event or condition is to accelerate, or to permit the
acceleration of, the maturity of such Debt; or (iii) any such Debt shall be
declared to be due and payable, or
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required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof;
(e) Insolvency. The Borrower or any of its Subsidiaries shall generally
not pay its debts as such debts become due, or shall admit in writing its
inability to pay its debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or against the
Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee or other similar official for it or for any substantial part of its
property and, in the case of any such proceeding instituted against the Borrower
or any such Subsidiary, either such proceeding shall remain undismissed for a
period of 30 days or any of the actions sought in such proceeding shall occur;
or the Borrower or any of its Subsidiaries shall take any corporate action to
authorize any of the actions set forth above in this paragraph (e);
(f) Judgments. Any judgment or order for the payment of money in excess
of $500,000.00 shall be rendered against the Borrower or any of its Subsidiaries
and either (i) enforcement proceedings shall have been commenced by any creditor
upon such judgment or order or (ii) there shall be any period of 30 consecutive
days during which a stay of enforcement of such judgment or order, by reason of
a pending appeal or otherwise, shall not be in effect;
(g) Termination Events. Any Termination Event with respect to a Plan
shall have occurred, and, 30 days after notice thereof shall have been given to
the Borrower by the Agent, (i) such Termination Event shall not have been
corrected and (ii) the then present value of such Plan's vested benefits exceeds
the then current value of assets accumulated in such Plan by more than the
amount of $500,000.00 (or in the case of a Termination Event involving the
withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of
ERISA), the withdrawing employer's proportionate share of such excess shall
exceed such amount);
(h) Plan Withdrawals. The Borrower or any member of the Controlled
Group as employer under a Multiemployer Plan shall have made a complete or
partial withdrawal from such Multiemployer Plan and the plan sponsor of such
Multiemployer Plan shall have notified such withdrawing employer that such
employer has incurred a withdrawal liability in an annual amount exceeding
$500,000.00;
(i) Borrowing Base. Any failure to cure any Borrowing Base deficiency
in accordance with Section 2.04, including any failure of the dedicated cash
flow from the
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production of the Borrower's and its Subsidiaries' Oil and Gas Properties to
cure the Borrowing Base deficiency within the time period specified by and in
accordance with Section 2.04(b);
(j) Guaranties. Any provision of any Guaranty shall for any reason
cease to be valid and binding on the applicable Guarantor or the applicable
Guarantor shall so state in writing;
(k) Security Documents. Any Security Document shall at any time and for
any reason cease to create the Lien on the property purported to be subject to
such agreement in accordance with the terms of such agreement, or cease to be in
full force and effect, or shall be contested by the Borrower or any Guarantor;
(l) Change of Control. (i) As a result of one or more transactions
after the date of this Agreement, any "person" or "group" of persons shall have
"beneficial ownership" of more than 20% of the outstanding common stock of the
Borrower (within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended, and the applicable rules and regulations
thereunder), provided that the relationships among the officers and directors of
the Borrower and among the respective shareholders of the Borrower on the date
of this Agreement shall not be deemed to constitute all or any combination of
them as a "group" or (ii) during any period of 12 consecutive months, beginning
with and after the date of this Agreement, individuals who at the beginning of
such 12-month period were directors of the Borrower shall cease for any reason
to constitute a majority of the board of directors of the Borrower at any time
during such period; or
(m) Management. If any two of James H. Stone, D. Peter Canty, Michael
L. Finch, or James H. Prince shall cease to serve actively as officers of the
Borrower by reason of resignation, action by the board of directors or owners of
the Borrower, or otherwise (other than by death or permanent disability.)
Section 7.02. Optional Acceleration of Maturity. If any Event of Default
(other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall
have occurred and be continuing, then, and in any such event,
(a) the Agent (i) shall at the request, or may with the consent, of the
Majority Banks, by notice to the Borrower, declare the obligation of each Bank
and the Issuing Bank to make extensions of credit hereunder, including making
Advances and issuing Letters of Credit, to be terminated, whereupon the same
shall forthwith terminate, and (ii) shall at the request, or may with the
consent, of the Majority Banks, by notice to the Borrower, declare all
principal, interest, fees, reimbursements, indemnifications, and all other
amounts payable under this Agreement, the Notes, and the other Credit Documents
to be forthwith due and
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payable, whereupon all such amounts shall become and be forthwith due and
payable in full, without notice of intent to demand, demand, presentment for
payment, notice of nonpayment, protest, notice of protest, grace, notice of
dishonor, notice of intent to accelerate, notice of acceleration, and all other
notices, all of which are hereby expressly waived by the Borrower;
(b) the Borrower shall, on demand of the Agent at the request or with
the consent of the Majority Banks, deposit with the Agent into the Cash
Collateral Account an amount of cash equal to the Letter of Credit Exposure as
security for the Obligations; and
(c) the Agent shall at the request of, or may with the consent of, the
Majority Banks proceed to enforce its rights and remedies under the Security
Documents, the Guaranties, and any other Credit Document for the ratable benefit
of the Banks by appropriate proceedings.
Section 7.03. Automatic Acceleration of Maturity. If any Event of Default
pursuant to paragraph (e) of Section 7.01 shall occur,
(a) (i) the obligation of each Bank and the Issuing Bank to make
extensions of credit hereunder, including making Advances and issuing Letters of
Credit, shall terminate, and (ii) all principal, interest, fees, reimbursements,
indemnifications, and all other amounts payable under this Agreement, the Notes,
and the other Credit Documents shall become and be forthwith due and payable in
full, without notice of intent to demand, demand, presentment for payment,
notice of nonpayment, protest, notice of protest, grace, notice of dishonor,
notice of intent to accelerate, notice of acceleration, and all other notices,
all of which are hereby expressly waived by the Borrower;
(b) the Borrower shall deposit with the Agent into the Cash Collateral
Account an amount of cash equal to the outstanding Letter of Credit Exposure as
security for the Obligations; and
(c) the Agent shall at the request of, or may with the consent of, the
Majority Banks proceed to enforce its rights and remedies under the Security
Documents, the Guaranties, and any other Credit Document for the ratable benefit
of the Banks by appropriate proceedings.
Section 7.04. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, the Agent and each Bank is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by the Agent or such Bank to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or hereafter
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existing under this Agreement, the Notes held by the Agent or such Bank, and the
other Credit Documents, irrespective of whether or not the Agent or such Bank
shall have made any demand under this Agreement, such Notes, or such other
Credit Documents, and although such obligations may be unmatured. The Agent and
each Bank agrees to promptly notify the Borrower after any such set-off and
application made by the Agent or such Bank, provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Agent and each Bank under this Section 7.04 are in addition to any
other rights and remedies (including, without limitation, other rights of
set-off) which the Agent or such Bank may have. Notwithstanding the foregoing,
First National Bank of Commerce may not set off and apply any accounts held by
the Affiliate of First National Bank of Commerce in Lafayette so long as the
funds in such accounts represent unpaid amounts due to royalty and working
interest holders (including limited partnerships sponsored by the Borrower and
its Subsidiaries) and other segregated funds of the Borrower and its
Subsidiaries (but not any general corporate funds of the Borrower or its
Subsidiaries).
Section 7.05. Actions Under Credit Documents. Following an Event of
Default, the Agent shall at the request, or may with the consent, of the
Majority Banks, take any and all actions permitted under the other Credit
Documents, including enforcing it rights under the Security Documents and the
Guaranties for the ratable benefit of the Banks.
Section 7.06. Non-exclusivity of Remedies. No remedy conferred upon the
Agent is intended to be exclusive of any other remedy, and each remedy shall be
cumulative of all other remedies existing by contract, at law, in equity, by
statute or otherwise.
ARTICLE VIII
THE AGENT AND THE ISSUING BANK
Section 8.01. Authorization and Action. Each Bank hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof and of the other Credit Documents, together with such powers as are
reasonably incidental thereto. As to any matters not expressly provided for by
this Agreement or any other Credit Document (including, without limitation,
enforcement or collection of the Notes), the 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 the Majority Banks, and such instructions
shall be binding upon all Banks and all holders of Notes; provided, however,
that the Agent shall not be required to take any action which exposes the Agent
to personal liability or which is contrary to this Agreement, any other Credit
Document, or applicable law.
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Section 8.02. Agent's Reliance, Etc. Neither the Agent nor any of its
directors, officers, agents, or employees shall be liable for any action taken
or omitted to be taken (INCLUDING THE AGENT'S OWN NEGLIGENCE) by it or them
under or in connection with this Agreement or the other Credit Documents, except
for its or their own gross negligence or willful misconduct. Without limitation
of the generality of the foregoing, the Agent: (a) may treat the payee of any
Note as the holder thereof until the Agent receives written notice of the
assignment or transfer thereof signed by such payee and in form satisfactory to
the Agent; (b) may consult with legal counsel (including counsel for the
Borrower), independent public accountants, and other experts selected by it and
shall not be liable for any action taken or omitted to be taken in good faith by
it in accordance with the advice of such counsel, accountants, or experts; (c)
makes no warranty or representation to any Bank and shall not be responsible to
any Bank for any statements, warranties, or representations made in or in
connection with this Agreement or the other Credit Documents; (d) shall not have
any duty to ascertain or to inquire as to the performance or observance of any
of the terms, covenants or conditions of this Agreement or any other Credit
Document on the part of the Borrower or its Subsidiaries or to inspect the
property (including the books and records) of the Borrower or its Subsidiaries;
(e) shall not be responsible to any Bank for the due execution, legality,
validity, enforceability, genuineness, sufficiency, or value of this Agreement
or any other Credit Document; and (f) shall incur no liability under or in
respect of this Agreement or any other Credit Document by acting upon any
notice, consent, certificate, or other instrument or writing (which may be by
telecopier or telex) believed by it to be genuine and signed or sent by the
proper party or parties.
Section 8.03. The Agent and Its Affiliates. With respect to its
Commitments, the Advances made by it and the Notes issued to it, the Agent shall
have the same rights and powers under this Agreement as any other Bank and may
exercise the same as though it were not the Agent. The term "Bank" or "Banks"
shall, unless otherwise expressly indicated, include the Agent in its individual
capacity. The 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, the Borrower or any of its Subsidiaries, and any Person who may do
business with or own securities of the Borrower or any such Subsidiary, all as
if the Agent were not an agent hereunder and without any duty to account
therefor to the Banks.
Section 8.04. Bank Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank and based on
the Financial Statements and the Interim Financial Statements and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Bank also acknowledges
that it shall, independently and without reliance upon the Agent or any other
Bank and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit decisions in taking or not taking
action under this Agreement.
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Section 8.05. Indemnification. THE BANKS SEVERALLY AGREE TO
INDEMNIFY THE AGENT AND THE ISSUING BANK AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS (TO THE EXTENT NOT
REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES 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 THE
AGENT AND THE ISSUING BANK IN ANY WAY RELATING TO OR ARISING OUT OF THIS
AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT OR THE ISSUING BANK UNDER
THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING THE AGENT'S AND THE
ISSUING BANK'S OWN NEGLIGENCE), 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 THE AGENT'S
AND THE ISSUING BANK'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT
LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE AGENT PROMPTLY
UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING
COUNSEL FEES) INCURRED BY THE AGENT IN CONNECTION WITH THE PREPARATION,
EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT, OR ENFORCEMENT
(WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS, OR OTHERWISE) OF, OR LEGAL
ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY
OTHER CREDIT DOCUMENT, TO THE EXTENT THAT THE AGENT IS NOT REIMBURSED FOR SUCH
BY THE BORROWER.
Section 8.06. Successor Agent and Issuing Bank. The Agent or the
Issuing Bank may resign at any time by giving written notice thereof to the
Banks and the Borrower and may be removed at any time with or without cause by
the Majority Banks upon receipt of written notice from the Majority Banks to
such effect. Upon receipt of notice of any such resignation or removal, the
Majority Banks shall have the right to appoint a successor Agent or Issuing Bank
only with the consent of the Borrower, which consent shall not be unreasonably
withheld. If no successor Agent or Issuing Bank shall have been so appointed by
the Majority Banks with the consent of the Borrower, and shall have accepted
such appointment, within 30 days after the retiring Agent's or Issuing Bank's
giving of notice of resignation or the Majority Banks' removal of the retiring
Agent or Issuing Bank, then the retiring Agent or Issuing Bank may, on behalf of
the Banks and the Borrower, appoint a successor Agent or Issuing Bank, which
shall be, in the case of a successor agent, a
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commercial bank organized under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$500,000,000.00 and, in the case of the Issuing Bank, a Bank. Upon the
acceptance of any appointment as Agent or Issuing Bank by a successor Agent or
Issuing Bank, such successor Agent or Issuing Bank shall thereupon succeed to
and become vested with all the rights, powers, privileges, and duties of the
retiring Agent or Issuing Bank, and the retiring Agent or Issuing Bank shall be
discharged from its duties and obligations under this Agreement and the other
Credit Documents, except that the retiring Issuing Bank shall remain the Issuing
Bank with respect to any Letters of Credit outstanding on the effective date of
its resignation or removal and the provisions affecting the Issuing Bank with
respect to such Letters of Credit shall inure to the benefit of the retiring
Issuing Bank until the termination of all such Letters of Credit. After any
retiring Agent's or Issuing Bank's resignation or removal hereunder as Agent or
Issuing Bank, the provisions of this Article VIII shall inure to its benefit as
to any actions taken or omitted to be taken by it while it was Agent or Issuing
Bank under this Agreement and the other Credit Documents.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments, Etc. No amendment or waiver of any provision
of this Agreement, the Notes, or any other Credit Document, nor consent to any
departure by the Borrower or any Guarantor therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Majority Banks
and the Borrower, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given; provided,
however, that no amendment, waiver, or consent shall, unless in writing and
signed by all the Banks, do any of the following: (a) waive any of the
conditions specified in Section 3.01, 3.02, or 3.03, (b) increase the Revolving
Commitment or the Term Commitment of the Banks, (c) reduce the principal of, or
interest on, the Notes or any fees or other amounts payable hereunder or under
any other Credit Document, (d) postpone any date fixed for any payment of
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder or extend the Revolving Maturity Date or the Term Maturity Date, (e)
change the percentage of Banks which shall be required for the Banks or any of
them to take any action hereunder or under any other Credit Document, (f) amend
Section 2.10 or this Section 9.01, (g) amend the definition of "Majority Banks,"
(h) release any Guarantor from its obligations under any Guaranty, or (i)
release any collateral securing the Obligations; and provided, further, that no
amendment, waiver or consent shall, unless in writing and signed by the Agent or
the Issuing Bank in addition to the Banks required above to take such action,
affect the rights or duties of the Agent or the Issuing Bank, as the case may
be, under this Agreement or any other Credit Document.
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Section 9.02. Notices, Etc. All notices and other communications shall
be in writing (including, without limitation, telecopy or telex) and mailed by
certified mail, return receipt requested, telecopied, telexed, hand delivered,
or delivered by a nationally recognized overnight courier, at the address for
the appropriate party specified in Schedule 1 or at such other address as shall
be designated by such party in a written notice to the other parties. All such
notices and communications shall, when so mailed, telecopied, telexed, or hand
delivered or delivered by a nationally recognized overnight courier, be
effective when received if mailed, when telecopy transmission is completed, when
confirmed by telex answer-back, or when delivered by such messenger or courier,
respectively, except that notices and communications to the Agent pursuant to
Article II or VIII shall not be effective until received by the Agent.
Section 9.03. No Waiver; Remedies. No failure on the part of any Bank,
the Agent, or the Issuing Bank to exercise, and no delay in exercising, any
right hereunder or under any Note shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 9.04. Costs and Expenses. The Borrower agrees to pay on demand
(a) all reasonable out-of-pocket costs and expenses of the Agent in connection
with the preparation, execution, delivery, administration, modification, and
amendment of this Agreement, the Notes, the Guaranties, and the other Credit
Documents including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Agent with respect to advising the Agent as to its
rights and responsibilities under this Agreement, and (b) all out-of-pocket
costs and expenses, if any, of the Agent, the Issuing Bank, and each Bank
(including, without limitation, reasonable counsel fees and expenses of the
Agent, the Issuing Bank, and each Bank) in connection with the enforcement
(whether through negotiations, legal proceedings, or otherwise) of this
Agreement, the Notes, the Guaranties, and the other Credit Documents.
Section 9.05. Binding Effect. This Agreement shall become effective
when it shall have been executed by the Borrower and the Agent, and when the
Agent shall have, as to each Bank, either received a counterpart hereof executed
by such Bank or been notified by such Bank that such Bank has executed it and
thereafter shall be binding upon and inure to the benefit of the Borrower, the
Agent, the Issuing Bank, and each Bank and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
or delegate its duties under this Agreement or any interest in this Agreement
without the prior written consent of each Bank.
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Section 9.06. Bank Assignments and Participations.
(a) Assignments. Any Bank may assign to one or more banks or other
entities all or any portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Commitments, the
Advances owing to it, the Notes held by it, and the participation interest in
the Letter of Credit Obligations held by it); provided, however, that (i) each
such assignment shall be of a constant, and not a varying, percentage of all of
such Bank's rights and obligations under this Agreement, (ii) the amount of the
Commitments and Advances of such Bank being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall be, if to an entity other than a Bank, not
less than $5,000,000.00 and shall be an integral multiple of $1,000,000.00,
(iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to
each such assignment shall execute and deliver to the Agent, for its acceptance
and recording in the Register, an Assignment and Acceptance, together with the
Notes subject to such assignment, and (v) each Eligible Assignee (other than the
Eligible Assignee of the Agent) shall pay to the Agent a $2,500 administrative
fee. Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, which effective date
shall be at least three Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto for all purposes and, to the extent
that rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, have the rights and obligations of a Bank hereunder
and (B) such Bank thereunder shall, to the extent that rights and obligations
hereunder have been assigned by it pursuant to such Assignment and Acceptance,
relinquish its rights and be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of such Bank's rights and obligations under this Agreement, such Bank
shall cease to be a party hereto).
(b) Term of Assignments. By executing and delivering an Assignment and
Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (i) other than as
provided in such Assignment and Acceptance, such Bank makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency of
value of this Agreement or any other instrument or document furnished pursuant
hereto; (ii) such Bank makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or the
Guarantors or the performance or observance by the Borrower or the Guarantors of
any of their obligations under this Agreement or any other instrument or
document furnished pursuant hereto; (iii) such assignee confirms that it has
received a copy of this Agreement, together with copies of the financial
statements referred to in Section 4.05 and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision
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to enter into such Assignment and Acceptance; (iv) such assignee will,
independently and without reliance upon the Agent, such Bank or any other Bank
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (v) such assignee appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together with such
powers as are reasonably incidental thereto; and (vi) such assignee agrees that
it will perform in accordance with their terms all of the obligations which by
the terms of this Agreement are required to be performed by it as a Bank.
(c) The Register. The Agent shall maintain at its address referred to
in Section 9.02 a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and addresses of
the Banks and the Commitments of, and principal amount of the Advances owing to,
each Bank from time to time (the "Register"). The entries in the Register shall
be conclusive and binding for all purposes, absent manifest error, and the
Borrower, the Agent, the Issuing Bank, and the Banks may treat each Person whose
name is recorded in the Register as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower or any
Bank at any reasonable time and from time to time upon reasonable prior notice.
(d) Procedures. Upon its receipt of an Assignment and Acceptance
executed by a Bank and an Eligible Assignee, together with the Notes subject to
such assignment, the Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of the attached Exhibit A, (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in
the Register, and (iii) give prompt notice thereof to the Borrower. Within five
Business Days after its receipt of such notice, the Borrower shall execute and
deliver to the Agent in exchange for the surrendered Notes (A) a new Revolving
Note to the order of such Eligible Assignee in an amount equal to the Revolving
Commitment assumed by it pursuant to such Assignment and Acceptance and a new
Term Note to the order of such Eligible Assignee in an amount equal to the
outstanding principal amount of the Term Advances assigned to such Eligible
Assignee and (B) if such Bank has retained any Revolving Commitment hereunder, a
new Revolving Note to the order of such Bank in an amount equal to the Revolving
Commitment retained by it hereunder and a new Term Note to the order of such
Bank in an amount equal to the outstanding principal amount of the Term Advances
retained by such Bank. Such new Notes shall be dated the effective date of such
Assignment and Acceptance and shall otherwise be in substantially the form of
the attached Exhibit D-1 and D-2, respectively.
(e) Participations. Each Bank may sell participations to one or more
banks or other entities in or to all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Commitments, the Advances owing to
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it, its participation interest in the Letter of Credit Obligations, and the
Notes held by it); provided, however, that (i) such Bank's obligations under
this Agreement (including, without limitation, its Commitments to the Borrower
hereunder) shall remain unchanged, (ii) such Bank shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) such Bank shall remain the holder of any such Notes for all purposes of
this Agreement, (iv) the Borrower, the Agent, and the Issuing Bank and the other
Banks shall continue to deal solely and directly with such Bank in connection
with such Bank's rights and obligations under this Agreement, and (v) such Bank
shall not require the participant's consent to any matter under this Agreement,
except for change in the principal amount of the Notes, reductions in fees or
interest, releasing any collateral, or extending the Revolving Maturity Date or
the Term Maturity Date. The Borrower hereby agrees that participants shall have
the same rights under Sections 2.11, 2.12, 2.13(c), and 9.07 as a Bank to the
extent of their respective participations.
Section 9.07. Indemnification. THE BORROWER SHALL INDEMNIFY THE
AGENT, THE BANKS, THE ISSUING BANK, AND EACH AFFILIATE THEREOF AND THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS FROM, AND DISCHARGE,
RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES,
LIABILITIES, CLAIMS, OR DAMAGES WHICH MAY BE IMPOSED ON, INCURRED BY, OR
ASSERTED AGAINST THEM IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR
ANY ACTION TAKEN OR OMITTED BY THEM UNDER THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT (INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE
INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED'S OWN NEGLIGENCE), BUT
EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSES INCURRED BY
REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE
INDEMNIFIED.
Section 9.08. Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
Section 9.09. Survival of Representations, Etc. All representations and
warranties contained in this Agreement or made in writing by or on behalf of the
Borrower in connection herewith shall survive the execution and delivery of this
Agreement and the Credit Documents, the making of the Advances and any
investigation made by or on behalf of the Banks, none of which investigations
shall diminish any Bank's right to rely on such representations and warranties.
All obligations of the Borrower provided for in Sections 2.11, 2.12, 2.13(c),
9.04, and 9.07 and all of the obligations of the Banks in Section
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8.05 shall survive any termination of this Agreement and repayment in full of
the Obligations.
Section 9.10. Severability. In case one or more provisions of this
Agreement or the other Credit Documents shall be invalid, illegal or
unenforceable in any respect under any applicable law, the validity, legality,
and enforceability of the remaining provisions contained herein or therein shall
not be affected or impaired thereby.
Section 9.11. Business Loans. The Borrower warrants and represents that
the Loans evidenced by the Notes are and shall be for business, commercial,
investment, or other similar purposes and not primarily for personal, family,
household, or agricultural use, as such terms are used in Chapter One ("Chapter
One") of the Texas Credit Code. At all such times, if any, as Chapter One shall
establish a Maximum Rate, the Maximum Rate shall be the "indicated rate ceiling"
(as such term is defined in Chapter One) from time to time in effect.
Section 9.12. Governing Law. This Agreement, the Notes and the other
Credit Documents shall be governed by, and construed and enforced in accordance
with, the laws of the State of Texas. Without limiting the intent of the parties
set forth above, (a) Chapter 15, Subtitle 3, Title 79, of the Revised Civil
Statutes of Texas, 1925, as amended (relating to revolving loans and revolving
tri-party accounts), shall not apply to this Agreement, the Notes, or the
transactions contemplated hereby and (b) to the extent that any Bank may be
subject to Texas law limiting the amount of interest payable for its account,
such Bank shall utilize the indicated (weekly) rate ceiling from time to time in
effect as provided in Article 5069-1.04 of the Revised Civil Statutes of Texas,
as amended. Each Letter of Credit shall be governed by the Uniform Customs and
Practice for Documentary Credits, International Chamber of Commerce Publication
No. 500 (1993 version).
THE BORROWER, THE BANKS, THE ISSUING BANK AND THE AGENT HEREBY
IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER CREDIT
DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND IRREVOCABLY SUBMIT
TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF HARRIS COUNTY, TEXAS, AND THE
SOUTHERN DISTRICT OF TEXAS FOR THE RESOLUTION OF ANY DISPUTES UNDER THIS
AGREEMENT AND THE CREDIT DOCUMENTS, AND HEREBY IRREVOCABLY WAIVE ANY CLAIM THAT
SUCH JURISDICTION IS IMPRACTICAL OR INCONVENIENT.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS
DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT
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<PAGE>
AMONG 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 AMONG THE
PARTIES.
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<PAGE>
EXECUTED as of the date first above written.
BORROWER:
STONE ENERGY CORPORATION
Name: /s/ Micheal L. Finch
----------------------
Title: Executive Vice President
Name: /s/ James H. Prince
----------------------
Title: Vice President
AGENT:
NATIONSBANK OF TEXAS, N.A.
Name: /s/ Paul A. Squires
-----------------------
Title: Senior Vice President
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<PAGE>
BANKS:
NATIONSBANK OF TEXAS, N.A.
REVOLVING COMMITMENT
$37,500,000.00 Name: /s/ Paul A. Squires
TERM COMMITMENT -------------------
$18,750,000.00 Title: Senior Vice President
FIRST NATIONAL BANK OF
COMMERCE
REVOLVING COMMITMENT
$18,750,000.00 Name: /s/ David R. Reid
TERM COMMITMENT ------------------
$9,375,000.00 Title: Sr. Vice President
HIBERNIA NATIONAL BANK
REVOLVING COMMITMENT
$18,750,000.00 Name:/s/ Lyndsay Job
TERM COMMITMENT ------------------
$9,375,000.00 Title:Senior Vice President
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<PAGE>
BANKBOSTON, N.A.
REVOLVING COMMITMENT
$25,000,000.00 Name: /s/ George W. Passela
TERM COMMITMENT --------------------
$12,500,000.00 Title: Managing Director
TOTAL REVOLVING COMMITMENTS
$100,000,000.00
TOTAL TERM COMMITMENTS
$50,000,000.00
MILERJ\60877\004973
HOUSTON\733573.4
7/29/97--10:34 am
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<PAGE>
Exhibit 10.9
STONE ENERGY CORPORATION
1993 STOCK OPTION PLAN
[As Amended and Restated Effective as of May 15, 1997]
I. Purpose of the Plan
The STONE ENERGY CORPORATION 1993 STOCK OPTION PLAN (the "Plan") is
intended to provide a means whereby certain employees of STONE ENERGY
CORPORATION, a Delaware corporation (the "Company"), and its subsidiaries may
develop a sense of proprietorship and personal involvement in the development
and financial success of the Company, and to encourage them to remain with and
devote their best efforts to the business of the Company, thereby advancing the
interests of the Company and its stockholders. Accordingly, the Company may
grant to certain employees ("Optionees") the option ("Option") to purchase
shares of the common stock of the Company ("Stock"), as hereinafter set forth.
Options granted under the Plan may be either incentive stock options, within the
meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), ("Incentive Stock Options") or options which do not constitute
Incentive Stock Options.
The Plan as set forth herein constitutes an amendment and restatement
of the Plan as previously adopted by the Company, and shall supersede and
replace in its entirety such previously adopted plan. This amendment and
restatement of the Plan shall be effective as of May 15, 1997, provided this
amendment and restatement of the Plan is approved by the stockholders of the
Company on such date at the Company's 1997 Annual Meeting of Stockholders. If
this amendment and restatement of the Plan is not so approved by the
stockholders, then no Options shall be granted under the Plan on or after May
15, 1997.
II. Administration
The Plan shall be administered by a committee (the "Committee") of, and
appointed by, the Board of Directors of the Company (the "Board"), and the
Committee shall be comprised solely of two or more directors who are both (a)
outside directors (within the meaning of section 162(m) of the Code and
applicable interpretive authority thereunder), and (b) nonemployee directors
(within the meaning of Rule 16b-3, as currently in effect or as hereinafter
modified or amended ("Rule 16b-3"), promulgated under the Securities Exchange
Act of 1934, as amended (the "1934 Act")). The Committee shall have sole
authority to select the Optionees from among those individuals eligible
hereunder and to establish the number of shares which may be issued under each
Option; provided, however, that, notwithstanding any provision in the Plan to
the contrary, the maximum number of shares that may be subject to Options
granted under the Plan to an individual Optionee during any calendar year may
not exceed 50,000 (subject to adjustment in the same manner as provided in
Paragraph VIII hereof with respect to shares of Stock subject to Options then
outstanding). The limitation set forth in the preceding sentence shall be
applied in a manner which will permit compensation generated under the Plan to
constitute "performance-based" compensation for purposes of section 162(m) of
the Code, including, without limitation, counting against such maximum number of
shares, to the extent required under section 162(m) of the Code and applicable
interpretive authority thereunder, any shares subject to Options that are
canceled or repriced. In
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<PAGE>
selecting the Optionees from among individuals eligible hereunder and in
establishing the number of shares that may be issued under each Option, the
Committee may take into account the nature of the services rendered by such
individuals, their present and potential contributions to the Company's success
and such other factors as the Committee in its discretion shall deem relevant.
The Committee is authorized to interpret the Plan and may from time to time
adopt such rules and regulations, consistent with the provisions of the Plan, as
it may deem advisable to carry out the Plan. All decisions made by the Committee
in selecting the Optionees, in establishing the number of shares which may be
issued under each Option and in construing the provisions of the Plan shall be
final.
III. Option Agreements
(a) Each Option shall be evidenced by a written agreement between the
Company and the Optionee ("Option Agreement") which shall contain such terms and
conditions as may be approved by the Committee. The terms and conditions of the
respective Option Agreements need not be identical. Specifically, an Option
Agreement may provide for the surrender of the right to purchase shares under
the Option in return for a payment in cash or shares of Stock or a combination
of cash and shares of Stock equal in value to the excess of the fair market
value of the shares with respect to which the right to purchase is surrendered
over the option price therefor ("Stock Appreciation Rights"), on such terms and
conditions as the Committee in its sole discretion may prescribe; provided,
that, except as provided in Subparagraph VIII(c) hereof, the Committee shall
retain final authority (i) to determine whether an Optionee shall be permitted,
or (ii) to approve an election by an Optionee, to receive cash in full or
partial settlement of Stock Appreciation Rights. Moreover, an Option Agreement
may provide for the payment of the option price, in whole or in part, by the
delivery of a number of shares of Stock (plus cash if necessary) having a fair
market value equal to such option price. Further, an Option Agreement may
provide for a "cashless exercise" of the Option pursuant to procedures
established by the Committee (as the same may be amended from time to time).
(b) For all purposes under the Plan, the fair market value of a share
of Stock on a particular date shall be equal to the mean of the high and low
sales prices of the Stock (i) reported by the National Market System of NASDAQ
on that date or (ii) if the Stock is listed on a national stock exchange,
reported on the stock exchange composite tape on that date; or, in either case,
if no prices are reported on that date, on the last preceding date on which such
prices of the Stock are so reported. If the Stock is traded over the counter at
the time a determination of its fair market value is required to be made
hereunder, its fair market value shall be deemed to be equal to the average
between the reported high and low or closing bid and asked prices of Stock on
the most recent date on which Stock was publicly traded. In the event Stock is
not publicly traded at the time a determination of its value is required to be
made hereunder, the determination of its fair market value shall be made by the
Committee in such manner as it deems appropriate.
(c) Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as
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<PAGE>
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder, and shall be exercisable during the
Optionee's lifetime only by the Optionee or the Optionee's guardian or legal
representative.
IV. Eligibility of Optionee
Options may be granted only to individuals who are employees (including
officers and directors who are also employees) of the Company or any parent or
subsidiary corporation (as defined in section 424 of the Code) of the Company at
the time the Option is granted; provided, however, that members of the Committee
shall not be eligible to be granted Options. Options may be granted to the same
individual on more than one occasion. No Incentive Stock Option shall be granted
to an individual if, at the time the Option is granted, such individual owns
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of its parent or subsidiary corporation, within the
meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is
granted the option price is at least 110% of the fair market value of the Stock
subject to the Option and (ii) such Option by its terms is not exercisable after
the expiration of five years from the date of grant. To the extent that the
aggregate fair market value (determined at the time the respective Incentive
Stock Option is granted) of stock with respect to which Incentive Stock Options
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such excess Incentive Stock Options
shall be treated as Options which do not constitute Incentive Stock Options. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of an
Optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Optionee of such determination
as soon as practicable after such determination.
V. Shares Subject to the Plan
The aggregate number of shares which may be issued under Options
granted under the Plan shall not exceed 1,170,000 shares of Stock. Such shares
may consist of authorized but unissued shares of Stock or previously issued
shares of Stock reacquired by the Company. Any of such shares which remain
unissued and which are not subject to outstanding Options at the termination of
the Plan shall cease to be subject to the Plan, but, until termination of the
Plan, the Company shall at all times make available a sufficient number of
shares to meet the requirements of the Plan. Should any Option hereunder expire
or terminate prior to its exercise in full, the shares theretofore subject to
such Option may again be subject to an Option granted under the Plan to the
extent permitted under Rule 16b-3. The aggregate number of shares which may be
issued under the Plan shall be subject to adjustment in the same manner as
provided in Paragraph VIII hereof with respect to shares of Stock subject to
Options then outstanding. Exercise of an Option in any manner, including an
exercise involving a Stock Appreciation Right, shall result in a decrease in the
number of shares of Stock which may thereafter be available, both for purposes
of the Plan and for sale to any one individual, by the number of shares as to
which the Option is exercised. Separate stock certificates shall be issued by
the Company for those shares acquired pursuant to the exercise of an
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<PAGE>
Incentive Stock Option and for those shares acquired pursuant to the exercise of
any Option which does not constitute an Incentive Stock Option.
VI. Option Price
The purchase price of Stock issued under each Option shall be
determined by the Committee, but such purchase price shall not be less than the
fair market value of Stock subject to the Option on the date the Option is
granted.
VII. Term of Plan
The Plan originally became effective on July 8, 1993 (the
"Original Effective Date"). This amendment and restatement of the Plan shall be
effective as provided in Paragraph I. Except with respect to Options then
outstanding, if not sooner terminated under the provisions of Paragraph IX, the
Plan shall terminate upon and no further Options shall be granted after the
expiration of ten years from the Original Effective Date.
VIII. Recapitalization or Reorganization
(a) The existence of the Plan and the Options granted hereunder shall
not affect in any way the right or power of the Board or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) The shares with respect to which Options may be granted are shares
of Stock as presently constituted, but if, and whenever, prior to the expiration
of an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives
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<PAGE>
only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges
all or substantially all of its assets to any other person or entity, (iii) the
Company is to be dissolved and liquidated, (iv) any person or entity, including
a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains
ownership or control (including, without limitation, power to vote) of more than
50% of the outstanding shares of the Company's voting stock (based upon voting
power), or (v) as a result of or in connection with a contested election of
directors, the persons who were directors of the Company before such election
shall cease to constitute a majority of the Board (each such event is referred
to herein as a "Corporate Change"), no later than (a) ten days after the
approval by the stockholders of the Company of such merger, consolidation,
reorganization, sale, lease or exchange of assets or dissolution or such
election of directors or (b) thirty days after a change of control of the type
described in Clause (iv), the Committee, acting in its sole discretion without
the consent or approval of any Optionee, shall act to effect one or more of the
following alternatives, which may vary among individual Optionees and which may
vary among Options held by any individual Optionee: (1) accelerate the time at
which Options then outstanding may be exercised so that such Options may be
exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Committee, after which
specified date all unexercised Options and all rights of Optionees thereunder
shall terminate, (2) require the mandatory surrender to the Company by selected
Optionees of some or all of the outstanding Options held by such Optionees
(irrespective of whether such Options are then exercisable under the provisions
of the Plan) as of a date, before or after such Corporate Change, specified by
the Committee, in which event the Committee shall thereupon cancel such Options
and the Company shall pay to each Optionee an amount of cash per share equal to
the excess, if any, of the amount calculated in Subparagraph (d) below (the
"Change of Control Value") of the shares subject to such Option over the
exercise price(s) under such Options for such shares, (3) make such adjustments
to Options then outstanding as the Committee deems appropriate to reflect such
Corporate Change (provided, however, that the Committee may determine in its
sole discretion that no adjustment is necessary to Options then outstanding) or
(4) provide that the number and class of shares of Stock covered by an Option
theretofore granted shall be adjusted so that such Option shall thereafter cover
the number and class of shares of stock or other securities or property
(including, without limitation, cash) to which the Optionee would have been
entitled pursuant to the terms of the agreement of merger, consolidation or sale
of assets and dissolution if, immediately prior to such merger, consolidation or
sale of assets and dissolution, the Optionee had been the holder of record of
the number of shares of Stock then covered by such Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the
"Change of Control Value" shall equal the amount determined in clause (i), (ii)
or (iii), whichever is applicable, as follows: (i) the per share price offered
to stockholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to stockholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such Options being surrendered are
exercisable, as determined by the Committee as of the date determined by the
Committee to be the date of cancellation and surrender of such Options. In the
event that the consideration offered to stockholders of the Company in any
transaction described in this Subparagraph (d) or Subparagraph
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<PAGE>
(c) above consists of anything other than cash, the Committee shall determine
the fair cash equivalent of the portion of the consideration offered which is
other than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above shall
be subject to any required stockholder action.
(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, and in any case whether or not for fair value, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Stock subject to Options theretofore granted or the purchase
price per share.
IX. Amendment or Termination of the Plan
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided, that no change in any Option theretofore granted may be
made which would impair the rights of the Optionee without the consent of such
Optionee; and provided, further, that the Board may not, without the approval of
the stockholders of the Company, make any alteration or amendment which would
(a) increase the aggregate number of shares which may be issued pursuant to the
provisions of the Plan or (b) change the class of individuals eligible to
receive Options under the Plan.
X. Securities Laws
(a) The Company shall not be obligated to issue any Stock pursuant to
any Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of 1933
and such other state and federal laws, rules or regulations as the Company or
the Committee deems applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration requirements of such laws,
rules or regulations available for the offering and sale of such shares.
(b) It is intended that the Plan and any grant of an Option made to a
person subject to Section 16 of the 1934 Act meet the requirements of Rule 16b-3
so that any transaction under the Plan involving a grant, award, or other
acquisition from the Company or disposition to the Company is exempt from
Section 16(b) of the 1934 Act. If any provision of the Plan or any such Option
would result in any such transaction not being exempt from Section 16(b) of the
1934 Act, such provision or Option shall be construed or deemed amended so that
such transaction will be exempt from Section 16(b) of the 1934 Act.
VEHOU02:63914.1
3/6/97
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<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated March 2, 1998, on our audits of the consolidated
financial statements of Stone Energy Corporation as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997
included in this Annual Report on Form 10-K for the year ended December 31,
1997, into the Company's previously filed Registration Statement on Form S-8
(Registration No.
33-67332).
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
March 20, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We do hereby consent to the use of our name in "Item 2. Properties" of
the Annual Report on Form 10-K of Stone Energy Corporation (the "Company") for
the year ended December 31, 1997 (the "Form 10-K"), and the incorporation by
reference of the Form 10-K into the Company's Registration Statement on Form S-8
(Registration No. 33-67332), and the incorporation by reference of the Form 10-K
into the Company's Registration Statement on Form S-3 (Registration No. 33-
72236).
ATWATER CONSULTANTS, LTD.
By: /s/ O.R. Carter
------------------------
O.R. Carter
Co-Chairman, Board of Directors
New Orleans, Louisiana
March 13, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We do hereby consent to the use of our name in "Item 2. Properties" of
the Annual Report on Form 10-K of Stone Energy Corporation (the "Company") for
the year ended December 31, 1997 (the "Form 10-K"), the incorporation by
reference of the Form 10-K into the Company's Registration Statement on Form S-8
(Registration No. 33-67332), and the incorporation by reference of the Form 10-K
into the Company's Registration Statement on Form S-3 (Registration No.
33-72236).
Cawley, Gillespie & Associates, Inc.
By: /s/ Aaron Cawley
--------------------------
Aaron Cawley, P.E.
Executive Vice President
Fort Worth, Texas
March 11, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Stone Energy Corporation as of December 31,
1997 and the related consolidated statement of operations
for the year ended December 31, 1997 and is qualified in
its entirety by reference to such financial statements included in
Stone Energy Corporation's annual report on Form 10-K. Note that
earnings per share data for the year ended December 31, 1997 has been
reflected in accordance with SFAS 128.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,304
<SECURITIES> 19,940
<RECEIVABLES> 22,202
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,151
<PP&E> 12,281
<DEPRECIATION> 2,708
<TOTAL-ASSETS> 354,144
<CURRENT-LIABILITIES> 44,823
<BONDS> 100,000
0
0
<COMMON> 150
<OTHER-SE> 156,487
<TOTAL-LIABILITY-AND-EQUITY> 354,144
<SALES> 69,079
<TOTAL-REVENUES> 70,987
<CGS> 0
<TOTAL-COSTS> 42,921
<OTHER-EXPENSES> 4,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,916
<INCOME-PRETAX> 18,414
<INCOME-TAX> 6,495
<INCOME-CONTINUING> 11,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,919
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Stone Energy Corporation as of December 31,
1996 and the related consolidated statement of opertions for the
year ended December 31, 1996 and is qualified in its entirety by
reference to such financial statments included in Stone Energy
Corporation's annual report on Form 10-K. Note that this Financial Data
Schedule has been restated to reflect earnings per share data for the year
ended December 31, 1996 in accordance with SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,864
<SECURITIES> 10,331
<RECEIVABLES> 12,466
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,225
<PP&E> 6,922
<DEPRECIATION> 2,137
<TOTAL-ASSETS> 209,406
<CURRENT-LIABILITIES> 26,542
<BONDS> 0
0
0
<COMMON> 150
<OTHER-SE> 144,291
<TOTAL-LIABILITY-AND-EQUITY> 209,406
<SALES> 55,839
<TOTAL-REVENUES> 57,965
<CGS> 0
<TOTAL-COSTS> 32,015
<OTHER-EXPENSES> 4,437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,574
<INCOME-PRETAX> 17,939
<INCOME-TAX> 6,906
<INCOME-CONTINUING> 11,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,033
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The purpose of this restated financial data schedule is to submit
earnings per share data for the interim periods for the fiscal year ended
December 31, 1997, in accordance with SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 8,097 10,396 5,008
<SECURITIES> 23,459 16,003 26,340
<RECEIVABLES> 10,293 11,443 13,913
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 41,866 38,274 45,668
<PP&E> 7,264 7,513 10,724
<DEPRECIATION> 2,262 2,390 2,524
<TOTAL-ASSETS> 236,282 253,556 325,142
<CURRENT-LIABILITIES> 32,648 35,546 40,905
<BONDS> 0 0 100,000
0 0 0
0 0 0
<COMMON> 150 150 150
<OTHER-SE> 147,783 149,380 152,162
<TOTAL-LIABILITY-AND-EQUITY> 236,282 253,556 325,142
<SALES> 15,809 29,005 44,608
<TOTAL-REVENUES> 16,237 29,899 45,857
<CGS> 0 0 0
<TOTAL-COSTS> 8,910 18,276 27,653
<OTHER-EXPENSES> 1,053 2,075 3,151
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 426 1,103 2,551
<INCOME-PRETAX> 5,848 8,445 12,502
<INCOME-TAX> 2,252 3,252 4,814
<INCOME-CONTINUING> 3,596 5,193 7,688
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,596 5,193 7,688
<EPS-PRIMARY> 0.24 0.35 0.51
<EPS-DILUTED> 0.24 0.34 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The purpose of this restated financial data schedule is to submit
earnings per share data for the interim periods for the fiscal year ended
December 31, 1996, in accordance with SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 5,316 7,593 6,686
<SECURITIES> 11,639 15,992 20,124
<RECEIVABLES> 8,910 9,171 10,621
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 26,422 33,396 37,667
<PP&E> 8,050 8,116 6,582
<DEPRECIATION> 4,238 4,300 2,019
<TOTAL-ASSETS> 142,802 162,294 201,037
<CURRENT-LIABILITIES> 17,212 27,113 27,647
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 118 118 118
<OTHER-SE> 70,071 72,960 74,980
<TOTAL-LIABILITY-AND-EQUITY> 142,802 162,294 201,037
<SALES> 14,687 28,391 41,248
<TOTAL-REVENUES> 15,093 29,496 42,747
<CGS> 0 0 0
<TOTAL-COSTS> 8,008 16,073 24,286
<OTHER-EXPENSES> 991 1,940 2,734
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 790 1,537 2,496
<INCOME-PRETAX> 5,304 9,946 13,231
<INCOME-TAX> 2,042 3,829 5,093
<INCOME-CONTINUING> 3,262 6,117 8,138
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,262 6,117 8,138
<EPS-PRIMARY> 0.28 0.52 0.69
<EPS-DILUTED> 0.28 0.51 0.68
</TABLE>
