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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
Commission File Number 1-12204
_______________________________
TRANSTEXAS GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0401023
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 NORTH SAM HOUSTON PARKWAY EAST
SUITE 310
HOUSTON, TEXAS 77032
(Address of principal executive offices) (Zip Code)
(281) 987-8600
(Registrant's telephone number, including area code)
_______________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock of the registrant outstanding on
December 15, 1997 was 57,515,566.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Report of Independent Accountants 2
Condensed Consolidated Balance Sheet as of October 31, 1997
and January 31, 1997 3
Condensed Consolidated Statement of Operations for the three
and nine months ended October 31, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for the nine
months ended October 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of October 31, 1997 and the related condensed
consolidated statements of operations for the three and nine months ended
October 31, 1997 and 1996 and cash flows for the nine months ended October 31,
1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1997, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended (not presented herein); and in our report dated
May 1, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January 31, 1997, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 15, 1997
2
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1997 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 3,513 $ 23,561
Cash restricted for interest . . . . . . . . . . . . . . . . . . . -- 46,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 30,538 78,660
Receivable from affiliates . . . . . . . . . . . . . . . . . . . . -- 3,248
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,784 12,481
Other current assets (Note 4) . . . . . . . . . . . . . . . . . . 11,030 24,984
------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 61,865 188,934
------- ----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . 1,325,422 2,280,880
Less accumulated depreciation, depletion and amortization . . . . . 697,862 1,434,487
---------- ----------
Net property and equipment -- based on the full cost method of
accounting for gas and oil properties of which $122,709 and
$158,973 are excluded from amortization at October 31, 1997
and January 31, 1997, respectively . . . . . . . . . . . . . . . 627,560 846,393
----------- ----------
Cash restricted for share repurchases (Note 2) . . . . . . . . . . . 136,879 --
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . 17,561 17,825
----------- ----------
$ 843,865 $1,053,152
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . $ 9,726 $ 5,787
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 70,571 28,150
Accrued interest payable to affiliate . . . . . . . . . . . . . . 18,759 --
Accrued liabilities (Note 5) . . . . . . . . . . . . . . . . . . . 38,317 83,411
----------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . 137,373 117,348
----------- ----------
Long-term debt, less current maturities . . . . . . . . . . . . . . . 12,015 8,775
Production payments, less current portion . . . . . . . . . . . . . . 6,696 11,931
Note payable to affiliate . . . . . . . . . . . . . . . . . . . . . . 453,000 --
Senior secured notes . . . . . . . . . . . . . . . . . . . . . . . . -- 800,000
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . 115,815 101,092
Revolving credit agreement . . . . . . . . . . . . . . . . . . . . . 11,329 26,268
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . -- 54,554
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 53,237 31,367
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . 1,087 19,621
Other liabilities (Note 6) . . . . . . . . . . . . . . . . . . . . . 13,933 32,991
Commitments and contingencies (Note 3) . . . . . . . . . . . . . . . -- --
Stockholders' equity:
Common stock, $0.01 par value, 100,000,000 shares authorized,
57,515,566 shares issued and outstanding . . . . . . . . . . . . 740 740
Additional paid-in capital (capital deficit) . . . . . . . . . . . 22,820 (123,524)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 278,225 31,267
----------- -----------
301,785 (91,517)
Treasury stock, at cost, 16,484,434 shares . . . . . . . . . . . . (262,405) --
Less advances to affiliates . . . . . . . . . . . . . . . . . . . -- (59,278)
----------- ------------
Total stockholders' equity (deficit) . . . . . . . . . . . . 39,380 (150,795)
----------- ------------
$ 843,865 $ 1,053,152
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
Revenues:
<S> <C> <C> <C> <C>
Gas, condensate and natural gas liquids . . $ 28,347 $ 70,993 $ 140,517 $ 228,694
Transportation . . . . . . . . . . . . . . . -- 8,928 12,055 25,798
Gains on the sale of assets . . . . . . . . 7,482 80 540,411 7,842
Other . . . . . . . . . . . . . . . . . . . 1,404 103 2,021 460
---------- ---------- ---------- -----------
Total revenues . . . . . . . . . . . . . . 37,233 80,104 695,004 262,794
---------- ---------- ---------- -----------
Costs and expenses:
Operating . . . . . . . . . . . . . . . . . 7,113 25,819 45,938 78,305
Depreciation, depletion and amortization . . 13,247 30,811 67,219 92,356
General and administrative . . . . . . . . . 5,170 15,535 29,693 35,324
Taxes other than income taxes . . . . . . . 2,117 2,081 9,845 14,457
Litigation settlement . . . . . . . . . . . -- -- -- (96,000)
---------- ----------- ---------- -----------
Total costs and expenses . . . . . . . . . 27,647 74,246 152,695 124,442
---------- ---------- ---------- -----------
Operating income . . . . . . . . . . . . . 9,586 5,858 542,309 138,352
---------- ---------- ---------- -----------
Other income (expense):
Interest income . . . . . . . . . . . . . . 3,999 1,020 11,286 2,944
Interest expense, net . . . . . . . . . . . (15,620) (21,333) (62,823) (73,382)
---------- ---------- ---------- -----------
Total other income (expense) . . . . . . . (11,621) (20,313) (51,537) (70,438)
---------- ---------- ---------- -----------
Income (loss) before income taxes and
extradordinary item. . . . . . . . . . (2,035) (14,455) 490,772 67,914
Income taxes (benefit) . . . . . . . . . . . . (712) (5,059) 171,771 2,729
---------- ---------- ---------- -----------
Income (loss) before income taxes and
extraordinary item . . . . . . . . . . (1,323) (9,396) 319,001 65,185
Extraordinary item - early extinguishment . .
of debt (net of income tax benefit of $38,793) 74 -- (72,043) --
---------- ---------- ---------- -----------
Net income (loss) . . . . . . . . . . . . $ (1,249) $ (9,396) $ 246,958 $ 65,185
========== ========== ========== ===========
Net income (loss) per common share:
Income (loss) before extraordinary item . . $ (0.02) $ (0.13) $ 4.55 $ 0.88
Extraordinary item . . . . . . . . . . . . -- -- (1.03) --
---------- ---------- ------------ -----------
Net income (loss) per common share. $ (0.02) $ (0.13) $ 3.52 $ 0.88
========== ========== ============ ===========
Weighted average number of shares outstanding . 63,404,675 74,000,000 70,082,047 74,000,00
========== ========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31,
------------------------------
1997 1996
------------ -----------
Operating activities:
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,958 $ 65,185
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . 72,043 --
Depreciation, depletion and amortization . . . . . . . . . . . . 67,219 92,356
Amortization of debt issue costs . . . . . . . . . . . . . . . . 1,879 7,654
Accretion on subordinated notes . . . . . . . . . . . . . . . . 4,941 --
Gains on the sale of assets . . . . . . . . . . . . . . . . . . (540,411) (7,842)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 171,771 (14,242)
Proceeds from volumetric production payment . . . . . . . . . . -- 58,621
Repayment of volumetric production payments . . . . . . . . . . (45,134) --
Amortization of deferred revenue . . . . . . . . . . . . . . . . (9,420) (27,070)
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . 48,122 (9,759)
Receivable from affiliates . . . . . . . . . . . . . . . . . 3,248 697
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (4,300) (617)
Other current assets . . . . . . . . . . . . . . . . . . . . 9,954 2,837
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 23,826 2,225
Accrued interest payable to affiliate. . . . . . . . . . . . . 18,759 --
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . (47,924) 27,058
Transactions with affiliates, net . . . . . . . . . . . . . . (811) (23,500)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 255 (1,312)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 4,680 (9,464)
----------- -----------
Net cash provided by operating activities . . . . . . . . . 25,655 162,827
----------- -----------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (316,706) (201,630)
Proceeds from the sale of assets . . . . . . . . . . . . . . . . 1,035,188 91,559
Advances to affiliates . . . . . . . . . . . . . . . . . . . . . (13,304) (24,750)
Payment of advances by affiliate . . . . . . . . . . . . . . . . 56,354 --
Increase in cash restricted for interest . . . . . . . . . . . . -- (46,000)
Withdrawals from cash restricted for interest . . . . . . . . . 46,000 46,000
Increase in cash restricted for share repurchases . . . . . . . (399,284) --
Withdrawals from cash restricted for share repurchases . . . . . 262,405 --
----------- -----------
Net cash provided (used) by investing activities . . . . . 670,653 (134,821)
----------- -----------
Financing activities:
Issuance of dollar-denominated production payments. . . . . . . . 20,977 16,903
Principal payments on production payments . . . . . . . . . . . (27,472) (34,348)
Issuance of note payable to affiliate . . . . . . . . . . . . . . 453,000 --
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . 14,946 25,480
Principal payments on long-term debt . . . . . . . . . . . . . . (7,767) (17,827)
Revolving credit agreement, net . . . . . . . . . . . . . . . . (14,939) (5,534)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . (696) (4,284)
Retirement of senior secured notes . . . . . . . . . . . . . . . (892,000) --
Purchases of treasury stock . . . . . . . . . . . . . . . . . . (262,405) --
----------- -----------
Net cash used by financing activities . . . . . . . . . . . (716,356) (19,610)
----------- -----------
Increase (decrease) in cash and cash equivalents . . . . . (20,048) 8,396
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . 23,561 11,248
----------- -----------
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,513 $ 19,644
=========== ===========
Noncash operating and investing activities:
Accounts payable and other liabilities for property and equipment $ 45,787 $ 24,046
Exchange of Subordinated Notes . . . . . . . . . . . . . . . . . 115,815 --
Deferred financing costs from affiliate . . . . . . . . . . . . 12,228 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management, all adjustments, consisting of normal
recurring accruals, have been made that are necessary to fairly state the
financial position of TransTexas Gas Corporation ("TransTexas") as of October
31, 1997 and the results of its operations and cash flows for the interim
periods ended October 31, 1997 and 1996. The results of operations for
interim periods should not be regarded as necessarily indicative of results
that may be expected for the entire year. The financial information presented
herein should be read in conjunction with the consolidated financial statements
and notes included in TransTexas' annual report on Form 10-K for the period
ended January 31, 1997. Unless otherwise noted, the term "TransTexas" refers
to TransTexas Gas Corporation and its subsidiaries as of October 31, 1997,
TransTexas Exploration Corporation ("TTEX"), TransTexas Drilling Services, Inc.
("TTXD"), TransTexas Energia de Mexico, S.A. de C.V. and TransTexas Gas
Corporation - Liberia. TransTexas is a subsidiary of TransAmerican Energy
Corporation ("TEC") and indirectly a subsidiary of TransAmerican Natural Gas
Corporation ("TransAmerican"). TransAmerican Refining Corporation ("TARC") is
a subsidiary of TEC.
LIQUIDITY
Cash flow from operations is sensitive to the prices TransTexas
receives for its natural gas. TransTexas' debt covenants may limit its ability
to obtain additional financing or to sell properties, and there is no assurance
that cash flow from operations will be sufficient to fund capital and debt
service requirements.
TransTexas makes substantial capital expenditures for the exploration
and development of natural gas reserves. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements with
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, an accounts receivable
revolving credit facility and other financings.
For the nine months ended October 31, 1997, total capital expenditures
were $317 million, including $45 million for lease acquisitions, $206 million
for drilling and development and $66 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. Additional
capital expenditures of $60 million are anticipated for the fourth quarter.
During fiscal 1998, TransTexas accelerated its exploration and development
drilling program, which included the successful exploration efforts in Galveston
Bay, Goliad County and Brazoria County and, as a result, its capital
expenditures for fiscal 1998 have significantly exceeded its original
anticipated amount of $220 million. In addition, TransTexas is developing
several oil and gas prospects with the potential to increase production and cash
flow from operations, but which require capital expenditures in excess of
projected cash flow over at least the next twelve months. To finance these
capital expenditure requirements and reduce its working capital deficit,
TransTexas intends to supplement its cash flow from operations with a
combination of asset sales and financings. There is no assurance that adequate
funds can be obtained on a timely basis from such sources. Failure to obtain
adequate funds for capital expenditures could have a material adverse effect on
financial position, results of operations and cash flows.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which establishes
standards for reporting information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement will be adopted by
TransTexas effective February 1, 1998. TransTexas has not determined the impact
that adoption of this statement will have on the financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and its
components in financial statements. This statement will be adopted by
TransTexas effective February 1, 1998. TransTexas does not believe that
adoption of this statement will have a material impact on its financial
statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128") and Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("SFAS 129"). These statements will be adopted by TransTexas
effective January 31, 1998. SFAS 128 simplifies the computation of earnings
per share by replacing primary and fully diluted presentations with the new
basic and diluted disclosures. SFAS 129 establishes standards for disclosing
information about an entity's capital structure. TransTexas does not believe
that adoption of these statements will have a material impact on its financial
statements.
6
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities" ("SOP 96-1"), which establishes new accounting and reporting
standards for the recognition and disclosure of environmental remediation
liabilities. SOP 96-1 was adopted by TransTexas effective February 1, 1997.
The adoption of SOP 96-1 did not have a material impact on TransTexas'
financial position, results of operations or cash flow.
2. RECENT EVENTS
LOBO SALE. On May 29, 1997, TransTexas consummated a stock purchase
agreement with an unaffiliated buyer (the "Lobo Sale Agreement"), with an
effective date of March 1, 1997, to effect the sale (the "Lobo Sale") of the
stock of TransTexas Transmission Corporation ("TTC"), its subsidiary that owned
substantially all of TransTexas' Lobo Trend producing properties and related
pipeline transmission system, for a sales price of approximately $1.1 billion,
subject to adjustments as provided for in the Lobo Sale Agreement. Purchase
price adjustments were made for, among other things: the value of certain NGLs
and stored hydrocarbons; the value of gas in TTC's pipeline; prepaid expenses
relating to post-effective date operations; post-closing expenses related to
pre-closing operations; the value of oil and gas produced and sold between the
effective date of the Lobo Sale Agreement and closing (approximately $44
million); property defects; and estimated costs associated with liabilities
incurred before closing. Purchase price adjustments made at the closing of the
Lobo Sale are subject to a review, reconciliation and resolution process. With
proceeds from the Lobo Sale, TransTexas repaid certain indebtedness and other
obligations, including production payments, in an aggregate amount of
approximately $84 million. The remaining net proceeds have been used for the
repurchase or redemption of the Senior Secured Notes and for general corporate
purposes.
Pursuant to the Lobo Sale, TransTexas is required to indemnify the
buyer for certain liabilities related to the assets owned by TTC. Although
TransTexas does not anticipate that it will incur any material indemnity
liability, no assurance can be given that TransTexas will have sufficient funds
to satisfy any such indemnity obligation or that any payment thereof will not
have a material adverse effect on its ability to fund its debt service, capital
expenditure and working capital requirements.
TEC NOTES OFFERING. On June 13, 1997, TEC completed a private offering
(the "TEC Notes Offering") of $475 million aggregate principal amount of 11 1/2%
Senior Secured Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion
aggregate principal amount of 13% Senior Secured Discount Notes due 2002 (the
"TEC Senior Secured Discount Notes" and, together with the TEC Senior Secured
Notes, the "TEC Notes") for net proceeds of approximately $1.3 billion. The
TEC Notes are senior obligations of TEC, secured by a lien on substantially all
its existing and future assets, including the intercompany loans described
below.
In conjunction with the TEC Notes Offering, TransTexas completed the
following transactions (collectively, the "Transactions"): (a) borrowing $450
million pursuant to an intercompany loan from TEC (the "TransTexas Intercompany
Loan"); (b) a tender offer and consent solicitation (the "Tender Offer") for
TransTexas' $800 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "Senior Secured Notes"); (c) an offer (the "Subordinated
Notes Exchange Offer") to exchange approximately $115.8 million aggregate
principal amount of new notes that pay interest in cash at the rate of 13 3/4%
per annum for TransTexas' $189 million aggregate principal amount of 13 1/4%
Senior Subordinated Notes due 2003 (the "Old Subordinated Notes"); and (d)
commencement of a share repurchase program for shares of TransTexas' common
stock (the "Share Repurchase Program") in an aggregate amount of approximately
$399 million.
INTERCOMPANY LOANS TO TRANSTEXAS AND TARC. With the proceeds of the
TEC Notes Offering, TEC made the TransTexas Intercompany Loan and also made an
intercompany loan to TARC (the "TARC Intercompany Loan" and, together with the
TransTexas Intercompany Loan, the "Intercompany Loans"). The TransTexas
Intercompany Loan (i) is in the principal amount of $450 million, (ii) bears
interest at a rate of 10 7/8% per annum, payable semi-
7
<PAGE> 9
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
annually in cash in arrears and (iii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than inventory,
receivables and equipment. The TARC Intercompany Loan (i) is in the original
amount of $676 million, (ii) accretes principal at 16% per annum, compounded
semi-annually, until June 15, 1999, to a final accreted value of $920 million,
and thereafter pays interest semi-annually in cash in arrears on the accreted
value thereof, at a rate of 16% per annum, and (iii) is secured initially by a
security interest in substantially all of TARC's assets other than inventory,
receivables and equipment. The Intercompany Loans will mature on June 1, 2002.
The Intercompany Loan Agreements contain certain restrictive covenants,
including, among others, limitations on incurring additional debt, asset sales,
dividends and transactions with affiliates. TEC allocated $24.9 million of
debt issuance costs to TARC and $12.2 million to TransTexas which are reflected
as a contribution of capital. Such costs are being amortized over the term of
the Intercompany Loans using the interest method. Upon the occurrence of a
Change of Control (as defined), TEC will be required to make an offer to
purchase all of the outstanding TEC Notes at a price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any,
or, in the case of any such offer to purchase the TEC Senior Secured Discount
Notes prior to June 15, 1999, at a price equal to 101% of the accreted value
thereof, in each case, to and including the date of purchase. Pursuant to the
terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay a
pro rata share of the purchase price paid by TEC in an offer to purchase
pursuant to a Change of Control. See "Potential Effects of a Change of
Control" in Note 3.
SENIOR SECURED NOTES TENDER OFFER. On June 13, 1997, TransTexas
completed the Tender Offer for its Senior Secured Notes for 111 1/2% of their
principal amount (plus accrued and unpaid interest). Approximately $785.4
million principal amount of Senior Secured Notes were tendered and accepted by
TransTexas. The Senior Secured Notes remaining outstanding were called for
redemption on June 30, 1997 pursuant to the terms of the Senior Secured Notes
Indenture.
SUBORDINATED NOTES EXCHANGE OFFER. On June 19, 1997, TransTexas
completed the Subordinated Notes Exchange Offer, pursuant to which it exchanged
approximately $115.8 million aggregate principal amount of its 13 3/4% Series C
Senior Subordinated Notes due 2001 (the "Series C Subordinated Notes") for all
of the Old Subordinated Notes. On October 10, 1997, the Company completed a
registered exchange offer whereby it issued $115.8 million aggregate principal
amount of its 13 3/4% Series D Senior Subordinated Notes due 2001 (the
"Subordinated Notes") in exchange for all of the outstanding Series C
Subordinated Notes. The indenture governing the Subordinated Notes includes
certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
As a result of the Lobo Sale, the Tender Offer and the Subordinated
Notes Exchange Offer, TransTexas recorded a $540 million pretax gain and a $72
million after tax extraordinary charge during the nine months ended October 31,
1997.
SHARE REPURCHASE PROGRAM. In June 1997, TransTexas implemented the
Share Repurchase Program pursuant to which it plans to repurchase common stock
from its public stockholders and from its affiliates, including TEC and TARC, in
an aggregate amount of approximately $399 million in value of stock purchased.
Shares may be purchased through open market purchases, negotiated transactions
or tender offers, or combination of the above. It is anticipated that the price
paid to affiliated stockholders will equal the weighted average price paid to
purchase shares from the public stockholders. As of October 31, 1997,
approximately 3.9 million shares had been repurchased from public stockholders
for an aggregate purchase price of approximately $61.4 million, and
approximately 12.6 million shares had been repurchased from TARC and TEC for an
aggregate purchase price of approximately $201 million.
TRANSTEXAS DISBURSEMENT ACCOUNT. Pursuant to a disbursement agreement
(the "Disbursement Agreement") among TransTexas, TEC, the TEC Indenture Trustee,
and Firstar Bank of Minnesota, N.A. as
8
<PAGE> 10
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
disbursement agent, approximately $399 million of the proceeds of the TransTexas
Intercompany Loan was placed in an account (the "Disbursement Account") to be
held and invested by the disbursement agent until disbursed. Funds in the
Disbursement Account will be disbursed to TransTexas as needed to fund the
Share Repurchase Program. TransTexas may at any time request disbursement of
interest earned on the funds in the Disbursement Account. The Disbursement
Account is classified as "cash restricted for share repurchases" in the
accompanying condensed consolidated balance sheet. As of October 31, 1997,
approximately $262.4 million had been disbursed for use in the Share Repurchase
Program.
3. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
ALAMEDA. On May 22, 1993, Alameda Corporation ("Alameda") sued
TransAmerican in the 234th Judicial District Court, Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a 1990 settlement of litigation with El Paso
Natural Gas Company ("El Paso"), and that TransAmerican has been unjustly
enriched by its failure to share such proceeds with Alameda. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda appealed
to the Fourteenth Court of Appeals, which affirmed the trial court judgment in
favor of TransAmerican. Alameda's motion for rehearing was denied, and
Alameda has appealed to the Texas Supreme Court.
ARABIAN OFFSHORE PARTNERS. On June 27, 1997, Arabian Offshore Partners
filed a lawsuit against TransTexas in the 14th Judicial District Court, Dallas
County, Texas, seeking $20 million in damages in connection with TransTexas'
refusal to proceed with the acquisition of two jack-up drilling rigs.
TransTexas' motion for summary judgment is pending before the court.
ASPEN. TransAmerican brought suit on September 29, 1993 against Aspen
Services, Inc. ("Aspen"), seeking an audit and accounting of drilling costs
that Aspen had charged while providing drilling services to TransAmerican.
This suit is pending in the 215th Judicial District Court, Harris County,
Texas. The parties' drilling agreement provided, among other things, that
Aspen would receive payment for its drilling-related costs from the production
and sale of gas from the wells that were drilled, and that the revenues that
TransAmerican would otherwise receive from the wells would be reduced by the
amounts received by Aspen. On July 19, 1995, Aspen filed a counterclaim and
third party claim against TransAmerican, TransTexas, and affiliated entities,
asserting, among other things, that these entities failed to make certain
payments and properly market the gas from these wells. Aspen sought damages
in an unspecified amount, as well as certain equitable claims. In April 1997,
the trial court ruled against Aspen on all of its claims and counterclaims.
BRIONES. In an arbitration proceeding, Jesus Briones, a lessor,
claimed that one of TransTexas' wells on adjacent lands had been draining
natural gas from a portion of his acreage leased to TransTexas on which no well
had been drilled. On October 31, 1995, the arbitrator decided that drainage
had occurred. On June 3, 1996, the arbitrator issued a letter indicating that
drainage damages would be awarded to Briones in the amount of approximately
$1.4 million. The arbitrator entered his award of damages on June 27, 1996.
On July 3, 1996, TransTexas filed a petition in the 49th Judicial District
Court, Zapata County, Texas, to vacate the arbitrator's award. Briones also
filed a petition to confirm the arbitrator's award. In April 1997, the court
granted Briones' motion for summary judgment. In August 1997, the court
entered a final judgment for Briones in the amount of approximately $1.6
million. The court amended the final judgment and denied TransTexas' motion
for new trial in October 1997. TransTexas has filed a revised motion for new
trial.
FINKELSTEIN. On April 15, 1990, H.S. Finkelstein filed suit against
TransAmerican in the 49th Judicial District Court, Zapata County, Texas,
alleging that TransAmerican failed to pay royalties and improperly marketed
oil and gas produced from certain leases. On September 27, 1994, the plaintiff
added TransTexas as an additional
9
<PAGE> 11
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
defendant. On January 6, 1995, a judgment against TransAmerican and TransTexas
was entered for approximately $18 million in damages, interest and attorneys'
fees. TransTexas and TransAmerican appealed the judgment to the Fourth Court
of Appeals, San Antonio, Texas, which affirmed the judgment on April 3, 1996.
TransTexas and TransAmerican filed a motion for rehearing. On August 14, 1996,
the Fourth Court of Appeals reversed the trial court judgment and rendered
judgment in favor of TransAmerican and TransTexas. On August 29, 1996,
Finkelstein filed a motion for stay and a motion for rehearing with the court.
On October 9, 1996, the court denied Finkelstein's rehearing request. In
November 1996, Finkelstein filed an application for writ of error with the
Supreme Court of Texas.
On April 22, 1991, Finkelstein filed a separate suit against
TransAmerican and various affiliates in the 49th Judicial District Court,
Zapata County, Texas, alleging an improper calculation of overriding royalties
allegedly owed to the plaintiff and seeking damages and attorneys' fees in
excess of $33.7 million. On November 18, 1993, the plaintiff added TransTexas
as an additional defendant. The parties arbitrated this matter in January
1997. A partial decision from the arbitration panel has been rendered in favor
of Finkelstein. Although the amount of damages has yet to be determined under
the panel's decision, such amount will be substantially less than that
originally sought by plaintiff.
GENERAL. TransTexas is also a named defendant in other ordinary course,
routine litigation incidental to its business. These matters, individually and
in the aggregate, amount to significant potential liability. The resolution in
any reporting period of one or more of these matters in a manner adverse to
TransTexas could have a material adverse effect on TransTexas' results of
operations and cash flows for that period. Although the outcome of these
lawsuits cannot be predicted with certainty, TransTexas does not expect these
matters to have a material adverse effect on its financial position. At October
31, 1997, the possible range of estimated losses related to all of the
aforementioned claims, in addition to the estimates accrued by TransTexas is $0
to $36 million. Litigation expense, including legal fees, totaled approximately
$0.5 million and $8.0 million for the three months ended October 31, 1997 and
1996, respectively, and approximately $11.9 million and $15.0 million for the
nine months ended October 31, 1997 and 1996.
ENVIRONMENTAL MATTERS
TransTexas' operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various TransTexas' operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. TransTexas also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
that has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. It is not anticipated that TransTexas will be
required in the near future to expend amounts that are material to the
financial condition or operations of TransTexas by reason of environmental laws
and regulations, but because such laws and regulations are frequently
changed and, as a result, may impose increasingly strict requirements,
TransTexas is unable to predict the ultimate cost of complying with such laws
and regulations.
PRODUCTION PAYMENTS
In April 1997, TransTexas sold to an unaffiliated third party a term
overriding royalty in the form of a dollar-denominated production payment in
certain of TransTexas' producing properties for net proceeds of $20 million.
The production payment calls for the repayment of the primary sum plus an
amount equivalent to a 16% annual interest rate on the unpaid portion of such
primary sum.
10
<PAGE> 12
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
LETTER OF CREDIT
In January 1996, TransTexas entered into a reimbursement agreement with
an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas. If there is a draw under the letter of credit, TransTexas
is required to reimburse the third party within 60 days. TransTexas has agreed
to issue up to 8.6 million shares of its common stock to the third party if this
contingent obligation to such third party becomes fixed and remains unpaid for
60 days. TransTexas does not believe that this contingency will occur. If the
obligation becomes fixed, and alternative sources of capital are not available,
TransTexas could elect to sell shares of TransTexas' common stock prior to the
maturity of the obligation and use the proceeds of such sale to repay the third
party. Based on TransTexas' current capitalization, the issuance of shares of
TransTexas' common stock to satisfy this obligation would result in
deconsolidation of TransTexas for federal income tax purposes.
POTENTIAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will not
challenge this position, or that such challenge would not be upheld. Under an
agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such tax
would be offset in future years by alternative minimum tax credits and retained
loss and credit carryforwards to the extent recoverable from TransAmerican. As
a member of the TNGC Consolidated Group (defined below), each of TransTexas, TEC
and TARC will be severally liable for any tax liability resulting from the
above-described transactions. The IRS has commenced an audit of the
consolidated federal income tax returns of the TNGC Consolidated Group for its
taxable years ended July 31, 1994 and 1995. At this time, it is not possible
to predict the scope of the IRS' review or whether any tax deficiencies will be
proposed by the IRS as a result of its review.
Based upon independent legal advice, TransTexas has determined that it
will not report any significant federal income tax liability as a result of the
Lobo Sale. There are, however, significant uncertainties regarding TransTexas'
tax position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been
or will be obtained from the IRS regarding the Lobo Sale by any member of the
TNGC Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $250 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that
TransAmerican would be able to fund any such payment at the time due and the
other members of the TNGC Consolidated Group, thus, may be required to pay the
tax. TransTexas has reserved approximately $75 million with respect to the
potential tax liability for financial reporting purposes to reflect a portion
of the federal tax liability that TransAmerican might not be able to pay. If
TransTexas
11
<PAGE> 13
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
were required to pay this tax deficiency, it is likely that it would be
required to sell significant assets or raise additional debt or equity capital
to fund the payment.
Under certain circumstances, TransAmerican or TEC may sell or otherwise
dispose of shares of common stock of the Company. If, as a result of any sale
or other disposition of the Company's common stock, the aggregate ownership of
TransTexas by members of the TNGC Consolidated Group (excluding TransTexas) is
less than 80% (measured by voting power and value), TransTexas will no longer
be a member of the TNGC Consolidated Group for federal tax purposes
("Deconsolidation") and, with certain exceptions, will no longer be obligated
under the terms and conditions of, or entitled to the benefits of, the Tax
Allocation Agreement. Further, if TEC or TARC sells or otherwise transfers any
stock of TARC, or issues any options, warrants or other similar rights
relating to such stock, outside of the TNGC Consolidated Group, which represents
more than 20% of the voting power or equity value of TARC, then a
Deconsolidation of TARC would occur. A Deconsolidation of TARC would result in
a Deconsolidation of TransTexas if the TNGC Consolidated Group, excluding TARC,
does not then own at least 80% of the voting power and equity value of
TransTexas. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred during
the fiscal year ending January 31, 1998, the aggregate amount of this tax
liability is estimated to be between $50 million and $100 million, assuming no
reduction for tax attributes of the TNGC Consolidated Group. However, such tax
liability generally would be substantially reduced or eliminated in the event
that the IRS successfully challenged TransTexas' position on the Lobo Sale.
Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the IRS for the consolidated federal income tax
liability of the consolidated group. There can be no assurance that each TNGC
Consolidated Group member will have the ability to satisfy any tax obligation
attributable to the Transactions at the time due and, therefore, other members
of the group, including TEC, TransTexas or TARC, may be required to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TARC or TEC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit pursuant
to the Tax Allocation Agreement for net operating losses of TransTexas used by
other members of the TNGC Consolidated Group prior to the Deconsolidation of
TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of
a Change of Control, each holder of the Subordinated Notes will have the right
to require TransTexas to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the
terms of the TransTexas Intercompany Loan, upon the occurrence of a Change of
Control, TEC would have the right to require TransTexas to repay the principal
of the TransTexas Intercompany Loan in an amount equal to a pro rata share of
the amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount
of the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of
Control would be deemed to occur under the Subordinated Notes Indenture in the
case of certain changes or other events in respect of the ownership of
TransTexas, including any circumstances
12
<PAGE> 14
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
pursuant to which any person or group other than John R. Stanley (or his heirs,
his estate, or any trust in which he or his immediate family members have,
directly or indirectly, a beneficial interest in excess of 50%) and his
subsidiaries or the TEC Indenture Trustee is or become the beneficial owner of
more than 50% of the total voting power of TransTexas' then outstanding voting
stock, and during the 90 days thereafter, the rating of the notes is downgraded
or withdrawn. A Change of Control would be deemed to occur under the
TransTexas Intercompany Loan in the case of certain changes or other events in
respect of the ownership or control of TEC, TransTexas, or TARC including any
circumstance pursuant to which (i) any person or group, other than John R.
Stanley (or his heirs, his estate, or any trust in which he or his immediate
family members have, directly or indirectly, a beneficial interest in excess of
50%) and his subsidiaries or the TEC Indenture Trustee is or becomes the
beneficial owner of more than 50% of the total voting power of TEC's then
outstanding voting stock, or (ii) TEC or any of its subsidiaries own some of
TransTexas' or TARC's capital stock, respectively, but less than 50% of the
total voting stock or economic value of TransTexas or TARC, respectively,
unless the TEC Notes have an investment grade rating for the period of 120 days
thereafter. The term "person," as used in the definition of Change of Control,
means a natural person, company, government or political subdivision, agency or
instrumentality of a government and also includes a "group," which is defined
as two or more persons acting as a partnership, limited partnership or other
group. In addition, certain changes or other events in respect of the
ownership or control of TransTexas that do not constitute a Change of Control
under the TEC Notes Indenture may result in a "change of control" of TransTexas
under the terms of the BNY Facility and certain equipment financing. Such an
occurrence could create an obligation for TransTexas to repay such other
indebtedness. At October 31, 1997, TransTexas had approximately $29.7 million
of indebtedness (excluding the Senior Secured Notes and the Subordinated Notes)
subject to such right of repayment or repurchase. In the event of a Change of
Control under the Subordinated Notes Indenture or the TEC Notes Indenture or a
"change of control" under the terms of other outstanding indebtedness, there
can be no assurance that TransTexas will have sufficient funds to satisfy any
such payment obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. These matters,
individually and in the aggregate, amount to significant potential liability
which, if adjudicated in a manner adverse to TransTexas in one reporting
period, could have a material adverse effect on TransTexas' cash flow or
operations for that period. Although the outcome of these contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position.
4. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
----------- -----------
<S> <C> <C>
Prepayments:
Trade $ 6,548 $ 9,580
Insurance 1,891 2,310
Deferred loss on commodity price swap agreements -- 8,276
Other 2,591 4,818
----------- ----------
$ 11,030 $ 24,984
=========== ==========
</TABLE>
13
<PAGE> 15
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
5. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
----------- ------------
<S> <C> <C>
Royalties $ 8,213 $ 27,607
Taxes other than income taxes 5,793 10,136
Accrued interest 7,276 13,370
Payroll 6,878 5,413
Litigation settlements and other -- 1,263
Settlement values of commodity price swap agreements -- 13,276
Insurance 4,981 6,618
Other 5,176 5,728
---------- ----------
$ 38,317 $ 83,411
========== ==========
</TABLE>
Included in litigation settlements and other at January 31, 1997 are
certain non-recurring costs associated with the Lobo Sale.
6. OTHER LIABILITIES
The major components of other liabilities are as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
----------- ------------
<S> <C> <C>
Litigation accrual $ 10,008 $ 8,008
Litigation settlement -- 1,633
Accrued interest 2,813 --
Short-term obligations expected to be refinanced:
Litigation settlement -- 2,500
Accrued capital expenditures -- 19,738
Other 1,112 1,112
----------- ----------
$ 13,933 $ 32,991
=========== ==========
</TABLE>
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million, of
which approximately $13.8 million remains outstanding as of October 31, 1997.
Proceeds from these transactions, net of current maturities, were used to pay
the obligations listed above under the caption "Short-term obligations expected
to be refinanced" at January 31, 1997 and for general corporate purposes.
7. HEDGING AGREEMENTS
From time to time, TransTexas enters into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in the
spot market for natural gas. The Hedge Agreements are accounted for as hedges
if the pricing of the hedge agreement correlates with the pricing of the natural
gas production hedged. Accordingly, gains or losses are deferred and recorded
as assets or liabilities and recognized as an increase or decrease in revenues
in the respective month the physical volumes are sold. For the nine months ended
October 31, 1997, TransTexas incurred net settlement losses pursuant to the
Hedge Agreements of approximately $7.4 million. TransTexas had no Hedge
Agreements outstanding during the quarter ended October 31, 1997.
14
<PAGE> 16
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. LITIGATION SETTLEMENT
FARIAS. On February 15, 1996, Celita Suzana Farias filed a wrongful
death action in the 93rd District Court, Hidalgo County, Texas, against
TransTexas and one of its contractors for fatal injuries suffered by the
plaintiff's husband at the Yzaguirre Heirs #3 Well on February 13, 1996. The
plaintiff alleges the defendants operated a crane in such a manner that they
were negligent and grossly negligent. The plaintiff seeks unspecified damages.
On March 7, 1996, the mother of the deceased TransTexas employee filed a
petition in intervention also alleging negligence, gross negligence and malice
and seeking unspecified damages. This litigation was settled in August 1997.
9. CREDIT AGREEMENTS
TransTexas and BNY Financial Corporation are parties to a Second
Amended and Restated Accounts Receivable Management and Security Agreement (the
"BNY Facility"), dated as of October 14, 1997. As of October 31, 1997,
outstanding advances under the BNY Facility totaled approximately $11.3
million. Interest accrues on advances at the rate of (i) the higher of (a)
the prime rate of The Bank of New York or (b) the Federal Funds Rate plus 1/2
of 1% plus (ii) 1/2 of 1%. Obligations under the BNY Facility are secured by
liens on TransTexas' receivables and inventory.
10. TRANSACTIONS WITH AFFILIATES
TransTexas sells natural gas to TARC under an interruptible long-term
sales contract. Revenues from TARC under this contract totaled approximately
$0.4 million and $2.2 million for the nine months ended October 31, 1997 and
1996, respectively.
15
<PAGE> 17
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
On June 13, 1997, a new services agreement was entered into among
TransAmerican, TEC, TARC and TransTexas. Under the new services agreement,
TransTexas will provide accounting, legal, administrative and other services to
TARC, TEC and TransAmerican and its affiliates. TransAmerican will provide
advisory services to TransTexas, TARC and TEC. TARC will pay to TransTexas
approximately $300,000 per month for services rendered to, and for allocated
expenses paid by TransTexas on behalf of TARC and TEC. TransAmerican will pay
to TransTexas approximately $20,000 per month for such services. TEC and its
subsidiaries will pay $2.5 million in the aggregate per year to TransAmerican
for advisory services and benefits provided by TransAmerican. As of October
31, 1997, the receivable from TARC and TransAmerican for such services was $1.3
million and $0.1 million, respectively.
In September, November and December 1997, TEC advanced an aggregate of
approximately $34 million to TransTexas pursuant to promissory notes which
mature on June 14, 2002. The notes bear interest in an amount equal to a
proportionate share of the fixed semi-annual interest payment of $2.8 million
based upon the average outstanding balance of all notes (other than the notes
evidencing the Intercompany Loans) between TransTexas and TEC and the average
outstanding balance of all notes (other than the notes evidencing the
Intercompany Loans) between TARC and TEC.
16
<PAGE> 18
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto of TransTexas
included elsewhere in this report.
RESULTS OF OPERATIONS
GENERAL
TransTexas' results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
NGLs. The profitability of TransTexas also depends on its ability to minimize
finding and lifting costs and maintain its reserve base while maximizing
production. On May 29, 1997, TransTexas consummated a stock purchase agreement
with an unaffiliated buyer (the "Lobo Sale Agreement"), with an effective date
of March 1, 1997, to effect the sale (the "Lobo Sale") of the stock of
TransTexas Transmission Corporation ("TTC"), its subsidiary that owned
substantially all of TransTexas' Lobo Trend producing properties and related
pipeline transmission system, for a sales price of approximately $1.1 billion,
subject to adjustments as provided for in the Lobo Sale Agreement. Accordingly,
the Company's reported results for the three and nine months ended October 31,
1997 include the effect of reduced volumes attributable to the producing
properties sold as part of the Lobo Sale.
TransTexas' operating data for the three months and nine months ended
October 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31, October 31,
----------------------- ---------------------
1997 1996 1997 1996
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Sales volumes:
Gas (Bcf) (1) 10.3 38.1 63.5 112.4
NGLs (MMgal) -- 39.3 61.7 128.6
Condensate (MBbls) 92 120 518 400
Average prices:
Gas (dry) (per Mcf)(2) $ 2.66 $ 1.62 $ 2.04 $ 1.87
NGLs (per gallon) -- .38 .29 .33
Condensate (per Bbl) 18.45 22.07 19.52 20.47
Number of gross wells drilled 21 34 79 111
Percentage of wells completed 76% 79% 63% 73%
- ----------------------
</TABLE>
(1) Sales volumes for the nine months ended October 31, 1997 include 7.3 Bcf
delivered prior to the third quarter pursuant to volumetric production
payments.
(2) Average prices for the nine months ended October 31, 1997 includes amounts
delivered under volumetric production payments. The average gas price for
TransTexas' undedicated production for this period was $2.15 per Mcf. Gas
prices do not include the effect of hedging agreements.
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<PAGE> 19
A summary of TransTexas' operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- -----------------------
1997 1996 1997 1996
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Lease $ 3.0 $ 7.0 $ 15.2 $ 19.8
Pipeline 2.7 8.9 14.1 25.2
Natural gas liquids 0.1 9.7 14.6 32.9
Well services 1.4 0.2 2.1 0.4
---------- -------- --------- ---------
7.2 25.8 46.0 78.3
Taxes other than income taxes (1) 2.1 2.1 9.8 14.4
---------- -------- --------- ---------
Total $ 9.3 $ 27.9 $ 55.8 $ 92.7
- ----------------------------- ========== ========= ========= =========
</TABLE>
(1) Taxes other than income taxes include severance, property, and other
taxes.
TransTexas' average depletion rates have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Depletion rates (per Mcfe) $ 1.09 $ 0.94 $ 1.04 $ 0.93
=========== ========== ======== =========
</TABLE>
TransTexas' Consolidated EBITDA, as defined in the Indenture, is set
forth below (in millions of dollars). EBITDA consists of TransTexas' earnings
before consolidated fixed charges (excluding capitalized interest), income
taxes, depreciation, depletion, and amortization. EBITDA is not intended to
represent cash flow or any other measure of financial performance in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- ----------------------
1997 1996 1997 1996
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated EBITDA $ 27.2 $ 40.0 $ 621.6 $ 234.4
Cash flows from:
Operating activities 38.5 21.5 25.7 162.8
Investing activities 137.3 (65.5) 670.7 (134.8)
Financing activities (210.6) 21.9 (716.4) (19.6)
=========== ========== ========= =========
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1997, COMPARED WITH THE THREE MONTHS ENDED
OCTOBER 31, 1996
Gas, condensate and NGLs revenues for the three months ended October
31, 1997 decreased $42.6 million from the comparable prior year quarter, due
primarily to lower prices for and decreased volumes of natural gas and NGLs,
primarily in the second and third quarters. The average monthly prices received
per Mcf of gas, ranged from $2.30 to $2.94 in the three months ended October 31,
1997, compared to a range of $1.70 to $1.99 in the same period in the prior
year. The decrease in natural gas sales volumes resulted primarily from the
divestiture of approximately 207 Bcfe of TransTexas' reserves as a result of the
Lobo Sale. Lobo Trend production was 12.1 Bcfe for the three months ended
October 31, 1996. As of October 31, 1997, TransTexas had a total of 106
producing wells compared to 832 at October 31, 1996. NGL sales volumes
decreased as a result of decreases in the volumes of natural gas processed.
Transportation revenues decreased $8.9 million over the prior year quarter due
to the divestiture of the pipeline system as a result of the Lobo Sale.
As a result of the Lobo Sale, the Tender Offer and the Subordinated
Notes Exchange Offer described in Note 2 of Notes to Condensed Consolidated
Financial Statements, TransTexas recorded a $540 million pretax gain
($7.5 million of which was realized in the third quarter as a result of
post-closing adjustments) and a $72 million after tax extraordinary charge
during the nine months ended October 31, 1997.
Primarily as a result of the Lobo Sale, lease operating expenses,
pipeline operating expenses and NGLs cost for the quarter ended October 31,
1997 decreased $4.0 million, $6.2 million and $9.6 million, respectively,
compared
18
<PAGE> 20
to the comparable prior year period. Well service expense for the three months
ended October 31, 1997 increased $1.2 million as compared to the same period of
1996 primarily due to costs related to providing services to third parties.
Depreciation, depletion and amortization expense for the three months ended
October 31, 1997 decreased $17.6 million due to a decrease in TransTexas'
undedicated natural gas production as a result of the Lobo Sale offset by a
$0.15 increase in the depletion rate. The depletion rate increased primarily as
a result of the transfer of approximately $30 million of previously excluded
costs of unevaluated properties into the full cost pool.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests which are classified as unevaluated properties. As a result
of exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $13 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the full cost pool which could result in continued increases in
the depletion rate. The majority of unevaluated properties will be evaluated
over the next two years.
General and administrative expenses decreased approximately
$10.4 million in the three months ended October 31, 1997, due primarily to
lower litigation expenses.
Interest income for the three months ended October 31, 1997 increased
approximately $3.0 million over the comparable prior year period due to
increased cash balances in the current quarter. TransTexas does not expect to
earn significant interest income during fiscal 1999. Interest expense decreased
$5.7 million over the same period of the prior year primarily as a result of the
retirement of the Senior Secured Notes, offset in part by a decrease in the
amount of interest capitalized in connection with the acquisition of undeveloped
leasehold acreage.
NINE MONTHS ENDED OCTOBER 31, 1997, COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1996
Gas, condensate and NGL revenues for the nine months ended October 31,
1997 decreased by $88.2 million from the comparable period of the prior year,
due primarily by decreases in gas, condensate and NGLs sales prices and gas
sales volumes, offset in part by increases in condensate sales volumes. The
average monthly prices received per Mcf of gas, excluding amount dedicated to
volumetric production payments, ranged from $2.94 to $1.49 in the nine months
ended October 31, 1997, compared to a range of $1.70 to $2.45 in the same period
in the prior year. The increase in condensate sales volumes is due primarily to
increased production from TransTexas' new development areas, offset in part by
the divestiture of certain producing properties as a result of the Lobo Sale.
NGLs sales volumes decreased as a result of decreases in the volumes of natural
gas processed. Transportation revenues decreased by $13.7 million for the nine
months ended October 31, 1997, due primarily to the divestiture of the pipeline
system as a result of the Lobo Sale.
Lease operating expenses in the nine months ended October 31, 1997
decreased by $4.6 million from the prior year period due primarily to a decrease
in the number of producing wells as a result of the Lobo Sale offset partially
by an increase in salt water disposal costs and the initiation of a program to
increase flow rates on certain TransTexas' wells through increased workovers and
the installation of leased wellhead compressors. Pipeline operating expenses
decreased by $11.1 due primarily to the divestiture of the pipeline system as a
result of the Lobo Sale. NGLs cost decreased by $18.3 million from the
comparable period in the prior year primarily due to a decrease in volumes of
natural gas processed as a result of the Lobo Sale. Well service expenses for
the nine months ended October 31, 1997 increased $1.7 million as compared to the
comparable prior year period primarily due to costs related to providing
services to third parties. Depreciation, depletion and amortization expense for
the nine months ended October 31, 1997 decreased by $25.1 million due to the
decrease in TransTexas' undedicated natural gas production as a result of the
Lobo Sale, partially offset by a $0.11 increase in the depletion rate. The
depletion rate increased primarily as a result of the transfer of approximately
$30 million of previously excluded costs of unevaluated properties into the full
cost pool. General and administrative expenses decreased by $5.6 million due
primarily to a decrease in litigation expense. Taxes other than income taxes
decreased by $4.6 million over the comparable prior year period due primarily to
a decrease in ad valorem, severance, and excise taxes.
Beginning in fiscal 1996, TransTexas substantially increased its
exploration activities and has made significant capital expenditures for
leasehold interests which are classified as unevaluated properties. As a result
of exploratory discoveries on certain of these leases and the related capital
requirements, TransTexas has farmed out certain other interests with a carrying
value of $13 million and expects to farm out additional leases. To the extent
these activities do not result in the discovery of proved reserves, the leases
will be added to the full cost pool which could result in continued increases in
the depletion rate. The majority of unevaluated properties will be evaluated
over the next two years.
Interest income for the nine months ended October 31, 1997 increased by
approximately $8.3 million over the comparable period of the prior year due to
increased average cash balances. TransTexas does not expect to earn significant
interest income during fiscal 1999. Interest expense decreased by $10.6 million
primarily as a result of the retirement of the Senior Secured Notes offset in
part by the accretion on the Old Subordinated Notes.
Cash flow from operating activities for the nine months ended October
31, 1997 decreased by approximately $137.2 million from the prior-year period
due primarily to lower net income from gas and oil production activities and
cash settlement of volumetric production payments in connection with the Lobo
Sale. In addition, during fiscal 1997, TransTexas collected $58.6 million
from the sale of volumetric production payments.
Cash provided by investing activities increased by $805.5 million
due to proceeds from the sale of certain TransTexas producing properties
offset in part by the net increase in cash restricted for share repurchases
pursuant to the Share Repurchase Program and increased capital expenditures.
Cash flow used in financing activities increased by approximately
$696.7 million due primarily to the retirement of the Senior Secured Notes and
purchases of stock pursuant to the Share Repurchase Program offset in part by
the TransTexas Intercompany Loan.
19
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is sensitive to the prices TransTexas
receives for its natural gas. TransTexas from time to time enters into
commodity price swap agreements to reduce its exposure to price risk in the spot
market for natural gas. Proceeds from natural gas sales are received at
approximately the same time that production-related burdens, such as royalties,
production taxes and drilling program obligations, are payable.
TransTexas makes substantial capital expenditures for the exploration,
development and production of natural gas. TransTexas historically has financed
its capital expenditures, debt service and working capital requirements from
cash from operations, public and private offerings of debt and equity
securities, the sale of production payments, asset sales, an accounts receivable
revolving credit facility and other financings. TransTexas' debt covenants may
limit its ability to obtain additional financings or to sell properties, and
there is no assurance that cash flow from operations will be sufficient to fund
capital and debt service requirements.
For the nine months ended October 31, 1997, total capital expenditures
were $317 million, including $45 million for lease acquisitions, $206 million
for drilling and development and $66 million for TransTexas' gas gathering and
pipeline system and other equipment and seismic acquisitions. Additional
capital expenditures of $60 million are anticipated for the fourth quarter.
During fiscal 1998, TransTexas accelerated its exploration and development
drilling program, which included the successful exploration efforts in Galveston
Bay, Goliad County and Brazoria County and, as a result, its capital
expenditures for fiscal 1998 have significantly exceeded its original
anticipated amount of $220 million. In addition, TransTexas is developing
several oil and gas prospects with the potential to increase production and cash
flow from operations, but which require capital expenditures in excess of
projected cash flow over at least the next twelve months. To finance these
capital expenditure requirements and reduce its working capital deficit,
TransTexas intends to supplement its cash flow from operations with a
combination of asset sales and financings. There is no assurance that adequate
funds can be obtained on a timely basis from such sources. Failure to obtain
adequate funds for capital expenditures could have a material adverse effect on
financial position, results of operations and cash flows.
On May 29, 1997, TransTexas consummated the Lobo Sale Agreement, with
an effective date of March 1, 1997, to effect the Lobo Sale for a sales price of
approximately $1.1 billion. With proceeds from the Lobo Sale, TransTexas repaid
certain indebtedness and other obligations, including production payments, in an
aggregate amount of approximately $84 million. The remaining net proceeds have
been used for the redemption or repurchase of the Senior Secured Notes and for
general corporate purposes.
On June 13, 1997, TEC completed a private offering (the "TEC Notes
Offering") of $475 million aggregate principal amount of 11 1/2% Senior Secured
Notes due 2002 (the "TEC Senior Secured Notes") and $1.13 billion aggregate
principal amount of 13% Senior Secured Discount Notes due 2002 (the "TEC Senior
Secured Discount Notes" and, together with the TEC Senior Secured Notes, the
"TEC Notes") for net proceeds of approximately $1.3 billion.
With the proceeds of the TEC Notes Offering, TEC made intercompany
loans to TransTexas in the principal amount of $450 million (the "TransTexas
Intercompany Loan") and to TARC in the original amount of $676 million (the
"TARC Intercompany Loan" and, together with the TransTexas Intercompany Loan,
the "Intercompany Loans"). The promissory note evidencing the TransTexas
Intercompany Loan (i) bears interest at a rate of 10 7/8% per annum, payable
semi-annually in cash in arrears and (ii) is secured initially by a security
interest in substantially all of the assets of TransTexas other than
inventory, receivables and equipment. The promissory note evidencing the TARC
Intercompany Loan (i) accretes principal at the rate of 16% per annum,
compounded semi-annually, until June 15, 1999 to a final accreted value of $920
million, and thereafter pays interest semi-annually in cash in arrears on the
accreted value thereof, at a rate of 16% per annum and (ii) is secured
initially by a security interest in substantially all of TARC's assets other
than inventory, receivables and equipment. The Intercompany Loans will mature
on June 1, 2002. The Intercompany Loan Agreements contain certain restrictive
covenants including, among others, limitations on incurring additional debt,
asset sales, dividends and transactions with affiliates. Upon the occurrence
of a Change of Control (as defined), TEC will be required to make an offer to
purchase all of the outstanding TEC Notes at a price equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any,
or, in the case of any such offer to purchase the TEC Senior Secured Discount
Notes prior to June 15, 1999, at a price equal to 101% of the accreted value
thereof, in each case, to and including the date of purchase. Pursuant to the
terms of the Intercompany Loans, TEC may require TransTexas and TARC to pay a
pro
20
<PAGE> 22
rata share of the purchase price paid by TEC in an offer to purchase pursuant
to a Change of Control. See "Potential Effects of a Change of Control."
On June 13, 1997, TransTexas completed a tender offer for its Senior
Secured Notes for 111 1/2% of their principal amount (plus accrued and unpaid
interest). Approximately $785.4 million principal amount of Senior Secured
Notes were tendered and accepted by TransTexas. The Senior Secured Notes
remaining outstanding were called for redemption on June 30, 1997 pursuant to
the terms of the Senior Secured Notes Indenture.
On June 19, 1997, TransTexas completed an exchange offer, pursuant to
which it exchanged approximately $115.8 million aggregate principal amount of
its 13 3/4% Series C Senior Subordinated Notes due 2001 (the "Series C
Subordinated Notes") for all of the Old Subordinated Notes. On October 10,
1997, TransTexas completed a registered exchange offer resulting in the
issuance of $115.8 million aggregate principal amount of its 13 3/4% Series D
Senior Subordinated Notes due 2001 (the "Subordinated Notes") in exchange for
all of its outstanding Series C Subordinated Notes. The Subordinated Notes pay
interest in cash semi-annually in arrears on each June 30 and December 31
commencing December 31, 1997. The indenture governing the Subordinated Notes
includes certain restrictive covenants, including, among others, limitations on
incurring additional debt, asset sales, dividends and transactions with
affiliates.
In June 1997, TransTexas implemented a share repurchase program
pursuant to which it plans to repurchase common stock from its public
stockholders and from its affiliates, including TEC and TARC, in an aggregate
amount of approximately $399 million in value of stock purchased. Shares may be
purchased through open market purchases, negotiated transactions or tender
offers, or a combination of the above. It is anticipated that the price paid to
affiliated stockholders will equal the weighted average price paid to purchase
shares from the public stockholders. As of October 31, 1997, approximately 3.9
million shares had been repurchased from public stockholders for an aggregate
purchase price of approximately $61.4 million, and approximately 12.6 million
shares had been repurchased from TARC and TEC for an aggregate purchase price of
approximately $201 million.
TransTexas and BNY Financial Corporation are parties to a Second
Amended and Restated Accounts Receivable Management and Security Agreement (the
"BNY Facility"), dated as of October 14, 1997. As of October 31, 1997,
outstanding advances under the BNY Facility totaled approximately $11.3
million. Interest accrues on advances at the rate of (i) the higher of (a) the
prime rate of The Bank of New York or (b) the Federal Funds Rate plus 1/2 of
1% plus (ii) 1/2 of 1%. Obligations under the BNY Facility are secured by
liens on TransTexas' receivables and inventory.
During the months of April and May 1997, TransTexas obtained
additional financing in the aggregate amount of approximately $45.8 million, of
which approximately $13.8 million remains outstanding as of October 31, 1997.
Proceeds from these transactions, net of current maturities, were used to pay
certain short-term obligations outstanding at January 31, 1997.
In September 1997, TEC advanced $3 million to TransTexas pursuant to a
non-interest-bearing note which matures on June 14, 2002. In November and
December 1997, TEC advanced an aggregate of approximately $31 million to
TransTexas pursuant to promissory notes which mature on June 14, 2002. The
notes bear interest in an amount equal to a proportionate share of the fixed
semi-annual interest payment of $2.8 million based upon the average outstanding
balance of all notes (other than the note evidencing the Intercompany Loans)
between TransTexas and TEC and the average outstanding balance of all notes
(other than the note evidencing the Intercompany Loans) between TARC and TEC.
CONTINGENT LIABILITIES
TransTexas has significant contingent liabilities, including
liabilities with respect to litigation matters described in Note 3 of Notes to
Condensed Consolidated Financial Statements. These matters, individually and
in the aggregate, amount to significant potential liability which, if
adjudicated in a manner adverse to TransTexas in one reporting period, could
have a material adverse effect on TransTexas' cash flow or operations for that
period. Although the outcome of these contingencies or the probability of the
occurrence of these contingencies cannot be predicted with certainty, TransTexas
does not expect these matters to have a material adverse effect on its financial
position.
21
<PAGE> 23
In January 1996, TransTexas entered into a reimbursement agreement
with an unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of TransTexas. If there is a draw under the letter of credit,
TransTexas is required to reimburse the third party within 60 days. TransTexas
has agreed to issue up to 8.6 million shares of common stock of TransTexas to
the third party if this contingent obligation to such third party becomes fixed
and remains unpaid for 60 days. TransTexas does not believe that this
contingency will occur. If the obligation becomes fixed, and alternative
sources of capital are not available, TransTexas could elect to sell shares of
TransTexas' common stock prior to the maturity of the obligation and use the
proceeds of such sale to repay the third party. Based on TransTexas' current
capitalization, the issuance of shares of TransTexas' common stock to satisfy
this obligation would result in deconsolidation of TransTexas for federal
income tax purposes.
Pursuant to the Lobo Sale Agreement, TransTexas is required to
indemnify the buyer for certain liabilities related to the assets owned by TTC.
Although TransTexas does not anticipate that it will incur any material
indemnity liability, no assurance can be given that TransTexas will have
sufficient funds to satisfy any such indemnity obligation or that any payment
thereof will not have a material adverse effect on its ability to fund its debt
service, capital expenditure and working capital requirements.
POTENTIAL TAX LIABILITY
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of this
debt cancellation is excluded from its income under the cancellation of
indebtedness provisions (the "COD Exclusion") of the Internal Revenue Code of
1986, as amended, and has reduced its tax attributes (including its net
operating loss and credit carryforwards) as a consequence of the COD Exclusion.
No federal tax opinion was rendered with respect to this transaction, however,
and TransAmerican has not obtained a ruling from the Internal Revenue Service
(the "IRS") regarding this transaction. TransTexas believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness. However, due to
factual and legal uncertainties, there can be no assurance that the IRS will
not challenge this position, or that such challenge would not be upheld. Under
an agreement between TransTexas, TransAmerican and certain of TransAmerican's
subsidiaries (the "Tax Allocation Agreement"), TransTexas has agreed to pay an
amount equal to any federal tax liability (which would be approximately $25.4
million) attributable to the inapplicability of the COD Exclusion. Any such
tax would be offset in future years by alternative minimum tax credits and
retained loss and credit carryforwards to the extent recoverable from
TransAmerican. As a member of the TNGC Consolidated Group (defined below),
each of TransTexas, TEC and TARC will be severally liable for any tax liability
resulting from the above-described transactions. The IRS has commenced an
audit of the consolidated federal income tax returns of the TNGC Consolidated
Group for its taxable years ended July 31, 1994 and 1995. At this time, it is
not possible to predict the scope of the IRS' review or whether any tax
deficiencies will be proposed by the IRS as a result of its review.
Based upon independent legal advice, TransTexas has determined that it
will not report any significant federal income tax liability as a result of the
Lobo Sale. There are, however, significant uncertainties regarding TransTexas'
tax position and no assurance can be given that TransTexas' position will be
sustained if challenged by the IRS. TransTexas is part of an affiliated group
for tax purposes (the "TNGC Consolidated Group"), which includes TNGC Holdings
Corporation, the sole stockholder of TransAmerican. No letter ruling has been
or will be obtained from the IRS regarding the Lobo Sale by any member of the
TNGC Consolidated Group. If the IRS were to successfully challenge TransTexas'
position, each member of the TNGC Consolidated Group would be severally liable
under the consolidated tax return regulations for the resulting taxes, in the
estimated amount of up to $250 million (assuming the use of existing tax
attributes of the TNGC Consolidated Group), possible penalties equal to 20% of
the amount of the tax, and interest at the statutory rate (currently 9%) on the
tax and penalties (if any). The Tax Allocation Agreement has been amended so
that TransAmerican will become obligated to fund the entire tax deficiency (if
any) resulting from the Lobo Sale. There can be no assurance that
TransAmerican would be able to fund any such payment at the time due and the
other members of the TNGC Consolidated Group, thus, may be required to pay the
tax. TransTexas has reserved approximately $75 million with respect to the
potential tax liability for financial reporting purposes to reflect a portion
of the federal tax liability that TransAmerican might not be able to pay. If
TransTexas were required to pay this tax deficiency, it is likely that it would
be required to sell significant assets or raise additional debt or equity
capital to fund the payment.
22
<PAGE> 24
Under certain circumstances, TransAmerican or TEC may sell or
otherwise dispose of shares of common stock of the Company. If, as a result
of any sale or other disposition of the Company's common stock, the aggregate
ownership of TransTexas by members of the TNGC Consolidated Group (excluding
TransTexas) is less than 80% (measured by voting power and value), TransTexas
will no longer be a member of the TNGC Consolidated Group for federal tax
purposes ("Deconsolidation") and, with certain exceptions, will no longer be
obligated under the terms and conditions of, or entitled to the benefits of,
the Tax Allocation Agreement. Further, if TEC or TARC sells or otherwise
transfers any stock of TARC, or issues any options, warrants or other similar
rights relating to such stock, outside of the TNGC Consolidated Group, which
represents more than 20% of the voting power or equity value of TARC, then a
Deconsolidation of TARC would occur. A Deconsolidation of TARC would result in
a Deconsolidation of TransTexas if the TNGC Consolidated Group, excluding TARC,
does not then own at least 80% of the voting power and equity value of
TransTexas. Upon a Deconsolidation of TransTexas, members of the TNGC
Consolidated Group that own TransTexas' common stock could incur a substantial
amount of federal income tax liability. If such Deconsolidation occurred
during the fiscal year ending January 31, 1998, the aggregate amount of this
tax liability is estimated to be between $50 million and $100 million, assuming
no reduction for tax attributes of the TNGC Consolidated Group. However, such
tax liability generally would be substantially reduced or eliminated in the
event that the IRS successfully challenged TransTexas' position on the Lobo
Sale. Each member of a consolidated group filing a consolidated federal income
tax return is severally liable to the IRS for the consolidated federal income
tax liability of the consolidated group. There can be no assurance that each
TNGC Consolidated Group member will have the ability to satisfy any tax
obligation attributable to the Transactions at the time due and, therefore,
other members of the group, including TEC, TransTexas, or TARC, may be required
to pay the tax.
Generally, under the Tax Allocation Agreement, if net operating losses
of TransTexas are used by other members of the TNGC Consolidated Group, then
TransTexas is entitled to the benefit (through reduced current taxes payable)
of such losses in later years to the extent TransTexas has taxable income,
remains a member of the TNGC Consolidated Group and the other group members
have the ability to pay such taxes. If TransAmerican, TEC, or TARC transfers
shares of common stock of TransTexas (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of
TransTexas occurs, TransTexas would not thereafter receive any benefit
pursuant to the Tax Allocation Agreement for net operating losses of TransTexas
used by other members of the TNGC Consolidated Group prior to the
Deconsolidation of TransTexas.
TransTexas is required, under the Tax Allocation Agreement, to pay any
Texas franchise tax (which is estimated not to exceed $11.4 million)
attributable to prior year transactions. TransTexas paid approximately $5.4
million of such tax as of the closing of the Lobo Sale and will pay a
substantial amount of the remaining tax within the ensuing 12-month period.
POTENTIAL EFFECTS OF A CHANGE OF CONTROL
The Subordinated Notes Indenture provides that, upon the occurrence of
a Change of Control, each holder of the Subordinated Notes will have the right
to require TransTexas to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. Pursuant to the
terms of the TransTexas Intercompany Loan, upon the occurrence of a Change of
Control, TEC would have the right to require TransTexas to repay the principal
of the TransTexas Intercompany Loan in an amount equal to a pro rata share of
the amount TEC is required to pay under the TEC Notes Indenture. Such pro rata
share would be calculated using the ratio of the outstanding principal amount
of the TransTexas Intercompany Loan to the sum of (i) the outstanding principal
amount of the TransTexas Intercompany Loan plus (ii) the accreted value of the
outstanding principal amount of the TARC Intercompany Loan. A Change of
Control would be deemed to occur under the Subordinated Notes Indenture in the
case of certain changes or other events in respect of the ownership of
TransTexas, including any circumstances pursuant to which any person or group
other than John R. Stanley (or his heirs, his estate, or any trust in which he
or his immediate family members have, directly or indirectly, a beneficial
interest in excess of 50%) and his subsidiaries or the TEC Indenture Trustee is
or become the beneficial owner of more than
23
<PAGE> 25
50% of the total voting power of TransTexas' then outstanding voting stock, and
during the 90 days thereafter, the rating of the notes is downgraded or
withdrawn. A Change of Control would be deemed to occur under the TransTexas
Intercompany Loan in the case of certain changes or other events in respect of
the ownership or control of TEC, TransTexas, or TARC including any circumstance
pursuant to which (i) any person or group, other than John R. Stanley (or his
heirs, his estate, or any trust in which he or his immediate family members
have, directly or indirectly, a beneficial interest in excess of 50%) and his
subsidiaries or the TEC Indenture Trustee is or becomes the beneficial owner of
more than 50% of the total voting power of TEC's then outstanding voting
stock, or (ii) TEC or any of its subsidiaries own some of TransTexas' or TARC's
capital stock, respectively, but less than 50% of the total voting stock or
economic value of TransTexas or TARC, respectively, unless the TEC Notes have
an investment grade rating for the period of 120 days thereafter. The term
"person," as used in the definition of Change of Control, means a natural
person, company, government or political subdivision, agency or instrumentality
of a government and also includes a "group," which is defined as two or more
persons acting as a partnership, limited partnership or other group. In
addition, certain changes or other events in respect of the ownership or
control of TransTexas that do not constitute a Change of Control under the TEC
Notes Indenture may result in a "change of control" of TransTexas under the
terms of the BNY Facility and certain equipment financing. Such an occurrence
could create an obligation for TransTexas to repay such other indebtedness. At
October 31, 1997, TransTexas had approximately $29.7 million of indebtedness
(excluding the Senior Secured Notes and the Subordinated Notes) subject to such
right of repayment or repurchase. In the event of a Change of Control under
the Subordinated Notes Indenture or the TEC Notes Indenture or a "change of
control" under the terms of other outstanding indebtedness, there can be no
assurance that TransTexas will have sufficient funds to satisfy any such
payment obligations.
A change of control or other event that results in deconsolidation of
TransTexas and TransAmerican for federal income tax purposes could result in
acceleration of a substantial amount of federal income taxes. These matters,
individually and in the aggregate, amount to significant potential liability
which, if adjudicated in a manner adverse to TransTexas in one reporting
period, could have a material adverse effect on TransTexas' cash flow or
operations for that period. Although the outcome of these contingencies or the
probability of the occurrence of these contingencies cannot be predicted with
certainty, TransTexas does not expect these matters to have a material adverse
effect on its financial position.
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. All statements other than statements of
historical facts included in this report regarding TransTexas' financial
position, business strategy, and plans and objectives of management for future
operations, including, but not limited to words such as "anticipates,"
"expects," "estimates," "believes" and "likely" indicate forward-looking
statements. TransTexas' management believes its current views and expectations
are based on reasonable assumptions; however, there are significant risks and
uncertainties that could significantly affect expected results. Factors that
could cause actual results to differ materially from those in the
forward-looking statements include fluctuations in the commodity prices for
natural gas, crude oil, condensate and natural gas liquids, the extent of
TransTexas' success in discovering, developing and producing reserves,
conditions in the equity and capital markets, the ultimate resolution of
litigation, and competition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
24
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 3 and 8 of Notes to Condensed Consolidated Financial
Statements for a discussion of TransTexas' legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.1 Second Amended and Restated Accounts Receivable Management
Agreement dated October 14, 1997 between TransTexas and BNY
Financial Corporation.
15.1 Letter of Independent Accountants regarding awareness of
incorporation by reference.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On August 18, 1997, the Company filed a current report on Form 8-K
dated June 13, 1997 to report under Item 5 the completion of the TEC Notes
Offering and related transactions. Pro forma financial statements were filed
as an exhibit to this report.
25
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial and accounting
officer.
TRANSTEXAS GAS CORPORATION
(Registrant)
By: /s/ Edwin B. Donahue
---------------------------------
Edwin B. Donahue, Vice President
and Chief Financial Officer
December 15, 1997
26
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.1 Second Amended and Restated Accounts Receivable Management Agreement dated October 14, 1997
between TransTexas and BNY Financial Corporation.
15.1 Letter of Independent Accountants regarding awareness of incorporation by reference.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
SECOND AMENDED AND RESTATED ACCOUNTS RECEIVABLE MANAGEMENT
AND SECURITY AGREEMENT
This Second Amended and Restated Accounts Receivable Management and
Security Agreement is made as of October 14, 1997 by and between BNY FINANCIAL
CORPORATION ("Lender"), having offices at 1290 Avenue of the Americas, New
York, New York 10104 and TRANSTEXAS GAS CORPORATION ("TRANSTEXAS" or
"Borrower"), having its principal place of business at 1300 North Sam Houston
Parkway East, Suite 310, Houston, Texas 77032-2949.
W I T N E S S E T H
WHEREAS, Borrower and Lender have heretofore entered into an Accounts
Receivable Management and Security Agreement dated as of October 6, 1994 (the
"Original Credit Agreement"), providing, among other things, for revolving
credit advances to be made and letters of credit to be issued by Lender to, or
for the account of, Borrower on the terms and subject to the conditions therein
set forth;
WHEREAS, the Original Credit Agreement was amended by an Amended and
Restated Accounts Receivable Management and Security Agreement dated as of
October 31, 1995, and by a First Amendment to Amended and Restated Accounts
Receivable Management and Security Agreement dated as of December 13, 1996
(collectively the "Amended Credit Agreement").
WHEREAS, Borrower has requested that Lender amend the Amended Credit
Agreement to reflect the execution and delivery by Transamerican Energy
Corporation ("TEC") of a new Indenture (as hereinafter defined);
WHEREAS, TEC has provided to TransTexas a secured loan (the
"Intercompany Loan") in the amount of $450,000,000 upon substantially the terms
described in the form attached to the Indenture as Exhibit L;
WHEREAS, Lender is willing to (a) amend the Amended Credit Agreement
to reflect the execution and delivery of the Indenture and (b) to restate the
Amended Credit Agreement as so amended, all on the terms and subject to the
conditions herein set forth.
NOW, THEREFORE, Borrower and Lender agree that the Amended Credit
Agreement is hereby amended and restated, effective as of the Closing Date, to
read in its entirety as follows:
1. (A) General Definitions. When used in this Agreement,
the following terms shall have the following meanings:
"Affiliate" of any Person means (a) any other Person (other than a
Subsidiary or an Unrestricted Subsidiary) which, directly or indirectly, is in
control of, is controlled by, or is under common control with such Person, or
(b) any Person who is a director or officer (i) of such Person, (ii) of any
Subsidiary of such Person or (iii) of any Person described in clause (a) above.
For purposes of this definition, control of a Person shall mean the power,
direct or indirect, (i) to vote 5% or more of
<PAGE> 2
the securities having ordinary voting power for the election of directors of
such Person, or (ii) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Alternate Base Rate" means, for any day, a rate per annum equal to
the higher of (i) the Prime Rate in effect on such day and (ii) the Federal
Funds Rate in effect on such day plus 1/2 of 1%.
"Ancillary Agreements" means the Letter of Credit Agreement, the
Guaranty Agreement, any Subsidiary Guaranty Agreement and all other agreements,
instruments, and documents including, without limitation, mortgages, pledges,
powers of attorney, consents, assignments, contracts, security agreements,
trust agreements, whether heretofore, concurrently, or hereafter executed by or
on behalf of Borrower or any Subsidiary or Guarantor and delivered to Lender,
relating to this Agreement or any of such Ancillary Agreements or to the
transactions contemplated by this Agreement.
"Asset Sale" means any direct or indirect conveyance, sale, transfer
or other disposition (including through damage or destruction for which
insurance proceeds are paid or by condemnation), in one or a series of related
transactions, of any of the properties, businesses or assets of Borrower or any
Subsidiary Guarantor; provided, however, that "Asset Sale" shall not include
(i) any disposition of property that is not Collateral, (ii) any disposition of
Collateral in accordance with Section 8(a) hereof, or (iii) any pledge or
disposition of assets to the extent and only to the extent that it results in
the creation of a Permitted Lien.
"Attributable Debt" in respect of a Sale and Leaseback Transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP
or, in the event that such rate of interest is not reasonably determinable,
discounted at the rate of interest of 9%) of the obligation of the lessee for
net rental payments during the remaining term of the lease included in such
Sale and Leaseback Transaction (including any period for which such lease has
been extended or may, at the option of the lessor, be extended).
"Bank" means The Bank of New York.
"Business Day" means (a) any day other than a day on which commercial
banks in New York or Texas are authorized or required by law to close and (b)
relative to the making, continuing, prepaying or repaying of any LIBO Rate
Loans, any day on which dealings in dollars are carried on in the London
interbank eurodollar market.
"Capital Expenditures" of a Person means expenditures (whether paid in
cash or accrued as a liability) by such Person or any of its Subsidiaries that,
in conformity with GAAP, are or would be included in "capital expenditures,"
"additions to property, plant or equipment" or comparable items in the
consolidated financial statements of such Person consistent with prior
accounting practices.
"Capital Stock" means, with respect to any Person, any capital stock
of such Person and shares, interests, participations or other ownership
interests (however designated), of such Person and any rights (other than debt
securities convertible into corporate stock), warrants or options to purchase
any of the foregoing, including without limitation each class of common stock
and preferred stock of such Person if such Person is a corporation and each
general and limited partnership interest or other equity interest of such
Person if such Person is a partnership.
2
<PAGE> 3
"Capitalized Lease Obligation" means obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP (including Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board as in effect on the Closing Date), and the
amount of Indebtedness represented by such obligations shall be the capitalized
amount of such obligations, as determined in accordance with GAAP.
"Cash Equivalents" means (a) United States dollars, (b) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (c) certificates of deposit
with maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year, and overnight bank
deposits, in each case, with any Eligible Institution, (d) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (b) and (c) entered into with any Eligible
Institution, (e) commercial paper rated "P-1," "A-1" or the equivalent thereof
by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group,
respectively, and in each case maturing within one year after the date of
acquisition and (f) shares of money market funds, that invest solely in United
States dollars and securities of the types described in clauses (a) through (e)
above, (g) demand and time deposits and certificates of deposit with any
commercial bank organized in the United States not meeting the qualifications
specified in clause (c) above or an Eligible Institution, provided that such
deposits and certificates support bonds, letters of credit and other similar
types of obligations incurred in the ordinary course of business, (h) deposits,
including deposits denominated in foreign currency, with any Eligible
Institution; provided that all such deposits do not exceed $10,000,000 in the
aggregate at any one time, and (i) demand or fully insured time deposits used
in the ordinary course of business with commercial banks insured by the Federal
Deposit Insurance Corporation.
"Change of Control" means (i) any sale, transfer, or other conveyance,
whether direct or indirect, of all or substantially all of the assets of
Borrower, on a consolidated basis, to any "person" or "group" (as such terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether
or not applicable), whether in a single transaction or a series of related
transactions, unless, immediately after such transaction, John R. Stanley (or
his heirs, estate or any trusts in which he or his immediate family members and
each of his and their respective lineal descendants have, directly or
indirectly, a beneficial interest of more than 50%) has, directly or
indirectly, in the aggregate, sole beneficial ownership of more than 50%, on a
fully diluted basis, of the total voting power entitled to vote in the election
of directors, managers, or trustees of the transferee, (ii) the liquidation or
dissolution of, or the adoption of a plan of liquidation by, Borrower, (iii)
any transaction, event or circumstance pursuant to which any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable), other than John R. Stanley (or his
heirs, estate or any trusts in which he or his immediate family members and
each of his and their respective lineal descendants have, directly or
indirectly, a beneficial interest of more than 50%) and his Subsidiaries, is or
becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5
under the Exchange Act, whether or not applicable, directly or indirectly, of
more than 50% of the total voting power of Borrower's then outstanding Voting
Stock, or (iv) any merger or consolidation of Borrower not otherwise permitted
under the terms of this Agreement.
"Closing Date" means October 14, 1997 or such other date as may be
agreed upon by the parties hereto.
"Collateral" means and includes:
3
<PAGE> 4
(i) all Inventory;
(ii) all Receivables; and
(iii) all products and proceeds of the foregoing (i) and
(ii).
"Consolidated EBITDA" of any Person for any period, unless otherwise
defined herein, means (a) the Consolidated Net Income of such Person for such
period, plus (b) the sum, without duplication (and only to the extent such
amounts are deducted from net revenues in determining such Consolidated Net
Income), of (i) the provision for income taxes for such period for such Person
and its Consolidated Subsidiaries, (ii) depreciation, depletion, amortization,
and asset impairment charges of such Person and its Consolidated Subsidiaries
during such period, and (iii) Consolidated Fixed Charges of such Person for
such period, determined, in each case, on a consolidated basis for such Person
and its Consolidated Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charges" of any Person for any period means
(without duplication) the sum of (i) Consolidated Interest Expense of such
Person for such period, (ii) dividend requirements of such Person and its
Subsidiaries (whether in cash or otherwise (except dividends payable solely in
shares of Qualified Capital Stock)) with respect to Disqualified Capital Stock
paid, accrued or scheduled to be paid or accrued during such period, in each
case to the extent attributable to such period and excluding items eliminated
in consolidation, and (iii) fees paid, accrued or scheduled to be paid or
accrued during such period by such Person and its Subsidiaries in respect of
performance bonds or other guarantees of payment. For purposes of clause (ii)
above, dividend requirements shall be increased to an amount representing the
pre-tax earnings that would be required to cover such dividend requirements;
accordingly, the increased amount shall be equal to a fraction, the numerator
of which is such dividend requirements and the denominator of which is 1 minus
the applicable actual combined effective federal, state, local, and foreign
income tax rate of such Person and its Subsidiaries (expressed as a decimal),
on a consolidated basis, for the fiscal year immediately preceding the date of
the transaction giving rise to the need to calculate Consolidated Fixed
Charges.
"Consolidated Interest Expense" of any Person means for any period,
the aggregate interest (without duplication), whether expensed or capitalized,
paid, accrued or scheduled to be paid or accrued during such period in respect
of all Indebtedness of such Person and its Consolidated Subsidiaries (including
(i) amortization of deferred financing costs and original issue discount and
non-cash interest payments or accruals (ii) the interest portion of all
deferred payment obligations, calculated in accordance with the effective
interest method and (iii) all commissions, discounts, other fees and charges
owed with respect to letters of credit and banker's acceptance financing and
costs associated with Interest Swap Obligations, in each case to the extent
attributable to such period but excluding any interest accrued (but not then
due or payable) on intercompany payables for taxes to the extent the liability
for such taxes has been assumed by TransAmerican pursuant to the Tax Allocation
Agreement determined on a consolidated basis in accordance with GAAP. For
purposes of this definition, (x) interest on a Capitalized Lease Obligation
shall be deemed to accrue at the interest rate reasonably determined by such
Person to be the rate of interest implicit in such Capitalized Lease Obligation
in accordance with GAAP (including Statement of Financial Accounting Standards
No. 13 of the Financial Accounting Standards Board) and (y) Consolidated
Interest Expense attributable to any indebtedness represented by the guarantee
by such Person or a Subsidiary of such Person other than
4
<PAGE> 5
with respect to Indebtedness of such Person or a Subsidiary of such Person
shall be deemed to be the interest expense attributable to the item guaranteed.
"Consolidated Net Income" of any Person for any period means the net
income (loss) of such Person and its Consolidated Subsidiaries for such period,
determined in accordance with GAAP, excluding (without duplication) (i) all
extraordinary gains, (ii) the net income, if positive, of any other Person,
other than a Consolidated Subsidiary, in which such Person or any of its
Consolidated Subsidiaries has an interest, except to the extent of the amount
of any dividends or distributions actually paid in cash to such Person or a
Consolidated Subsidiary of such Person during such period, but not in excess of
such Person's pro rata share of such other Person's aggregate net income earned
during such period or earned during the immediately preceding period, and not
distributed during such period, (iii) the net income, if positive, of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition and (iv) the net income, if positive, of any
Subsidiary of such Person to the extent that the declaration or payment of
dividends or similar distributions is not at the time permitted by operation of
the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to such Subsidiary.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of
such Person (whether now existing or hereafter created or acquired) the
financial statements of which shall be (or should have been) consolidated for
financial statement reporting purposes with the financial statements of such
Person in accordance with GAAP.
"Continuation Notice" means a notice of continuation duly executed by
an authorized officer of Borrower substantially in the form of Exhibit I
hereto.
"Contract Rate" means an interest rate per annum equal to the sum of,
in the case of LIBO Rate Loans, (i) the applicable LIBO Rate plus (ii) two
percent (2%) and (ii) in the case of all other Loans, the (i) Alternate Base
Rate plus (ii) one-half percent ( 1/2%); provided, however, the Contract Rate
shall not at any time exceed the Highest Lawful Rate or be less than 6%.
"Coverage Ratio" means, for any period, the ratio of (i) the sum of
Consolidated EBITDA of the Borrower for such period, plus the net proceeds
received by the Borrower and its consolidated Subsidiaries in respect of
Indebtedness for borrowed money (other than Indebtedness under this Agreement)
incurred during such period, plus, without duplication, the net proceeds
received by the Borrower and its consolidated Subsidiaries from asset sales
(other than sales of Inventory and Hydrocarbons in the ordinary course of
business) consummated during such period, plus, solely for the purpose of
measuring the Coverage Ratio for the fiscal quarter ended January 31, 1998,
$10,000,000 to (ii) the sum of Consolidated Interest Expense of the Borrower
for such period, plus Capital Expenditures of the Borrower during such period,
plus required principal payments by the Borrower and its consolidated
Subsidiaries on Indebtedness for borrowed money (other than Indebtedness under
this Agreement) during such period.
"Credit Risk" means the risk of loss resulting solely and exclusively
from a Customer's financial inability to pay at maturity with respect to any
Receivable constituting collateral hereunder.
"Customer" means and includes the account debtor with respect to any
Receivable and/or any party who enters into any contract or other arrangement
with Borrower pursuant to which Borrower is to deliver any personal property or
perform any services.
5
<PAGE> 6
"Default Rate" means a rate equal to two (2%) percent per annum in
excess of the Contract Rate, or the Overadvance Rate, as the case may be.
"Dispute" means any cause asserted for nonpayment of Receivables,
including, without limitation, any alleged defense, counterclaim, offset,
dispute or other claim (real or merely asserted) whether arising from or
relating to the sale of goods or rendition of services or arising from or
relating to any other transaction or occurrence (other than returns, discounts,
claims, credits and allowances against such Receivables as provided in clause
(n) of the definition of Eligible Receivables).
"Disqualified Capital Stock" means with respect to any Person, any
Capital Stock of such Person or its Subsidiaries that, by its terms or by the
terms of any security into which it is convertible or exchangeable, is, or upon
the happening of an event or the passage of time would be, required to be
redeemed or repurchased by such Person or its subsidiaries, including at the
option of the holder, in whole or in part, or has, or upon the happening of an
event or passage of time would have, a redemption or similar payment due, on or
prior to December 31, 2000.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Drilling Program" means any arrangement between the Borrower or any
Subsidiary of the Borrower and another Person pursuant to which (i) such Person
agrees to drill, complete or perform operations to enhance recovery from, a
well or wells on mineral interests owned by the Borrower or such Subsidiary (or
to pay all or a portion of the costs paid or incurred in connection with
drilling, completing or performing such other operations) and (ii) the Borrower
or such Subsidiary agrees to convey or assign to such person an interest in
such well or wells in accordance with clause (e) of the definition of
"Permitted Liens."
"Eligible Institution" means a domestic commercial banking institution
that has combined capital and surplus of not less than $500,000,000, that is
rated "A" (or higher) according to Moody's Investors Service, Inc. or Standard
& Poor's Ratings Group (a division of McGraw Hill, Inc.) at the time as of
which any investment or rollover therein is made.
"Eligible Inventory" means Inventory used in either the Borrower's or
a Subsidiary Guarantor's oil and gas drilling, and production business which
Lender, in the exercise of its reasonable discretion, determines: (a) is
subject to the security interest of Lender and is subject to no other Liens
whatsoever (other than Permitted Liens); (b) is in good condition and meets all
standards imposed by any governmental agency, or any department or division
thereof having regulatory authority over such Inventory, its use or sale
including but not limited to the Federal Fair Labor Standards Act of 1938 as
amended, and all rules, regulations and orders thereunder; (c) is currently
either usable or salable in the normal course of Borrower's or such Subsidiary
Guarantor's oil and gas drilling and production business; (d) is located in a
location listed on Schedule 13(d) attached hereto, as amended from time to
time; and (e) is not determined by Lender, in the exercise of its reasonable
discretion, to be ineligible for any other reason including, without
limitation, Inventory of a Subsidiary Guarantor on account of the limited
amount of such Subsidiary Guarantor's Guaranteed Obligations.
"Eligible Receivables" means and includes each Receivable which
conforms to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; (b) no
6
<PAGE> 7
return, rejection or repossession of the merchandise has occurred; (c)
merchandise or services shall not have been rejected or disputed by the
Customer and there shall not have been asserted any Dispute; (d) continues to
be in full conformity with the representations and warranties made by Borrower
to Lender with respect thereto; (e) Lender is, and continues to be, satisfied
in its reasonable discretion with the credit standing of the Customer in
relation to the amount of credit extended; (f) is or by the 15th day of the
following month will be documented by an invoice in a form approved by Lender
and shall not be unpaid more than 45 days from invoice date or more than 30
days from due date; (g) less than 25% of the unpaid amount of invoices due from
such Customer remain unpaid more than 45 days from invoice date or more than 30
days from due date; (h) is not evidenced by chattel paper or an instrument of
any kind with respect to or in payment of the Receivable unless such instrument
is duly endorsed to and in possession of Lender or represents a check in
payment of a Receivable; (i) if the Customer is located outside of the United
States, the goods which gave rise to such Receivable were shipped after receipt
by Borrower or a Subsidiary Guarantor, as the case may be, from or on behalf of
the Customer of an irrevocable letter of credit, assigned and delivered to
Lender and confirmed by a financial institution acceptable to Lender and in
form and substance acceptable to Lender in its sole and absolute discretion,
payable in the full amount of the Receivable in United States dollars at a
place of payment located within the United States; (j) such Receivable is not
subject to any Lien, other than Permitted Liens; (k) does not arise out of
transactions with any employee, officer, agent, director, stockholder or
Unrestricted Subsidiary of Borrower or any Subsidiary of Borrower; (l) is
payable to Borrower or a Subsidiary Guarantor, as the case may be; (m) does not
arise out of a bill and hold sale prior to shipment and, if the Receivable
arises out of a sale to any Person to which Borrower or a Subsidiary Guarantor,
as the case may be, is indebted, the amount of such Indebtedness, and any
anticipated Indebtedness, is deducted in determining the face amount of such
Receivable; (n) is net of any returns, discounts, claims, credits and
allowances; (o) if the Receivable arises out of contracts between Borrower or
any Subsidiary Guarantor and the United States, any state, or any department,
agency or instrumentality of any of them, Borrower has so notified Lender, in
writing, prior to the creation of such Receivable, and, if Lender so requests,
there has been compliance with any governmental notice or approval
requirements, including without limitation, compliance with the Federal
Assignment of Claims Act; (p) is a good and valid account representing an
undisputed bona fide obligation incurred by the Customer therein named, for a
fixed sum as is or will be set forth in the invoice relating thereto with
respect to an unconditional sale and delivery upon the stated terms of goods
sold by Borrower or any Subsidiary Guarantor, as the case may be, or work,
labor and/or services rendered by Borrower or any Subsidiary Guarantor, as the
case may be; (q) if such Receivable at such time is not evidenced by an
invoice, Borrower or such Subsidiary Guarantor has a purchase order,
confirmation, contract or other written evidence of the existence of an
agreement with the Customer giving rise to such Receivable; (r) if such
Receivable arose from the sale of Hydrocarbons by the Borrower or a Subsidiary
Guarantor, the Borrower or such Subsidiary Guarantor, as the case may be, was
the owner of such Hydrocarbons immediately prior to such sale and such
Receivable was invoiced by such owner; and (s) is otherwise satisfactory to
Lender as determined in good faith by Lender in its reasonable discretion (it
being understood and agreed that Lender may exclude Receivables of a Subsidiary
Guarantor on account of the limited amount of such Subsidiary Guarantor's
Guaranteed Obligations).
"Event of Default" means the occurrence of any of the events set forth
in Section 19.
"Federal Funds Rate" means, for any day, 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
7
<PAGE> 8
day which is a Business Day, the average of quotations for such day on such
transactions received by The Bank of New York from three Federal funds brokers
of recognized standing selected by The Bank of New York.
"Formula Amount" shall have the meaning set forth in Section 2(c).
"GAAP" means generally accepted accounting principles, practices and
procedures in effect from time to time.
"Guaranteed Obligations" with respect to any Subsidiary Guarantor, has
the meaning set forth in the Subsidiary Guaranty Agreement.
"Guarantor" means John R. Stanley.
"Guaranty Agreement" means the Amended and Restated Guaranty Agreement
dated on or about October 14, 1997 which is executed by John R. Stanley, an
individual, in favor of Lender.
"Hazardous Substance" means, without limitation, any flammable
explosives, radon, radioactive materials, friable asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, hazardous wastes, hazardous or toxic substances
or related materials as defined in CERCLA, the Hazardous Materials
Transportation Act, as amended (49 U.S.C. Sections 1801, et. seq.), RCRA, or
any other applicable Environmental Law and in the regulations adopted pursuant
thereto.
"Hedging Subsidiary" means a Subsidiary of the Borrower which engages
solely in the business of facilitating Hedging Transactions which constitute
Permitted Hedging Transactions.
"Hedging Transaction" means non-speculative transactions in futures,
forwards, swaps or option contracts (including both physical and financial
settlement transactions) engaged in by Borrower or any of its Subsidiaries as
part of its normal business operations as a risk management strategy or hedge
against adverse changes in market conditions in the oil and natural gas
industry.
"Highest Lawful Rate" means, as of a particular date, the maximum
nonusurious interest rate that may under applicable law then be contracted for,
charged or received by the Lender in connection with its Loans.
"Hydrocarbons" means oil, gas, condensate and natural gas liquids.
"Incipient Event of Default" means any act or event which, with the
giving of notice or passage of time or both, would constitute an Event of
Default.
"Indebtedness" of any Person means, without duplication, (i) all
liabilities, contingent or otherwise, of such Person (a) for borrowed money
(regardless of whether the recourse of the lender is to the whole of the assets
of such Person or only to a portion thereof), (b) evidenced by bonds, notes,
debentures, or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property acquired by
such Person or services received by such Person (other than long-term service
or supply contracts which require minimum periodic payments provided such
contracts can be terminated on no more than 30 days' notice without premium or
penalty),
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<PAGE> 9
(c) evidenced by bankers' acceptances or similar instruments issued or accepted
by banks, (d) for the payment of money relating to a Capitalized Lease
Obligation, (e) the Attributable Debt associated with any Sale and Leaseback
Transaction, (f) Dollar-Denominated Production Payments that such Person elects
to treat as Indebtedness (excluding all other Permitted Production Payment
Obligations) (g) in respect to unfunded vested benefits under its pension plans
as defined in section 3(2) of ERISA (other than a multiemployer plan) which is
subject to the funding requirements of Section 302 of ERISA or Section 412 of
the Internal Revenue Code of 1986 (as amended); (ii) reimbursement obligations
of such Person with respect to letters of credit; (iii) all net payments or
amounts owing by Borrower or any Subsidiary Guarantor in respect of any Hedging
Transaction or Interest Swap Obligations; (iv) all liabilities of others of the
kind described in the preceding clause (i), (ii) or (iii) that such Person has
guaranteed or that is otherwise its legal liability (to the extent of such
guaranty or other legal liability) other than for endorsement with recourse of
negotiable instruments in the ordinary course of business; (v) all obligations
secured by a Lien (other than Permitted Liens, except to the extent the
obligations secured by such Permitted Liens are otherwise included in clause
(i), (ii), (iii) or (iv) of this definition and are obligations of such Person)
to which the property or assets (including, without limitation, leasehold
interests and any other tangible or intangible property rights) of such Person
are subject, regardless of whether the obligations secured thereby shall have
been assumed by or shall otherwise be such Person's legal liability (but, if
such obligations are not assumed by such Person or are not otherwise such
Person's legal liability, the amount of such Indebtedness shall be deemed to be
limited to the fair market value of such property or assets determined as of
the end of the preceding fiscal quarter); and (vi) any and all deferrals,
renewals, extensions, refinancings, and refundings (whether direct or indirect)
of, or amendments, modifications, or supplements to, any liability of the kind
described in any of the preceding clauses (i) through (v) regardless of whether
between or among the same parties. For all purposes of this Agreement, the
Indebtedness of any Person shall include the Indebtedness of any partnership or
joint venture in which such Person is a general partner or a joint venturer
unless, pursuant to the express terms of the instrument creating such
Indebtedness, such Indebtedness is non-recourse to such Person, partnership or
joint venture. The Indebtedness of any Person shall not include trade payables
and expense accruals incurred or assumed on normal customary terms in the
ordinary course of business provided such trade payables are not overdue for a
period of more than ninety days (or if overdue for more than ninety days, the
obligation in respect to such trade payables is being diligently contested in
good faith by appropriate proceedings and adequate reserves with respect
thereto are being maintained on the books of such Person in accordance with
GAAP).
"Indenture" means the Indenture dated as of June 13, 1997 by
TRANSAMERICAN ENERGY CORPORATION, Issuer, and Firstar Bank of Minnesota, N.A.,
Trustee, for $475,000,000 of Senior Secured Notes due 2002 and $1,130,000,000
of Senior Secured Discount Notes due 2002, as the same may be amended,
supplemented or modified from time to time.
"Intercompany Loan" is defined in the fourth WHEREAS clause.
"Interest Period" means, relative to any Revolving Credit Advances
constituting a LIBO Rate Loan, the period beginning on (and including) the date
on which such LIBO Rate Loan is made or continued as, or converted into, a LIBO
Rate Loan pursuant to Section 4(a) or 4(b) and shall end on (but exclude) the
day which numerically corresponds to such date one, two or three months
thereafter (or, if such month has no numerically corresponding day, on the last
Business Day of such month), in either case as the Borrower may select in its
relevant notice pursuant to Section 4(a) or 4(b); provided, however, that
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<PAGE> 10
(a) the Borrower shall not be permitted to select
Interest Periods to be in effect at any one time which have expiration
dates occurring on more than five different dates;
(b) if such Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the
next following Business Day (unless such next following Business Day
is the first Business Day of a calendar month, in which case such
Interest Period shall end on the Business Day next preceding such
numerically corresponding day); and
(c) no Interest Period may end later than the last day of
the Term.
"Interest Swap Obligation" means any obligation of any Person pursuant
to any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a fixed or floating rate of interest on a stated notional
amount in exchange for periodic payments made by such Person calculated by
applying a fixed or floating rate of interest on the same notional amount;
provided, that the term "Interest Swap Obligation" shall also include interest
rate exchange, collar, cap, swap option or similar agreements providing
protection from interest rate volatility, and currency agreements providing
protection for currency exchange fluctuations.
"Inventory" means and includes, as to any Person, all of such Person's
now owned or hereafter acquired casing, drill pipe and other supplies accounted
for as inventory (whether or not constituting equipment for purposes of any
applicable Uniform Commercial Code) by such Person on its financial statements
(excluding any Hydrocarbons), all proceeds thereof, and all documents of title,
books, records, ledger cards, files, correspondence, and computer files, tapes,
disks and related data processing software that at any time evidence or contain
information relating to the foregoing.
"Inventory Advance Rate" shall have the meaning set forth in the
definition of Inventory Availability.
"Inventory Availability" means the amount of Revolving Credit Advances
against Eligible Inventory Lender may from time to time in its sole and
absolute discretion during the Term make available to the Borrower up to the
lesser of (a) $1,000,000 or (b) 50% ("Inventory Advance Rate") of the value of
the Eligible Inventory (calculated on the basis of the lower of cost or market,
on a first-in first-out basis.
"Investment" by any Person in any other Person means (a) the
acquisition (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or any agreement to make any
such acquisition; (b) the making by such Person of any deposit with, or
advance, loan or other extension of credit to, such other Person (including the
purchase of property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
Person) and (without duplication) any amount committed to be advanced, lent or
extended to such other Person; (c) the entering into of any guarantee of, or
other contingent obligation with respect to, Indebtedness or other liability of
such other Person; (d) the entering into of any Interest Swap Obligation with
such other Person; or (e) the making of any capital contribution by such Person
to such other Person.
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<PAGE> 11
"Investment Grade Rating" means, with respect to any Person or an
issue of debt securities or preferred stock, a rating in one of the four
highest letter rating categories (without regard to "+" or "-" or other
modifiers) by any rating agency or if any such rating agency has ceased using
such letter rating categories or the four highest of such letter rating
categories are not considered to represent "investment grade" ratings, then the
comparable "investment grade" ratings (as designated by any such rating
agency).
"Letter of Credit" shall have the meaning set forth in Section 2(j).
"Letter of Credit Agreement" shall have the meaning set forth in
Section 2(j).
"Letter of Credit Liabilities" - shall mean, at any time, with respect
to any Letter of Credit then in effect, the sum of (i) the undrawn face amount
of such Letter of Credit plus (ii) the aggregate unpaid amount, if any, of all
obligations of the Borrower then due and payable to reimburse the issuing bank
and the Lender in respect of drawings under such Letter of Credit which have
not been reimbursed.
"Letter of Credit Sublimit" shall have the meaning set forth in
Section 2(j).
"LIBO Rate" means, relative to any Interest Period for LIBO Rate
Loans, the rate of interest equal to the average (rounded upwards, if
necessary, to the nearest 1/100th of 1%) of the rates per annum at which Dollar
deposits in immediately available funds are offered to The Bank of New York's
LIBOR Office by prime banks in the London interbank eurodollar market as at or
about 11:00 a.m. (London time) two Business Days prior to the beginning of such
Interest Period for delivery on the first day of such Interest Period, and in
an amount approximately equal to the amount of the LIBO Rate Loan and for a
period approximately equal to such Interest Period.
"LIBO Rate Loan" means the Loan or any portion thereof bearing
interest, at all times during an Interest Period applicable to such Loan, at a
fixed rate of interest determined by reference to the LIBO Rate (Reserve
Adjusted).
The "LIBO Rate (Reserve Adjusted)" means, relative to the Loan or any
portion thereof to be made, continued or maintained as, or converted into, a
LIBO Rate Loan for any Interest Period, a rate per annum (rounded upwards, if
necessary, to the nearest 1/100th of 1%) determined pursuant to the following
formula:
LIBO Rate = LIBO Rate
(Reserve Adjusted) ------------------------------
1.00 - LIBOR Reserve Percentage
The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans
will be determined by the Lender on the basis of the LIBOR Reserve Percentage
in effect two Business Days before the first day of such Interest Period.
"LIBOR Office" means the office of The Bank of New York at 48 Wall
Street, New York, New York or such other office of The Bank of New York as
designated from time to time by The Bank of New York, whether or not outside
the United States.
"LIBOR Reserve Percentage" means, relative to any Interest Period for
LIBO Rate Loans, the reserve percentage (expressed as a decimal) equal to the
maximum aggregate reserve requirements
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<PAGE> 12
(including all basic, emergency, supplemental, marginal and other reserves and
taking into account any transitional adjustments or other scheduled changes in
reserve requirements) specified under regulations issued from time to time by
the Federal Reserve Board and then applicable to assets or liabilities
consisting of and including "Eurocurrency Liabilities", as currently defined in
Regulation D of the Federal Reserve Board, having a term approximately equal or
comparable to such Interest Period and applicable to The Bank of New York.
"Lien" means any mortgage, lien, pledge, charge, security interest, or
other encumbrance of any kind, regardless of whether filed, recorded or
otherwise perfected under applicable law (including any conditional sale or
other title retention agreement and any lease deemed to constitute a security
interest and any option or other agreement to give any security interest).
"Loans" means the Revolving Credit Advances and all other extensions
of credit hereunder.
"Material Subsidiary" means, at any particular time, any Subsidiary
that, together with its Subsidiaries, (i) was the owner of more than 5% of the
consolidated assets of the Borrower and its Subsidiaries at the end of the most
recent fiscal year of the Borrower, as shown on the consolidated financial
statements of the Borrower and its Subsidiaries for such fiscal year and (ii)
generated Eligible Receivables or owned Eligible Inventory, in each case,
included in the determination of the Formula Amount.
"Matured Funds Rate" means the rate of interest per annum equal to the
lesser of (i) the Federal Funds Rate from time to time or (ii) the difference
of the Prime Rate from time to time minus 3%, such Matured Funds Rate to be
adjusted automatically on the effective date of any change in such rates as
determined by Lender.
"Maximum Loan Amount" at any time means $40,000,000.
"Obligations" means and includes all Loans, all advances, debts,
liabilities, obligations, covenants and duties owing by Borrower to Lender (or
any corporation that directly or indirectly controls or is controlled by or is
under common control with Lender) of every kind and description (whether or not
evidenced by any note or other instrument and whether or not for the payment of
money or the performance or non-performance of any act), direct or indirect,
absolute or contingent, due or to become due, contractual or tortious,
liquidated or unliquidated, whether existing by operation of law or otherwise
now existing or hereafter arising, under or as a result of this Agreement and
the Ancillary Agreements including, without limitation, all interest, charges
or any other payments Borrower is required to make by law or otherwise,
together with all reasonable expenses and reasonable attorneys' fees chargeable
to Borrower's account or incurred by Lender in connection with Borrower's
account whether provided for herein or in any Ancillary Agreement.
"Overadvance Rate" means a rate equal to one-half percent (1/2%) per
annum in excess of the Contract Rate.
"Permitted Hedging Transactions" means non-speculative transactions in
futures, forwards, swaps or option contracts (including both physical and
financial settlement transactions) engaged in by Borrower or any of its
Subsidiaries as part of its normal business operations as a risk-management
strategy or hedge against adverse changes in market conditions in the oil and
natural gas industry; provided, that such transactions do not, on a monthly
basis, relate to more than 90% of the Borrower's average net oil and
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<PAGE> 13
natural gas production per month for the most recent 3-month period measured at
the time of incurrence; and provided, further, that, at the time of such
transaction (i) the counterparty to any such transaction is an Eligible
Institution or a Person that has an Investment Grade Rating or has an issue of
debt securities or preferred stock outstanding with an Investment Grade Rating
or (ii) such counterparty's obligation pursuant to such transaction is
unconditionally guaranteed in full by, or secured by a letter of credit issued
by, an Eligible Institution or a Person that has an Investment Grade Rating or
has an issue of debt securities or preferred stock outstanding with an
Investment Grade Rating.
"Permitted Investment" means, when used with reference to Borrower or
its Subsidiaries, (i) trade credit extended to persons in the ordinary course
of business; (ii) purchases of Cash Equivalents; (iii) Investments in Wholly
Owned Subsidiaries of the Borrower that are engaged in the Related Businesses;
(iv) Interest Swap Obligations permitted to be incurred under Section 4.11 of
the Indenture as in effect on the date of this Agreement; (v) the receipt of
capital stock in lieu of cash in connection with the settlement of litigation;
(vi) advances to officers and employees in connection with the performance of
their duties in the ordinary course of business in an amount not to exceed
$3,000,000 in the aggregate outstanding at any time; (vii) margin deposits in
connection with Permitted Hedging Transactions; (viii) an Investment in one or
more Unrestricted Subsidiaries of Borrower in an aggregate amount, net of
return on such Investment, not in excess of $25,000,000 less the amount of any
Unrestricted Non-Recourse Debt outstanding of Borrower, or any of its
Subsidiaries; (ix) Investments and expenditures made in the ordinary course of
business by Borrower or its Subsidiaries, and of a nature that is or shall have
become customary in, the oil and gas business as a means of actively
exploiting; exploring for, acquiring, developing, processing, gathering,
marketing or transporting oil or gas through agreements, transactions interest
or arrangements which permit a person to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of the oil and gas business jointly
with third parties, including, without limitation, (a) ownership interests in
oil and gas properties or gathering systems and (b) Investments and
expenditures in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling
arrangements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties (including Unrestricted Subsidiaries); provided, that in the case of
any joint venture engaged in processing, gathering, marketing or transporting
oil or gas (i) all Indebtedness of such joint venture (other than a joint
venture that is an Unrestricted Subsidiary) that would not otherwise constitute
Indebtedness of Borrower or a Subsidiary shall be deemed Indebtedness of
Borrower in proportion to its direct or indirect ownership interest in such
joint venture and (ii) such joint venture shall be reasonably calculated to
enhance the value of the reserves of Borrower or marketability of production
from such reserves; (x) a guaranty by any Subsidiary of the Borrower permitted
under Section 4.11 of the Indenture as in effect on the date of this Agreement;
(xi) deposits permitted by the definition of Permitted Liens or any extension,
renewal, or replacement of any of them; (xii) an equity investment in TTXD up
to $75 million (in addition to any contribution pursuant to clause (xiii)
below); (xiii) capital contributions by Borrower to TTXD or to a joint venture,
a partnership, a limited liability company or a similar entity of Borrower's
drilling and energy services business and pipeline services business and
related assets; (xiv) guarantees by Borrower of Indebtedness of TTXD to the
extent that such Indebtedness relates to assets contributed to TTXD pursuant to
clause (xii) and (xiii) hereof; (xv) an Investment in Capital Stock or other
equity interests permitted by Section 4.14(b)(xiii) of the Indenture; or (xvi)
other Investments not in excess of $5,000,000 at any time outstanding; (xvii) a
capital contribution by TTXD of any or all of its assets to a joint venture, a
partnership, a limited liability company, or a similar entity, and (xviii)
loans made (A) to officers, directors or employees of Borrower or any of its
Subsidiaries approved by the applicable Board of Directors (or by
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<PAGE> 14
an authorized officer), the proceeds of which are used solely to purchase stock
or to exercise stock options received pursuant to an employee stock option plan
or other incentive plan, in a principal amount not to exceed the purchase price
of such stock or the exercise price of such stock options, as applicable, and
(B) to refinance loans, together with accrued interest thereon, made pursuant
to this clause, in each case not in excess of $3 million in the aggregate
outstanding at any one time.
"Permitted Liens" means, with respect to any Person, (a) Liens in
favor of Lender; (b) Liens imposed by governmental authorities for taxes,
assessments, or other charges not yet due or which are being contested in good
faith and by appropriate proceedings, if adequate reserves with respect thereto
are maintained on the books of such Person in accordance with GAAP; (c)
statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen,
repairmen, mineral interest owners, or other like Liens arising by operation of
law in the ordinary course of business, provided that (i) the underlying
obligations are not overdue for a period of more than 60 days, or (ii) such
Liens are being contested in good faith and by appropriate proceedings and
adequate reserves with respect thereto are maintained on the books of such
Person in accordance with GAAP; (d) Liens arising by operation of law in
connection with judgments, only to the extent, for an amount and for a period
not resulting in an Event of Default with respect thereto; (e) Liens created on
acreage drilled or to be drilled pursuant to Drilling Programs, on Hydrocarbons
produced therefrom and on the proceeds of such Hydrocarbons to secure such
Person's obligations thereunder, provided that (i) the number of wells included
in such program commenced in any fiscal year (without duplication of wells
included in programs commenced in prior years) does not exceed 30 per fiscal
year (plus the number of wells included in programs commenced in prior years
but not completed), (ii) such obligations are limited to a percentage of
production from such wells, (iii) such Liens survive only until the Person to
whom such Lien was granted has received production with a value equal to the
reimbursable costs, expenses and fees related to property and services provided
or paid for by such Person plus an agreed-upon interest component, and (iv)
such Liens secure obligations that are nonrecourse to the Borrower and its
Subsidiaries; (f) Liens on the assets of any entity existing at the time such
assets are acquired by the Borrower or any of its Subsidiaries, whether by
merger, consolidation, purchase of assets or otherwise so long as such Liens
(i) are not created, incurred or assumed in contemplation of such assets being
acquired by the Borrower or such Subsidiary and (ii) do not extend to any other
assets of the Borrower or any of its Subsidiaries; (g) any extension, renewal,
or replacement of Liens created pursuant to any of clauses (a) through (f) or
(h) through (j) of this definition, provided that such Liens would have
otherwise been permitted under such clauses, and further provided that the
Liens permitted by this clause (g) shall not be spread to cover any additional
Indebtedness or property; (h) Liens securing Royalty Payment Obligations and
Permitted Production Payment Obligations; (i) Liens (other than Liens on
Collateral) in favor of the Borrower; (j) Liens on the proceeds of any property
subject to a Permitted Lien or on deposit accounts containing any such
proceeds; (k) Liens (including extensions and renewals thereof) on real or
personal property, acquired after the Closing Date ("New TransTexas Property");
provided, however, that (i) such Lien is created solely for the purpose of
securing Indebtedness Incurred to finance the cost (including the cost of
improvements or construction) of New TransTexas Property subject thereto and
such Lien is created at the time of or within six months after the later of the
acquisition, the completion of construction, or the commencement of full
operation of such New TransTexas Property, (ii) the principal amount of the
Debt secured by such Lien does not exceed 100% of such cost including costs and
fees related to the financing thereof, (iii) any such Lien shall not extend to
or cover any property or assets constituting Collateral or any property or
assets other than such item of New TransTexas property and any improvements on
such New TransTexas Property.
"Permitted Production Payment Obligations" means Volumetric Production
Payments and Dollar-Denominated Production Payments each as permitted to be
made under the Indenture, and similar burdens
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on the property of Borrower or any Subsidiary of Borrower to the extent such
burdens are limited in recourse to (x) the properties subject to such interests
or agreements, (y) the Hydrocarbons produced from such properties, and (z) the
proceeds of such Hydrocarbons.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
"Presale of Gas" means any advance payment agreement or other
arrangement pursuant to which Borrower or any Subsidiary Guarantor having
received full payment of the purchase price for a specified quantity of
Hydrocarbons prior to the first scheduled date of delivery, is required to
deliver, in one or more installments subsequent to the date of such agreement
or arrangement, such quantity of Hydrocarbons to the purchaser of such
Hydrocarbons pursuant to and during the term of such agreement or arrangement,
provided, however, that the term "Presale of Gas" shall not include (i) any
such agreement or other arrangement covering deliveries of Hydrocarbons for a
period not exceeding three calendar months and pursuant to which Borrower or
such Subsidiary Guarantor has received full payment of the purchase price
within 120 days of the last scheduled date of delivery, (ii) a transaction to
the extent and only to the extent that it results in the creation of any
Permitted Lien under clauses (e) or (h) of the definition of "Permitted Liens,"
(iii) Permitted Hedging Transactions or (iv) an asset sale of Hydrocarbon
reserves.
"Prime Rate" means the prime commercial lending rate of the Bank as
publicly announced in New York, New York to be in effect from time to time,
such rate to be adjusted automatically, without notice, on the effective date
of any change in such rate. This rate of interest is determined from time to
time and is neither tied to any external rate of interest or index nor does it
necessarily reflect the lowest rate of interest actually charged to any
particular class or category of customers.
"Qualified Capital Stock" means any Capital Stock of the Borrower that
is not Disqualified Capital Stock.
"Receivables" means and includes any and all of a Person's now owned
or hereafter acquired "accounts" as such term is defined in Article 9 of the
Uniform Commercial Code in the State of New York, all products and proceeds
thereof, and all books, records, ledger cards, files, correspondence, and
computer files, tapes, disks or software that at anytime evidence or contain
information relating to the foregoing.
"Receivables Advance Rate" shall have the meaning set forth in the
definition of Receivables Availability.
"Receivables Availability" means 90% ("Receivables Advance Rate") of
the face amount of Eligible Receivables provided that in calculating
Receivables Availability there shall be deducted from the face amount of
Eligible Receivables an amount equal to the greater of (a) with respect to
Eligible Receivables arising from the sale of Hydrocarbons, 38% of the face
amount of such Eligible Receivables and (b) the aggregate amount which lessors,
royalty holders, working interest holders and other Persons would be entitled
to assert are secured by a UCC 9.319 Lien on the Receivables or proceeds
thereof, whether or not such lessors, royalty holders, working interest holders
or Persons, or any of them, have asserted or claimed any such UCC 9.319 Lien.
"Related Business" means (i) the exploration for, acquisition of,
development of, production, transportation, gathering, marketing and, in
connection with natural gas and natural gas liquids only,
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<PAGE> 16
processing of, crude oil, natural gas, condensate and natural gas liquids;
provided that the term "Related Business" shall not include any refining or
distilling of Hydrocarbons other than processing and fractionating natural gas
liquids; (ii) the drilling and energy services business and pipeline service
business; or (iii) owning and operating one or more Hedging Subsidiaries.
"Reports" shall have the meaning set forth in Section 15.
"Reserve Report" means a report prepared by independent petroleum
engineers with respect to Hydrocarbon reserves in accordance with guidelines
published by the SEC.
"Revolving Credit Advances" shall have the meaning set forth in
Section 2(c).
"Royalty Payment Obligations" means (i) royalties, overriding
royalties, revenue interests, net revenue interests, net profit interests,
reversionary interests and production payments, (ii) the interests of others in
pooling or unitization agreements, production sales contracts and operating
agreements, (iii) Liens arising under, in connection with or related to
farm-out, farm-in, joint operating or area of mutual interest agreements or
other similar or customary arrangements, agreements or interests, and (iv)
similar burdens on the property of the Borrower or any Subsidiary of the
Borrower, each as incurred in the ordinary course of business and to the extent
such burdens are limited in recourse to (x) the properties subject to such
interests or agreements, (y) the Hydrocarbons produced from such properties and
(z) the proceeds of such Hydrocarbons.
"Sale and Leaseback Transaction" means an arrangement relating to
property owned on the Closing Date or thereafter acquired whereby the Borrower
or a Subsidiary of the Borrower transfers such property to a Person and leases
it back from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Debt" means, with respect to any Person, any Indebtedness that
is not Subordinated Debt.
"Settlement Date" means one (1) Business Day after the day on which
the applicable Receivable is actually collected by Lender.
"Subordinated Debt" means Indebtedness of Borrower that (i) requires
no payment of principal prior to or on the date on which the Term is scheduled
to end and (ii) is subordinate and junior in right of payment to the
Obligations in the event of a liquidation.
"Subsidiary" with respect to any Person, means (i) a corporation at
least fifty percent of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors 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, or (ii) a partnership in which such
Person or a subsidiary of such Person is, at the time, a general partner of
such partnership and has more than 50% of the total voting power of partnership
interests entitled (without regard to the occurrence of any contingency) to
vote in the election of managers thereof, or (iii) any other Person (other than
a corporation or partnership) in which such Person, one or more Subsidiaries of
such Person, or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof has (x) at least a
fifty percent ownership interest or (y) the power to elect or direct the
election of the directors or other governing body of such Person; provided,
however, that "Subsidiary" shall not include any Unrestricted Subsidiary of
such Person
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or an entity that would be a "Subsidiary" hereunder only because of an
investment in such entity by Borrower or its Subsidiaries in accordance with
clause (ix) of the definition of "Permitted Investment."
"Subsidiary Guarantor" means each of Borrower's Subsidiaries that
becomes a guarantor of the Obligations in compliance with the provisions of
Section 13(j) of this Agreement.
"Subsidiary Guaranty Agreement" means the guaranty of the Obligations
executed by Subsidiaries of Borrower in accordance with Section 13(j) of this
Agreement in favor of Lender substantially in the form of Exhibit II attached
hereto, either as originally executed or as the same may from time to time be
supplemented, modified, amended, renewed, extended or supplanted.
"Tax Allocation Agreement" means the Tax Allocation Agreement dated as
of August 24, 1993, among TNGC Holdings Corporation, TEC, the Borrower and
certain other Subsidiaries of TEC.
"TEC" means TransAmerican Energy Corporation, a Delaware corporation.
"Term" means the Closing Date through December 31, 2000 subject to
acceleration upon the occurrence of an Event of Default hereunder or other
termination hereunder.
"TransAmerican" means TransAmerican Natural Gas Corporation, a Texas
corporation.
"TransTexas Exploration" means TransTexas Exploration Corporation, a
Delaware corporation.
"TTXD" means TransTexas Drilling Services, Inc., a Delaware
corporation or a newly formed corporation which is a Wholly Owned Subsidiary of
Borrower formed for the purpose of receiving the Investments described herein
under clause (xii) or (xiii) under the definition of "Permitted Investments"
contained herein.
"UCC 9.319 Lien" means any rights created pursuant to Section 9.319 of
the Uniform Commercial Code of the State of Texas or a comparable provision of
the law of any other applicable jurisdiction in favor of a lessor, royalty
owner, working interest owner or other Person.
"Unrestricted Non-Recourse Debt" of any Person means collectively (i)
Indebtedness of such Person that is secured solely (other than with respect to
clause (ii) below) by a Lien upon the stock of an Unrestricted Subsidiary of
such Person and as to which there is no recourse (other than with respect to
clause (ii) below) against such Person or any of its assets other than against
such stock (and the dollar amount of any indebtedness of such Person as
described in this clause (i) shall be deemed to be zero for all other
provisions of this Agreement) and (ii) guaranties of the Indebtedness of
Unrestricted Subsidiaries of such Person.
"Unrestricted Subsidiary" of any Person means any other Person ("Other
Person") that would but for this definition of "Unrestricted Subsidiary" be a
Subsidiary of such Person organized or acquired after the Closing Date as to
which all of the following conditions apply: (i) neither such Person nor any of
its other Subsidiaries provides credit support of any Indebtedness of such
Other Person (including any undertaking, agreement or instrument evidencing
such Indebtedness), other than Unrestricted Non-Recourse Debt; (ii) such Other
Person is not liable, directly or indirectly, with respect to any Indebtedness
other than Unrestricted Subsidiary Debt; (iii) neither such Person nor any of
its Subsidiaries has made an Investment in such Other Person unless such
Investment was permitted by the provisions
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of Section 4.3 of the Indenture as in effect on the date of this Agreement; and
(iv) the Board of Directors of such Person, as provided below, shall have
designated such Other Person to be an Unrestricted Subsidiary on or prior to
the date of organization or acquisition of such Other Person. Any such
designation by the Board of Directors of such Person shall be evidenced to the
Lender by delivering to the Lender a resolution thereof giving effect to such
designation and a certificate of Borrower's President or Chief Financial
Officer certifying that such designation complies with the foregoing
conditions. Notwithstanding the foregoing, TransTexas Exploration shall be
deemed to be an Unrestricted Subsidiary of the Borrower. The Board of
Directors of any Person may designate any Unrestricted Subsidiary of such
Person as a Subsidiary of such Person; provided that (a) if the Unrestricted
Subsidiary has any Indebtedness outstanding or is otherwise liable for any
Indebtedness or has a negative net worth, then immediately after giving pro
forma effect to such designation, such Person could incur at least $1.00 of
additional Debt pursuant to Section 4.11 of the Indenture as in effect on the
date of this Agreement (assuming, for purposes of this calculation, that each
dollar of negative net worth is equal to one dollar of Indebtedness), (b) all
Indebtedness of such Unrestricted Subsidiary shall be deemed to be incurred by
a Subsidiary of the Person on the date such Unrestricted Subsidiary becomes a
Subsidiary, and (c) no Incipient Event of Default or Event of Default would
occur or be continuing after giving effect to such designation. Any subsidiary
of an Unrestricted Subsidiary shall be an Unrestricted Subsidiary for purposes
of this Agreement.
"Unrestricted Subsidiary Debt" means, as to any Unrestricted
Subsidiary of any Person, Indebtedness of such Unrestricted Subsidiary (i) as
to which neither such Person nor any Subsidiary of such Person is directly or
indirectly liable (by virtue of such Person or any such Subsidiary being the
primary obligor on, guarantor of, or otherwise liable in any respect to, such
Indebtedness), unless such liability constitutes Unrestricted Non-Recourse Debt
and (ii) which, upon the occurrence of a default with respect thereto, does not
result in, or permit any holder (other than the Borrower or any of its
Subsidiaries) of any Indebtedness of such Person or any Subsidiary of such
Person to declare, a default on such Indebtedness of such Person or any
Subsidiary of such Person or cause the payment thereof to be accelerated or
payable prior to its stated maturity, unless, in the case of this clause (ii),
such Indebtedness constitutes Unrestricted Non-Recourse Debt.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means Capital Stock of the Borrower having generally
the right to vote in the election of directors of the Borrower.
"Wholly Owned Subsidiary" means, with respect to any Person, at any
time, a Subsidiary of such Person to the extent (i), all of the Capital Stock
of which (except any director's qualifying shares) is at the time owned
directly or indirectly by such Person or (ii) such Subsidiary is organized in a
foreign (i.e. non-U.S.) jurisdiction and is required by the applicable laws and
regulations of such foreign jurisdiction to be partially owned by the
government of such foreign jurisdiction or individual or corporate citizens of
such foreign jurisdiction in order for such Subsidiary to transact business in
such foreign jurisdiction, provided that the Company, directly or indirectly,
owns the remaining capital stock or ownership interest in such foreign
Subsidiary and, by contract or otherwise, controls the management and business
of such Subsidiary and derives the economic benefits of ownership of such
Subsidiary to substantially the same extent as if such Subsidiary were a wholly
owned Subsidiary as defined in the preceding clause (i).
(B) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined shall have the meanings customarily given
them in accordance with GAAP.
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<PAGE> 19
(C) Other Terms. All other terms used in this Agreement and
defined in the Uniform Commercial Code as adopted in the State of New York,
shall have the meaning given therein unless otherwise defined herein.
2. Conditions; Accounts Receivables Management; Loans.
(a) In addition to the other terms and conditions hereof, the
obligation of the Lender to (x) make the initial Revolving Credit Advance or
(y) to assist Borrower in obtaining the initial Letter of Credit pursuant to
this Agreement and the Ancillary Agreements, is subject to the conditions (any
of which may be waived, in whole or in part, only by Lender in writing) that:
(i) Lender shall have received, in form and substance
satisfactory to Lender and its counsel, all consents, waivers,
acknowledgments and other agreements from third persons which Lender
may deem reasonably necessary or desirable in order to permit, protect
and perfect its Liens upon the Collateral or to effectuate the
provisions or purposes of this Agreement and the Ancillary Agreements,
including, without limitation, waivers by landlords and mortgagees of
any Liens by such Persons on the Collateral and agreements permitting
Lender access to the premises to exercise its rights and remedies and
otherwise deal with the Collateral;
(ii) Lender shall have received evidence of insurance and
loss payee endorsements required hereunder and under the other
Ancillary Agreements, in form and substance satisfactory to Lender,
and certificates of insurance policies and/or endorsements naming
Lender as an insured or co-insured, as its interests may appear;
(iii) The Ancillary Agreements and all instruments and
documents hereunder and thereunder shall have been executed and
delivered to Lender, in form and substance satisfactory to Lender;
(iv) Borrower shall have paid to Lender the fees due on
the Closing Date required by this Agreement;
(v) Lender shall have received the following documents,
each to be in form and substance satisfactory to Lender and its
counsel:
(A) copies of all filing receipts or
acknowledgments issued by any governmental authority to
evidence any filing or recordation (including, without
limitation, filing of UCC-3 financing statement amendments and
UCC-1 financing statements in all appropriate counties and in
all appropriate central filing offices) necessary to perfect
the Liens of Lender in the Collateral and evidence to Lender
that such Liens constitute valid and perfected Liens, having
the lien priority specified in Section 7(a) hereof;
(B) a copy of the Certificate of Incorporation,
certificate of limited partnership, or certificate of
formation of limited liability company, as the case may be, of
Borrower and each Subsidiary Guarantor and all amendments
thereto, certified within 15 days before the Closing Date by
the Secretary of State or other appropriate official of its
jurisdiction of incorporation or formation;
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<PAGE> 20
(C) a copy of the bylaws, partnership agreement
or limited liability company agreement, as the case may be, of
Borrower and each Subsidiary Guarantor and all amendments
thereto, certified as of the Closing Date by the Secretary or
Assistant Secretary of Borrower and such Subsidiary Guarantor;
(D) good standing certificates for Borrower and
each Subsidiary Guarantor issued within 30 days before the
Closing Date by the Secretary of State or other appropriate
official of Borrower's or such Subsidiary Guarantor's
jurisdiction of incorporation or formation and each
jurisdiction where the conduct of Borrower's or such
Subsidiary Guarantor's business activities or the ownership of
its properties necessitates qualification (other than from
those jurisdictions the failure in which to be in good
standing would not reasonably be expected to have a material
adverse effect);
(E) a closing certificate signed by the Chief
Financial Officer of Borrower dated as of the Closing Date,
stating that (i) the representations and warranties set forth
in Section 7 hereof are true and correct on and as of such
date, (ii) Borrower and each Subsidiary Guarantor is on such
date in compliance with all the terms and provisions set forth
in this Agreement, and the Ancillary Agreements, and (iii) on
such date no Incipient Event of Default or Event of Default
has occurred or is continuing;
(F) the favorable, written opinion of Butler &
Binion, L.L.P., special counsel to Borrower and John R.
Stanley, regarding Borrower and John R. Stanley, the Ancillary
Agreements and the transactions contemplated hereby and by the
Ancillary Agreements, in form and substance satisfactory to
Lender;
(G) a copy of Borrower's report on Securities and
Exchange Commission Form 10-Q for the period ended July 31,
1997;
(H) a duly executed letter agreement from
Borrower and Guarantor regarding consent to jurisdiction in
form and substance satisfactory to Lender;
(I) the initial report pursuant to Section 8(h)
in form and substance, and in such detail, as is satisfactory
to the Lender;
(J) the personal financial statements, in form
and substance satisfactory to Lender, of John R. Stanley;
(K) A certificate of financial condition,
substantially in the form of Exhibit III hereto, duly executed
by the chief financial officer of Borrower; and
(L) Lender shall have received such other
documents, instruments and agreements as Lender shall
reasonably request in connection with the foregoing matters.
(b) In addition to the other terms and conditions hereof, the
obligation of the Lender to make each Revolving Credit Advance and to assist
Borrower in obtaining Letters of Credit pursuant to this Agreement and the
Ancillary Agreements, including the making of the initial and any future
Revolving Credit Advances and Letters of Credit contemplated hereunder, is
subject to the conditions (any of which may be waived, in whole or in part, by
Lender in writing) that:
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<PAGE> 21
(i) All representations and warranties contained herein
(except those contained in Sections 12(e)and 12(h) hereof) and in the
Ancillary Agreements shall be true and correct in all respects as of
the date made (except representations and warranties that relate
solely to an earlier date and were true and correct on such earlier
date);
(ii) Either (x) all representations and warranties
contained in Sections 12(e) and (h) hereof shall be true and correct
in all respects as of the date made or (y) the Borrower shall have
notified the Lender in writing of the occurrence of any and all
events, facts or circumstances which make any such representations and
warranties untrue or incorrect and the Lender shall either (i) have
consented in writing with respect thereto, or (ii) have funded such
Revolving Credit Advance pursuant hereto (which funding shall be
deemed to be such consent); and
(iii) No Event of Default shall have occurred and be
continuing and no Incipient Event of Default shall have occurred and
be continuing;
(c) Subject to the terms and conditions set forth herein and in
the Ancillary Agreements, Lender shall make revolving credit advances (the
"Revolving Credit Advances") to Borrower from time to time during the Term
which, in the aggregate at any time outstanding together (without duplication)
with the aggregate then outstanding Letter of Credit Liabilities, will not
exceed the lesser of (x) the Maximum Loan Amount or (y) an amount equal to the
difference of:
(i) Receivables Availability plus Inventory Availability,
minus
(ii) such reserves as Lender may in its sole and absolute
discretion deem proper and necessary from time to
time.
The difference of the foregoing (i) minus (ii) shall be referred to as
the "Formula Amount".
(d) Notwithstanding the limitations set forth above, Lender
retains the right to lend to Borrower from time to time such amounts in excess
of such limitations as Lender may determine in its sole and absolute discretion
which excess amounts shall be payable on demand.
(e) If Borrower does not pay any interest, fees, costs, charges or
commissions to Lender when due in accordance with the terms of this Agreement
or any Ancillary Agreement, Borrower shall thereby be deemed to have requested,
and Lender is hereby authorized at its discretion to make and charge to
Borrower's account, a Revolving Credit Advance to Borrower as of such date in
an amount equal to such unpaid interest, fees, costs, charges or commissions.
(f) Any sums expended by Lender in accordance with the terms of
this Agreement or any Ancillary Agreement due to Borrower's or any Subsidiary
or Guarantor's failure to perform or comply with its obligations under this
Agreement, the Guaranty Agreement or the Subsidiary Guaranty Agreement or any
other Ancillary Agreement, as the case may be, including but not limited to the
payment of taxes, insurance premiums or leasehold obligations, shall be charged
to Borrower's account as a Revolving Credit Advance and added to the
Obligations.
(g) Lender will account to Borrower monthly with a statement of
all Loans and other advances, charges and payments made pursuant to this
Agreement, and such account rendered by Lender shall be deemed final, binding
and conclusive unless Lender is notified by Borrower in writing to the contrary
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<PAGE> 22
within thirty (30) days of the date each account was rendered specifying the
item or items to which objection is made.
(h) During the Term, Borrower may borrow, prepay and reborrow
Revolving Credit Advances, all in accordance with the terms and conditions
hereof.
(i) The aggregate balance, without duplication, of Loans plus
Letter of Credit Liabilities outstanding at any time shall not exceed the
Maximum Loan Amount. Except as provided in Section 2(d), the aggregate
balance, without duplication, of Revolving Credit Advances plus Letter of
Credit Liabilities outstanding at any time shall not exceed the Formula Amount.
The aggregate balance of Letter of Credit Liabilities outstanding at any time
shall not exceed the Letter of Credit Sublimit.
(j) In connection herewith, Borrower has entered into a letter
with the Lender dated October 14, 1997 Re: Letter of Credit Financing
Supplement to Second Amended and Restated Accounts Receivable Management and
Security Agreement (the "Letter of Credit Agreement") pursuant to which Lender
agrees to assist the Borrower in obtaining letters of credit (herein "Letters
of Credit") from time to time. The aggregate Letter of Credit Liabilities in
respect of all Letters of Credit at any time outstanding shall not exceed
$10,000,000 (such amount the "Letter of Credit Sublimit"). No Letter of Credit
will have an expiry date of more than twelve (12) months from the date of
issuance or an expiry date which is later than the last day of the Term.
3. Repayment.
Borrower shall be required to (i) make a mandatory prepayment
hereunder at any time that the aggregate outstanding principal balance of the
Loans made by Lender hereunder plus, without duplication, the aggregate of the
then outstanding Letter of Credit Liabilities is in excess of the Formula
Amount, in an amount equal to such excess, and (ii) repay on the expiration of
the Term (x) the then aggregate outstanding principal balance of Revolving
Credit Advances made by Lender hereunder together with accrued and unpaid
interest, fees, charges and commissions and (y) all other amounts owed Lender
under this Agreement and the Ancillary Agreements.
In the event that a Change of Control shall occur, Borrower shall
immediately notify Lender in writing of such Change in Control and unless
Lender shall consent to such Change of Control, the obligation of the Lender to
make Revolving Credit Advances under this Agreement shall terminate, and
Borrower shall within 30 days of Borrower's receipt of written notice from the
Lender repay the then aggregate outstanding principal balance of Revolving
Credit Advances made by Lender hereunder together with accrued and unpaid
interest, fees, charges and commissions and all other amounts and obligations
owed Lender under this Agreement (including, without limitation, Section 18(c))
and the Ancillary Agreements.
In the event of any sale by Borrower, or any sale, transfer or
issuance by any of its Subsidiaries, of any shares of Capital Stock of any
Subsidiary to any Person other than Borrower or a Wholly Owned Subsidiary of
Borrower (other than the sale of director's qualifying shares or shares of
foreign Subsidiaries which after giving effect to the sale of such shares are
Wholly Owned Subsidiaries as provided in clause (ii) of the definition of
Wholly Owned Subsidiary), the Borrower shall pay all overadvances, if any,
pursuant to Section 2(d).
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<PAGE> 23
4. Procedure for Revolving Credit Advances.
(a) The Borrower may by written notice request a borrowing of
Revolving Credit Advances prior to 1:00 P.M. New York time, in the form of a
LIBO Rate Loan three (3), and in the form of a Loan bearing interest determined
with reference to the Alternate Base Rate one (1), Business Days prior to the
date on which it requests to incur a Revolving Credit Advance (provided that,
with respect to an Alternate Base Rate advance, such advance may be made on the
same Business Day as the request is submitted if the request is submitted
before 11:00 a.m. New York time), such request to specify the amount of the
Revolving Credit Advance requested (which in the case of a LIBO Rate Loan shall
be in a minimum amount of $100,000 and an integral multiple of $1) and of the
requested duration of the initial Interest Period therefor in the case of LIBO
Rate Loans. All Revolving Credit Advances shall be disbursed from whichever
office or other place Lender may designate from time to time and, together with
any and all other Obligations of Borrower to Lender, shall be charged to
Borrower's account on Lender's books. The proceeds of each Revolving Credit
Advance made by the Lender shall be made available to the Borrower on the day
so requested by way of credit to Borrower's operating account maintained with
Lender. Any and all Obligations due and owing to Lender hereunder may be
charged to the Borrower's account.
(b) Continuation and Conversion Elections. By delivering a
Continuation Notice to the Lender on or before 10:00 a.m., New York time, on a
Business Day, the Borrower may from time to time irrevocably elect, on not less
than three nor more than five Business Days' notice that all, or any portion in
an aggregate minimum amount of $100,000 and an integral multiple of $1, of (A)
a LIBO Rate Loan be continued as, or a Loan bearing interest determined with
reference to the Alternate Base Rate be converted into, a LIBO Rate Loan (in
the absence of delivery of a Continuation Notice with respect to any LIBO Rate
Loan at least three Business Days before the last day of the then current
Interest Period with respect thereto, such LIBO Rate Loan shall, on such last
day, automatically convert to a LIBO Rate Loan with an Interest Period of one
month) or (B) a LIBO Rate Loan may be converted into a Loan bearing interest
determined with reference to the Alternate Base Rate; provided, however, that
no portion of the outstanding principal amount of a Loan may be continued as,
or converted into, a LIBO Rate Loan when any Incipient Event of Default or
Event of Default has occurred and is continuing.
5. Interest; Fees; Commissions.
(a) Interest.
(i) Except as modified by paragraph 5(a)(iii) below,
interest on Loans shall be payable in arrears on the last day of each
month except that interest with respect to LIBO Rate Loans shall be
payable on the last day of the Interest Period with respect thereto.
Interest payments hereunder may, at Lender's option, be charged by
Lender to Borrower's account. Interest charges shall be computed on
the unpaid balance of the Loans for each day they are outstanding at a
rate per annum equal to the Contract Rate applicable thereto. In the
event the aggregate amount, without duplication, of Revolving Credit
Advances plus the aggregate amount of Letter of Credit Liabilities
exceeds the Formula Amount for ten (10) or more days in any month
during the Term, the average daily balance of Revolving Credit
Advances in that month shall bear interest at the Overadvance Rate.
(ii) Interest shall be computed on the basis of actual
days elapsed over a 360-day year.
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<PAGE> 24
(iii) Upon the occurrence and during the continuance of an
Event of Default, interest shall be payable at the Default Rate.
(iv) Notwithstanding the foregoing, in no event shall
interest exceed the Highest Lawful Rate, and if any provision of this
Agreement or any Ancillary Agreement is in contravention of any law or
regulation, such provision shall be deemed amended to provide for
interest at said Highest Lawful Rate and any excess amount shall
either be applied, at Lender's option, to the outstanding Loans in
such order as Lender shall determine or refunded by Lender to
Borrower.
(v) Borrower shall pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without
any deduction whatsoever, including, but not limited to, any deduction
for any set-off or counterclaim.
(b) Fees.
(i) Closing Fee. Upon execution of this Agreement by the
Borrower and Lender, Borrower shall pay to Lender a closing fee in an
amount equal to $100,000.
(ii) Unused Line Fee. In the event the average of the sum
of closing daily unpaid balances of all Revolving Credit Advances
hereunder plus, without duplication, outstanding Letter of Credit
Liabilities during any calendar month is less than the Maximum Loan
Amount, Borrower shall pay to Lender a fee at a rate per annum equal
to 1/8th of one percent (0.125%) on the amount by which the Maximum
Loan Amount exceeds such average sum. Such fee shall be calculated on
the basis of a year of 360 days and actual days elapsed, and shall be
charged to Borrower's account on the first day of each month with
respect to the prior month.
(iii) Collateral Monitoring Fee. Upon Lender's performance
of any collateral monitoring - namely any field examination,
collateral analysis or other business analysis, the need for which is
to be determined by Lender and which monitoring is undertaken by
Lender or for Lender's benefit, an amount equal to $750 per day, per
person, for each person employed to perform such monitoring together
with all costs, disbursements and expenses incurred by the Lender and
the persons performing such collateral monitoring shall be charged to
Borrower's account; provided, however that the maximum amount that the
Lender shall charge for a Collateral Monitoring Fee during any period
during which no Event of Default shall be in existence for each
calendar year, commencing with the calendar year 1998, is $75,000 and
for any such period during which an Event of Default shall be in
existence, there is no such maximum amount.
(iv) Letter of Credit Fee. Borrower shall pay Lender a
fee each month at the rate of one quarter of one percent (.25%) per
annum times the total amount of the undrawn face amount of outstanding
Letters of Credit of Borrower for each day during the prior month.
This fee shall be increased to an overadvance rate of five sixteenths
(5/16) of one percent per annum for each day in any month in which the
aggregate amount of Revolving Credit Advances plus the aggregate
amount of Letter of Credit Liabilities exceeds the Formula Amount or
the Letter of Credit Liabilities exceed the Letter of Credit Sublimit.
Upon the occurrence and during the continuance of an Event of Default,
the applicable letter of credit fee for any month within such period
shall be increased by an additional one sixth (1/6) of one percent per
annum.
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<PAGE> 25
(c) Increased Costs. In the event that any applicable
law, treaty or governmental regulation, or any change therein or in
the interpretation or application thereof, or compliance by Lender
(for purposes of this Section 5(c), the term "Lender" shall include
Lender and any corporation or bank controlling Lender) with any
request or directive (whether or not having the force of law) from any
central bank or other financial, monetary or other authority, shall;
(i) subject Lender to any tax of any kind whatsoever with
respect to this Agreement or any Ancillary Agreement or any Letter of
Credit or change the basis of taxation of payments to Lender of
principal, fees, interest or any other amount payable hereunder or
under any Ancillary Agreements (except for changes in the rate of tax
on the overall net income, gross receipts or franchise taxes of
Lender);
(ii) impose, modify or hold applicable any reserve,
special deposit, assessment or similar requirement against assets held
by, or deposits in or for the account of, advances or loans or letters
of credit by, or other credit extended by, any office of Lender,
including (without limitation) pursuant to Regulation D of the Board
of Governors of the Federal Reserve System (to the extent same are not
covered in the definition of LIBO Rate (Reserve Adjusted)); or
(iii) impose on Lender any other condition with respect to
this Agreement or any Ancillary Agreements;
and the result of any of the foregoing is to increase the cost to Lender of
making, renewing or maintaining its Loans or Letters of Credit hereunder by an
amount that Lender deems to be material or to reduce the amount of any payment
(whether of principal, interest or otherwise) in respect of any of the Loans or
Letters of Credit by an amount that Lender deems to be material, then, in any
case Borrower shall promptly pay Lender, upon its demand, such additional
amount as will compensate Lender for such additional cost or such reduction, as
the case may be. Lender shall certify the amount of such additional cost or
reduced amount to Borrower, and such certification shall be presumed correct.
If Lender is owed such additional amounts or amounts at any one time
pursuant to this Section 5(c) in excess of three-fourths of one percent (3/4 of
1%) of the average daily balance of Revolving Credit Advances for the preceding
30 days, then the Borrower shall have the right to terminate this Agreement,
subject to the terms and provisions of Sections 18(d) and (e) of this
Agreement; provided, however, (i) no such termination shall be effective until
Borrower has paid all of the Obligations (except as set forth in clause (ii)
below) in immediately available funds and (ii) Borrower shall not be obligated
to pay to Lender any termination charge described in Section 18(c) of this
Agreement.
(d) Capital Adequacy.
(i) In the event that Lender shall have determined that
any applicable law, rule, regulation or guideline regarding capital
adequacy, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank
or comparable agency charged with the interpretation or administration
thereof, or compliance by Lender (for purposes of this Section 5(d),
the term "Lender" shall include Lender and any corporation or bank
controlling Lender) with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on Lender's capital as a
consequence of its obligations hereunder or under any Letter of Credit
to a level below that which Lender could have achieved
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<PAGE> 26
but for such adoption, change or compliance (taking into consideration
Lender's policies with respect to capital adequacy) by an amount
deemed by Lender to be material, then, from time to time, Borrower
shall pay upon demand to Lender such additional amount or amounts as
will compensate Lender for such reduction. In determining such amount
or amounts, Lender may use any reasonable averaging or attribution
methods. The protection of this Section shall be available to Lender
regardless of any possible contention of invalidity or inapplicability
with respect to the applicable law, regulation or condition.
(ii) A certificate of Lender setting forth such amount or
amounts as shall be necessary to compensate Lender with respect to
Section 5(d) hereof when delivered to Borrower shall be presumed
correct.
(iii) If Lender is owed such additional amounts or amounts
at any one time pursuant to Section 5(d) hereof in excess of
three-fourths of one percent (3/4 of 1%) of the average daily balance
of Revolving Credit Advances for the preceding 30 days, then the
Borrower shall have the right to terminate this Agreement, subject to
the terms and provisions of Sections 18(d) and (e) of this Agreement;
provided, however, (i) no such termination shall be effective until
Borrower has paid all of the Obligations (except as set forth in
clause (ii) below) in immediately available funds and (ii) Borrower
shall not be obligated to pay to Lender any termination charge
described in Section 18(c) of this Agreement.
(e) Commission. Borrower shall pay to Lender monthly, on the
fifteenth day of each month, a commission at the rate of the greater of $1,500
in the aggregate or $50 per invoice evidencing any Receivable pledged or
assigned hereunder during the previous month. The procedure manual Lender has
delivered to Borrower describes Lender's current practices and procedures
regarding its accounts receivable management and record keeping services.
Lender reserves the right to vary such practices and procedures from time to
time in its sole and absolute discretion. Lender's liability to Borrower and
Guarantor and the Subsidiary Guarantors for any alleged failure on Lender's
part to provide adequate accounts receivable management and record keeping
services shall be expressly limited to a refund of commissions paid by Borrower
during the period of such alleged failure and Lender shall have no liability of
any kind whatsoever for consequential or other damages of any type or penalties
based upon any such alleged failure on Lender's part.
(f) Interest on Borrower's Account. On the last day of each month
during the Term, Lender shall credit Borrower's account with interest at the
Matured Funds Rate in effect during such month on the average daily balance
during such month of any amounts payable by Lender to Borrower hereunder which
are not drawn by Borrower on the Settlement Date.
(g) Fixed Rate Lending Unlawful. If the Lender (for purposes of
this Section 5(g) the term "Lender" shall include Lender and any corporation or
bank controlling Lender) shall determine (which determination shall, upon
notice thereof to Borrower, be conclusive and binding on Borrower) that the
introduction of or any change in or in the interpretation of any law makes it
unlawful, or any central bank or other governmental authority asserts that it
is unlawful, for the Lender to make, continue or maintain the Loans or any
portion thereof as a LIBO Rate Loan, the obligations of the Lender to make,
continue, maintain or convert the Loans or any portion thereof as or into LIBO
Rate Loans shall, upon such determination, forthwith be suspended until the
Lender shall notify Borrower that the circumstances causing such suspension no
longer exist, and all LIBO Rate Loans shall automatically convert into
Alternate Base
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Rate Loans at the end of the then current Interest Periods with respect thereto
or sooner, if required by such law or assertion.
(h) LIBO Rates Unavailable. If the Lender (for purposes of this
Section 5(h) the term "Lender" shall include Lender and any corporation or bank
controlling Lender) shall have determined that by reason of circumstances
affecting the London interbank market, adequate means do not exist for
ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then,
upon notice from the Lender to Borrower, the obligations of the Lender under
this Agreement to make or continue the Loans or any portion thereof as LIBO
Rate Loans shall forthwith be suspended until the Lender shall notify Borrower
that the circumstances causing such suspension no longer exist.
(i) Funding Losses. In the event the Lender (for purposes of this
Section 5(i) the term "Lender" shall include Lender and any corporation or bank
controlling Lender) shall incur any loss or expense (including any loss or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by the Lender to make, continue or maintain any portion of
the principal amount of the Loans or any portion thereof as a LIBO Rate Loan)
as a result of
a. any conversion or repayment or prepayment of the
principal amount of any LIBO Rate Loans on a date other than the
scheduled last day of the Interest Period applicable thereto;
b. the Loan not being made as LIBO Rate Loans in
accordance with the written request therefor (other than as a result
of the breach of Lender's obligation to make such LIBO Rate Loan in
accordance with the terms hereof); or
c. the Loan or any portion thereof not being continued
as LIBO Rate Loans in accordance with the Continuation Notice therefor
(other than as a result of the breach of Lender's obligation to make
such LIBO Rate Loan in accordance with the terms hereof),
then, upon the written notice of the Lender to Borrower the Borrower shall,
within five days of receipt thereof, pay to the Lender such amount as will (in
the reasonable determination of the Lender) reimburse the Lender for such loss
or expense. Such written notice (which shall include calculations in
reasonable detail) shall be presumed correct.
(j) Time Limit. Notwithstanding anything to the contrary in
Sections 5(c), (d), (g), (h), or (i), Borrower shall not be required to
reimburse or pay any costs or expenses to Lender under such sections which have
accrued more than 120 days prior to Lender's giving notice to Borrower that
Lender has suffered or incurred such costs or expenses; provided, however, if
such costs and expenses accrued more than 120 days prior to Lender's giving of
such notice because Lender did not have knowledge of the events or
circumstances that gave rise to such costs and expenses and Lender provides
Borrower with such notice within 60 days after obtaining knowledge of such
events or circumstances, then the foregoing time limit shall not apply with
respect to such costs and expenses.
6. Security Interest.
(a) Borrower, to secure the prompt payment to Lender of the
Obligations and of any debt, liability or obligation owing from Borrower to
others which Lender may have obtained by assignment or otherwise, and each
Subsidiary Guarantor, to secure the prompt payment to Lender of the Guaranteed
Obligations of such Subsidiary Guarantor, hereby assigns, pledges and grants to
Lender a continuing
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security interest in and Lien on its Collateral, whether now owned or existing
or hereafter acquired or arising and wheresoever located (whether or not the
same is subject to Article 9 of the Uniform Commercial Code). Each
confirmatory assignment schedule or other form of assignment hereafter executed
by Borrower or a Subsidiary Guarantor shall be deemed to include the foregoing
grant, whether or not the same appears therein.
(b) To the extent permitted by applicable law, Lender may file one
or more financing statements disclosing Lender's security interest in the
Collateral without Borrower's or such Subsidiary Guarantor's signature (as the
case may be) appearing thereon or Lender may sign on Borrower's or such
Subsidiary Guarantor's behalf as provided in Section 14 hereof. The parties
agree that a carbon, photographic or other reproduction of this Agreement shall
be sufficient as a financing statement. If any Receivable in excess of
$250,000 or any Eligible Receivable becomes evidenced by a promissory note or
any other instrument for the payment of money, Borrower or such Subsidiary
Guarantor will immediately deliver such instrument to Lender, appropriately
endorsed.
7. Representations Concerning the Collateral. Borrower
represents and warrants as to itself and each Subsidiary Guarantor represents
and warrants as to itself (each of which such representations and warranties
shall be deemed repeated upon the making of each request for a Revolving Credit
Advance and made as of the time of each and every Revolving Credit Advance
hereunder):
(a) (i) all the Collateral is owned by Borrower or the Subsidiary
Guarantors free and clear of all Liens except (A) those in Lender's favor and
(B) Permitted Liens and (ii) none of the Collateral is subject to any
enforceable agreement prohibiting or restricting the granting of a security
interest to the Lender or requiring notice of or consent to the granting of a
security interest; provided, however, that this Section 7(a)(ii) shall not
apply to the contracts listed on Schedule 7(A) hereto;
(b) all Receivables for Hydrocarbon sales (i) represent complete
bona fide transactions which, with the exception of delivery of invoices,
require no further act under any circumstances on either Borrower's or such
Subsidiary Guarantor's, part to make such Receivables payable by Customers,
(ii) to the best of Borrower's or such Subsidiary Guarantor's knowledge, except
as disclosed to Lender, are not subject to any present, future or contingent
Disputes and (iii) do not represent bill and hold sales, consignment sales,
guaranteed sales, sale or return or other similar understandings or obligations
of any Affiliate or Subsidiary Guarantor.
8. Covenants Concerning the Collateral. During the Term,
Borrower covenants as to itself and each Subsidiary Guarantor and each
Subsidiary Guarantor covenants as to itself that it shall:
(a) not dispose of any of its Collateral whether by sale, lease or
otherwise except for the sale of Inventory in the ordinary course of business;
(b) not encumber, mortgage, pledge, assign or grant a Lien on any
of its Collateral except Permitted Liens;
(c) place notations upon Borrower's or such Subsidiary
Guarantor's, as the case may be, books of account and any annual audited
consolidated financial statement of Borrower and its Subsidiaries prepared by
Borrower to disclose Lender's security interest in the Collateral;
(d) defend the Collateral against the claims and demands of all
Persons;
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(e) not extend the payment terms of any (i) Eligible Receivable or
(ii) other Receivable in excess of $250,000 in the aggregate for all such other
Receivables more than 30 Business Days, without prompt notice thereof to
Lender;
(f) perform all other steps reasonably requested by Lender to
create and maintain in Lender's favor a valid perfected first security interest
(but subject to Permitted Liens) in all Collateral;
(g) promptly provide Lender with duplicate originals of all
credits which it issues to its Customers and immediately notify Lender of any
Disputes. Each of Borrower and each Subsidiary Guarantor shall bear the cost
of resolving all Disputes at no cost or expense to Lender. Should Lender so
elect, upon the occurrence and during the continuation of any Event of Default,
Lender may at any time in its discretion (i) withdraw Borrower's and each
Subsidiary Guarantor's authority to issue credits to its Customers without
Lender's prior written consent or (ii) litigate Disputes or settle them
directly with Customers on terms acceptable to Lender;
(h) supply Lender each Business Day a report through the close of
business the immediately preceding Business Day concerning the Collateral in
form and substance satisfactory to Lender which report will contain, among
other items (i) a listing of all additional Receivables created since the date
of the previous report delivered pursuant to this Section 8(h), and setting
forth the amount of such additional Receivables, the Customers of such
Receivables, identified by Receivable, the volume of natural gas shipped to
such Customers to create such Receivables, (ii) a listing of all invoices, by
date, Customer and amount, issued since the date of the previous report
delivered pursuant to this Section 8(h), together with a reconciliation in
reasonable detail of any differences between invoices issued and Receivables
created as described in the preceding clause (i), (iii) a computation in
reasonable detail of the Formula Amount as of the close of business the
immediately preceding Business Day, (iv) a listing as of the close of business
of the immediately preceding Business Day of the Inventory located at the
locations specified in Schedule 13(d), (v) a listing in reasonable detail as of
the close of business of the immediately preceding Business Day setting forth
the amount of obligations of Borrower and the Subsidiary Guarantors secured by
a UCC 9.319 Lien, whether or not the Person entitled to such Lien has asserted
or claimed such Lien, including, without limitation, a listing broken down by
month incurred of all (a) obligations of Borrower and the Subsidiary Guarantors
to royalty interest owners, (b) obligations of Borrower and the Subsidiary
Guarantors to any other Hydrocarbon interest owners, (c) the payment of
severance taxes on taxable wells and (d) a calculation in reasonable detail
showing the percentage of production from the Borrower's wells, which would be
entitled to the benefits of a UCC 9.319 Lien (provided that notwithstanding the
foregoing, prior to the occurrence and continuation of an Event of Default,
unless otherwise requested by Lender, Borrower and each Subsidiary Guarantor
shall only be obligated to deliver a report containing the information
described in the foregoing clause (iv) and in this clause (v) monthly, within
two Business Days after the 15th of the month) and (vi) such other information
as Lender may reasonably request concerning the Collateral; and
(i) deliver to Lender, monthly, on or before the fifteenth day of
each month, a report showing in detail all obligations of Borrower and each
Subsidiary Guarantor created during any previous month which remain unpaid as
of the date of such report and which are secured by a UCC 9.319 Lien, whether
or not the Person entitled to such Lien has asserted or claimed such Lien.
(j) immediately notify Lender if Borrower or any Subsidiary
Guarantor shall drill and complete or acquire any oil or gas well, or any
interest therein, located other than in Wayne County, Mississippi, Billings,
Dunn or Starks County, North Dakota, or Chambers, Galveston, Goliad, Hidalgo,
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Jackson, Jim Hogg, Live Oak, Starr, Webb, Wharton or Zapata County, Texas,
which notice will specify the location of such well or wells and shall contain
such information as needed to enable Lender to perfect its security interest in
Receivables generated by production from such well or wells.
9. Collection and Maintenance of Collateral and Records. Lender
may at any time verify Borrower's or any Subsidiary Guarantors' Receivables
utilizing an audit control company or any other agent of Lender provided that
prior to an Event of Default, Lender shall do so only at reasonable intervals.
Lender or Lender's designee may notify Customers, at any time at Lender's sole
discretion, of Lender's security interest in Receivables, collect them directly
and charge the collection costs and expenses to Borrower's or such Subsidiary
Guarantor's account, but, unless and until Lender does so or gives Borrower and
each Subsidiary Guarantor other instructions, Borrower and each Subsidiary
Guarantor shall instruct all of their Customers to make payments on account of
Receivables to an account under Lender's dominion and control at such bank as
Lender may designate, as provided by the terms of Section 24. To the extent
Borrower or any Subsidiary Guarantor receives any payments on account of
Receivables, it shall hold such payments for Lender's benefit in trust as
Lender's trustee and immediately deliver them to Lender in their original form
with all necessary endorsements or, as directed by Lender, deposit such
payments as directed by Lender pursuant to Section 23 hereof. Lender will
credit (conditional upon final collection) all payments to the Borrower's
account on the Settlement Date; provided that Lender shall apply all amounts so
credited first to Obligations then outstanding (other than in respect of LIBO
Rate Loans) and then to amounts outstanding in respect of LIBO Rate Loans;
provided further that if the amount credited to Borrower's account as of the
close of business on the Business Day immediately preceding such Settlement
Date is in excess of an amount equal to the sum of (i) the total Obligations
outstanding (after giving effect to any requests for Revolving Credit Advances
or Letters of Credit to be made or issued on such Settlement Date), plus (ii)
all unpaid liabilities owing to lessors, royalty holders, working interest
holders, the State of Texas and other Persons who would be entitled to assert a
UCC 9-319 Lien on the proceeds of Borrower's or any Subsidiary Guarantor's
previously collected Receivables on such Settlement Date, then the Lender, if
requested by the Borrower, will make such excess available to the Borrower on
such Settlement Date or the next Business Day following such Settlement Date,
and, provided, further, that so long as no Incipient Event of Default or Event
of Default shall have occurred and be continuing, to the extent of any
outstanding LIBO Rate Loans, in order to avoid payment of a LIBO Rate Loan on a
day other than the last day of an Interest Period, Lender will hold in such
account any amounts otherwise to be applied to such LIBO Rate Loans on such
Settlement Date as cash collateral to be applied to LIBO Rate Loans and the
other Obligations on the last day of the Interest Period relating to each such
LIBO Rate Loan and so long as no Incipient Event of Default or Event of Default
shall have occurred and be continuing, the Formula Amount shall be deemed
increased by the amount so held as cash collateral. Promptly after the
creation of any Receivables by Borrower or any Subsidiary Guarantor, Borrower
or such Subsidiary Guarantor shall provide Lender with schedules describing all
Receivables created or acquired by Borrower or such Subsidiary Guarantor and
shall execute and deliver confirmatory written assignments of such Receivables
to Lender, but Borrower's or such Subsidiary Guarantor's failure to execute and
deliver such schedules or written confirmatory assignments of such Receivables
shall not affect or limit Lender's security interest or other rights in and to
the Receivables. Borrower and each Subsidiary Guarantor shall furnish, at
Lender's request, copies of contracts, invoices or the equivalent, and any
original shipping and delivery receipts for all merchandise sold or services
rendered and such other documents and information as Lender may require. All
of Borrower's and each Subsidiary Guarantor's invoices shall bear the terms
stated on the applicable customer order, and no material change from the
original terms of such customer order shall be made without the prior written
consent of Lender. Each of Borrower and each Subsidiary Guarantor shall
provide Lender on a monthly (within fifteen (15) days after the end of each
month), or more frequent basis, as requested by Lender, certified as true and
accurate by its President or Chief
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Financial Officer, an aged trial balance of its existing accounts payable.
Each of Borrower and each Subsidiary Guarantor shall provide Lender, as
requested by Lender, such other schedules, documents and/or information
regarding the Collateral as Lender may require.
10. Inspections. At all times during normal business hours (and
provided no Event of Default shall have occurred and be continuing, upon
reasonable notice), Lender shall have the right to (a) visit and inspect each
of Borrower's and each Subsidiary Guarantor's respective properties and the
Collateral, (b) inspect, audit and make extracts from each of Borrower's and
each Subsidiary Guarantor's respective relevant books and records, including,
but not limited to, management letters prepared by independent accountants, and
(c) discuss with each of Borrower's and each Subsidiary Guarantor's respective
principal officers, and independent accountants, each of Borrower's and each
Subsidiary Guarantor's respective business, assets, liabilities, financial
condition, results of operations and business prospects. Each of Borrower and
each Subsidiary Guarantor will deliver to Lender any instrument necessary for
Lender to obtain records from any service bureau maintaining records for it.
11. Financial Information. Borrower shall provide Lender (a) as
soon as available, but in any event within one hundred (100) days after the end
of each of its fiscal years, its consolidated balance sheet as at the end of
such fiscal year and the related statements of income, retained earnings and
statement of cash flow for such fiscal year, setting forth in comparative form
the figures as at the end of and for the previous fiscal year, which shall have
been reported on by independent certified public accountants who shall be
satisfactory to Lender and shall be accompanied by an unqualified audit report
issued by such independent certified public accountants together with its
report on Securities and Exchange Commission Form 10-K for such fiscal year;
(b) as soon as available, but in any event within thirty (30) days after the
close of each month, quarter and fiscal year, balance sheets as at the end of
such month, quarter and fiscal year and the related statements of income,
retained earnings and changes in cash flow for such month, quarter or fiscal
year, as the case may be, which have been internally prepared by it on a
consolidated basis (and together with consolidating worksheets); (c) within
fifty-five (55) days after the close of each quarter, copies of its report on
Securities and Exchange Commission form 10-Q for such quarter. All financial
statements required under (a), (b) and (c) above shall be prepared in
accordance with GAAP, subject to year-end adjustments in the case of monthly
and quarterly statements. Together with the financial statements furnished
pursuant to (a) above, Borrower shall deliver a certificate of its certified
public accountants addressed to Lender stating that (i) they have caused this
Agreement and the Ancillary Agreements to which Borrower or any Subsidiary
Guarantor is a party to be reviewed and (ii) in making the examination
necessary for the issuance of such financial statements, nothing has come to
their attention to lead them to believe that any Event of Default or Incipient
Event of Default exists and, in particular, they have no knowledge of any Event
of Default or Incipient Event of Default or, if such is not the case,
specifying such Event of Default or Incipient Event of Default and its nature,
when it occurred and whether it is continuing. At the times the financial
statements are furnished pursuant to (a), (b) and (c) above, a certificate of
Borrower's President or Chief Financial Officer shall be delivered to Lender
stating that, based on an examination sufficient to enable him to make an
informed statement, no Event of Default or Incipient Event of Default exists,
or, if such is not the case, specifying such Event of Default or Incipient
Event of Default and its nature, when it occurred, whether it is continuing and
the steps being taken with respect to such event, and setting forth a
calculation in reasonable detail of the financial ratios provided in Section
13(l) as at the end of the period covered by such financial statements.
In addition to the foregoing financial statements, Borrower shall
furnish Lender no less than thirty (30) days prior to the beginning of each
fiscal year commencing with fiscal year ending January 31, 1998, a month by
month projected operating budget and cash flow for such fiscal year (including
an income
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statement for each month and a balance sheet as at the end of the last month in
each fiscal quarter), such projections to be prepared on a consolidated basis
for the Borrower and its Subsidiaries and to be accompanied by a certificate
signed by its President or Chief Financial Officer to the effect that such
projections have been prepared on the basis of sound financial planning
practice and except as disclosed to Lender consistent with past budgets and
financial statements and that such officer has no reason to question the
reasonableness of any material assumptions on which such projections were
prepared.
In addition to the foregoing, promptly upon incurring any Indebtedness
in a principal amount in excess of $10,000,000, Borrower shall furnish Lender a
copy of the principal documents relating to such Indebtedness.
12. Additional Representations and Warranties. Borrower
represents and warrants as to itself and each Subsidiary Guarantor represents
and warrants as to itself (each of which such representations and warranties
(except those contained in Sections 12(e) and 12(h) (except representations and
warranties that relate solely to an earlier date and were true and correct on
such earlier date)) shall be deemed repeated upon the making of a request for a
Revolving Credit Advance and made as of the time of each Revolving Credit
Advance made hereunder and either (x) all representations and warranties
contained in Sections 12(e) and 12(h) shall be deemed repeated in all respects
upon the making of a request for a Revolving Credit Advance and made as of the
time of each Revolving Credit Advance made hereunder or (y) Borrower shall have
notified Lender in writing of the occurrence of any and all events, facts or
circumstances which makes any such representations and warranties in Sections
12(e) and 12(h) untrue or incorrect and Lender shall have either (i) consented
in writing with respect thereto in its sole discretion) or (ii) have funded
such Revolving Credit Advance pursuant hereto (which funding shall be deemed to
be such consent):
(a) each of Borrower and each Subsidiary Guarantor is a
corporation, partnership or limited liability company duly organized and
validly existing under the laws of the State of its organization and is duly
qualified and in good standing in every other state or jurisdiction in which
the nature of its business requires such qualification except to the extent
failure to be so qualified or in good standing would not have a material
adverse effect upon its business, assets, operations, condition, business
prospects, financial or otherwise of the Borrower and its Subsidiaries, taken
as a whole, or upon the Collateral or upon Borrower's or such Subsidiary
Guarantor's ability to perform its obligations hereunder or under any of the
other Ancillary Agreements;
(b) the execution, delivery and performance of this Agreement and
the Ancillary Agreements (i) have been duly authorized, (ii) are not in
contravention of either Borrower's or any Subsidiary Guarantor's certificate of
incorporation, by-laws, certificate of limited partnership, certificate of
formation, limited liability company agreement or partnership agreement, of the
Indenture or of any other material agreement or undertaking to which Borrower
or any Subsidiary Guarantor is a party or by which Borrower or any Subsidiary
Guarantor is bound and (iii) are within each of Borrower's and each Subsidiary
Guarantor's powers;
(c) this Agreement and the Ancillary Agreements executed and
delivered by Borrower, Guarantor or any Subsidiary Guarantor are their
respective legal, valid and binding obligations, enforceable in accordance with
their terms except as such enforcement may be limited by bankruptcy, insolvency
or similar laws relating to the enforcement of creditors' rights generally and
by general principles of equity;
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(d) each of Borrower and each Subsidiary Guarantor keeps all of
its books and records concerning the Collateral at its executive offices
located at the address set forth in the introductory paragraph of this
Agreement or at such other address as notified to Lender in writing pursuant to
Section 26;
(e) Except as disclosed on Schedule 12(e) hereto, on the Closing
Date the operation of each of Borrower's and each Subsidiary Guarantor's
businesses is in compliance in all material respects with all applicable
federal, state and local laws, including but not limited to all applicable
environmental laws and regulations. At all times after the Closing Date when
this representation is deemed made, except as disclosed on Schedule 12(e)
hereto or otherwise disclosed in writing to the Lenders the operation of each
of Borrower's and each Subsidiary Guarantor's business is in compliance with
such laws, except where the failure to comply would not have a material adverse
effect on Borrower and its Subsidiary Guarantors taken as a whole.
(f) based upon the Employee Retirement Income Security Act of 1974
(as amended from time to time, "ERISA"), and the regulations and published
interpretations thereunder: (i) neither Borrower nor any Subsidiary Guarantor
has engaged in any Prohibited Transaction as defined in Section 406 of ERISA
and Section 4975 of the Internal Revenue Code, as amended; (ii) Borrower and
its Subsidiary Guarantors taken as a whole have met all applicable minimum
funding requirements under Section 302 of ERISA for which an administrative or
statutory exemption was not available in respect of its plans; (iii) neither
Borrower nor any Subsidiary Guarantor has any knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) neither Borrower nor any Subsidiary Guarantor has any fiduciary
responsibility for investments with respect to any plan existing for the
benefit of Persons other than such Borrower's or such Subsidiary Guarantor's
employees; and (v) neither Borrower nor any Subsidiary Guarantor has withdrawn,
completely or partially, from any multi-employer pension plan so as to incur
liability under the Multiemployer Pension Plan Amendments Act of 1980 the
effect of which in any case described in clauses (i) through (v) would have a
material adverse effect on Borrower and its Subsidiary Guarantors taken as a
whole;
(g) each of Borrower, Guarantor and each Subsidiary Guarantor is
solvent, able to pay its debts as they mature, has capital sufficient to carry
on its business and all businesses in which it is about to engage and the fair
saleable value of its assets (calculated on a going concern basis and taking
into account their respective rights of reimbursement and contribution in
respect of any Guaranty) is in excess of the amount of its liabilities;
(h) except as disclosed in Borrower's report on Securities
Exchange Commission Form 10-Q for the period ended July 31, 1997, on Schedule
12(h) hereto or otherwise in writing to the Lender, there is no pending or to
Borrower's knowledge threatened litigation, action or proceeding which could
reasonably be expected to have a material adverse effect on Borrower's and its
Subsidiary's (taken as a whole) business, assets, operations, condition or
prospects, financial or otherwise, or the ability of any of Borrower or any
Subsidiary Guarantor to perform this Agreement or any of the Ancillary
Agreements to which it is a party;
(i) all consolidated balance sheets and income statements of
Borrower, its Subsidiaries and its Unrestricted Subsidiaries which have been
delivered to Lender present fairly in all material respects the Borrower's
consolidated financial condition on the date as of which such financial
statements were prepared on a basis consistent with that of previous financial
statements and there has been no material adverse
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change in Borrower's consolidated financial condition as reflected in the most
recent of such statements since the date thereof and such statements do not
fail to disclose any fact or facts which could reasonably be expected to
materially and adversely affect Borrower's and its Subsidiaries' financial
condition taken as a whole;
(j) (x) each of Borrower and each Subsidiary Guarantor, possesses
all of the material licenses, patents, copyrights, trademarks, tradenames and
permits necessary to conduct its business and (y) there has been no assertion
or claim of violation or infringement with respect thereof which could
reasonably be expected to have a material and adverse effect on Borrower's and
its Subsidiaries' financial condition, taken as a whole;
(k) all financial projections of Borrower's or any Subsidiary
Guarantor's performance prepared by Borrower or at Borrower's direction and
delivered to Lender represent, at the time of delivery to Lender, its
reasonable estimate of such Borrower's or such Subsidiary Guarantor's future
financial performance and are based upon assumptions that are reasonable in
light of such Borrower's or such Subsidiary Guarantor's past performance and
then current business conditions; and
(l) TransTexas Exploration satisfies the conditions in clauses
(i), (ii) and (iv) of the definition of Unrestricted Subsidiary.
13. Covenants. Borrower hereby covenants as to itself and each
Subsidiary Guarantor covenants as to itself that from the date hereof and until
satisfaction in full of the Obligations the Borrower shall, and shall cause the
Subsidiary Guarantors to, comply with the following:
(a) Each of Borrower's and each Subsidiary Guarantor's businesses
will continue to be in compliance in all material respects with all applicable
federal, state and local laws, including but not limited to all applicable
environmental laws and regulations.
(i) Each of Borrower and each Subsidiary Guarantor will
do all things necessary to systematically assure and monitor continued
compliance in all material respects with all applicable environmental
laws, including periodic reviews of such compliance.
(ii) In the event any of Borrower, any of the Subsidiary
Guarantors or any of Borrower's Unrestricted Subsidiaries obtains,
gives or receives notice of any material release or threat of release
of a reportable quantity of any Hazardous Substances on its property
(any such event being hereinafter referred to as a "Hazardous
Discharge") or receives any notice of material violation, request for
information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions on its property,
demand letter or complaint, order, citation, or other written notice
with regard to any material Hazardous Discharge or material violation
of any environmental laws affecting its property or its interest
therein (any of the foregoing is referred to herein as an
"Environmental Complaint") from any governmental authority, including
any state agency responsible in whole or in part for environmental
matters in the state in which such property is located or the United
States Environmental Protection Agency (any such governmental
authority hereinafter the "Authority"), then it shall, within five (5)
Business Days, give written notice of same to the Lender detailing
facts and circumstances of which it is aware giving rise to the
Hazardous Discharge or Environmental Complaint and periodically inform
Lender of the status of the matter. Such information is to be
provided to allow the Lender to protect its security interest
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in the Collateral and is not intended to create nor shall it create
any obligation upon the Lender with respect thereto.
(iii) Each of Borrower, each Subsidiary Guarantor and each
Unrestricted Subsidiary of Borrower shall respond promptly to any
Hazardous Discharge or Environmental Complaint applicable to it and
take all necessary action in order to safeguard the health of any
Person and to avoid subjecting the Collateral to any claim or Lien
other than a Permitted Lien.
(iv) Borrower and the Subsidiary Guarantors shall each
jointly and severally defend and indemnify the Lender, its officers,
directors, employees and agents and hold the Lender, its officers,
directors, employees and agents harmless from and against all loss,
liability, damage and expense, claims, costs, fines and penalties,
including attorney's fees, suffered or incurred by the Lender, its
officers, directors, employees and agents under or on account of any
violation by Borrower, any Subsidiary Guarantor or any of Borrower's
Unrestricted Subsidiaries of any environmental laws, including,
without limitation, the assertion of any Lien thereunder other than
Permitted Liens, with respect to any Hazardous Discharge, the presence
of any Hazardous Substances in violation of applicable environmental
laws affecting Borrower's, such Subsidiary Guarantor's or such
Unrestricted Subsidiary's property, whether or not the same originates
or emerges from Borrower's, such Subsidiary Guarantor's or such
Unrestricted Subsidiary's property or any contiguous real estate,
including any loss of value of the Collateral as a result of the
foregoing, except to the extent such loss, liability, damage and
expense is directly attributable to any Hazardous Discharge resulting
from actions on the part of the Lender, its officers, directors,
employees and agents. The obligations of Borrower and the Subsidiary
Guarantors under this Section 13(a) shall arise upon the discovery of
the presence of any Hazardous Substances in violation of applicable
environmental laws on Borrower's, such Subsidiary Guarantor's or such
Unrestricted Subsidiary's property, whether or not any federal, state,
or local environmental agency has taken or threatened any action in
connection with the presence of any Hazardous Substances. The
obligation and the indemnifications hereunder shall survive the
termination of this Agreement.
(v) For purposes of Section 13(a) all references to
Borrower's, a Subsidiary Guarantor's or an Unrestricted Subsidiary's
property shall be deemed to include all of such Borrower's, such
Subsidiary Guarantor's or such Unrestricted Subsidiary's right, title
and interest in and to all owned and/or leased premises;
(b) Each of Borrower and each Subsidiary Guarantor shall, and
shall cause each of its Subsidiaries to, pay or discharge when due or cause to
be paid or discharged when due all taxes, assessments and governmental charges
or levies (including withholding taxes and any penalties, interest, and
additions to taxes) levied or imposed upon Borrower or any of its Subsidiaries
or any of their respective properties and assets; provided, however, that
neither Borrower nor any Subsidiary Guarantor shall be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
levy whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which disputed amounts adequate reserves
have been established in accordance with GAAP.
(c) Borrower will promptly inform Lender in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental body and all actions and
proceedings in any court or before any arbitrator against or in any way
concerning any of Borrower's or any Subsidiary Guarantor's properties, assets
or business, which singly or in the
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aggregate could reasonably be expected to have a material adverse effect on
Borrower and the Subsidiary Guarantors taken as a whole; (ii) any material
amendment of Borrower's or any Subsidiary Guarantor's certificate of
incorporation, by-laws, certificate of formation, certificate of limited
partnership, limited liability company agreement or partnership agreement;
(iii) any change in any of Borrower's or any Subsidiary Guarantor's business,
assets, liabilities, condition (financial or otherwise), results of operations
or business prospects which has had or could reasonably be expected to have a
material adverse effect on the Borrower, and the Subsidiary Guarantors, taken
as a whole, or the Collateral; (iv) any Event of Default or Incipient Event of
Default; (v) any default or any event which with the passage of time or giving
of notice or both would constitute a default under any agreement for the
payment of money to which Borrower or any Subsidiary Guarantor is a party or by
which Borrower or any Subsidiary Guarantor or any of Borrower's or any
Subsidiary Guarantor's properties may be bound which would have a material
adverse effect on Borrower's and the Subsidiary Guarantors' (taken as a whole)
business, operations, property or condition (financial or otherwise) or the
Collateral; (vi) any change in the location of Borrower's or a Subsidiary
Guarantor's executive offices; (vii) any change in the location of Borrower's
or a Subsidiary Guarantor's Inventory from the locations listed on Schedule
13(c) attached hereto (other than Inventory in transit for use by Borrower or
such Subsidiary Guarantor (which notice shall be deemed to amend Schedule
13(d)); (viii) any change in Borrower's or a Subsidiary Guarantor's corporate
name; (ix) any material delay in Borrower's or a Subsidiary Guarantor's
performance of any of its obligations to any Customer and of any assertion of
any material Disputes by any Customer and of any allowances, credits and/or
other monies granted by it to any Customer; and (x) all material adverse
information known to Borrower or its Subsidiaries relating to the financial
condition of any account debtor with accounts in excess of $1,000,000 in the
aggregate.
(d) Limitations on Incurrences of Additional Indebtedness and
Issuances of Disqualified Stock. Borrower shall not, and shall not permit any
Subsidiary Guarantor to, directly or indirectly, create, incur, assume,
guarantee or otherwise become liable for, contingently or otherwise (to "Incur"
or, as appropriate, an "Incurrence"), any Indebtedness or issue any
Disqualified Capital Stock (other than Capital Stock of a Subsidiary of
Borrower issued to the Borrower or a Wholly Owned Subsidiary of Borrower)
except any such Indebtedness or Disqualified Capital Stock which Borrower and
its Subsidiaries would be permitted to incur in compliance with Section 4.11 of
the Indenture as in effect on the date of this Agreement provided that for
purposes of this Section 13(d) the term "Subordinated Debt" as used in Section
4.11 of the Indenture as in effect on the date of this Agreement shall have the
meaning assigned to such term in this Agreement; provided, further, that
notwithstanding the foregoing, Borrower will not Incur any Attributable Debt in
respect of any Sale and Leaseback Transaction involving the Collateral.
Indebtedness Incurred and Disqualified Capital Stock issued by any Person that
is not a Subsidiary, which Indebtedness is outstanding at the time such Person
becomes, or is merged into, or consolidated with, a Borrower or Subsidiary of
Borrower shall be deemed to have been Incurred or issued, as the case may be,
at the time such Person becomes, or is merged into, or consolidated with
Borrower or such Subsidiary.
(e) neither Borrower nor any Subsidiary Guarantor will (i)
declare, pay or make any dividend or distribution of any shares of the common
stock or preferred stock of TRANSTEXAS or apply any of its funds, property or
assets to the purchase, redemption or other retirement of any common or
preferred stock of TRANSTEXAS if an Event of Default exists or if, after giving
effect thereto an Incipient Event of Default or an Event of Default shall
exist, (ii) directly or indirectly, prepay any Indebtedness (other than to
Lender), or repurchase, redeem, retire or otherwise acquire any Indebtedness of
Borrower or any Subsidiary Guarantor or any Unrestricted Subsidiary of Borrower
if an Event of Default exists or if, after giving effect thereto an Incipient
Event of Default or an Event of Default shall exist; (iii) enter into any
merger, consolidation or other reorganization with or into any other Person
(other than the Borrower or
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a Subsidiary Guarantor) or permit any other Person (other than the Borrower or
a Subsidiary Guarantor) to consolidate with or merge with Borrower unless the
Borrower shall be the continuing Person and the Net Worth (as defined in the
Indenture) of the Borrower after giving effect to such merger shall be at least
the Net Worth (as defined in the Indenture) of the Borrower immediately prior
to such merger; (iv) materially change the nature of its business to a business
that is not a Related Business; (v) change its fiscal year or make any changes
in accounting treatment and reporting practices without prior written notice to
Lender except as required by GAAP or in the tax reporting treatment or except
as required by law; (vi) enter into any transaction with any Subsidiary or
Affiliate, except as permitted by Section 4.10 of the Indenture as in effect on
the date of this Agreement; or (vii) bill Receivables under any name except the
present name of Borrower or any Subsidiary Guarantor;
(f) neither Borrower nor any Subsidiary Guarantor will enter into
or be a party to any Presale of Gas unless (i) Borrower or such Subsidiary
Guarantor has provided Lender prior written notice of such Presale of Gas, (ii)
Borrower has paid to Lender a fee equal to 2% of the aggregate amount of the
purchase price for such Presale of Gas and (iii) the aggregate purchase price
for all Presales of Gas in a calendar month does not exceed $5,000,000;
(g) none of the proceeds of the Loans or Letters of Credit
hereunder will be used directly or indirectly to "purchase" or "carry" "margin
stock" including the repurchase of Borrower's Capital Stock or to repay
Indebtedness incurred to "purchase" or "carry" "margin stock" within the
respective meanings of each of the quoted terms under Regulation G of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect;
(h) Insurance. Borrower and the Subsidiary Guarantors will bear
the full risk of loss from any loss of any nature whatsoever with respect to
the Collateral. Each of Borrower and each Subsidiary Guarantor at its own cost
and expense in amounts and with carriers reasonably acceptable to Lender, shall
(i) keep all of its insurable properties and properties in which it has an
interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to its business; (ii) maintain public and product liability insurance
against claims for personal injury, death or property damage suffered by others
as is customary in the case of companies engaged in businesses similar to its;
(iii) maintain all such workmen's compensation or similar insurance as may be
required under the laws of any state or jurisdiction in which it is engaged in
business; (iv) furnish Lender with (x) certificates evidencing insurance
policies and other evidence of the maintenance of such policies at least
fifteen (15) days before any expiration date, and (y) appropriate loss payable
endorsements (with respect to Collateral only) in form and substance
satisfactory to Lender, naming Lender and the Trustee under the Indenture as
their interests may appear as loss payee (with respect to Collateral only) and
providing that as to Lender the insurance coverage shall not be impaired or
invalidated by any act or neglect of Borrower or any Subsidiary Guarantor and
the insurer will provide Lender with at least fifteen (15) days notice prior to
cancellation. Borrower, for itself and on behalf of the Subsidiary Guarantors
shall instruct the insurance carriers that in the event of any loss thereunder,
the carriers shall make payment for such loss (with respect to Collateral only)
to Lender and Trustee under the Indenture, as their interests may appear. Upon
the occurrence and during the continuance of an Event of Default, if any
insurance losses payable with respect to the Collateral are paid by check,
draft or other instrument payable to (i) Borrower or (ii) a Subsidiary
Guarantor or (iii) Guarantor or (iv) Borrower and Subsidiary Guarantor jointly,
Borrower and Guarantor jointly or Subsidiary Guarantor and Guarantor jointly or
(v) Borrower or a Subsidiary Guarantor or Guarantor or all or any combination
of them, and Lender jointly, Lender may endorse Borrower's, Guarantor's and
such Subsidiary Guarantor's name thereon and do such other things as Lender may
deem advisable to reduce the same to cash. Lender is hereby authorized to
adjust and compromise claims with
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respect to the Collateral at any time after the occurrence and during the
continuance of an Event of Default. Upon the occurrence and during the
continuance of an Event of Default, all loss recoveries received by Lender upon
any such insurance may be applied to the Obligations in such order as Lender in
its sole discretion shall determine. Any surplus shall be paid by Lender to
the Borrower or applied as may be otherwise required by law. Any deficiency
thereon shall be paid by Borrower to Lender, on demand;
(i) Borrower will not make any Investment in any Person except
Permitted Investments and other Investments permitted under Section 4.3 of the
Indenture;
(j) Borrower will cause each of its Material Subsidiaries
hereafter formed or acquired to execute and deliver a joinder of this
Agreement, a joinder of the Subsidiary Guaranty Agreement and the documents,
opinions, instruments and certificates listed in Sections 2(a)(i) and
2(a)(v)(A), (B), (C), (D), and (H) with respect to such Subsidiary promptly
following such formation or acquisition provided that if no Incipient Event of
Default or Event of Default shall have occurred and be continuing, the Lender
will release the Subsidiary Guaranty Agreement of a Subsidiary Guarantor and
any unapplied Collateral from such Subsidiary Guarantors upon the written
request of the Borrower if (i) the stock of such Subsidiary is sold or
transferred by the Borrower and such Subsidiary Guarantor ceases to be a
Subsidiary or (ii) all or substantially all of the assets of such Subsidiary
Guarantor are sold or transferred and such Subsidiary has ceased or then ceases
to be a Material Subsidiary, so long as, in each case under the foregoing (i)
and (ii) any outstanding over advance, if any, pursuant to Section 2(d) is
concurrently repaid and a portion of the outstanding Loans equal to the amount
of the Formula Amount attributable to the Eligible Receivables and Eligible
Inventory of such Subsidiary Guarantor that are then included in the
determination of the Formula Amount are concurrently repaid.
(k) within 60 days following the Closing Date, deliver to Lender lien
search reports, in form and substance satisfactory to Lender and its counsel,
on the properties of Borrower located in the counties listed in Section 8(j) of
this Agreement (to the extent not delivered to Lender on the Closing Date) and
evidencing that the Liens of the Lender on the Collateral have the lien
priority specified in Section 7(a) hereof.
(l) Financial Covenants.
(A) The Borrower will not permit the Coverage Ratio at
the end of any fiscal quarter of the Borrower (i) for its fiscal
quarter ending on January 31, 1998, to be less than 0.8 to 1.0, (ii)
for its two fiscal quarters ending on April 30, 1998, to be less than
0.8 to 1.0, (iii) for its three fiscal quarters ending on July 31,
1998 to be less than 1.0 to 1.0, and (iv) commencing with its fiscal
quarter ending October 31, 1998 and each fiscal quarter thereafter,
for the four-fiscal quarter period ending with such fiscal quarter, to
be less than 1.0 to 1.0; provided, however, that failure to meet this
requirement shall not be deemed a breach of this financial covenant
unless the Borrower fails to meet this requirement for two consecutive
fiscal quarters.
(B) The Borrower will not have Consolidated Net Income
(i) less than negative $5,000,000 for any quarter, commencing with the
fiscal quarter ending January 31, 1998 (provided, however, that
failure to meet this requirement shall not be deemed a breach of this
financial covenant unless the Consolidated Net Income for any such
quarter plus the Consolidated Net Income for the quarter immediately
preceding said quarter is less than a negative $5,000,000) or (ii)
less than zero for any fiscal year, commencing with the fiscal year
ending January 31, 1998.
For purposes of determining Consolidated EBITDA and
Consolidated Interest Expense in the Coverage Ratio and for purposes
of Section 13(l)(B), Consolidated Net Income and
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Consolidated Interest Expense shall exclude any interest accrued (but
not then due and payable) on intercompany payables for taxes to the
extent the liability for such taxes has been assumed by TransAmerican
pursuant to the Tax Allocation Agreement.
14. Power of Attorney. Each of Borrower and each Subsidiary
Guarantor hereby appoints Lender (or any other Person whom Lender may designate
as its attorney) with power to: (i) endorse Borrower's or such Subsidiary
Guarantor's name on any uniform commercial code financing statements, any
checks, notes, acceptances, money orders, drafts or other forms of payment or
security that may come into Lender's possession; (ii) sign Borrower's or such
Subsidiary Guarantor's name on any invoice or bill of lading relating to any
Receivables, drafts against Customers, schedules and notices of assignment,
financing statements and other public records, verifications of account and
notices to or from Customers; (iii) verify the validity, amount or any other
matter relating to any Receivable by mail, telephone, telegraph or otherwise
with Customers; (iv) execute customs declarations and such other documents as
may be required to clear Inventory through Customs; (v) do all things necessary
to carry out this Agreement, any Ancillary Agreement and all related documents;
and (vi) on or after the occurrence and during the continuation of an Event of
Default, notify the post office authorities to change the address for delivery
of Borrower's or such Subsidiary Guarantor's mail to an address designated by
Lender, and to receive, open and dispose of all mail addressed to Borrower or
such Subsidiary Guarantor. Each of Borrower and each Subsidiary Guarantor
hereby ratifies and approves all acts of the attorney-in-fact permitted
pursuant to this Section 14. Neither Lender nor the attorney-in-fact will be
liable for any acts or omissions or for any error of judgment or mistake of
fact or law made by Lender in good faith and in the absence of willful
misconduct and gross negligence. This power, being coupled with an interest,
is irrevocable so long as any Receivable in which Lender has a security
interest remains unpaid and until the Obligations have been fully satisfied.
15. Expenses. Borrower shall pay all of Lender's out-of-pocket
costs and expenses, including without limitation reasonable fees and
disbursements of counsel retained or employed by Lender and appraisers, in
connection with the preparation, execution and delivery of this Agreement and
the Ancillary Agreements, and in connection with the prosecution or defense of
any action, contest, dispute, suit or proceeding concerning any matter in any
way arising out of, related to or connected with this Agreement or any
Ancillary Agreement. Borrower shall also pay all of Lender's out-of-pocket
costs and expenses, including without limitation reasonable fees and
disbursements of counsel retained or employed by Lender, in connection with (a)
the preparation, execution and delivery of any waiver, any amendment thereto or
consent proposed or executed in connection with the transactions contemplated
by this Agreement or the Ancillary Agreements, (b) Lender's obtaining
performance of the Obligations under this Agreement and any Ancillary
Agreements, including, but not limited to, the enforcement or defense of
Lender's Liens hereunder as valid perfected security interests, (c) any attempt
to protect, collect, sell, liquidate or otherwise dispose of any Collateral,
(d) after the occurrence and during the continuance of an Event of Default, any
consultations in connection with any of the foregoing and (e) subject to the
cost limitations of Section 5(b)(iii) for any period during which an Event of
Default does not exist any attempt to inspect or verify any Collateral.
Borrower shall also pay Lender's then standard price for furnishing Borrower or
any Subsidiary Guarantor or their respective designees copies of any
statements, records, files or other data (collectively, "Reports") requested by
Borrower or any Subsidiary Guarantor or their respective designees, other than
reports of the kind furnished to Borrower and the Subsidiary Guarantors and
Lender's other borrowers on a regular, periodic basis in the ordinary course of
Lender's business. Borrower shall also pay Lender's customary bank charges,
including, without limitation, all wire transfer fees incurred by Lender, for
all bank services performed or caused to be performed by Lender for Borrower or
any Subsidiary Guarantor at its request. All such costs and expenses together
with all filing, recording and search fees, reimbursable taxes and interest
payable by Borrower or any Subsidiary Guarantor to Lender
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shall be payable on demand and shall be secured by the Collateral. If any tax
by any governmental authority is or may be imposed on or as a result of any
transaction between Borrower or any Subsidiary Guarantor and Lender (other than
any franchise taxes or income taxes imposed on or measured by the net income,
assets, net worth or shareholders' capital of the Lender or any lending office
of the Lender) which Lender is or may be required to withhold or pay, each of
Borrower and each Subsidiary Guarantor agrees to indemnify and hold Lender
harmless in respect of such taxes, and each of Borrower and each Subsidiary
Guarantor will repay to Lender the amount of any such taxes paid by Lender,
which shall be charged to Borrower's account; and until Borrower or such
Subsidiary Guarantor shall furnish Lender with indemnity therefor (or supply
Lender with evidence satisfactory to it that due provision for the payment
thereof has been made), Lender may hold without interest any balance standing
to Borrower's or such Subsidiary Guarantor's credit (but only to the extent of
the amount of such taxes, penalties and interest) and Lender shall retain its
security interests in any and all Collateral. Each of Borrower and each
Subsidiary Guarantor hereby acknowledges that Lender shall not be liable in any
manner whatsoever for any selling expenses, orders, purchases or contracts of
any kind resulting from any transaction between Borrower or any Subsidiary
Guarantor and any other Person and each of Borrower and each Subsidiary
Guarantor hereby indemnifies and holds Lender harmless with respect thereto,
which indemnity shall survive termination of this Agreement.
16. Assignment By Lender. Lender, with the prior written consent
of Borrower (which consent shall not be unreasonably withheld or delayed), may
at any time and from time to time assign this Agreement or any or all of the
Obligations together with any or all of the security therefor and any
transferee shall succeed to all of Lender's rights with respect to the interest
so assigned; provided that the consent of Borrower shall not be required for
any assignment by Lender so long as (i) BNY Financial Corporation shall remain
as agent for the Lenders hereunder and (ii) satisfactory voting and payment
mechanisms are established under this Agreement. Upon such transfer, Lender
shall be released from all responsibility with respect to the interest so
assigned (from the effective date of such assignment forward) and for the
Collateral to the extent same is assigned to any transferee and Borrower shall
have no further obligations to Lender with respect to the interests so
assigned, provided such transferee has assumed all of Lender's responsibilities
and obligations with respect to the interest and Collateral so assigned.
Lender may from time to time sell or otherwise grant participations in any of
the Obligations to any bank, finance company, insurance company, or other
financial services company (except that Lender will not, without the prior
written consent of Borrower sell or otherwise grant such participations to a
direct competitor of the Borrower or any Subsidiary Guarantor or to a Person
engaged as one of its principal activities in a Related Business), and the
holder of any such participation shall, subject to the terms of any agreement
between Lender and such holder, be entitled to the same benefits as Lender with
respect to any security for the Obligations in which such holder is a
participant. Any agreement pursuant to which the Lender may grant such a
participating interest shall provide that the Lender shall retain the sole
right and responsibility to enforce the obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
agreement may provide that the Lender will not agree to any modification,
amendment or waiver of this Agreement that (i) increases the Maximum Loan
Amount, (ii) decreases the interest rate applicable to Revolving Credit
Advances or (iii) releases Collateral (other than, in each instance, as
expressly permitted or allowed by this Agreement or the applicable Ancillary
Document) without the consent of the participant. Borrower agrees that each
such holder may exercise any and all rights of banker's lien, set-off and
counterclaim with respect to its participation in the Obligations as fully as
though Borrower were directly indebted to such holder in the amount of such
participation.
17. Waivers. Borrower waives presentment and protest of any
instrument and notice thereof, notice of default (except as expressly required
hereunder), notice of intent to accelerate, notice of
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acceleration and, to the extent permitted under applicable law, all other
notices to which it might otherwise be entitled.
18. Term of Agreement. (a) This Agreement shall continue in
full force and effect until the expiration of the Term. The Term shall be
automatically extended for successive periods of one (1) year each unless
either party shall have provided the other with a written notice of
termination, at least ninety (90) days prior to the expiration of the initial
Term or any renewal Term.
(b) Notwithstanding the foregoing, but subject to the other terms
and provisions of this Section 18, upon at least ninety (90) days prior written
notice to Lender, Borrower may, at its option, terminate this Agreement;
provided, however, no such termination shall be effective until Borrower has
paid all of the Obligations in immediately available funds.
(c) At the effective date of any such termination by Borrower,
Borrower shall pay to Lender (in addition to the then outstanding principal,
accrued interest and other charges owing under the terms of this Agreement and
any of the other Ancillary Agreements), as liquidated damages for the loss of
the bargain and not as a penalty, an amount equal to $1,200,000 if termination
occurs prior to January 1, 1999; $800,000 if termination occurs during the
period from January 1, 1999 through December 31, 1999; $400,000 if termination
occurs during the period from January 1, 2000 through December 31, 2000;
provided that in the event that Lender shall assign 50% or more of this
Agreement and the commitments hereunder and the Obligations to any other lender
in accordance with Section 16 hereof, the amount payable pursuant to this
Section 18(c) shall be reduced by one-half.
(d) All of the Obligations shall be forthwith due and payable upon
any termination of this Agreement. Except as otherwise expressly provided for
in this Agreement or the Ancillary Documents, no termination or cancellation
(regardless of cause or procedure) of this Agreement or any of the other
Ancillary Agreements shall in any way affect or impair the rights, powers or
privileges of Lender or the obligations, duties or liabilities of Borrower, the
Guarantor, the Subsidiary Guarantors or Lender in any way relating to any
transaction or event occurring prior to such termination or cancellation. All
of the undertakings, agreements, consents, warranties or representations of
Borrower, the Guarantor or the Subsidiary Guarantors contained in this
Agreement or any of the other Ancillary Agreements shall survive termination or
cancellation of this Agreement and the other Ancillary Agreements and Lender
shall retain its Liens in the Collateral and all of its rights and remedies
under this Agreement and the other Ancillary Agreements notwithstanding such
termination or cancellation until all of the Obligations have been paid in
full, in immediately available funds. Upon payment in full of all Obligations
and the termination of this Agreement, the Liens granted herein and in the
other Ancillary Agreements shall terminate, all rights to the Collateral shall
revert to the Borrower or the respective Subsidiary Guarantors, as the case may
be, and the Lender will, at the Borrower's expense, execute and deliver to the
Borrower and each Subsidiary Guarantor, as the case may be, such documents as
the Borrower or such Subsidiary Guarantor shall request to evidence such
termination; provided, however, that notwithstanding the foregoing, such
termination and reversion, and the delivery of such documents evidencing such
termination, shall be subject to the conditions precedent that Borrower, the
Guarantor and the Subsidiary Guarantors and any Person whose loans to Borrower
are used in whole or in part to satisfy the Obligations shall first have
executed an agreement indemnifying Lender from any loss or damage Lender may
incur as the result of dishonored checks or other items of payment received by
Lender from Borrower, the Subsidiary Guarantor or any Customer and applied to
the Obligations.
(e) It is understood that Borrower may elect to terminate this
Agreement in its entirety only; no section or lending facility may be
terminated singly.
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19. Events of Default. The occurrence of any of the following
shall constitute an Event of Default:
(a) failure to make payment of any of the Obligations when
required hereunder;
(b) Borrower or any Subsidiary or the Guarantor shall fail to
perform under and/or commit any breach of this Agreement or any Ancillary
Agreement to which it is a party, or all or any of them, (which failure or
breach is not otherwise an Event of Default under this Section 19) and such
failure or breach shall continue for twenty-five (25) days after written notice
from Lender to Borrower or such Subsidiary or Guarantor.
(c) occurrence of a default under any agreement to which (i)
Borrower is a party with third parties which default has a material adverse
effect upon Borrower's and its Subsidiaries' business, operations, property or
condition (financial or otherwise, including, without limitation, all leases
for premises where inventory is located), taken as a whole, or (ii) any
Subsidiary or Guarantor of Borrower is a party with third parties which default
has a material adverse effect upon Borrower's and its Subsidiaries' business,
operations, property or condition (financial or otherwise), taken as a whole.
(d) any representation, warranty or statement made by Borrower or
any Subsidiary or the Guarantor hereunder, in any Ancillary Agreement to which
it is a party, any written certificate, statement or document delivered by
Borrower or such Subsidiary or Guarantor pursuant to the terms hereof, or in
connection with the transactions contemplated by this Agreement should be false
or misleading in any material respect when made or deemed made;
(e) an attachment or levy is made upon any of Borrower's or any
Subsidiary's or Guarantor's assets having an aggregate value in excess of
$2,000,000, or a judgment is rendered either against Borrower or any Subsidiary
or Guarantor or any of their property involving a liability of more than
$2,000,000, which shall not have been vacated, discharged, stayed or bonded
pending appeal within thirty (30) days from the entry thereof;
(f) any change in Borrower's or any Subsidiary's or Guarantor's
condition or affairs (financial or otherwise) which in Lender's good faith
opinion, acting reasonably, materially impairs the Collateral or the ability of
Borrower or any Subsidiary or Guarantor to perform its Obligations;
(g) any Lien on the Collateral (other than Inventory which is not
a material portion of the Inventory) created hereunder or under any Ancillary
Agreement for any reason ceases to be or is not a valid and perfected Lien on
the Collateral having a first priority interest except for Permitted Liens;
(h) Borrower or any Subsidiary or Guarantor shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (vi) acquiesce to, or fail to have dismissed, within sixty (60) days,
any petition filed against it in any involuntary case under such bankruptcy
laws, or (vii) take any action for the purpose of effecting any of the
foregoing;
(i) Borrower or any Subsidiary or Guarantor shall admit in writing
its inability, or be generally unable to pay its debts as they become due or
cease operations of its present businesses;
42
<PAGE> 43
(j) TEC or any other Person which is directly or indirectly
controlled by TEC or any Subsidiary of TEC (other than the Borrower or a
Subsidiary of the Borrower) that is engaged in a Related Business or in the
refining or distilling of Hydrocarbons, shall (i) apply for or consent to the
appointment of, or the taking possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its property, (ii)
admit in writing its inability, or be generally unable, to pay its debts as
they become due or cease operations of its present business, (iii) make a
general assignment for the benefit of creditors, (iv) commence a voluntary case
under the federal bankruptcy laws (as now or hereafter in effect), (v) be
adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vii) fail to
have dismissed, within sixty (60) days, or acquiesce to, any petition filed
against it in any involuntary case under such bankruptcy laws, or (viii) take
any corporate action for the purpose of effecting any of the foregoing;
(k) a default by Borrower or any Subsidiary or Guarantor in the
payment, when due (after any applicable grace period, or extension for the
payment thereof), of any principal of or interest on any Indebtedness having a
principal amount, individually or in the aggregate, in excess of $500,000,
except so long as the holder or holders of such Indebtedness shall have waived
such default;
(l) if any Subsidiary Guarantor (i) attempts to terminate or (ii)
challenges the validity of, or its liability under, any Subsidiary Guaranty
Agreement or Guarantor (i) attempts to terminate or (ii) challenges the
validity of, or its liability under, its Guaranty Agreement;
(m) should any Subsidiary Guarantor default in the payment of any
of its payment obligations under the Subsidiary Guaranty Agreement and such
default shall continue for a period of ten (10) days hereunder or under the
Subsidiary Guaranty Agreement or if any proceeding shall be brought to
challenge the validity, binding effect of this Agreement or the Subsidiary
Guaranty Agreement, or should this Agreement or the Subsidiary Guaranty
Agreement cease to be a valid, binding and enforceable obligation of a
Subsidiary Guarantor;
(n) should Guarantor default in the payment of any of its payment
obligations under the Guaranty Agreement and such default shall continue for a
period of 10 days under the Guaranty Agreement or should the Guaranty Agreement
cease to be a valid, binding and enforceable obligation of the Guarantor;
(o) the occurrence and continuation of any Event of Default under
the Indenture unless waived thereunder.
20. Remedies. (a) Upon the occurrence of an Event of Default
pursuant to Section 19(h) or (i), all Obligations shall be immediately due and
payable and this Agreement shall be deemed terminated; upon the occurrence and
continuation of any other of the Events of Default, Lender shall have the right
to demand repayment in full of all Obligations, whether or not otherwise due.
Until all Obligations have been fully satisfied, Lender shall retain its
security interest in all Collateral. Lender shall have, in addition to all
other rights provided herein, the rights and remedies of a secured party under
the Uniform Commercial Code in effect in any applicable jurisdiction, and under
other applicable law, all other legal and equitable rights to which Lender may
be entitled, including without limitation, the right to take immediate
possession of the Collateral, to require each of Borrower and each Subsidiary
Guarantor to assemble the Collateral, at its expense, and to make it available
to Lender at a place designated by Lender which is reasonably convenient to all
parties and to enter any of the premises of Borrower or such Subsidiary
Guarantor or wherever the Collateral shall be located, with or without force or
process of law, and to keep and store the same on said premises until sold (and
if said premises be the property of Borrower or such Subsidiary Guarantor,
Borrower or such Subsidiary Guarantor, as the case may be,
43
<PAGE> 44
agrees not to charge Lender for storage thereof for a period up to at least
sixty (60) days after taking possession of said Collateral). Further, Lender
may, at any time or times after the occurrence and during the continuance of an
Event of Default, sell and deliver all Collateral held by or for Lender at
public or private sale for cash, upon credit or otherwise, at such commercially
reasonable prices and upon such commercially reasonable terms as Lender, in
Lender's sole discretion, deems advisable or Lender may otherwise recover upon
the Collateral in any commercially reasonable manner as Lender, in its sole
discretion, deems advisable. Except as to that part of the Collateral which is
perishable or threatens to decline speedily in nature or is of a type
customarily sold on a recognized market, the requirement of reasonable notice
shall be met if such notice is mailed postage prepaid to Borrower and the
Subsidiary Guarantors at their respective addresses as shown in Lender's
records, at least ten (10) days before the time of the event of which notice is
being given. Lender may be the purchaser at any sale, if it is public. The
proceeds of sale shall be applied first to all costs and expenses of sale,
including all reasonable attorneys' fees, and second to the payment (in
whatever order Lender elects) of all Obligations. Lender will return any
excess to the Borrower or such Subsidiary Guarantor, as the case may be, and
the Borrower and the Subsidiary Guarantors shall remain liable to Lender for
any deficiency to the extent not prohibited by applicable law.
21. Waiver; Cumulative Remedies. Failure by Lender to exercise
any right, remedy or option under this Agreement or any supplement hereto or
any other agreement between Borrower or any Subsidiary Guarantor, or any or all
of them, and Lender or delay by Lender in exercising the same, will not operate
as a waiver; no waiver by Lender will be effective unless it is in writing and
then only to the extent specifically stated. Lender's rights and remedies
under this Agreement will be cumulative and not exclusive of any other right or
remedy which Lender may have.
22. Application of Payments. Each of Borrower and each Subsidiary
Guarantor irrevocably waives the right to direct the application of any and all
payments at any time or times hereafter received by Lender from or on
Borrower's behalf and each of Borrower and each Subsidiary Guarantor hereby
irrevocably agrees that following an Event of Default Lender shall have the
continuing exclusive right to apply and reapply any and all payments received
at any time or times hereafter against Borrower's Obligations, Guarantor's
obligations under the Guaranty Agreement and any Subsidiary Guarantor's
obligations under the Subsidiary Guaranty Agreement in such manner as Lender
may deem advisable notwithstanding any entry by Lender upon any of Lender's
books and records.
23. Depository Accounts. Any payment received by Borrower or any
Subsidiary Guarantor on account of any Collateral shall be held by it in trust
for Lender and shall promptly be delivered in kind to Lender or deposited into
a cash collateral account at such bank as Lender may designate for application
to payment of the Obligations. Each of Borrower and each Subsidiary Guarantor
shall also execute such further documents as Lender may deem necessary to
establish such an account and Lender's dominion and control over all funds
deposited in such account.
24. Lock Box Accounts. Borrower and each Subsidiary Guarantor
shall instruct all of their respective Customers to make such payments on
account of Borrower's and the Subsidiary Guarantors' Receivables to, if by
wire, Bank of New York, 48 Wall Street, New York, New York, ABA #021-0000-18
for credit to TransTexas Gas Corporation Account #809-065-3114, and if by mail,
to P.O. Box 730086, Dallas, TX 75373-0086, or, if notified by Lender to
Borrower, to an account under Lender's dominion and control at such bank as
Lender may designate. Each of Borrower and each Subsidiary Guarantor shall
also execute such further documents as Lender may deem necessary to establish
such an account and Lender's dominion and control over all funds deposited in
such account.
44
<PAGE> 45
25. Revival. Each of Borrower and each Subsidiary Guarantor
further agrees that to the extent Borrower or such Subsidiary Guarantor makes a
payment or payments to Lender, which payment or payments or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or repayment, the Obligations or part
thereof intended to be satisfied shall be revived and continued in full force
and effect as if said payment had not been made.
26. Notices. Any notice or request hereunder may be given to
Borrower, each Subsidiary Guarantor or Lender at the respective addresses set
forth below or as may hereafter be specified in a notice designated as a change
of address under this paragraph. Any notice or request hereunder shall be
given by registered or certified mail, return receipt requested, or by
overnight courier or by telecopy (confirmed by mail). Notices and requests
shall be, in the case of those by mail or overnight courier, deemed to have
been given when deposited in the mail or with the overnight courier, and, in
the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to the Lender: BNY Financial Corporation
1290 Avenue of the Americas
New York, New York 10104
Attention: Andrew Rogow
Telephone: (212) 408-7531
Telecopy: (212) 408-4384
If to TRANSTEXAS: TransTexas Gas Corporation
1300 North Sam Houston Parkway East, Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue
Telephone: (281) 987-8600
Telecopy: (281) 986-8877
27. Governing Law; Consent to Exclusive Jurisdiction and Waiver of
Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. LENDER SHALL HAVE THE
RIGHTS AND REMEDIES OF A SECURED PARTY UNDER APPLICABLE LAW INCLUDING, BUT NOT
LIMITED TO, THE UNIFORM COMMERCIAL CODE OF NEW YORK.
EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR HEREBY AGREES THAT ALL
ACTIONS AND PROCEEDINGS RELATING DIRECTLY OR INDIRECTLY TO OR ARISING IN ANY
WAY FROM THIS AGREEMENT OR ANY ANCILLARY AGREEMENT TO WHICH BORROWER OR SUCH
SUBSIDIARY GUARANTOR IS A PARTY OR ANY OBLIGATIONS SHALL BE LITIGATED
EXCLUSIVELY IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK OR, AT LENDER'S OPTION, IN ANY OTHER COURT OF COMPETENT JURISDICTION
LOCATED IN NEW YORK STATE AS LENDER MAY SELECT EXCEPTING ONLY THAT LENDER MAY
BRING AN ACTION WHEREVER IT MAY BE NECESSARY TO PROTECT ITS RIGHTS IN
COLLATERAL. EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR HEREBY FURTHER
AGREES THAT
45
<PAGE> 46
SUCH COURTS ARE CONVENIENT FORUMS AND EACH OF BORROWER AND EACH SUBSIDIARY
GUARANTOR HEREBY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS. IT IS
THE EXPRESS INTENT OF THE PARTIES HERETO TO CONFINE ALL SUCH ACTIONS AND
PROCEEDINGS TO COURTS LOCATED WITHIN THE STATE OF NEW YORK EXCEPTING ONLY TO
SUITS BY LENDER TO PROTECT ITS RIGHTS TO ITS COLLATERAL AS PREVIOUSLY SET
FORTH, AND EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR HEREBY WAIVES ANY AND
ALL PROCEDURAL RIGHTS OR DEVICES INSOFAR AS SUCH RIGHTS OR DEVICES WOULD
PREVENT OR INTERFERE WITH THE REALIZATION OF THAT INTENT.
EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR HEREBY AGREES NOT TO
JOIN ANY CLAIM AGAINST LENDER WITH ANY CLAIM AGAINST ANY OTHER PERSON OR ENTITY
(OTHER THAN ANY TRANSFEREE OR ASSIGNEE UNDER SECTION 16), AND EACH OF BORROWER
AND EACH SUBSIDIARY GUARANTOR HEREBY AGREES THAT ANY SUCH JOINDER OF CLAIMS
SHALL BE DEEMED TO BE FRAUDULENT PER SE. IN THE EVENT ANY CLAIM AGAINST LENDER
IS JOINED WITH ANY CLAIM AGAINST ANY OTHER PERSON OR ENTITY (OTHER THAN ANY
TRANSFEREE OR ASSIGNEE UNDER SECTION 16), EACH OF BORROWER AND EACH SUBSIDIARY
GUARANTOR HEREBY AGREES THAT UPON DEMAND BY LENDER THEY SHALL TAKE ALL STEPS
NECESSARY TO SECURE THE SEVERANCE OF SUCH CLAIMS. EACH OF BORROWER AND EACH
SUBSIDIARY GUARANTOR FURTHER AGREES THAT VENUE IN THE COURTS OF ANY STATE OTHER
THAN THE STATE OF NEW YORK (INCLUDING THE STATE OF TEXAS), IS INCONVENIENT FOR
LENDER AND THAT TRANSFER OF VENUE TO THE COUNTY OF NEW YORK, NEW YORK IS
APPROPRIATE UNDER THE DOCTRINE OF FORUM NON CONVENIENS.
EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR, WAIVES PERSONAL
SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY
CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO IT AT ITS
ADDRESS APPEARING ON LENDER'S RECORDS, AND SERVICE SO MADE SHALL BE DEEMED
COMPLETED TWO (2) BUSINESS DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED.
ALL THE PARTIES HERETO WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BETWEEN BORROWER OR A SUBSIDIARY GUARANTOR, OR BOTH, AND
LENDER, BORROWER AND EACH SUBSIDIARY GUARANTOR WAIVE THE RIGHT TO ASSERT IN
ANY ACTION OR PROCEEDING WITH REGARD TO THIS AGREEMENT, ANY ANCILLARY AGREEMENT
OR ANY OF THE OBLIGATIONS ANY OFFSETS OR COUNTERCLAIMS WHICH THEY MAY HAVE.
EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR ACKNOWLEDGES THAT THE
PROVISIONS OF THIS SECTION 27 ARE A MATERIAL INDUCEMENT TO THE LENDER TO ENTER
INTO THIS AGREEMENT AND THE ANCILLARY DOCUMENTS AND THAT IN LIGHT OF THE VOLUME
AND NATURE OF LITIGATION THAT BORROWER AND ITS AFFILIATES HAVE BEEN INVOLVED
IN, IF BORROWER AND THE SUBSIDIARY GUARANTORS HAD NOT AGREED TO THE FOREGOING,
LENDER WOULD NOT HAVE ENTERED INTO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS.
46
<PAGE> 47
EACH OF BORROWER AND EACH SUBSIDIARY GUARANTOR FURTHER ACKNOWLEDGES
THAT IT HAS REVIEWED THIS SECTION WITH, AND HAS HAD THE ADVICE OF, COMPETENT
LEGAL COUNSEL OF ITS OWN CHOOSING, WITH RESPECT TO THIS SECTION.
28. Limitation of Liability. Borrower acknowledges and
understands that in order to assure repayment of the Obligations hereunder
Lender may be required to exercise any and all of Lender's rights and remedies
hereunder and agree that neither Lender nor any of Lender's agents shall be
liable for acts taken or omissions made in connection therewith except for
actual bad faith, gross negligence or willful misconduct.
29. Entire Understanding. This Agreement and the Ancillary
Agreements contain the entire understanding between Borrower, the Guarantor,
the Subsidiary Guarantors and Lender and any promises, representations,
warranties or guarantees not herein contained shall have no force and effect
unless in writing, signed by the Borrower's, the Subsidiary Guarantor's or
Lender's respective officers or the Guarantor.
30. Modification. Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged.
31. Severability. Wherever possible each provision of this
Agreement or the Ancillary Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or the Ancillary Agreements shall be prohibited by or invalid under
applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions thereof.
32. Captions. All captions are and shall be without substantive
meaning or content of any kind whatsoever.
33. Confidentiality. Lender agrees that it will use reasonable
efforts not to disclose (other than to its employees, affiliates, auditors or
counsel or to any other party hereto) any information with respect to the
Borrower, the Guarantor, the Subsidiaries or the Unrestricted Subsidiaries
which is furnished pursuant to this Agreement or any other Ancillary Agreement
executed pursuant hereto and which is clearly designated by the Borrower, the
Guarantor, the Subsidiaries or the Unrestricted Subsidiaries to Lender in
writing as confidential, without the prior written consent of the Borrower, the
Guarantor, the Subsidiaries or the Unrestricted Subsidiaries, as applicable,
provided that the foregoing shall not apply to, and Lender may disclose any
such information (a) as has become generally available to the public by no
fault of Lender, (b) to any of its examiners or as may be required by any
municipal, state or Federal regulatory body having or claiming to have
jurisdiction over Lender or by the Federal Reserve Board or the Federal Deposit
Insurance Corporation or similar organizations (whether in the United States or
elsewhere) or their successors, (c) as may be required in response to any
summons or subpoena issued by any court having jurisdiction over Lender, (d) in
order to comply with any law, order, regulation or ruling applicable to Lender,
(e) to any prospective transferee or participant consented to by Borrower
(which consent will not be unreasonably withheld or delayed) in connection with
any contemplated transfer of any interest herein by Lender in accordance with
Section 16, provided, that such prospective transferee or participant (other
than an Affiliate of Lender) executes an agreement with the Borrower containing
provisions substantially identical to those contained in this Section 33, (f)
with the prior written authorization of the Borrower, the
47
<PAGE> 48
Guarantor, the Subsidiaries or the Unrestricted Subsidiaries, as applicable,
(g) already known by, or in the possession of Lender without restrictions on
the disclosure thereof at the time such information was received by Lender or
(h) in connection with the exercise of any remedies by Lender.
34. Counterparts. This Agreement may be executed in one or more
counterparts, each of which taken together shall constitute one and the same
instrument.
35. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction
to the effect that any ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation of this Agreement or any
amendments, schedules or exhibits thereto.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day and year first above written.
ATTEST:
BNY FINANCIAL CORPORATION
By:
------------------------------
- ---------------------------- Title:
SECRETARY
[CORPORATE SEAL]
ATTEST:
TRANSTEXAS GAS CORPORATION
By:
------------------------------
Title:
- ----------------------------
SECRETARY
[CORPORATE SEAL]
48
<PAGE> 49
Schedule 7(A)
CERTAIN CONTRACTS
Master Services Contract dated May 30, 1997 between Conoco Inc. and Borrower
Agreement for Services dated effective March 1, 1997 between Conoco Inc. and
Borrower
<PAGE> 1
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: TransTexas Gas Corporation
Registration Statements on Form S-3 and Form S-4
We are aware that our report dated December 15, 1997 on our review of
interim condensed consolidated financial information of TransTexas Gas
Corporation for the three and nine months ended October 31, 1997 and 1996
included in this Form 10-Q for the quarter then ended is incorporated by
reference in the Company's registration statements on Form S-3 (Registration
No. 33-91494) and Form S-4 (333-33803), each as filed with the Securities and
Exchange Commission. Pursuant to Rule 436(c) under the Securities Act of 1933,
this report should not be part of the registration statements prepared or
certified by us within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
Houston, Texas
December 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the unaudited
condensed consolidated balance sheet at October 31, 1997 and the unaudited
condensed consolidated statement of operations for the nine months ended October
31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,513
<SECURITIES> 0
<RECEIVABLES> 30,538
<ALLOWANCES> 0
<INVENTORY> 16,784
<CURRENT-ASSETS> 61,865
<PP&E> 1,325,422
<DEPRECIATION> 697,862
<TOTAL-ASSETS> 843,865
<CURRENT-LIABILITIES> 137,373
<BONDS> 592,159
0
0
<COMMON> 740
<OTHER-SE> 38,640
<TOTAL-LIABILITY-AND-EQUITY> 843,865
<SALES> 152,572
<TOTAL-REVENUES> 695,004
<CGS> 45,938
<TOTAL-COSTS> 152,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,823
<INCOME-PRETAX> 490,772
<INCOME-TAX> 171,771
<INCOME-CONTINUING> 319,001
<DISCONTINUED> 0
<EXTRAORDINARY> (72,043)
<CHANGES> 0
<NET-INCOME> 246,958
<EPS-PRIMARY> 3.52
<EPS-DILUTED> 0.00
</TABLE>
