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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000930661-01-000770.txt : 20010329
<SEC-HEADER>0000930661-01-000770.hdr.sgml : 20010329
ACCESSION NUMBER: 0000930661-01-000770
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010327
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: QUICKSILVER RESOURCES INC
CENTRAL INDEX KEY: 0001060990
STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311]
IRS NUMBER: 752756163
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-14837
FILM NUMBER: 1580960
BUSINESS ADDRESS:
STREET 1: 777 WEST ROSEDALE ST
CITY: FORT WORTH
STATE: TX
ZIP: 76104
BUSINESS PHONE: 8176655000
MAIL ADDRESS:
STREET 1: 1619 PENNSYLVANIA AVE
CITY: FORT WORTH
STATE: TX
ZIP: 76104
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ To ______.
Commission file number: 001-14837
----------------
QUICKSILVER RESOURCES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 75-2756163
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
777 West Rosedale Suite 300,
Fort Worth, Texas 76104
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (817) 665-5000
----------------
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
Common Stock, par value
$0.01 per share American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Documents incorporated by reference: Proxy statement of Quicksilver
Resources Inc. relating to the annual meeting of stockholders to be held on
June 5, 2001, which is incorporated into Part III of this Form 10-K.
As of March 9, 2001, 18,567,010 shares of common stock of Quicksilver
Resources Inc. were outstanding, and the aggregate market value of the voting
stock held by non-affiliates of Quicksilver Resources Inc. was approximately
$102,977,912 based on the American Stock Exchange composite trading closing
price of $11.98 on March 9, 2001, and using the definition of beneficial
ownership contained in Rule 16a-1(a) (2) promulgated pursuant to the
Securities Exchange Act of 1934.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2000
<TABLE>
<CAPTION>
Page
----
<C> <C> <S>
Part I
Item 1. Description of Business................................................................ 3
Item 2. Description of Properties.............................................................. 9
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 15
Item 6. Selected Financial Data................................................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 25
Item 8. Financial Statements and Supplementary Data............................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 53
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 53
Item 11. Executive Compensation................................................................. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 55
Item 13. Certain Relationships and Related Transactions......................................... 55
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 55
SIGNATURES............................................................................. 57
</TABLE>
2
<PAGE>
PART I
ITEM 1. Description of Business
Formation of Quicksilver
Quicksilver Resources Inc. (the "Company" or "Quicksilver") was formed as a
Delaware corporation in December 1997 for the purpose of combining certain oil
and gas properties owned by Mercury Exploration Company ("Mercury"),
Quicksilver Energy, L.C. ("QELC") and Michigan Gas Partners Limited
Partnership ("Michigan Gas Partners"). On January 1, 1998 Mercury, QELC,
Michigan Gas Partners, Trust Company of the West, Joint Energy Development
Investments Limited Partnership and Quicksilver entered into an agreement and
a plan of reorganization and merger. Michigan Gas Partners was merged into
Quicksilver and Mercury and QELC transferred certain assets, principally
natural gas and crude oil producing properties, and liabilities to
Quicksilver.
On March 4, 1999, the stockholders of MSR Exploration Ltd. ("MSR") approved
the merger of MSR into Quicksilver pursuant to the terms of an Agreement and
Plan of Merger, dated September 1, 1998, by and among Quicksilver and MSR. As
a result of the MSR merger, the separate corporate existence of MSR ceased and
all of the properties, rights, privileges, powers and franchises of MSR vested
in Quicksilver, the surviving corporation of the merger. All the debts,
liabilities and duties of MSR were transferred to Quicksilver. Each share of
common stock of MSR outstanding immediately prior to the effective time of the
merger was converted into the right to receive one tenth of one share of
common stock of Quicksilver. Quicksilver became a publicly traded corporation
and shares of Quicksilver common stock became listed for trading on the
American Stock Exchange under the symbol "KWK".
Business of Quicksilver
Quicksilver is an independent energy company engaged in the acquisition,
development, exploration, production and sale of natural gas, crude oil and
condensate and the gathering, processing and transmission of natural gas.
Quicksilver pursues its business through the acquisition and development of
oil and gas mineral leases, gas gathering systems and producing natural gas
and crude oil properties. Based upon the specifics of each mineral lease, as
well as geological and engineering interpretations, Quicksilver develops its
inventory of leases by drilling wells, redrilling wells or recompleting
existing wells located on those leases for the recovery of the reserves
located there. Quicksilver currently has an interest in natural gas and crude
oil mineral leases, a pipeline transmission system, gas gathering and
processing facilities and wells producing hydrocarbons that are located
principally in the states of Michigan, Wyoming, Montana, and Indiana as well
as Canada. Quicksilver evaluates other opportunities for the development of
reserves and related assets as they become available and, under certain
circumstances, may explore opportunities in regions other than those in which
Quicksilver is currently involved.
As part of its formation, Quicksilver entered into a management agreement
with Mercury to act as operator of Quicksilver's oil and gas properties. In
this capacity, Mercury was responsible for the daily activities of producing
natural gas and crude oil from Quicksilver's individual wells and leases.
Mercury supervised its field employees and managed Quicksilver's properties
with a view toward maximizing profitability. For some wells, Mercury also
contracted with individuals doing business in proximity to the wells (who are
more commonly referred to as "pumpers") for performance of various tasks that
are required to maintain production from the wells. Upon completion of the MSR
merger on March 4, 1999, the management agreement with Mercury terminated and
Quicksilver and Mercury entered into a new management agreement. Under this
new management agreement, Mercury provided administrative and accounting
services, and continued to provide operations services under existing
operating agreements. In July 2000, Quicksilver terminated the management
agreement with Mercury and now performs all of its own administrative,
finance, and operating functions.
Quicksilver is not a user or refiner of the natural gas or crude oil it
produces, except when related to the operation of wells that produce natural
gas. Once extracted from the ground, Quicksilver either connects the
3
<PAGE>
production to a pipeline gathering system, in the case of natural gas and
condensate, or stores the crude oil in storage tanks located close to the
producing field for collection by oil purchasers.
Quicksilver owns or holds interests in over 4,814 producing wells.
Quicksilver also holds interests in properties that contain proved undeveloped
natural gas and crude oil reserves that require additional drilling,
workovers, water flooding or other forms of enhancement in order to become
productive.
The Company controls capital expenditures and timing of all field activities
and strives to manage its producing properties to maximize economic production
over the life of the properties through a combination of development well
drilling, existing well recompletions and workovers and enhanced recovery
operations. Quicksilver uses advanced drilling technologies to minimize costs
and performs regular operational reviews to minimize operating expenses.
Quicksilver continually evaluates producing property acquisition
opportunities and may increase its total annual capital expenditures depending
upon its success in identifying and completing attractive acquisitions.
Business Strategy
Quicksilver's business strategy focuses on achieving growth in value per
share while maintaining profitability. The Company accomplishes this by (i)
pursuing low-cost development projects within its existing property base, (ii)
pursuing selective complementary acquisitions of high-quality, long-lived
producing properties with the potential for operating cost reductions, (iii)
focusing on the Company's expertise developed in production from
unconventional natural gas resources, (iv) managing exposure to commodity
price volatility through an aggressive hedging program, and (v) pursuing
limited low-risk exploration drilling projects.
Low-cost Development of Existing Property Base
A principal component of Quicksilver's strategy is to increase production
and reserves through aggressive management of operations and low-risk
development drilling. The Company's principal properties possess geological
and reservoir characteristics that make them well-suited for production
increases through exploitation activity and development drilling. The Company
initiates projects to reduce operating costs and increase production through
the repair and upgrading of lifting equipment; the redesigning of equipment to
improve production from different zones; the modification of gathering and
other surface facilities; and the conducting of restimulations and
recompletions. Through these and other techniques, the Company regularly
reviews operations and mechanical data on operated properties to determine if
actions can be taken to profitably increase reserves and production.
Pursuit of Selective Complementary Acquisitions
Quicksilver seeks to acquire operated, long-lived producing properties that
present opportunities to profitably increase reserves and production levels
through the implementation of technically advanced reservoir management
techniques and the reduction of expenses through the consolidation and active
management of field operations. Quicksilver targets acreage that would expose
the Company to high potential prospects located in areas that are geologically
similar to neighboring areas with large developed fields. Quicksilver believes
that the Company will be able to continue this cost-effective acquisition
strategy over the long term as larger oil and gas companies continue to divest
domestic onshore properties in order to focus on projects in offshore and
international areas; however, current commodity prices have reduced the number
of economically acceptable acquisition opportunities.
Focus on Unconventional Gas Reserves
Conventional or traditional reservoirs produce gas at commercial flow rates
with minimal stimulation requirements. Unconventional reservoirs, the opposite
of traditional, will not produce at commercial flow rates unless the formation
is successfully stimulated. The most successful form of stimulation is usually
hydraulic
4
<PAGE>
fracturing. Unconventional gas resources play an important role in the
production of natural gas and are the largest remaining natural gas resources
in North America. Natural gas produced from shale, coal beds, and tight gas
sands are included in the unconventional gas resource category. The majority
of the Company's Michigan production is from the Antrim shale where
Quicksilver or its predecessors have been an active driller and producer for
over ten years. The Company's Antrim shale activity has allowed it to develop
a technical and operational expertise in the acquisition, development and
production of unconventional natural gas reserves. Quicksilver will continue
to focus on unconventional natural gas resources in order to use its developed
expertise.
Management of Product Price Risk
Quicksilver is focused on growing its oil and gas operations while
minimizing the effect of commodity price swings on net income and cash flow
from operations. To help ensure a level of predictability in the prices
received for the Company's natural gas and crude oil production and,
therefore, the resulting cash flow, Quicksilver has entered into natural gas
sales contracts with up to eight years remaining as well as financial hedges
for approximately 83% of its natural gas production, or 65% of its total
production. The Company's commodity risk management strategy helps to ensure a
predictable, base level of cash flow which allows the Company to execute its
drilling and exploitation program, meet debt service requirements, and pursue
acquisition opportunities, even in times of weakness in the prices of natural
gas and crude oil.
Participation in Exploratory Drilling Projects
Quicksilver will continue to focus the bulk of its activities on lower risk
exploitation activity and development drilling. Quicksilver may, however,
allocate future capital expenditures to target high potential exploratory
projects with low financial risk. In particular, Quicksilver anticipates
pursuing exploratory and follow-on development and exploitation drilling in
areas which are believed to be attractive prospects for unconventional gas
projects including shales, coal bed methane and tight sands gas, to which the
Company's technical and operational expertise is well suited. Whenever
possible, the Company will seek to fund the initial higher-risk portion of
capital expenditures associated with the exploration phase of these projects
through farmouts to larger, better capitalized industry participants while
maintaining the ability to participate in any subsequent lower risk
development and exploitation activities.
Recent Events
During the year 2000, Quicksilver advanced toward its goal of becoming a
significant independent oil and gas producing company through acquisitions,
exploration agreements, and assumption of administrative and operational
functions.
CMS Acquisition
On March 31, 2000, the Company acquired from CMS Oil and Gas Company, a
subsidiary of CMS Energy Corporation, oil and gas properties located primarily
in Michigan ("CMS Properties" or "CMS Acquisition") for $164 million. The CMS
Properties consist of interests in approximately 3,050 (650 net) producing oil
and gas wells on approximately 512,000 gross (450,000 net) acres. Estimated
proved reserves attributable to the CMS Properties include 315.1 Bcf of
natural gas, 747.8 Mbbls of crude oil and condensate and 143.9 Mbbls of
natural gas liquids, or a total of 320.4 Bcfe. Approximately 80% of the proved
reserve volumes are classified as proved developed. This acquisition doubled
the Company's revenues, and was financed through additional borrowings and a
monetization of tax credits.
Mercury Acquisition
Effective July 31, 2000, Quicksilver purchased substantially all of the oil
and gas-related assets of, and 65% of a gas compression company from, Mercury
Exploration Company ("Mercury"), a related party. The assets purchased
included all the capital stock of Mercury Michigan, Inc. ("MMI"), 65% of the
capital stock of
5
<PAGE>
Mechanical Technology Services, LLC ("MTS"), and gas and oil properties
located in Indiana and Kentucky (See Dominion Indiana Acquisition below). MMI
is a gas processing company, which gathers and processes approximately 75
million cubic feet of natural gas per day, and which owns fifty percent each
of Beaver Creek Pipeline, LLC and Cinnabar Energy Services & Trading, LLC.
Quicksilver now owns 100% of Beaver Creek and Cinnabar. MTS sells, installs,
repairs, and maintains compression for the natural gas industry.
Dominion Indiana Acquisition
On September 26, 2000, Quicksilver purchased substantially all of the
interests in producing gas wells, related gathering and transmission systems
and fifty percent in undeveloped leasehold acres owned by Dominion Reserves-
Indiana, Inc. for $2.2 million. The remaining interests in these properties
located in Indiana and Kentucky were acquired by Quicksilver from Mercury
effective July 1, 2000.
MGV Energy Inc.
In December 2000, MGV Energy Inc. ("MGV"), Quicksilver's Canadian
subsidiary, announced the formation of a joint venture with PanCanadian
Petroleum Limited to explore for and develop coal bed methane reserves on over
1 million acres of PanCanadian lands. The exploration project, which initially
focuses on PanCanadian's Palliser block in southern Alberta, began in December
of 2000. Quicksilver subsequently acquired the remaining minority interest in
MGV it did not own for the equivalent of 283,669 shares of Quicksilver common
stock in the form of MGV exchangeable shares.
Assumption of Administrative and Operational Functions
On April 1, 2000, Quicksilver assumed the accounting, treasury and
administrative functions, and on July 1, 2000, it assumed operational
functions of its oil and gas properties, all of which were previously
performed by Mercury. As a result, headcount went from 23 on December 31, 1999
to 214 at year-end 2000. With the acquisition of the Mercury assets (described
above) and assumption of all functions from Mercury, the Company has all but
eliminated its dependence on and transactions with Mercury.
Cinnabar Expansion
During 2000, Cinnabar Energy Services & Trading, LLC ("Cinnabar"),
Quicksilver's wholly owned marketing company (upon completion of the Mercury
acquisition), expanded its operations to provide third party marketing
services to other producers, as well as managing the equity product sales of
Quicksilver. Cinnabar, on behalf of Quicksilver and its third party clients,
sold over 25 Bcf of gas in 2000.
Marketing
The natural gas produced from Quicksilver's properties is marketed by
Cinnabar under existing long-term sales contracts and short-term wholesale
spot market sales. Oil production is sold at local prices to the principal
purchasers of crude oil in the respective areas of operations.
Cinnabar sells the oil and gas to creditworthy counterparties, such as
utilities, major oil companies (or their affiliates), industrial customers,
large trading companies or energy marketing companies, refineries and other
users of petroleum products. Cinnabar is not confined to or dependent upon one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser in areas in which Cinnabar sells its production would not materially
affect Quicksilver's product values. For 2000, however, purchases by CoEnergy
Trading Company, Reliant Energy Services Inc., Scana Energy Marketing Inc. and
Sempra Energy Trading Corp., exceeded 10% of the total revenues from
Quicksilver's product sales.
6
<PAGE>
Competition
The Company encounters substantial competition in acquiring oil and gas
leases and properties, marketing oil and gas, securing personnel and
conducting its drilling and field operations. Many competitors have financial
and other resources, which substantially exceed those of the Company. The
competitors in development, exploration, acquisitions and production include
the major oil companies as well as numerous independents, individual
proprietors and others. Resources of the Company's competitors may enable them
to pay more for desirable leases and to evaluate, bid for and purchase a
greater number of properties or prospects than the Company. The ability of the
Company to replace and expand its reserve base in the future through
acquisition will be dependent upon its ability to select and acquire suitable
producing properties and prospects for future drilling.
The Company's acquisitions have been financed through debt and internally
generated cash flow. There is competition for capital to finance oil and gas
acquisitions and drilling. The ability of the Company to obtain such financing
is uncertain and can be affected by numerous factors beyond its control. The
inability of the Company to raise capital in the future could have an adverse
effect on certain areas of its business.
Governmental Regulation
The Company's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations.
In particular, natural gas and crude oil production and related operations are
or have been subject to price controls, taxes and other laws and regulations
relating to the industry. Failure to comply with such laws and regulations can
result in substantial penalties. The regulatory burden on the industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, such laws and regulations are frequently
amended or reinterpreted so the Company is unable to predict the future cost
or impact of complying with such laws and regulations.
Environmental Matters
The Company's oil and natural gas exploration, development, production and
pipeline gathering operations are subject to stringent federal, state and
local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental
agencies, such as the Environmental Protection Agency ("EPA"), issue
regulations to implement and enforce such laws, and compliance is often
difficult and costly. Failure to comply may result in substantial civil and
criminal penalties. These laws and regulations may require the acquisition of
a permit before drilling commences; restrict the types, quantities and
concentrations of various substances that can be released into the environment
in connection with drilling, production and pipeline gathering activities;
limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands, frontier and other protected areas; require some form of
remedial action to prevent pollution from former operations such as plugging
abandoned wells; and impose substantial liabilities for pollution resulting
from the Company's operations. In addition, these laws, rules and regulations
may restrict the rate of natural gas and crude oil production below the rate
that would otherwise exist. The regulatory burden on the industry increases
the cost of doing business and consequently affects the Company's
profitability. Changes in environmental laws and regulations occur frequently,
and any changes that result in more stringent and costly waste handling,
disposal or clean-up requirements could adversely affect the Company's
operations and financial position, as well as the industry in general. While
management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations and the Company has not
experienced any materially adverse effect from compliance with these
environmental requirements, there is no assurance that this will continue in
the future.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to be responsible for the release of a "hazardous
substance" into
7
<PAGE>
the environment. These persons include the present or past owners or operators
of the disposal site or sites where the release occurred and the companies
that transported or arranged for the disposal of the hazardous substances at
the site where the release occurred. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to
natural resources and for the costs of certain health studies; it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damages allegedly caused by the release of
hazardous substances or other pollutants into the environment. Furthermore,
although petroleum, including natural gas and crude oil, is exempt from
CERCLA, at least two courts have ruled that certain wastes associated with the
production of crude oil may be classified as "hazardous substances" under
CERCLA and thus such wastes may become subject to liability and regulation
under CERCLA. State initiatives to further regulate the disposal of crude oil
and natural gas wastes are also pending in certain states, and these various
initiatives could have adverse impacts on the Company.
Stricter standards in environmental legislation may be imposed on the
industry in the future. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain exploration and
production wastes as "hazardous wastes" and make the reclassified wastes
subject to more stringent handling, disposal and clean-up restrictions. If
such legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as on the industry in general.
Compliance with environmental requirements generally could have a materially
adverse effect upon the capital expenditures, earnings or competitive position
of the Company. Although the Company has not experienced any materially
adverse effect from compliance with environmental requirements, no assurance
may be given that this will continue in the future.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other petroleum
wastes into navigable waters. Permits must be obtained to discharge pollutants
into state and federal waters. The FWPCA and analogous state laws provide for
civil, criminal and administrative penalties for any unauthorized discharges
of crude oil and other hazardous substances in reportable quantities and may
impose substantial potential liability for the costs of removal, remediation
and damages. Federal effluent limitations guidelines prohibit the discharge of
produced water and sand, and some other substances related to the natural gas
and crude oil industry, into coastal waters. Although the costs to comply with
zero discharge mandated under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a materially adverse impact on the Company's
financial condition and results of operations. Some oil and gas exploration
and production facilities are required to obtain permits for their stormwater
discharges. Costs may be incurred in connection with treatment of wastewater
or developing storm water pollution prevention plans.
The Resource Conservation and Recovery Act ("RCRA"), as amended, generally
does not regulate most wastes generated by the exploration and production of
natural gas and crude oil. RCRA specifically excludes from the definition of
hazardous waste "drilling fluids, produced waters, and other wastes associated
with the exploration, development, or production of crude oil, natural gas or
geothermal energy." However, these wastes may be regulated by the EPA or state
agencies as solid waste. Moreover, ordinary industrial wastes, such as paint
wastes, waste solvents, laboratory wastes and waste compressor oils, are
regulated as hazardous wastes. Although the costs of managing solid hazardous
waste may be significant, the Company does not expect to experience more
burdensome costs than would be borne by similarly situated companies in the
industry.
In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters
of the United States" (a term defined to include rivers, creeks, wetlands and
coastal waters) to adopt and implement plans and procedures to prevent any
spill of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35
million in financial resources to pay for the costs of cleaning up an oil
spill and compensating any parties damaged by an oil spill. Substantial civil
and criminal fines and penalties can be imposed for violations of OPA and
other environmental statutes.
8
<PAGE>
Employees
As of March 9, 2001, the Company had 221 full time employees, including
officers.
ITEM 2. Description of Properties
Location and Characteristics
Quicksilver owns significant interests in the following properties:
Michigan
<TABLE>
<CAPTION>
Reserve Data as of Average Daily Production
December 31, 2000 for 2000
------------------------- ---------------------------
Gas Oil NGL Total Gas Oil NGL Total
(Bcf) (Mbbl) (Mbbl) (Bcfe) (Mmcf) (Bbls) (Bbls) (Mmcfe)
----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Producing Formation:
Antrim Shale.......... 469.1 -- -- 469.1 60.5 -- -- 60.5
Prairie du Chien and
Other................ 74.0 4.4 1.4 108.7 27.7 1,458 393 38.8
----- --- --- ----- ---- ----- --- ----
Total............... 543.1 4.4 1.4 577.8 88.2 1,458 393 99.3
===== === === ===== ==== ===== === ====
</TABLE>
Michigan has very favorable natural gas supply/demand characteristics in
that Michigan has been importing an increasing percentage of its natural gas,
and currently imports approximately 75% of its demand. This supply/demand
situation generally allows Michigan producers to sell their natural gas at a
slight premium to typical industry benchmark prices. It also provides
opportunities for long-term contracts at favorable terms with end users who
value such supply arrangements.
The Antrim Shale
The Antrim Shale underlies a large percentage of the Company's Michigan
acreage and is fairly homogeneous in terms of reservoir quality; wells tend to
produce relatively predictable amounts of natural gas. While subsurface
fracturing can increase reserves and production attributable to any particular
well, the over 7,000 wells drilled in the trend and the approximately 552
wells Quicksilver has drilled suggest typical per well reserves of 600 Mmcf to
800 Mmcf and a total productive life of more than 20 years. As new wells
produce and the de-watering process takes place, they tend to reach a
production level of 150 Mcf to 200 Mcf per day in six to 12 months, remaining
at these levels for one to two years, then declining at 8% to 10% per year
thereafter. The total cost to drill and complete an Antrim well is
approximately $225,000, including all acreage, production facilities and
flowlines, and the wells tend to produce the best economic results when
drilled in large numbers in a fairly concentrated area. This well
concentration provides for a more rapid de-watering of a specific area, which
decreases the time to natural gas production and increases the amount of
natural gas production. It also enables Quicksilver to maximize the use of
existing production infrastructure, which decreases per unit operating costs.
Since reserve quantities and production levels over a large number of wells
are fairly predictable, maximizing per well recoveries and minimizing per unit
production costs through a sizeable well-engineered drilling program are the
keys to profitable Antrim development.
At December 31, 2000, Quicksilver owned interests in 3,681 Antrim wells and
operated 1,249 of these wells, or 34% of the Company's total Antrim wells.
During 2000, average net production was 60.5 Mmcf per day. Since 1996, the
Company has drilled 186 Antrim wells and successfully completed 184 for a
success rate of 99%. Quicksilver has 201 net identified Antrim drilling
locations of which 156.0 (net) are currently classified as proved undeveloped
locations. In 2000, the Company drilled 30.5 (net) Antrim wells, all of which
were successfully completed. For 2001, Quicksilver has budgeted for the
drilling of 112.9 (net) Antrim wells at a cost of approximately $21.9 million.
9
<PAGE>
The Prairie du Chien
Quicksilver's Prairie du Chien ("PdC") wells produce from several Ordovician
age reservoirs with the majority being in the 1,000 feet to 1,200 feet thick
Prairie du Chien Group that has three major sands: the Lower PdC, Middle PdC
and Upper PdC. Many of these wells also can produce from the St. Peter
sandstone and the Glenwood formations, both of which lie directly above the
PdC. Some of the wells are producing from two or more of these zones.
Depending upon the area and the particular zone, the PdC will produce dry gas,
gas and condensate or, oil with associated gas. The average depths of these
wells range from 7,000 feet to 12,000 feet.
Quicksilver owns an average net revenue interest of 57%, on a Bcfe basis, in
the wells comprising the Company's PdC reserves. Quicksilver operates over 98%
of these reserves. The Company's PdC production is well established, and three
development wells have been drilled in recent years to increase production
from existing fields. As a result of some of this work and an acquisition from
Union Oil Company of California ("Unocal") in May of 1999, Quicksilver has
identified eight additional proved undeveloped locations. In addition, there
are numerous proved non-producing zones in existing wellbores that provide
recompletion opportunities, allowing the Company to maintain or, in some
cases, increase production from its PdC wells as currently producing
reservoirs deplete. As of December 31, 2000, the Company had 38 gross (24.1
net) PdC wells producing 25.0 Mmcfe per day. For 2001, the Company has
budgeted $430,000 for various workovers and recompletions on its PdC wells,
and plans to spend $3.3 million in 2001 to drill two new wells.
Richfield/Detroit River
Quicksilver's Richfield/Detroit River wells are located in Kalkaska and
Crawford counties in the Garfield and Beaver Creek fields. The Garfield
Richfield has seven producers producing under primary solution gas drive.
Additional potential exists in the Garfield Richfield either by secondary
waterflood and/or improved oil recovery ("IOR") with CO2 injection. The
potential upside is under evaluation and has not been included in
Quicksilver's booked reserves.
The Beaver Creek Richfield is currently being waterflooded, with 113
producing wells and 60 water injection wells. The Richfield zone consists of
seven dolomite reservoirs spread over a 200 foot interval. Quicksilver has
drilled two wells of a five well stepout program on the eastern flank of the
structure, with drilling operations ongoing. Once drilling operations have
ceased, the five wells will be completed. Pending a testing/production
monitoring period on this five well program, an additional five well drilling
and completion program is planned for later in 2001.
The Detroit River zone III at Beaver Creek also produces from three wells.
Lying approximately 200 feet above the Richfield, the Detroit River zone III
is a six foot dolomite zone which covers approximately 10,000 acres on the
Beaver Creek structure. Quicksilver is currently recompleting seven wells on
the north and west flank of the structure. A 20 well drilling program is
planed for midyear 2001 to continue development of the Detroit River zone III.
Quicksilver plans to continue drilling and recompleting wells to fully develop
the Detroit River zone III by mid 2002. In addition to booked primary proved
undeveloped reserves in the Detroit River zone III, upside potential exists
for IOR with CO2.
The Company's average daily production from the Richfield and Detroit River
formations totals approximately 4.2 Mmcfe.
Niagaran
Quicksilver's Niagaran wells produce from numerous Silurian age Niagaran
(dolomite/limestone) pinnacle reefs located in Cheboygan, Grand Traverse,
Kalkaska, Livingston, Manistee, Montmorency, Oakland, Otsego and Presque Isle
Counties. The depth of these wells range from 3,400 feet to 7,800 feet with
reservoir thickness from 300 feet to 600 feet. Depending upon the location of
the specific reef in the pinnacle reef belt of the northern shelf area, the
Niagaran reefs will produce dry gas, gas and condensate or oil with associated
gas.
10
<PAGE>
As of December 31, 2000, the Company had 64 gross (28 net) Niagaran wells
producing 7.3 Mmcfe per day. Quicksilver operates, on a Bcfe basis,
approximately 50% of the reserves associated with these wells.
Indiana
Quicksilver acquired a 95% working interest in 33 New Albany Shale producing
wells from Dominion Reserves-Indiana effective April 1, 2000 and also acquired
the remaining 5% working interest from its predecessor, Mercury Exploration
Company effective July 1, 2000. With these two acquisitions, the Company also
purchased the eight mile 12 inches GTG gas transmission pipeline that runs
from Southern Indiana to Northern Kentucky. Current production is
approximately 1.4 Mmcf per day. The New Albany Shale is similar to the
Michigan Antrim as it has to be dewatered in order to produce desorbed methane
gas. Typical reserves per well are estimated to be approximately 250 Mmcf.
Quicksilver initiated a five well expansion drilling program in December 2000
with the wells commencing production in February 2001. In addition,
Quicksilver anticipates that it will drill between 20 to 30 additional wells
in the New Albany Shale in 2001.
Rocky Mountain Region
Quicksilver's Rocky Mountain properties are located in Montana and Wyoming,
and production, which is primarily crude oil, is from well-established
producing formations at depths ranging from 1,000 feet to 17,000 feet. These
properties typically have multiple producing zones, some of which include the
Phosphoria at 750 feet to 1,000 feet, the Tensleep at 1,000 feet to 3,000 feet
and the Muddy/Mowry at 8,400 feet to 9,000 feet. The Company's Rocky Mountain
producing properties possess significant development drilling, secondary
recovery and other exploitation opportunities. As of December 31, 2000, the
Company's Rocky Mountain proved reserves were 10.3 Mmbbls of crude oil and 2.0
Bcf of natural gas, for total equivalent reserves of 63.8 Bcfe. In 2000, daily
production averaged 9.6 Mmcfe. During 2000, Quicksilver spent approximately
$500,000 on various exploitation activities relative to its Rocky Mountain
properties. The Company is currently conducting an active exploitation program
on several of its Rocky Mountain fields that involves recompletions in
existing wells. In 2001, Quicksilver has budgeted $2.6 million for the
drilling of 3 exploration wells and $1.2 million for exploitation activities.
South Casper Creek Steamflood Project
In October 1995, Quicksilver's predecessor acquired the South Casper Creek
steamflood project in Natrona County, Wyoming as part of a larger acquisition
from Unocal. In the 1970s and 1980s, Unocal had conducted several steamflood
evaluations of the Tensleep formation, a producing horizon that contains 14
degree gravity crude oil which is relatively heavy and is more effectively
recovered when heated with steam, allowing the oil to flow toward the wellbore
at a faster rate. In the late 1980s, Unocal attempted several additional
redesigned pilot steamfloods and had encouraging results. Based on these
results, Unocal undertook full development of the project, drilling additional
steam injection wells and installing four 50 Mmbtu per hour generators
providing 13,000 barrels of steam per day through eleven injection wells. The
post-steamflood production peaked in 1992 at 1,500 barrels per day, an 88%
increase from the pre-steamflood production of 800 barrels per day, exceeding
Unocal's original expectations. Despite this success, Unocal decided to cut
the project's budget, resulting in a decrease in steam injection, a decrease
in production and the eventual discontinuation of the project. Quicksilver's
predecessor's acquisition of this project included all of the associated steam
generating equipment in place that had been installed by Unocal. This
equipment is in good condition and could be restarted at an estimated cost of
under $2.4 million. While the project is economically viable at current crude
oil prices, the Company has excluded this project from its reserve report and
is studying options in light of the project's sensitivity to long-term oil
prices.
Canada
Quicksilver believes that a number of producing areas in Canada offer
excellent opportunities for acquisition and exploitation. The strengths of
MGV, Quicksilver's wholly-owned subsidiary, lie in its unconventional gas
resource expertise and its ability to conduct detailed reservoir engineering
studies over producing fields to
11
<PAGE>
identify remaining reserves not currently being exploited by the current
operator. MGV's technical staff has developed proprietary reservoir software
designed to integrate large amounts of engineering and geological data to
identify such opportunities. MGV has a joint venture with PanCandian Petroleum
Limited ("PanCandian") where MGV identifies opportunities in a 36,000 square
mile area of mutual interest. This area of mutual interest is primarily in
southern Alberta, which has historically produced and continues to produce
significant amounts of hydrocarbons. When MGV identifies a prospect, it has
the right to acquire up to a 20% interest if PanCanadian participates and a
100% interest if PanCanadian declines. During 2000, MGV acquired a 20%
interest in 26 wells and proven reserves estimated at 1.8 Bcf. At the end of
2000, MGV held an interest in 401 wells in southern Alberta and 15.3 Bcf of
proved reserves. Net daily production at the end of the year was 1.9 Mmcf. MGV
has budgeted for the drilling of 48 gross (5.36 net) infill wells in 2001 on
properties they do not operate. Also budgeted is the drilling of 10 infill
wells on operated lands acquired last fall. Late in 2000, MGV drilled the
first 8 wells of a 30 well program for a Coal Bed Methane ("CBM") project. The
CBM project is a joint venture with PanCandian to explore for and develop
natural gas from coal beds situated on over 1.0 million acres of PanCanadian
lands. During 2001, MGV has budgeted to spend $7.2 million (Cdn) on its CBM
project and $1.5 million (Cdn) for the drilling of infill wells on existing
properties. See also "Recent Events--MGV Energy Inc".
Oil and Gas Reserves
The following reserve quantity and future net cash flow information for
Quicksilver represents proved reserves that are primarily located in the
United States. Reserve estimates were prepared by Holditch-Reservoir
Technologies Consulting Services, independent petroleum engineers. The
determination of oil and gas reserves is based on estimates that are highly
complex and interpretive. The estimates are subject to continuing change, as
additional information becomes available. Under the guidelines set forth by
the SEC, the calculation is performed using year-end prices held constant
(unless a contract provides otherwise) and is based on a 10% discount rate.
Future production costs are based on year-end costs and include production
taxes. This standardized measure of discounted future net cash flows is not
necessarily representative of the market value of Quicksilver properties.
There are numerous uncertainties inherent in estimating oil and gas reserves
and their estimated values, including many factors beyond Quicksilver's
control. The reserve data set forth in this document represents only
estimates. Although Quicksilver believes the reserve estimates contained in
this document are reasonable, reserve estimates are imprecise and are expected
to change, as additional information becomes available.
The following table summarizes Quicksilver's proved reserves, the estimated
future net revenues from such proved reserves and the standardized measure of
discounted future net cash flows attributable thereto at December 31, 2000,
1999 and 1998.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Proved reserves:
Natural gas (Mmcf)........................ 570,814 192,963 147,226
Oil (Mbbl)................................ 14,856 15,281 17,983
Natural Gas Liquids ("NGL") (Mbbl)........ 1,535 845 996
Total (Mmcfe)........................... 669,160 289,719 261,100
($ in thousands)
Estimated future net cash flows, before
income tax................................. $4,026,537 $450,663 $275,737
Standardized measure of discounted future
net cash flows, before income tax.......... $1,592,761 $253,506 $160,495
Proved developed reserves:
Natural gas (Mmcf)........................ 444,865 135,326 118,295
Oil (Mbbl)................................ 9,391 9,954 9,829
NGL (Mbbl)................................ 813 838 908
Total (Mmcfe)........................... 506,089 200,078 182,717
</TABLE>
12
<PAGE>
Volumes, Sales Prices and Oil and Gas Production Expense
The following table sets forth certain information regarding the production
volumes and weighted average sales prices received for and average production
costs associated with Quicksilver's sale of oil and gas for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Production:
Natural gas (Mmcf).............................. 26,655 15,926 14,520
Oil (Mbbl)...................................... 1,035 724 667
NGL (Mbbl)...................................... 161 129 132
------- ------- -------
Total (Mmcfe)................................. 33,831 21,044 19,317
Weighted average sales price (including impact of
hedges):
Natural gas (per Mmcf).......................... $ 3.04 $ 2.25 $ 2.37
Oil (per Mbbl).................................. $ 22.87 $ 14.55 $ 9.55
NGL (per Mbbl).................................. $ 25.25 $ 9.93 $ 9.48
Production operating expense (per Mcfe) (1)....... $ 1.11 $ 0.90 $ 0.89
</TABLE>
- --------
(1) Includes production taxes.
Development, Exploration and Acquisition Capital Expenditures
The following table sets forth certain information regarding the approximate
costs incurred by Quicksilver in its development and exploration activities
and purchase of oil in place (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Acquisition of producing properties................ $167,855 $40,272 $ 1,715
Development costs.................................. 20,078 9,486 8,283
Exploration costs.................................. 360 -- 1,095
-------- ------- -------
Total............................................ $188,293 $49,758 $11,093
======== ======= =======
</TABLE>
Productive Oil and Gas Wells
The following table summarizes the productive oil and gas wells as of
December 31, 2000, attributable to Quicksilver's direct interests.
<TABLE>
<CAPTION>
Gross Net
------- -------
<S> <C> <C>
Natural Gas.................................................. 4,252.0 1,104.0
Oil.......................................................... 562.0 526.3
------- -------
Total...................................................... 4,814.0 1,630.3
======= =======
</TABLE>
Oil and Gas Acreage
The following table sets forth the developed and undeveloped leasehold
acreage held directly by Quicksilver as of December 31, 2000. Developed acres
are defined as acreage spaced or able to be assigned to productive wells.
Undeveloped acres are acres on which wells have not been drilled or completed
to a point that would permit the production of commercial quantities of oil or
gas, regardless of whether or not such acreage contains
13
<PAGE>
proved reserves. Gross acres are the total number of acres in which
Quicksilver has a working interest. Net acres are the sum of Quicksilver's
fractional interests owned in the gross acres. States in which Quicksilver
holds undeveloped acreage include Michigan, Montana, Indiana and Wyoming.
<TABLE>
<CAPTION>
Gross Net
--------- -------
<S> <C> <C>
Developed acreage.......................................... 594,033 272,484
Undeveloped acreage........................................ 687,472 251,034
--------- -------
Total.................................................... 1,281,505 523,518
========= =======
</TABLE>
Drilling Activity
The following table sets forth the number of wells attributable to
Quicksilver direct interests drilled.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Development Wells:
Productive..................................... 55.0 35.5 25.0 24.8 41.0 24.8
Dry............................................ -- -- 3.0 2.9 -- 2.9
---- ---- ---- ---- ---- ----
Total........................................ 55.0 35.5 28.0 27.7 41.0 27.7
==== ==== ==== ==== ==== ====
Exploratory Wells:
Productive..................................... -- -- -- -- 9.0 9.0
Dry............................................ -- -- -- -- 1.0 .5
---- ---- ---- ---- ---- ----
Total........................................ -- -- -- -- 10.0 9.5
==== ==== ==== ==== ==== ====
</TABLE>
ITEM 3. Legal Proceedings
The Company was not a party to any material pending legal proceedings during
2000 and is not currently a party to any material legal proceeding.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a stockholder vote during the fourth
quarter of 2000.
14
<PAGE>
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Comparative Market Data
Quicksilver's common stock is traded on the American Stock Exchange under
the symbol "KWK".
The following table sets forth the quarterly high and low closing sales
prices of Quicksilver's common stock for the periods indicated below.
QRI COMMON STOCK
<TABLE>
<CAPTION>
High Low
------- -------
2000
<S> <C> <C>
First Quarter................................................ $6.1250 $3.6250
Second Quarter............................................... 7.2500 5.6250
Third Quarter................................................ 9.7500 7.0000
Fourth Quarter............................................... 9.7500 7.7750
<CAPTION>
1999
<S> <C> <C>
First Quarter................................................ $7.6250 $7.2500
Second Quarter............................................... 7.3750 6.1250
Third Quarter................................................ 7.3750 6.5000
Fourth Quarter............................................... 7.6250 3.8125
</TABLE>
As of March 9, 2001, there were approximately 3,700 common stockholders of
record.
The Company has not paid dividends on its common stock and intends to retain
its cash flow from operations for the future operation and development of its
business. In addition, the Company's primary credit facility restricts
payments of dividends on its common stock.
Sales of Unregistered Securities
On March 4, 2000, the Company issued 3,650,000 unregistered shares of its
common stock to CMS Oil and Gas Company as part of an earnest money
performance deposit by the Company for an acquisition of properties from CMS.
CMS returned the shares to the Company upon closing of the acquisition on
March 31, 2000 and the shares are now held as treasury shares. The issuance of
these securities was exempt from registration under the Securities Act of 1933
in reliance on Section 4(2) of such act.
ITEM 6. Selected Financial Data
The following table sets forth, as of the dates and for the periods
indicated, selected financial information for the Company and its
predecessors. The Quicksilver financial information for each year ended
December 31, 2000, 1999 and 1998 has been derived from the audited
Consolidated Financial Statements of the Company for such periods. The
financial information of the Company's predecessors for periods ended in 1997
and 1996 has been derived from the audited financial statements of the
predecessors for such periods. The information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes thereto.
The following information is not necessarily indicative of future results for
the Company.
15
<PAGE>
Selected Financial Data of Quicksilver
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Total revenues................................ $ 120,048 $ 50,046 $ 45,028
Income before income taxes and minority
interest..................................... 27,731 3,023 7,413
Net income.................................... 17,618 3,162 4,885
Net income--per share
Basic....................................... $ 0.96 $ 0.24 $ 0.42
Diluted..................................... 0.95 0.24 0.42
Consolidated Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities.......................... $ 47,691 $ 10,220 $ 16,355
Investing activities.......................... (195,518) (42,288) (16,097)
Financing activities.......................... 158,103 34,330 (607)
Other Consolidated Financial Data:
Capital expenditures.......................... $ 194,507 $ 43,452 $ 16,097
EBITDA(1) .................................... 74,410 25,762 26,476
Consolidated Balance Sheet Data:
Working capital............................... $ 935 $ 7,168 $ 1,291
Properties--net............................... 374,099 170,800 134,810
Total assets.................................. 440,111 194,302 144,600
Total debt.................................... 244,135 97,086 85,039
Stockholders' equity.......................... 86,758 69,551 32,588
</TABLE>
- --------
(1) EBITDA (as used in this financial data) is calculated by adding interest,
income taxes, minority interest and depreciation, depletion and
amortization to net income. Interest includes interest expense accrued and
amortization of deferred financing costs. EBITDA is presented here not as a
measure of operating results, but rather as a measure of Quicksilver's
operating performance and ability to service debt. EBITDA should not be
considered as an alternative to earnings or operating earnings, as defined
by generally accepted accounting principles, as an indicator of the
Quicksilver's financial performance, as an alternative to cash flow, as a
measure of liquidity or as being comparable to other similarly titled
measures of other companies.
16
<PAGE>
Selected Historical Financial Data of Quicksilver Predecessors
MSR Exploration, Ltd.
For the Period from Inception, March 7, 1997, to December 31, 1997
(In thousands)
<TABLE>
<S> <C>
Statements of Operations Data:
Revenues.......................................................... $ 854
Net income........................................................ 30
Other Information:
Capital expenditures.............................................. $ 592
Balance Sheet Data:
Working capital................................................... $ 42
Total assets...................................................... 25,963
Long-term debt.................................................... 10,560
Stockholders' equity.............................................. 13,070
</TABLE>
Mercury Exploration Company
(Includes Quicksilver Energy, LC)
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Years Ended
September 30,
Three Months Ended -----------------
December 31, 1997 1997 1996
------------------ -------- -------
<S> <C> <C> <C>
Statements of Operations Data:
Revenues................................ $ 11,049 $ 41,328 $17,388
Net income.............................. 2,354 5,115 2,248
Net income per common share............. 9.38 20.38 8.96
Weighed average shares outstanding...... 251 251 251
Other Information:
Capital expenditures.................... $ 27,750 $ 54,231 $19,779
Balance Sheet Data:
Working capital (deficit)............... $ (9,324) $(13,133) $(5,813)
Total assets............................ 126,506 102,880 50,186
Long-term debt.......................... 65,275 47,174 19,560
Stockholders' equity.................... 17,670 15,316 10,427
</TABLE>
Michigan Gas Partners Limited Partnership
(In thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------
1997 1996
------ -------
<S> <C> <C>
Statements of Operations Data:
Revenues...................................................... $3,021 $ 3,368
Net income (loss)............................................. 19 (617)
Other Information:
Capital expenditures.......................................... $ 13 $ 132
Balance Sheet Data:
Working capital............................................... $ 343 $ 261
Total assets.................................................. 9,835 10,551
Long-term debt................................................ -- --
Partners' equity.............................................. 9,453 10,313
</TABLE>
17
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Information
Certain statements contained in this Annual Report on Form 10-K and other
materials filed by the Company with the Securities and Exchange Commission (as
well as information included in oral statements or other written statements
made or to be made by the Company), other than statements of historical fact,
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements may relate to a variety of
matters not currently ascertainable, such as future capital expenditures,
drilling activity, acquisitions and dispositions, development or exploratory
activities, cost savings efforts, production activities and volumes,
hydrocarbon reserves, hydrocarbon prices, hedging activities and the result
thereof, financing plans, liquidity, regulatory matters, competition and the
Company's ability to realize efficiencies related to certain transactions or
organizational changes. Forward-looking statements generally are accompanied
by words such as "anticipate," "believe," "expect," "intend," "plan,"
"project," "potential," or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove
correct. Factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include:
fluctuations in crude oil and natural gas prices; failure or delays in
achieving expected production from oil and gas development projects;
uncertainties inherent in predicting oil and gas reserves and oil and gas
reservoir performance; the effects of existing and future laws and
governmental regulations; liability resulting from litigation; world economic
and political conditions; changes in tax and other laws applicable to the
Company's business and certain factors discussed elsewhere in this Annual
Report on Form 10-K. All forward-looking statements are expressly qualified in
their entirety by the cautionary statements in this section. The following
discussion and analysis should be read in conjunction with "Selected Financial
Data" and the Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this annual report.
Mergers and Acquisitions
During the year 2000, Quicksilver more than doubled its revenue base
primarily through acquisitions funded through additional borrowings and
monetization of tax credits.
CMS Acquisition
On March 31, 2000, the Company acquired from CMS Oil and Gas Company, a
subsidiary of CMS Energy Corporation, oil and gas properties located primarily
in Michigan ("CMS Properties" or "CMS Acquisition"). The purchase price, which
was finalized in November 2000, was $164 million. The CMS Properties consist
of interests in approximately 3,050 (650 net) producing oil and gas wells on
approximately 512,000 gross (450,000 net) acres. Estimated proved reserves
attributable to the CMS Properties include 315.1 Bcf of natural gas, 747.8
Mbbls of crude oil and condensate and 143.9 Mbbls of natural gas liquids, or a
total of 320.4 Bcfe. Approximately 80% of the proved reserve volumes are
classified as proved developed.
The CMS Acquisition was financed through restructuring of Quicksilver's
senior bank facility, the sale of $53 million in subordinated notes, and the
monetization through a major financial institution of a portion of the
accompanying Internal Revenue Code Section 29 income tax credits related to
the CMS Properties.
The CMS Acquisition was accounted for under the purchase accounting method,
and consists of both CMS oil and gas properties as well as 100% of the common
stock of Terra Energy Ltd.
Mercury Acquisition
Effective July 31, 2000, Quicksilver purchased substantially all of the oil
and gas-related assets of, and 65% of a gas compression company from, Mercury
Exploration Company ("Mercury"), a related party, for approximately $18
million. An independent appraiser determined the fairness, from a financial
point of view, of
18
<PAGE>
the $18 million purchase price, and the non-related party members of the
Company's Board of Directors approved the purchase. The acquisition was
financed through assumption of existing debt of $6.1 million, application of
an account receivable of $7.2 million, a note payable to Mercury of $3.2
million and accounts payable of $1.3 million.
The assets purchased included all of the capital stock of Mercury Michigan,
Inc. ("MMI"), 65% of the capital stock of Mechanical Technology Services, LLC
("MTS"), and gas and oil properties located in Indiana and Kentucky (See
Dominion Indiana Acquisition below). MMI is a gas processing company, which
gathers and processes approximately 75 million cubic feet of natural gas per
day, and which owns fifty percent each of Beaver Creek Pipeline, LLC and
Cinnabar Energy Services & Trading, LLC. Quicksilver now owns 100% of Beaver
Creek and Cinnabar. MTS sells, installs, repairs, and maintains compression
for the natural gas industry.
Dominion Indiana Acquisition
Effective April 1, 2000, Quicksilver purchased substantially all of the
interests in producing gas wells, related gathering and transmission systems
and fifty percent in undeveloped leasehold acres owned by Dominion Reserves-
Indiana, Inc. for $2.2 million. The remaining interests in these properties
located in Indiana and Kentucky were acquired by Quicksilver from Mercury
effective July 1, 2000.
MGV Energy Inc. Minority Interest Acquisition
On December 22, 2000, Quicksilver acquired the remaining minority interest
in its Canadian subsidiary, MGV Energy Inc., headquartered in Calgary,
Alberta. Quicksilver's initial 89.5% interest in MGV was acquired on August
26, 1999. In exchange for their 10.5% interest, the minority shareholders of
MGV received the equivalent of 283,669 shares of Quicksilver common stock in
the form of MGV exchangeable shares valued at $2,309,000, which was allocated
to assets acquired and liabilities assumed based upon their fair value.
Results of Operations
Summary Financial Data
Year Ended December 31, 2000 Compared with December 31, 1999
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
Total revenues............................................. $120,048 $50,046
Total expenses............................................. 92,317 47,023
Income before income taxes................................. 27,731 3,164
Net income................................................. 17,618 3,162
</TABLE>
The Company recorded net income of $17,618,000 ($0.95 per diluted share) in
2000, compared to net income of $3,162,000 ($0.24 per diluted share) in 1999.
The improvement was largely due to the increase in production resulting from
the CMS Properties acquired March 31, 2000 and higher product prices.
Revenues: Total revenues for the year ended December 31, 2000 were
$120,048,000; an increase of 140% from the $50,046,000 reported for the year
ended December 31, 1999. Higher volumes contributed $40,540,000 of the revenue
increase while increased prices added $20,616,000 to revenue. Volume increases
were primarily the result of production from the CMS Properties acquired March
31, 2000. Other income increased $8,842,000 from the prior year primarily as a
result of deferred revenue recognition from the 2000 Section 29 tax credit
monetization.
19
<PAGE>
The Company's revenues for the year ended December 31, 2000 increased
significantly over 1999 as further shown below.
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
2000 1999
-------- -------
<S> <C> <C>
Average daily production volume
Gas--Mcf/d............................................... 72,829 43,633
Oil--Bbls/d.............................................. 2,829 1,984
Natural gas liquid ("NGL")--Bbls/d....................... 439 353
Product sale revenues (in thousands)
Natural gas sales........................................ $ 81,044 $35,799
Oil sales................................................ 23,674 10,540
NGL sales................................................ 4,054 1,277
-------- -------
Total oil, gas and NGL sales........................... $108,772 $47,616
======== =======
Unit prices-including impact of hedges
Gas price per Mcf........................................ $ 3.04 $ 2.25
Oil price per Bbl........................................ $ 22.87 $ 14.55
NGL price per Bbl........................................ $ 25.25 $ 9.93
</TABLE>
Gas sales of $81,044,000 for 2000 were 126% higher than the $35,799,000 for
1999. Gas volumes increased 67% over 1999 as a result of the CMS Acquisition.
Additional volumes of 10,729,000 Mcf contributed $32,622,000 of additional
revenue over 1999. Average gas prices were $3.04 per Mcf in for 2000, $0.79
per Mcf higher than the average price received in 1999. Increased prices added
$12,623,000 of revenue as compared to 1999.
Oil sales grew 125% to $23,674,000 for 2000 compared to $10,540,000 in 1999.
Crude oil production for 2000 was 1,035,000 barrels compared to 724,000
barrels in 1999 primarily as a result of the CMS Properties. The additional
311,000 barrels contributed revenue of $7,113,000 over 1999. Average 2000 oil
sales prices were $22.87 per barrel compared to $14.55 per barrel in 1999
increasing revenues $6,021,000.
NGL sales of $4,054,000 for 2000 increased significantly over sales for
1999. NGL prices increased from $9.93 to $25.25 per Bbl and added revenue of
$1,972,000. The additional NGL volumes, primarily from the CMS Properties,
added $804,000 of revenue.
Other income increased by $8,846,000 to $11,276,000 in 2000 compared to
$2,430,000 in 1999. Deferred revenue recognition from the 2000 Section 29 tax
credit monetization was $6,842,000. Revenue from the Company's marketing and
gas processing subsidiaries was $1,049,000 and income from equity affiliates
increased $867,000, both as a result of the acquisition of assets from Mercury
effective July 31, 2000.
Expenses: Total expenses of $92,317,000 in 2000 were 96% higher than the
$47,023,000 incurred in 1999 reflecting the addition of the CMS Properties,
Mercury assets and additional activity associated with MGV Energy Inc.
("MGV"), the Company's Canadian subsidiary, during 2000.
Operating Expenses
Operating expenses increased $18,870,000, or 101%, from 1999 operating
expense of $18,771,000. Lease operating expenses increased 86%, or
$13,995,000, to $30,332,000 reflecting an increase of 59% in sales volumes
from 1999 and increases in production overhead as a result of additional
operated wells associated with the CMS Acquisition. Increased sales volumes
and higher prices resulted in an increase of $4,305,000, or 177%, in severance
tax expense to $6,739,000.
20
<PAGE>
Depletion and Depreciation
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
2000 1999
------- -------
(In thousands,
except per unit
amounts)
<S> <C> <C>
Depletion................................................... $22,985 $13,315
Depreciation of other fixed assets.......................... 1,570 721
------- -------
Total depletion and depreciation............................ $24,555 $14,036
======= =======
Average depletion cost per Mcfe............................. $ 0.68 $ 0.63
</TABLE>
Depletion and depreciation increased to $24,555,000 in 2000 from $14,036,000
in 1999. Depletion increased $9,670,000 to $22,985,000 as a result of
production volumes associated with the CMS Properties and higher depletion
rates.
General and Administrative Expenses
General and administrative costs incurred during 2000 were $8,276,000, 99%
higher than in 1999, reflecting higher salaries and related payroll expenses
($1,486,000), office and building rent expense ($718,000), professional fees
($572,000), franchise taxes ($282,000), and Canadian office expenses
($550,000). These increases are related to the growth of the Company through
the CMS Acquisition, purchase of Mercury assets and increased activity
associated with MGV.
Interest Expense
Interest expense of $22,124,000 in 2000 increased $13,421,000 from 1999
reflecting higher debt levels due to the CMS Acquisition and higher effective
interest rates in 2000.
Income Taxes
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
2000 1999
------- ----
<S> <C> <C>
Income tax provision (in thousands)............................ $10,113 $ 2
Average income tax expense per Mcfe............................ $ 0.30 $--
Effective tax rate............................................. 36.5% --
</TABLE>
The income tax provision of $10,113,000 includes taxes on pre-tax earnings
at the statutory rate of 35% and adjustment of prior deferred taxes. The prior
deferred tax balance was recorded at 34% since it was previously estimated
that the timing differences would reverse at the lower rate. The increase in
profitability of the Company from the CMS Acquisition and record high prices
will result in future taxable income at the 35% rate. In 1999, $1,026,000 of
income taxes that would otherwise have been due were eliminated because the
utilization of net operating losses available from prior years.
As of December 31, 2000, the Company had a deferred tax liability of
$47,139,000. The increase in the deferred tax liability over the December 31,
1999 balance includes $24,497,000 as a result of the CMS Acquisition and a
$2,628,000 reduction in the liability that resulted from the acquisition of
the Mercury assets effective July 31, 2000. The remainder of the increase is
the result of year 2000 deferred tax expense.
21
<PAGE>
Summary Financial Data
Year Ended December 31, 1999 Compared with December 31, 1998
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Total revenues.............................................. $50,046 $45,028
Total expenses.............................................. 47,023 37,615
Income before income taxes.................................. 3,164 8,171
Net income.................................................. 3,162 4,885
</TABLE>
Net income of $3,162,000 ($0.24 per share) was recorded for 1999 as compared
to 1998 net income of $4,885,000 ($0.42 per share). The reduction was largely
due to the 191% increase in general and administrative costs. The increase
reflected the higher cost of being a public company with its own officers and
employees. In 1998, Mercury performed all administrative work for the Company.
Revenues: Total revenues for 1999 were $50,046,000, an increase of 11% from
the $45,028,000 reported in 1998. Additional volumes, resulting primarily from
properties acquired from Unocal, increased revenue $3,954,000 over the 1999
period while an overall increase in prices added $1,576,000 of revenue.
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Average daily production volume
Gas--Mcf/d................................................ 43,633 39,781
Oil--Bbls/d............................................... 1,984 1,829
NGL--Bbls/d............................................... 353 362
Product sale revenues (in thousands)
Natural gas sales......................................... $35,799 $34,463
Oil sales................................................. 10,540 6,367
NGL sales................................................. 1,277 1,250
------- -------
Total oil, gas and NGL sales............................ $47,616 $42,080
======= =======
Unit prices-including impact of hedges
Gas price per Mcf......................................... $ 2.25 $ 2.37
Oil price per Bbl......................................... $ 14.55 $ 9.55
NGL price per Bbl......................................... $ 9.93 $ 9.48
</TABLE>
Gas sales of $35,799,000 in 1999 were 4% higher than the $34,463,000 for
1998 as gas volumes increased 10% to 15,926,000 Mcf in 1999 reflecting
additional production volumes. Production increases were primarily related to
the additional production from properties acquired from Unocal in May 1999.
Average gas prices of $2.25 per Mcf for 1999 were $0.12 per Mcf lower than the
average received in 1998 and decreased revenues by $1,823,000 from the prior
year.
Oil sales grew 66% to $10,540,000 for 1999 compared to $6,367,000 in the
1998 period primarily as a result of higher prices. Average oil sales prices
in 1999 were $14.55 per barrel compared to $9.55 per barrel in 1998 and
provided additional revenue of $3,340,000 over the prior year. Additional oil
production contributed $826,000 of revenue as compared to 1998. Crude oil
production increased 57,000 barrels, or 9%, to 724,000 barrels, compared to
667,000 barrels for 1998.
NGL sales and volumes for 1999 were essentially unchanged from 1998. Revenue
of $1,277,000 resulted from NGL production of 129,000 barrels as compared to
$1,250,000 in revenue from 132,000 barrels in 1998.
22
<PAGE>
Other income in both 1999 and 1998 primarily consisted of income associated
with the monetization of Section 29 tax credits and income associated with
transportation and processing of natural gas. Income of $1,280,000 was
recognized from the monetization of Section 29 credits compared to $1,546,000
in 1998. Natural gas transportation and processing income for 1999 was
$1,017,000 versus $1,363,000 in 1998.
Expenses: Total expenses of $47,023,000 in 1999 were 25% higher than the
$37,615,000 incurred in 1998. Operating expenses of $18,771,000 increased 10%
from 1998 reflecting increased sales volumes of 9% over the prior year and
more well work-over projects.
Depletion and Depreciation
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------
1999 1998
------- -------
(in thousands,
except per unit
amounts)
<S> <C> <C>
Depletion................................................... $13,315 $12,008
Depreciation of other fixed assets.......................... 721 357
------- -------
Total depletion and depreciation............................ $14,036 $12,365
======= =======
Average depletion cost per Mcfe............................. $ 0.63 $ 0.62
</TABLE>
Depletion increased to $13,315,000 in 1999 from $12,008,000 in the 1998
period as a result of higher production volumes associated with the acquired
Unocal properties and a higher depletion rate.
General and Administrative Expenses
General and administrative costs incurred during 1999 totaled $4,163,000 and
were 191% higher than 1998 reflecting the higher cost of being a public
company. Salaries were $1,200,000 higher in 1999 as Quicksilver increased its
staff of officers and employees. In 1998, Mercury performed all administrative
work for the Company. The remaining cost increase resulted from higher
professional fees and rent expense.
Interest Expense
Interest expense of $8,703,000 in 1999 increased 30% from 1998 reflecting
higher debt levels in 1999 and higher effective interest rates in 1999.
Income Taxes
<TABLE>
<CAPTION>
Years Ended
December
31,
-----------
1999 1998
---- ------
<S> <C> <C>
Income tax provision (in thousands)............................. $ 2 $3,286
Average income tax expense per Mcfe............................. $-- $ 0.17
Effective tax rate.............................................. -- 40.2%
</TABLE>
Federal income tax of $1,026,000 that otherwise would have been due in 1999
was eliminated because of net operating losses available from prior years.
Liquidity and Capital Resources
General
The following discussion compares the Company's financial condition at
December 31, 2000 and 1999. For the years ended December 31, 2000 and 1999,
$194,507,000 and $43,452,000, respectively, was spent on acquisition and
development activities. The capital program was financed from operations,
additional borrowings, a restructured bank facility, monetization of a portion
of acquired Section 29 tax credits and the sale of subordinated notes.
23
<PAGE>
Cash Flow
The Company believes that its capital resources are adequate to meet the
requirements of its business. However, future cash flows are subject to a
number of variables including the level of production and oil and gas prices,
and there can be no assurance that operations and other capital resources will
provide cash in sufficient amounts to maintain planned levels of capital
expenditures.
As part of the acquisition of the CMS properties and Terra Energy Ltd., on
March 31, 2000, the Company amended the agreement setting forth the terms of
its credit facility ("Credit Facility"). The Credit Facility is a three-year
revolving credit facility that matures on March 31, 2003 and permits the
Company to obtain revolving credit loans and to issue letters of credit for
the account of the Company from time to time in an aggregate amount not to
exceed $225 million. The Borrowing base is $210 million and is subject to
semi-annual determination and certain other redeterminations based upon a
variety of factors, including the discounted present value of estimated future
net cash flow from the Company's natural gas and crude oil production. The
next scheduled re-determination date will be as of April 2, 2001, based on
December 31, 2000 assets and proved reserves. At the Company's option, loans
may be prepaid, and revolving credit commitments may be reduced in whole or in
part at any time in certain minimum amounts. As of year-end, the Company can
designate the interest rate on amounts outstanding at either the London
Interbank Offered Rate (LIBOR) + 1.875% or bank prime. At December 31, 2000,
the Company's interest rate was 8.635% through April 2, 2001 on $180 million.
The collateral for the Credit Facility consists of substantially all of the
existing assets of the Company and any future reserves acquired. The loan
agreements prohibit the declaration or payment of dividends by the Company and
contain other restrictive covenants, which, among other things, require the
maintenance of a minimum current ratio. The Company currently is in compliance
with all such restrictions. At December 31, 2000, the Company had $29,850,000
available under the Credit Facility, which terminates March 31, 2003.
The Company's principal operating sources of cash include sales of natural
gas and crude oil and revenues from transportation and processing. The Company
sells approximately 78% of its natural gas production under long-term, fixed
price contracts, and swap agreements. As a result, the Company benefits from
significant predictability of its natural gas revenues. Commodity market
prices affect cash flow for that portion of natural gas not under contract as
well as the Company's crude oil sales.
Net cash provided by operations for the year ended December 31, 2000 was
$47,691,000, compared to $10,220,000 for the same period last year. The
increase resulted from higher earnings, primarily as a result of the
acquisition of the CMS Properties, and higher non-cash charges.
Net cash used in investing for the year ended December 31, 2000 was
$195,518,000. Investing activities were comprised primarily of additions to
oil and gas properties through the acquisition of the CMS Properties ($164
million), development activity and, to a lesser extent, additions of field
service assets.
Net cash from financing activities for the year ended December 31, 2000 was
$158,103,000. The CMS Acquisition was financed through restructuring of
Quicksilver's senior bank facility, the sale of $53 million in subordinated
notes, and the monetization through a major financial institution of a portion
of the accompanying Internal Revenue Code Section 29 income tax credits
related to the CMS Properties.
Cash from operations in the year 2001 are budgeted to be sufficient to fund
the $54 million of planned capital expenditures and to repay a portion of the
long-term debt.
Recently Issued Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (amended by SFAS No. 138).
This statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. The statement requires that
24
<PAGE>
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. If hedge accounting
criteria are met, the change in a derivative's fair value (for a cash flow
hedge) is deferred in stockholders' equity as a component of other
comprehensive income. These deferred gains and losses are recognized in income
in the period in which the hedge item to the extent the hedge is effective.
The ineffective portions of hedge returns are recognized currently in
earnings.
All derivatives within the Company have been identified as of January 1,
2001. The Company has designated, documented and assessed the hedging
relationships, all of which are cash flow hedges. Adoption by the Company of
this accounting standard as of January 1, 2001 resulted in the recognition of
$92 million of derivative liabilities with a cumulative effect of $61 million
after tax as a decrease to other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" which
summarized the application of accounting principles generally accepted in the
United States of America for revenue recognition in financial statements. The
Company does not believe the adoption of Staff Accounting Bulletin 101 will
have an impact on its consolidated financial position or results of operations
since it recognizes revenue upon completion of the earnings process. Sales
from producing wells are recognized as the title passes to the purchasers.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company has established policies and procedures for managing risk within
its organization, including internal controls. The level of risk assumed by
the Company is based on its objectives and capacity to manage risk.
Quicksilver's primary risk exposure is related to natural gas commodity
prices. The Company has mitigated the downside risk of adverse price movements
through the use of swaps, futures and forward contracts; however, it has also
limited future gains from favorable movements.
Commodity Price Risk
The Company enters into various financial contracts to hedge its exposure to
commodity price risk associated with anticipated future natural gas
production. These contracts have included price ceilings and floors, no-cost
collars and fixed price swaps. Quicksilver sells approximately 35,000 Mcf/day
of natural gas under long-term fixed price contracts at $2.48/Mcf through
March 2009. Approximatley 25% of the volumes sold under long-term contracts
are third-party volumes controlled by the Company. Approximately 38,243
Mcf/day of its equity natural gas are hedged using fixed price swap
agreements. As a result, the Company benefits from significant predictability
of its natural gas revenues.
Commodity price fluctuations affect the remaining natural gas volumes as
well as the Company's crude oil and NGL volumes. Up to 4,500 Mcf/day of
natural gas is commited at market price through May 2004. Additional gas
volumes of 16,500 Mcf/day are committed at market price through September
2008. A portion of the natural gas volumes sold under these contracts are
third-party volumes controlled by Quicksilver.
Utilization of the Company's hedging program may result in natural gas and
crude oil realized prices varying from market prices that the Company receives
from the sale of natural gas and crude oil. As a result of the hedging
programs, revenues in 2000 and 1999 were $22,474,000 and $1,021,000,
respectively, lower than if the hedging program had not been in effect.
25
<PAGE>
The following table summarizes the Company's open positions as of December
31, 2000 related to natural gas production. Based on the financial fixed price
hedge positions, for each $1.00 per Mcf increase in the price of natural gas
the Company's annualized revenue would increase by approximately $17,762,000
of which $13,959,000 would be reduced due to the existing hedges.
<TABLE>
<CAPTION>
Contract Weighted Ave
Product Type Time Period Volume Price per Mcf Fair Value
- ------- ----------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Gas Fixed Price Jan-Apr 2004 7,500 Mcfd $2.40 $(19,244)
Gas Fixed Price Jan-Oct 2004 604 Mcfd $2.14 $ (1,918)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,532)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,637)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,637)
</TABLE>
Fair values were determined based on current market prices at December 29,
2000, as quoted by recognized dealers without regard to market liquidity. The
actual gains or losses ultimately realized by the Company from such hedges may
vary significantly from the foregoing amounts due to the volatility of the
natural gas commodity markets.
Interest Rate Risk
The Company has an interest rate swap agreement covering $25 million of its
variable-rate debt through June 17, 2002 that converts the debt floating LIBOR
base rate to a 6.86% fixed rate. The fair value of this swap was a loss of
$414,738 as of December 29, 2000. On October 2, 2000, the Company entered into
an additional interest rate swap agreement covering $50 million of its
variable-rate debt through March 31, 2003, which converts the debt floating
LIBOR base rate to a 6.78% fixed rate. The fair value of this swap was a loss
of $1,028,536 as of December 29, 2000. Interest expense for the year ended
December 31, 2000 was $177,532 lower as a result of interest rate swaps. If
interest rates on the Company's remaining variable debt increase or decrease
by one percentage point, the Company's annual pretax income would decrease or
increase by $1,050,000.
Credit Risk
Credit risk is the risk of loss as a result of non-performance by
counterparties of their contractual obligations. The Company sells its oil and
gas production directly under long-term contracts and through Cinnabar Energy
Services & Trading, LLC, a wholly owned subsidiary, to creditworthy
counterparties, such as utilities, major oil companies (or their affiliates),
industrial customers, large trading companies or energy marketing companies,
refineries and other users of petroleum products. In this manner, Quicksilver
reduces such credit risk.
Performance Risk
Performance risk results when a financial counter-party fails to fulfill its
contractual obligations such as commodity pricing or volume commitments.
Typically, such risk obligations are defined within the trading agreements.
The Company manages performance risk through management of credit risk. Each
customer and/or counter-party of the Company is reviewed as to credit
worthiness prior to the extension of credit and on a regular basis thereafter.
Foreign Currency Risk
The Company's Canadian subsidiary uses the Canadian dollar as its functional
currency. To the extent that business transactions in Canada are not
denominated in Canadian dollars, the Company is exposed to foreign currency
exchange rate risk.
26
<PAGE>
QUICKSILVER RESOURCES INC.
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUICKSILVER RESOURCES INC.
Independent Auditors' Report............................................. 28
Consolidated Balance Sheets as of December 31, 2000 and 1999............. 29
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998........................................................... 30
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 2000, 1999 and 1998........................................ 31
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998..................................................... 32
Notes to Consolidated Financial Statements for the Year Ended December
31, 2000................................................................ 33
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Quicksilver Resources Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Quicksilver
Resources Inc. (the Company) as of December 31, 2000 and December 31, 1999,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Fort Worth, Texas
February 26, 2001
28
<PAGE>
QUICKSILVER RESOURCES INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
In thousands, except for share and per share data
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ 12,833 $ 2,557
Accounts receivable, net of allowance for doubtful
accounts of $0 and of $1,350 at December 31, 2000 and
1999, respectively...................................... 32,595 15,555
Inventories and other current assets..................... 2,021 780
-------- --------
Total current assets................................... 47,449 18,892
Investments in and advances to equity affiliates........... 12,570 3,100
Properties, plant and equipment--net ("full cost")......... 374,099 170,800
Other assets............................................... 5,993 1,510
-------- --------
$440,111 $194,302
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt........................ $ 4,149 $ 2,134
Accounts payable......................................... 12,787 6,543
Accrued liabilities...................................... 29,578 3,047
-------- --------
Total current liabilities.............................. 46,514 11,724
Long-term debt............................................. 239,986 94,952
Unearned revenue........................................... 18,958 800
Other long-term liabilities................................ 147 2,000
Deferred income taxes...................................... 47,748 15,088
Minority interest.......................................... -- 187
Stockholders' equity
Preferred stock, par value $0.01 10,000,000 shares
authorized, 1 and no shares issued as of December 31,
2000 and 1999, respectively............................. -- --
Common stock, $0.01 par value, 40,000,000 shares
authorized, 22,332,950 and 17,994,900 shares issued as
of December 31, 2000 and 1999, respectively............. 223 180
Paid in capital in excess of par value..................... 75,544 61,383
Treasury stock of 3,765,947 and 10,808 shares as of
December 31, 2000 and 1999, respectively.................. (14,675) (73)
Accumulated other comprehensive income..................... (13) --
Retained earnings.......................................... 25,679 8,061
-------- --------
86,758 69,551
-------- --------
$440,111 $194,302
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
QUICKSILVER RESOURCES INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
In thousands, except for per share data
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Revenues
Oil, gas and related product sales................. $108,772 $47,616 $42,080
Other income....................................... 11,276 2,430 2,948
-------- ------- -------
Total revenues................................... 120,048 50,046 45,028
Expenses
Operating expenses................................. 37,641 18,771 17,122
Depletion and depreciation......................... 24,555 14,036 12,365
Provision for doubtful accounts.................... (279) 1,350 --
General and administrative......................... 8,276 4,163 1,430
Interest........................................... 22,124 8,703 6,698
-------- ------- -------
Total expenses................................... 92,317 47,023 37,615
-------- ------- -------
Income before income taxes and minority interest..... 27,731 3,023 7,413
Minority interest in net loss of MSR Exploration..... -- 141 758
-------- ------- -------
Income before income taxes........................... 27,731 3,164 8,171
Income tax expense................................... 10,113 2 3,286
-------- ------- -------
Net Income........................................... $ 17,618 $ 3,162 $ 4,885
======== ======= =======
Basic earnings per share............................. $ 0.96 $ 0.24 $ 0.42
======== ======= =======
Diluted earnings per share........................... $ 0.95 $ 0.24 $ 0.42
======== ======= =======
Basic weighted average of shares outstanding......... 18,290 13,151 11,511
======== ======= =======
Diluted weighted average shares outstanding.......... 18,467 13,151 11,511
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
QUICKSILVER RESOURCES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
In thousands, except for share and per share data
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Preferred stock, par value $0.01, 10,000 shares
authorized
Balance at beginning of year..................... $ -- $ -- $ --
Issuance of 1 share special voting preferred..... -- -- --
-------- ------- -------
Balance at end of year: 1 share issued at
December 31, 2000............................... $ -- $ -- $ --
-------- ------- -------
Common stock, par value $0.01, authorized
40,000,000 shares
Balance at beginning of year..................... $ 180 $ 115 $ 1
Issuance of common stock......................... 40 51 --
Stock dividend retroactively applied............. -- -- 102
Merger with MSR Exploration, shares in common
control for merger effective on March 4, 1999,
retroactively applied........................... -- -- 12
Common stock issued for purchase of minority
interest........................................ 3 14 --
-------- ------- -------
Balance at end of year: 22,332,950, 17,994,900
and 11,510,800 shares issued at December 31,
2000, 1999 and 1998, respectively............... 223 180 115
-------- ------- -------
Paid in capital in excess of par value
Balance at beginning of year..................... 61,383 27,574 27,851
Acquisition of minority interest................. 2,306 10,629 --
Acquisition of Mercury Assets.................... (4,883) -- --
Issuance of common stock......................... 16,779 23,806 --
Stock registration fees.......................... (41) (626) (149)
Merger with MSR Exploration, retroactively
applied......................................... -- -- (128)
-------- ------- -------
Balance at end of year........................... 75,544 61,383 27,574
-------- ------- -------
Treasury stock
Balance at beginning of year..................... (73) -- --
Reacquisition of treasury stock, at cost......... (14,602) (73) --
-------- ------- -------
Balance at end of year: 3,765,947, 10,808 and 0
shares at December 31, 2000, 1999 and 1998,
respectively.................................... (14,675) (73) --
-------- ------- -------
Retained earnings
Balance at beginning of year..................... 8,061 4,899 --
Merger with MSR Exploration, retroactively
applied......................................... -- -- 14
Net income....................................... 17,618 3,162 4,885
-------- ------- -------
Balance at end of year........................... 25,679 8,061 4,899
-------- ------- -------
Accumulated other comprehensive income
Balance at beginning of year..................... -- -- --
Foreign currency translation adjustment.......... (13) -- --
-------- ------- -------
Balance at end of year........................... (13) -- --
-------- ------- -------
Total stockholders' equity......................... $ 86,758 $69,551 $32,588
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
QUICKSILVER RESOURCES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years End December 31, 2000, 1999 and 1998
In thousands, except number of shares
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income.................................... $ 17,618 $ 3,162 $ 4,885
Charges and credits to net income not
affecting cash
Depletion and depreciation.................. 24,555 14,036 12,365
Deferred income taxes....................... 10,143 -- 2,336
Recognition of unearned revenues............ (6,842) (538) (1,342)
Change in minority interest in subsidiary... -- (141) (758)
(Income) / loss from equity affiliates...... (768) 99 --
Amortization of deferred loan costs......... 1,071 244 66
Provision for doubtful accounts............. -- 1,350 --
Other....................................... (166) -- --
Changes in assets and liabilities
Accounts receivable......................... (23,839) (9,129) (6,609)
Inventory, prepaid expenses and other....... (530) (14) (97)
Accounts payable............................ 4,008 1,462 4,410
Accrued liabilities......................... 22,441 (311) 1,099
--------- -------- --------
Net cash from operating activities.............. 47,691 10,220 16,355
--------- -------- --------
Investing activities:
Acquisition of properties and equipment....... (191,157) (40,253) (16,097)
Acquisition of pipeline and facilities........ -- (3,199) --
Acquisition of investment in Terra-Hayes
Pipeline LP.................................. (1,952) -- --
Acquisition of Mercury Assets, net of cash
balances received............................ (1,398) -- --
Advances to equity subsidiaries-net........... (1,285) -- --
Proceeds from sale of properties.............. 274 1,164 --
--------- -------- --------
Net cash used for investing activities.......... (195,518) (42,288) (16,097)
--------- -------- --------
Financing activities:
Notes payable, bank proceeds.................. 250,172 35,365 10,493
Principal payments on long-term debt.......... (112,468) (23,342) (10,271)
Monetization of Section 29 tax credits........ 25,000 -- --
Payments to acquire treasury stock............ -- (73) --
Deferred financing and stock registration
costs........................................ (4,601) (800) (829)
Issuance of common stock...................... -- 23,180 --
--------- -------- --------
Net cash from (used for) financing activities... 158,103 34,330 (607)
--------- -------- --------
Net increase (decrease) in cash and
equivalents.................................... 10,276 2,263 (349)
Cash and equivalents at beginning of period..... 2,557 294 643
--------- -------- --------
Cash and equivalents at end of period........... $ 12,833 $ 2,557 $ 294
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 2000
1. FORMATION OF QUICKSILVER AND NATURE OF OPERATIONS
Quicksilver Resources Inc. (the "Company" or "Quicksilver") was formed as a
Delaware Corporation in December 1997 to combine certain oil and gas
properties pursuant to a merger. On January 1, 1998, Mercury Exploration
Company ("Mercury"), Quicksilver Energy, L.C. ("QELC"), Michigan Gas Partners
Limited Partnership ("Michigan Gas Partners"), Trust Company of the West
("TCW"), Joint Energy Development Investments Limited Partnership, and
Quicksilver Resources Inc. entered into an agreement and plan of
reorganization and merger to combine certain oil and gas properties owned by
Mercury, QELC, and Michigan Gas Partners by causing Michigan Gas Partners to
be merged with Quicksilver and by causing certain assets and liabilities of
Mercury and QELC to be transferred to and assumed by Quicksilver. Quicksilver
was the surviving corporation of the merger. TCW received shares of
Quicksilver as conversion of debt.
In exchange for the contribution of properties and debt, Quicksilver issued
shares of common stock. The common stock was issued to contributing parties
based on their ownership interest in the oil and gas properties. The oil and
gas properties were evaluated based on the net present value of their
reserves, discounted at 10% and reduced for any associated debt. The
conversion of debt to equity was valued at its face value. The net values for
all properties and debt were summarized, and the percentage of each
contributed piece to the total was used to allocate shares of common stock
back to the shareholders.
On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd.
The merger qualified as a tax-free exchange and was accounted for in part as a
pooling of interest for entities under common control, with the minority
interest accounted for under the purchase method. In connection with the
merger, the Company issued 2,577,700 shares of its common stock in exchange
for all of the outstanding common stock of MSR Exploration Ltd. based on a
conversion ratio of 1 share (the merger exchange ratio) of the Company's
common stock for ten (10) shares of MSR common stock. MSR's outstanding common
stock options and warrants were converted into Quicksilver common stock
options and warrants to purchase approximately 24,856 shares and 1,133,750
shares, respectively.
Nature of Operations
Quicksilver is an independent energy company engaged in the acquisition,
development, exploration, production and sale of natural gas, natural gas
liguids ("NGLs"), oil and condensate. The Company also engages in the
gathering, processing and transmission of natural gas.
The Company's results of operations are largely dependent on the difference
between the prices received for its hydrocarbon products and the cost to find,
develop, produce and market such resources. Hydrocarbon prices are subject to
the fluctuations in response to changes in supply, market uncertainty and a
variety of factors beyond the control of the Company. These factors include
worldwide political instability, the foreign supply of crude oil and natural
gas, the price of foreign imports, the level of consumer demand and the price
and availability of alternative fuels. The Company manages a portion of the
operating risk relating to hydrocarbon price volatility through hedging
activities (see note 4).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Consolidated Financial Statements include the amounts of Quicksilver
Resources Inc. and subsidiaries (collectively, the "Company"). The Company
accounts for investments in companies over which it exercises influence, but
which it does not control on the equity method of accounting. The Company also
consolidates its pro-rata share of oil and gas joint ventures. All significant
inter-company transactions are eliminated.
33
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with the general
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of certain assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during each reporting period. Management believes its
estimates and assumptions are reasonable; however, such estimates and
assumptions are subject to a number of risks and uncertainties, which may
cause actual results to differ materially from the Company's estimates.
Significant estimates underlying these financial statements include the
estimated quantities of proved oil and gas reserves and the related present
value of estimated future net cash flows therefrom. (See Supplementary
Information beginning on page 50.)
Cash and Cash Equivalents
Cash equivalents consist of time deposits and liquid debt investments with
original maturities of three months or less.
Accounts Receivable
The Company's customers are large oil and natural gas purchasers. Each
customer and/or counter-party of the Company is reviewed as to credit
worthiness prior to the extension of credit and on a regular basis thereafter.
The Company does not require collateral, however, appropriate credit ratings
are required and parental guarantees are obtained. Receivables are generally
due in 30-60 days. When collections of specific amounts due are no longer
reasonably assured, an allowance for doubtful accounts is established.
Inventories
Inventories consist of well equipment, spare parts and supplies, carried on
a first in first out basis at the lower of cost or market.
Properties, Plant, and Equipment
The Company follows the "full cost" method of accounting for oil and gas
properties whereby all costs associated with acquiring, exploring for, and
developing oil and gas reserves are capitalized and accumulated in cost
centers established on a country-by-country basis. Such costs include land
acquisition costs, geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling both productive and non-productive
wells, and overhead charges directly related to acquisition, exploration, and
development activities.
The capitalized costs related to each cost center, including the estimated
future costs to develop proved reserves and the costs of production equipment,
are amortized using the unit-of-production method based on the estimated net
proved reserves as determined by petroleum engineers. Investments in unproved
properties are not amortized until proven reserves associated with them can be
determined or until impairment occurs. Oil and natural gas reserves and
production are converted into equivalent units based upon estimated relative
energy content.
34
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The capitalized costs less accumulated depletion and depreciation in each
cost center are limited to an amount equal to the estimated future net revenue
from proved reserves discounted at a 10% interest rate (based on prices and
costs at the balance sheet date) plus the lower of cost (net of impairments)
or fair market value of unproved properties.
Proceeds from the sale of oil and gas properties are applied against
capitalized costs, with no gain or loss recognized unless such a sale would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in
income.
Other plant and equipment are depreciated on the straight-line basis as
follows:
Pipeline, gas processing plants and gathering systems--over fifteen to
twenty years
Other equipment--over ten years
Building--over forty years
Furniture and fixtures--over five to ten years
Potential impairment of producing properties and significant unproved
properties and other plant and equipment are assessed annually (unless
economic events warrant more frequent reviews). In addition, a quarterly
impairment analysis of aggregated properties is performed by the Company using
discounted future net cash flows determined based upon current prices and
costs.
Revenue Recognition
The Company follows the "sales method" of accounting for its oil and natural
gas revenue, whereby the Company recognizes sales revenue on all oil or
natural gas sold to its purchasers, regardless of whether the sales are
proportionate to the Company's ownership in the property. A receivable or
liability is recognized only to the extent that the Company has an imbalance
on a specific property greater that the expected remaining proved reserves. As
of December 31, 2000 and 1999, the Company's aggregate oil and natural gas
imbalances were not material to its consolidated financial statements.
Major Customers
During 2000, four purchasers accounted for approximately 26%, 19%, 14% and
10%, respectively, of the Company's total consolidated oil and gas sales.
Quicksilver does not anticipate that the loss of any of its present purchasers
would adversely effect the Company's consolidated business. The Company also
believes that, in the event of a loss of a present purchaser, other oil and
gas purchasers located in the Company's areas of production would offer
competitive prices for such production.
Environmental Compliance and Remediation
Environmental compliance costs, including ongoing maintenance and
monitoring, are expensed as incurred. Environmental remediation costs, which
improve the condition of a property, are capitalized.
Income Taxes
Deferred income taxes are established for all temporary differences between
the book and the tax basis of assets and liabilities at rates that will be in
effect in years the temporary differences are expected to reverse. Net
operating carry forward and other deferred tax assets are reviewed annually
for recoverability, and are recorded, net of a valuation allowance, if
necessary.
35
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments include cash, time deposits, accounts
receivable, and notes payable, accounts payable, and long-term debt. The fair
value of long-term debt is estimated at the present value of future cash flows
discounted at rates consistent with comparable maturities for credit risk. The
carrying amounts reflected in the balance sheet for financial assets
classified as current assets and the carrying amounts for financial
liabilities classified as current liabilities approximate fair value due to
the short maturity of such instruments.
Hedging Transactions
The Company hedges a portion of its natural gas and crude oil sales not sold
under fixed price contracts, and a portion of its interest expense. Product
sale hedges are settled monthly, and any gains or losses are recognized in
revenue in the applicable month.
The differential to be paid or received on interest rate swaps is accrued as
interest rates change and recognized in interest expense over the life of the
agreements. The effect of extinguishments, maturities, terminations and sales
is recorded in earnings in the period the instrument terminates.
Change in Presentation
Certain reclassifications have been made for presentations adopted in 2000.
Earnings per share
Basic net income or loss per common share is computed by dividing the net
income or loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted net
income or loss per common share is calculated in the same manner, but also
considers the impact to net income and common shares for the potential
dilution from stock options, stock warrants and any other outstanding
convertible securities.
The following is a reconciliation of the numerator and denominator used for
the computation of basic and diluted net income or loss per common share.
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net income............................................. $17,618 $ 3,162 $ 4,885
Weighted average common shares--basic.................. 18,290 13,151 11,511
Effect of diluted securities:
Stock options........................................ 171 -- --
Warrants............................................. 5 -- --
Weighted average common shares--diluted................ 18,467 13,151 11,511
Net income--per share
Basic................................................ $ 0.96 $ 0.24 $ 0.42
Diluted.............................................. $ 0.95 $ 0.24 $ 0.42
</TABLE>
For the years ended December 31, 2000, 1999 and 1998, 24,856 shares of
common stock under options were excluded from the diluted net income per share
computation as the exercise price exceeded the average market price of the
Company's common stock price. Warrants representing 1,100,000 and 1,128,000
shares,
36
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, of common stock were also excluded from the 2000 and 1999
diluted net income per share computation as the exercise price exceeded the
average market price of the Company's common stock.
Segment Information
The Company has reviewed the requirements under Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
The Company believes that it has one segment and its operations outside of the
U.S. are insignificant.
Recently Issued Accounting Standards
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (amended by SFAS No. 138).
This statement, effective in 2001, establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
every derivative instrument be recorded on the balance sheet as either an
asset or liability measured at fair value. The statement requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. If hedge accounting criteria are
met, the change in a derivative's fair value (for a cash flow hedge) is
deferred in stockholders' equity as a component of other comprehensive income.
These deferred gains and losses are recognized in income in the period in
which the hedged item is recognized in income to the extent the hedge is
effective. The ineffective portions of hedge returns are recognized currently
in earnings.
All derivatives within the Company have been identified as of January 1,
2001. The Company has designated, documented and assessed the hedging
relationships, all of which are cash flow hedges. Adoption by the Company of
this accounting standard as of January 1, 2001 resulted in the recognition of
$92 million of derivative liabilities with a cumulative effect of $61 million
after tax as a decrease to other comprehensive income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements", which
summarized the application of accounting principles generally accepted in the
United States of America for revenue recognition in financial statements. The
Company does not believe the adoption of Staff Accounting Bulletin 101 has
impacted its consolidated financial position or results of operations since it
recognizes revenue upon completion of the earnings process. Sales from
producing wells are recognized as the title passes to the purchasers.
3. SIGNIFICANT EVENTS
Mergers and Acquisitions
During the year 2000, Quicksilver more than doubled its revenue base
primarily through acquisitions funded through additional borrowings.
CMS Acquisition
On March 31, 2000, the Company acquired from CMS Oil and Gas Company, a
subsidiary of CMS Energy Corporation, oil and gas properties located primarily
in Michigan ("CMS Properties" or "CMS Acquisition"). The purchase price, which
was finalized in November 2000, was $164 million. The CMS Properties consist
of interests in approximately 3,050 (650 net) producing oil and gas wells on
approximately 512,000 gross (450,000 net) acres. Holditch-Reservoir
Technologies Consulting Services, a Schlumberger company, estimates proved
37
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reserves attributable to the CMS Properties include 315.1 Bcf of natural gas,
747.8 Mbbls of crude oil and condensate and 143.9 Mbbls of natural gas
liquids, or a total of 320.4 Bcfe, with an estimated value of approximately
$184 million as of January 1, 2000. Approximately 80% of the proved reserve
volumes were classified as proved developed.
The CMS Acquisition was financed through restructuring of Quicksilver's
senior bank facility, the sale of $53 million in subordinated notes, and the
monetization through a major financial institution of a portion of the
accompanying Internal Revenue Code Section 29 income tax credits related to
the CMS Properties (see notes 9 and 10). The CMS Acquisition was accounted for
under the purchase accounting method, and consists of both CMS oil and gas
properties and 100% of the common stock of Terra Energy Ltd.
The following table represents the allocation of the assets acquired and
liabilities assumed, based upon their fair value on the date of the CMS
Acquisition. In accordance with SFAS 109, a deferred tax liability was
recognized for the differences between the allocated values and the tax bases
of the acquired assets and liabilities.
<TABLE>
<S> <C>
Property plant and equipment................................... $189,080,000
Working capital................................................ (570,000)
Deferred taxes................................................. (24,497,000)
------------
Total purchase price......................................... $164,013,000
============
</TABLE>
The following summary pro forma financial information (in thousands, except
per share amounts) gives the effect of the acquisition on the Company's
historical income statements as though the acquisition had occurred at the
beginning of the periods presented. Adjustments were made to reflect a
combined depletion rate, incremental general administrative expense and
interest expense on acquisition debt. The effects of the other acquisitions in
the year 2000 on the consolidated financial statements are not significant and
have been excluded from the pro forma presentation.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues........................................... $ 134,618 $ 104,273
Expenses........................................... 105,549 97,111
Net income......................................... 18,495 5,154
Earnings per share-
Basic............................................ $ 1.01 $ 0.39
Diluted.......................................... $ 1.00 $ 0.39
</TABLE>
Mercury Acquisition
Effective July 31, 2000, Quicksilver purchased substantially all of the oil
and gas-related assets of, and 65% of a gas compression company from, Mercury
Exploration Company ("Mercury"), a related party (see note 15 Related Party
Transactions), for $18 million. An independent appraiser determined the
fairness, from a financial point of view, of the $18 million purchase price,
and the non-related party members of the Board of Directors approved the
purchase. The acquisition was financed through assumption of existing debt of
$6.1 million, application of an account receivable of $7.4 million, a note of
$3.2 million and accounts payable of $1.3 million. The transaction was
accounted for as an acquisition of companies under common control. As a
result, all assets and liabilities acquired were recorded at Mercury's
historical book value. The excess of purchase price over book value was
accounted for as a reduction of paid in capital.
38
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assets purchased included all of the capital stock of Mercury Michigan,
Inc. ("MMI"), 65% of the capital stock of Mechanical Technology Services, LLC
("MTS"), and gas and oil properties located in Indiana and Kentucky (See
Dominion Indiana Acquisition below.) MMI is a gas processing company, which
gathers and processes approximately 75 million cubic feet of natural gas per
day, and which owns fifty percent each of Beaver Creek Pipeline, LLC and
Cinnabar Energy Services & Trading, LLC. Quicksilver now owns 100% of Beaver
Creek and Cinnabar. MTS sells, installs, repairs, and maintains compression
for the natural gas industry.
Dominion Indiana Acquisition
On September 26, 2000, Quicksilver purchased substantially all of the
interests in producing gas wells, related gathering and transmission systems
and fifty percent in undeveloped leasehold acres owned by Dominion Reserves-
Indiana, Inc. for $2.2 million. The remaining interests in these properties
were acquired by Quicksilver from Mercury effective July 1, 2000.
MGV Energy Inc. Minority Interest Acquisition
On December 22, 2000, Quicksilver acquired the remaining minority interest
in its Canadian subsidiary, MGV Energy Inc., headquartered in Calgary,
Alberta. Quicksilver's initial 89.5% interest in MGV was acquired on August
26, 1999. In exchange for their 10.5% interest, the minority shareholders of
MGV received the equivalent of 283,669 shares of Quicksilver common stock in
the form of MGV exchangeable shares valued at $2,309,000, which was allocated
to the assets acquired and liabilities assumed based upon their fair value.
4. FINANCIAL INSTRUMENTS
The Company has established policies and procedures for managing risk within
its organization, including internal controls. The level of risk assumed by
the Company is based on its objectives and capacity to manage risk.
Quicksilver's primary risk exposure is related to natural gas commodity
prices. The Company has mitigated the downside risk of adverse price movements
through the use of swaps, futures and forward contracts; however, it has also
limited future gains from favorable movements.
Commodity Price Risk
The Company enters into various financial contracts to hedge its exposure to
commodity price risk associated with anticipated future natural gas
production. These contracts have included price ceilings and floors, no-cost
collars and fixed price swaps. Quicksilver sells approximately 35,000 Mcf/day
of natural gas under long-term fixed price contracts at $2.48/Mcf through
March 2009. Approximatley 25% of all volumes sold under long-term contracts
are third-party volumes controlled by the Company. Approximately 38,243
Mcf/day of its equity natural gas are hedged using fixed price swap
agreements. As a result, the Company benefits from significant predictability
of its natural gas revenues.
Commodity price fluctuations affect the remaining natural gas volumes as
well as the Company's crude oil and NGL volumes. Up to 4,500 Mcf/day of
natural gas is commited at market price through May 2004. Additional gas
volumes of 16,500 Mcf/day are committed at market price through September
2008. A portion of the natural gas volumes sold under these contracts are
third-party volumes controlled by Quicksilver.
Utilization of the Company's hedging program may result in natural gas and
crude oil realized prices varying from market prices that the Company receives
from the sale of natural gas and crude oil. As a
39
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result of the hedging programs, revenues in 2000 and 1999 were $22,474,000 and
$1,021,000, respectively, lower than if the hedging program had not been in
effect.
The following table summarizes the Company's open positions as of December
31, 2000 related to equity natural gas production. Based on the financial
fixed price hedge positions, for each $1.00 per Mcf increase in the price of
natural gas the Company's annualized revenue would increase by approximately
$17,762,000, of which $13,959,000 would be reduced due to the existing hedges.
<TABLE>
<CAPTION>
Contract Weighted Ave
Product Type Time Period Volume Price per Mcf Fair Value
- ------- ----------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Gas Fixed Price Jan-Apr 2004 7,500 Mcfd $2.40 $(19,244)
Gas Fixed Price Jan-Oct 2004 604 Mcfd $2.14 $ (1,918)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,532)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,637)
Gas Fixed Price Jan-Apr 2005 10,000 Mcfd $2.79 $(23,637)
</TABLE>
Fair values were determined based on current market prices at December 31,
2000, as quoted by recognized dealers without regard to market liquidity. The
actual gains or losses ultimately realized by the Company from such hedges may
vary significantly from the foregoing amounts due to the volatility of the
natural gas commodity markets.
The Company has an interest rate swap agreement covering $25 million of its
debt through June 17, 2002 that converts the debt floating LIBOR base rate to
a 6.86% fixed rate. The fair value of this swap was a loss of $414,738 as of
December 29, 2000. On October 2, 2000, the Company entered into an additional
interest rate swap agreement covering $50 million of its variable rate debt
through March 31, 2003, which converts the debt floating LIBOR base rate to a
6.78% fixed rate. The fair value of this swap was a loss of $1,028,536 as of
December 29, 2000. Interest expense for the year ended December 31, 2000 was
$177,532 lower as a result of interest rate swaps. If interest rates on the
Company's remaining variable debt increase or decrease by one percentage
point, the Company's annual pretax income would decrease or increase by
$1,050,000.
Credit Risk
Credit risk is the risk of loss as a result of non-performance by
counterparties of their contractual obligations. The Company sells its oil and
gas production directly under long-term contracts and through Cinnabar Energy
Services & Trading, LLC, a wholly owned subsidiary, to creditworthy
counterparties, such as utilities, major oil companies (or their affiliates),
industrial customers, large trading companies or energy marketing companies,
refineries and other users of petroleum products. In this manner, Quicksilver
reduces such credit risk.
Performance Risk
Performance risk results when a financial counter-party fails to fulfill its
contractual obligations such as commodity pricing or volume commitments.
Typically, such risk obligations are defined within the trading agreements.
The Company manages performance risk through management of credit risk. Each
customer and/or counter-party of the Company is reviewed as to credit
worthiness prior to the extension of credit and on a regular basis thereafter.
Foreign Currency Risk
The Company's Canadian subsidiary uses the Canadian dollar as its functional
currency. To the extent that business transactions in Canada are not
denominated in Canadian dollars, the Company is exposed to foreign currency
exchange rate risk.
40
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. ACCOUNTS RECEIVABLE
On March 10, 1999, one of the Company's natural gas purchasers filed for
protection under Chapter 11 of the Federal Bankruptcy Code. Management
determined that a portion of the approximately $2,450,000 account receivable
associated with the purchaser was uncollectable; accordingly, an allowance for
doubtful accounts of $1,350,000 was established in the first quarter of 1999.
All contracts with that purchaser were terminated, and the gas was
recontracted with a creditworthy purchaser. The Company recovered $1,629,000
during 2000, and as a result, $279,000 was recorded in the current year as
recovery of the provision for doubtful accounts.
6. PROPERTIES, PLANT, AND EQUIPMENT
Capitalized costs are shown below in thousands.
<TABLE>
<CAPTION>
As of December 31,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Proved oil and gas properties........................... $ 430,507 $223,746
Unproved oil and gas interests.......................... 6,243 4,926
Accumulated depletion................................... (87,471) (65,075)
--------- --------
$ 349,279 $163,597
Other equipment......................................... 31,425 11,757
Accumulated depreciation................................ (6,605) (4,554)
--------- --------
$ 374,099 $170,800
========= ========
</TABLE>
Under full cost accounting, the Company has excluded certain unevaluated
costs from the depletion base pending determination of whether proved reserves
have been discovered or impairment has occurred. These costs of unproved oil
and gas interests are transferred into a depletion base on an ongoing basis as
projects are evaluated and proved reserves established or impairment
determined. Pending determination of proved reserves attributed to the
unproved costs, the Company can not assess the future impact on the depletion
rate.
Depletion per Mcfe was $0.69, $0.63 and $0.62 for the years ended December
31, 2000, 1999 and 1998, respectively.
7. OTHER ASSETS
Other assets, in thousands, consist of:
<TABLE>
<CAPTION>
As of December
31,
---------------
2000 1999
------- ------
<S> <C> <C>
Deferred loan costs......................................... $ 6,068 $1,510
Less accumulated amortization............................... (1,378) (307)
------- ------
Net deferred loan costs................................... 4,690 1,203
Other....................................................... 1,303 307
------- ------
$ 5,993 $1,510
======= ======
</TABLE>
Costs related to the acquisition of debt are deferred and amortized on a
straight line basis over the term of the debt.
41
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. ACCRUED LIABILITIES
Accrued liabilities include the following, in thousands:
<TABLE>
<CAPTION>
As of December
31,
--------------
2000 1999
------- ------
<S> <C> <C>
Accrued product purchases.................................... $14,417 $ --
Interest owners payable...................................... 4,281 --
Interest payable............................................. 3,997 513
Accrued operating expenses................................... 3,180 1,092
Mercury payable.............................................. 1,773 --
Environmental liabilities.................................... 845 1,000
Other........................................................ 1,085 442
------- ------
$29,578 $3,047
======= ======
</TABLE>
9. NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
As of December
31,
------------------
2000 1999
--------- -------
<S> <C> <C>
Long-term debt, in thousands, consists of:
Notes payable to banks................................. $ 180,000 $94,850
Subordinated notes payable............................. 53,000 --
Various loans.......................................... 11,135 2,236
--------- -------
244,135 97,086
Less current maturities.................................. (4,149) (2,134)
--------- -------
$ 239,986 $94,952
========= =======
</TABLE>
Maturities are as follows, in thousands of dollars:
<TABLE>
<CAPTION>
Years Ending
------------
<S> <C>
2001............................................................... $ 4,149
2002............................................................... 1,941
2003............................................................... 181,956
2004............................................................... 1,279
2005............................................................... 970
Thereafter......................................................... 53,840
---------
$ 244,135
=========
</TABLE>
As part of the acquisition of the CMS Properties and Terra Energy Ltd., on
March 31, 2000, the Company amended the agreement setting forth the terms of
its credit facility ("Credit Facility"). The Credit Facility is a three-year
revolving credit facility that matures on March 31, 2003 and permits the
Company to obtain revolving credit loans and to issue letters of credit for
the account of the Company from time to time in an aggregate amount not to
exceed $225 million. The Borrowing base is $210 million and is subject to
semi-annual determination and certain other redeterminations based upon a
variety of factors, including the discounted present value of estimated future
net cash flow from the Company's natural gas and crude oil production. The
next scheduled re-determination date will be as of April 2, 2001, based on
December 31, 2000 assets and proved reserves. At the Company's option, loans
may be prepaid, and revolving credit commitments may be reduced in
42
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
whole or in part at any time in certain minimum amounts. As of year-end, the
Company can designate the interest rate on amounts outstanding at either the
London Interbank Offered Rate (LIBOR) + 1.875% or bank prime. At December
31, 2000, the Company's interest rate was 8.635% through April 2, 2001 on $180
million. The collateral for the Credit Facility consists of substantially all
of the existing assets of the Company and any future reserves acquired. The
loan agreements prohibit the declaration or payment of dividends by the
Company and contain other restrictive covenants, which, among other things,
require the maintenance of a minimum current ratio. The Company currently is
in compliance with all such restrictions. At December 31, 2000, the Company
had $29,850,000 available under the Credit Facility, which terminates March
31, 2003.
The Company also sold $43 million of 14.75% Second Mortgage Notes
("Subordinated Notes") on March 31, 2000 and an additional $10 million on
April 24, 2000. The Company may not prepay the Subordinated Notes in whole or
any part until after March 28, 2003. Prepayments will require a premium
payment ranging from 3% to 6%. Quarterly interest payments to the note holders
may be paid in kind with respect to all or any portion of interest in excess
of 10% by issuing additional notes. The Subordinated Notes contain restrictive
covenants, which, among other things, require maintenance of working capital,
collateral coverage ratio and an earnings ratio before interest, taxes,
depreciation and amortization and costs associated with seismic geological and
geological services in connection and attributable to oil and gas exploration
("EBITDAX"). The Company is currently in compliance with such restrictions.
The Subordinated Notes are due on March 30, 2009, with quarterly principal
payments starting on June 28, 2006.
As a part of the Mercury Acquisition, the Company purchased the outstanding
stock of Mercury Michigan Inc., which had a note payable to a bank. The
balance of this note was $3,299,999 as of December 31, 2000 and the interest
rate was 9.75% with monthly payments of $85,000 together with interest through
April 2004. The Company also assumed a Mercury Exploration Company note
payable to Falcon Seaboard. The balance of this note was $2,225,140 as of
December 31, 2000. Quicksilver incurred $3,200,000 in debt to Mercury
Exploration Company as part of the total acquisition. This note has an
interest rate of 9% with quarterly payments of $160,000 together with interest
through December 2005.
MGV Energy Inc. has US $2,307,074 in debt as of December 31, 2000, that is
related to the August 1999 acquisition of the Monogram Unit, a Canadian
property. The interest rate is 0.75% over Canadian Imperial Bank of Commerce
("CIBC") prime. CIBC's prime was 7.5%, as of December 31, 2000.
As of December 31, 2000, the historical cost of the Company's fixed-rate
debt approximates fair value.
10. UNEARNED REVENUE
Certain properties of the Company carry Internal Revenue Code Section 29
income tax benefits. Code Section 29 allows a credit against regular federal
income tax liability for certain eligible gas production.
On March 31, 2000, the Company conveyed, to a bank, Section 29 tax credits
for 99.5% of the interests acquired from CMS and the Terra interests in
Devonian production from certain wells located in Michigan. Cash proceeds
received from the sale were $25 million and were recorded as unearned revenue.
Revenue is recognized as reserves are produced. The purchase and sale
agreement and ancillary agreements with the bank include a production payment
in favor of Quicksilver burdening future production on the properties. As of
December 31, 2000, the $25 million liability had decreased to $18,157,766.
Revenue of $6,842,234 was recognized in 2000 in other income.
During 1997, other tax credits were conveyed through the sale of certain
working interests to a bank. As of December 31, 2000, a balance of $800,000 in
unearned revenues existed as a result of the cash consideration
43
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
received in excess of the tax benefit earned. The balance of $800,000 will
remain unearned until the tax benefits of Internal Revenue Code Section 29
expire at December 31, 2002.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office buildings and other property under operating
leases. Future minimum lease payments, in thousands, for operating leases with
initial non-cancelable lease terms in excess of one year as of December 31,
2000, were as follows:
<TABLE>
<S> <C>
2001................................................................. $ 612
2002................................................................. 508
2003................................................................. 532
2004................................................................. 545
2005................................................................. 550
Thereafter........................................................... 1,701
------
Total lease commitments.............................................. $4,448
======
</TABLE>
As of December 31, 2000, the Company had approximately $589,000 in letters
of credit outstanding related to various state and federal bonding
requirements.
The Company is subject to various possible contigencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and natural gas industry. Such contingencies include
differing interpretations as to the prices at which oil and natural gas sales
may be made, the prices at which royalty owners may be paid for production
from their leases, environmental issues and other matters. Although management
believes it has complied with the various laws and regulations, administrative
rulings and interpretations thereof, adjustments could be required as new
interpretations and regulations are issued. In addition, production rates,
marketing and environmental matters are subject to regulation by various
federal and state agencies.
The Company and its subsidiaries are involved in various lawsuits, claims
and regulatory proceedings incidental to their business. In the opinion of
management, the outcome of such matters will not have a material adverse
effect on the Company's business, consolidated financial position, results of
operations or cash flows.
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 2000,
1999, and 1998 are as follows, in thousands:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets
Tax credit sale and unearned income............... $27,925 $ 3,709 $ 3,811
Net operating loss carry-forwards................. 4,381 4,171 2,500
Other carryforwards............................... 538 1,556 --
------- ------- -------
Total deferred tax assets....................... 32,844 9,436 6,311
Deferred tax liabilities
Properties, plant, and equipment.................. 80,592 24,524 18,264
------- ------- -------
Net deferred tax liabilities.................... $47,748 $15,088 $11,953
======= ======= =======
</TABLE>
44
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provisions for income taxes for the years ended December 31, 2000, 1999
and 1998 are as follows, in thousands:
<TABLE>
<CAPTION>
2000 1999 1998
------- ----- ------
<S> <C> <C> <C>
Current federal income tax expense (benefit):........ $ (33) $(934) $ 950
Foreign............................................ 3 -- --
------- ----- ------
Total current income tax expense................... (30) (934) 950
------- ----- ------
Deferred federal income tax expense................ 10,082 936 2,336
Foreign............................................ 61 -- --
------- ----- ------
Total deferred income tax expense.................. 10,143 936 2,336
------- ----- ------
Total............................................ $10,113 $ 2 $3,286
======= ===== ======
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate for the years ended December 31, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ------ -----
<S> <C> <C> <C>
U.S. federal statutory tax rate...................... 35.00 % 34.00 % 34.00%
Change in net operating loss carry-forwards.......... (0.12)% (33.49)% 6.20%
Permanent differences................................ (0.18)% (0.51)% --
Other................................................ 1.77 % -- --
----- ------ -----
Effective income tax rate............................ 36.47 % 0.00% 40.20%
===== ====== =====
</TABLE>
Included in deferred tax assets are net operating losses of approximately
$12.5 million that are available for carryover beginning in the year 2001 to
reduce future U.S. taxable income. The net operating losses will begin to
expire in 2001. These net operating losses have not been reduced by a
valuation allowance, because management believes that future taxable income
will more likely than not be sufficient to utilize substantially all of its
tax carryforwards prior to their expirations. However, under Internal Revenue
Code Section 382, a change of ownership was deemed to have occurred for MSR in
1998. Due to the limitations imposed by Section 382, a portion of MSR's net
operating losses could not be utilized and are not included in deferred tax
assets.
13. STOCKHOLDERS' EQUITY
The Company is authorized to issue 40 million shares of common stock with a
par value per share of one cent ($0.01) and 10 million shares of preferred
stock with a par value per share of one cent ($0.01). At December 31, 2000,
the Company had 18,567,010 shares of common stock outstanding (including
283,669 shares issuable in respect of the MGV exchangeable shares) and one
share of special voting preferred stock outstanding.
Prior to completion of the CMS Acquisition, the Company issued 3,650,000
shares of its common stock to CMS. Those shares were held in escrow and upon
the closing of the acquisition were returned to the Company and are included
in treasury stock.
In connection with the Company's acquisition of properties from Unocal
Corporation's Spirit Energy 76 Unit in May of 1999, 404,381 contingently
issuable unregistered shares of common stock were held in escrow. The Company
released 93,773 and 205,469 shares in the second and third quarters of 2000,
respectively. Shares totaling 105,139 were returned to the Company in the
third quarter of 2000 and are included in treasury stock.
As part of the MGV minority interest acquisition, all issued and outstanding
shares of MGV capital stock, other than those held by Quicksilver, were
converted into MGV exchangeable shares. The MGV exchangeable
45
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
shares are non-voting shares of MGV's capital stock exchangeable for 283,669
shares of Quicksilver common shares, which exchange can occur as a result of
(i) liquidation of MGV; (ii) exercise of a redemption right by an MGV
shareholder requiring MGV to purchase exchangeable shares; or (iii) exercise
of an exchange put right by an MGV shareholder requiring Quicksilver to
purchase the exchangeable shares. Any MGV exchangeable shares still
outstanding on December 31, 2005 will be treated as having been the subject of
an exercise of an exchange put right on that date. Upon exchange, the holder
of exchangeable shares is entitled to receive one share of Quicksilver common
stock and the full amount of all cash dividends declared on a share of
Quicksilver common stock from the date of issuance of the exchangeable share
to the date of exchange. In order to provide voting rights to holders of MGV
exchangeable shares equivalent to the voting rights of the Quicksilver common
shares, Quicksilver created, on December 15, 2000, a series of its preferred
stock designated as Special Voting Stock. Quicksilver issued a single share of
Special Voting Stock to an appointee.
During November 1999, the Company completed the sale of 5,100,000 shares of
its common stock at $5 per share. As a result of the sale, the Darden Family
interest ("Controlling Shareholders") in Quicksilver decreased from 75.3% to
54.3%.
The Company has warrants outstanding to sell 550,000 shares of common stock
at $12.50 per share, 550,000 shares at $20 per share, and 5,750 shares at
$0.10 per share (exercisable only after the closing price of the Company's
common stock reaches $10 per share). These warrants were issued in connection
with the formation of the Company.
Stock Option Plan
On October 4, 1999, the Board of Directors adopted the Company's 1999 Stock
Option and Stock Retention Plan, which was approved at the annual
stockholders' meeting held in June 2000. There are 1.3 million shares of
common stock reserved under the plan, which provides for the grant of
incentive stock options, non-qualified stock options, stock appreciation
rights and retention stock awards.
Under terms of the Plan, options may be granted to officers and employees at
an exercise price that is not less than 100% of the fair market value on the
date of grant, which are exercisable in whole or part by the optionee after at
least one year of continuous service from the date of grant. Incentive stock
options and non-qualified options may not be exercised more than ten years
from date of grant. A summary of stock option transactions under the 1999
Plan, including options for 24,856 shares of the Company's common stock
resulting from a conversion of outstanding MSR Exploration Ltd. options in
March of 1999, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 24,856 $8.75 24,856 $8.75 24,856 $8.75
Granted............... 804,203 5.16 -- -- -- --
Exercised............. -- -- -- -- -- --
Forfeited............. 27,000 3.69 -- -- -- --
------- ----- ------ ----- ------ -----
Outstanding at end of
year................... 802,059 $4.78 24,856 $8.75 24,856 $8.75
======= ===== ====== ===== ====== =====
Exercisable at end of
year................... 24,856 $8.75 24,856 $8.75 24,856 $8.75
======= ===== ====== ===== ====== =====
Weighted average fair
value of options
granted................ $2.13 NA NA
===== ===== =====
</TABLE>
46
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company has
accounted for its employee stock options under the fair value method of that
statement. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
2000
----
<S> <C>
Risk-free interest rate................................................ 5.7%
Expected life (in years)............................................... 2.5
Expected volatility.................................................... 60.8%
Dividend yield......................................................... --
</TABLE>
The following table reflects pro forma net income and earnings per share
under the fair value approach of SFAS No. 123 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
2000
---------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net income............................................. $17,618 $17,188
Basic net income per share............................. 0.96 0.94
Diluted net income per share........................... 0.95 0.93
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period, and additional options may be granted in future years.
The following table summarizes information about stock options outstanding
at December 31, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercisable Outstanding Remaining Average Exercisable Average
Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- ----------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3 -$4 432,203 4.1 years $3.69 -- $ --
7 - 8 345,000 4.5 years 7.12 -- --
8 - 9 24,856 1.1 years 8.75 24,856 8.75
------- --------- ----- ------ -----
802,059 4.2 years $5.33 24,856 $8.75
======= ========= ===== ====== =====
</TABLE>
14. OTHER INCOME
Other income, in thousands, consists of the following:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
2000 1999 1998
-------- ------ ------
<S> <C> <C> <C>
Section 29 Tax Credit income........................... $ 8,273 $1,280 $1,546
Transportation income.................................. 974 793 1,363
Income (loss) from equity affiliates................... 768 (99) --
Marketing income....................................... 598 224 --
Interest income........................................ 382 43 71
Other-net.............................................. 281 189 (32)
-------- ------ ------
$ 11,276 $2,430 $2,948
======== ====== ======
</TABLE>
47
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) for interest and income taxes is as follows, in
thousands:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Interest.............................................. $18,670 $8,190 $5,617
Income taxes.......................................... $ (663) $ 306 $ 600
</TABLE>
Other non-cash transactions are as follows, in thousands:
<TABLE>
<CAPTION>
For the Years
Ended December
31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Common stock used in acquisitions:
283,669 shares used for minority interest of MGV
Energy, Inc........................................... $ 2,309 $ --
404,381 shares used for Unocal properties.............. $ 2,221 $ --
3,650,000 shares used for CMS Acquisition.............. $ 14,600 $ --
1,377,000 shares used for minority interest of MSR..... $ -- $10,327
Treasury stock reacquired:
105,139 shares from Unocal Acquisition................. $ (1) $ --
3,650,000 shares from CMS Acquisition.................. $(14,600) $ --
</TABLE>
16. RELATED PARTY TRANSACTIONS
As of December 31, 2000, the Darden Family has 52% beneficial ownership in
Quicksilver including shares owned directly, and shares owned by Mercury
Exploration Company, and Quicksilver Energy L.C., companies that are owned by
the Darden's. Thomas Darden, Glenn Darden and Anne Darden Self are officers
and directors of the Company.
Mercury previously performed certain accounting, treasury, and
administrative services and operated the oil and gas properties of the Company
under service agreements. On April 1, 2000, Quicksilver began performing its
own accounting, treasury and administration, and on July 1, 2000, Quicksilver
began operating its own properties. Employees previously performing these
functions were transferred from Mercury to Quicksilver.
Effective July 1, 2000, Quicksilver purchased substantially all of the
natural gas producing, gathering, transmission, compression and marketing
assets of, and 65% of Mechanical Technology Services, LLC, a gas compression
company from, Mercury for $18 million. An independent appraiser determined the
fairness, from a financial point of view, of the $18 million purchase price
and the non-related party members of the Board of Directors approved the
purchase.
These acquisitions, combined with the transfer of administrative and
operational functions from Mercury to Quicksilver, reduces Quicksilver's
related party transactions with the Dardens to rent on its headquarters
building in Fort Worth and the combined ownership of Mechanical Technologies.
Mercury was paid $1,969,000 during 2000 and $2,592,000 in 1999 for all
services. At December 31, 2000, Quicksilver owed Mercury $1,773,000 of
accounts payable and a $3,200,000 note payable.
48
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. SUPPLEMENTAL INFORMATION (UNAUDITED)
Selected Quarterly Data
<TABLE>
<CAPTION>
Mar 31 Jun 30 Sep 30 Dec 31
------- ------- ------- -------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
2000
Operating revenues........................... $15,979 $31,736 $30,986 $41,347
Income before taxes.......................... 1,974 6,066 7,133 12,558
Net income................................... 1,269 3,778 4,767 7,804
Basic net income per share................... 0.07 0.21 0.26 0.43
Diluted net income per share................. 0.07 0.21 0.26 0.42
1999
Operating revenues........................... $ 8,790 $11,606 $14,233 $15,417
Income (loss) before income taxes and
minority interest........................... (876) 339 1,524 2,036
Net income (loss)............................ (485) 224 1,011 2,412
Basic and diluted net income (loss) per
share....................................... (0.04) 0.02 0.08 0.18
1998
Operating revenues........................... $11,629 $11,440 $11,622 $10,337
Income before income taxes and minority
interest.................................... 1,906 1,817 2,246 1,390
Net income................................... 1,296 1,290 1,958 341
Basic and diluted net income per share....... 0.11 0.11 0.17 0.13
</TABLE>
Supplemental Information for Oil and Gas Producing Activities
Holditch-Reservoir Technologies Consulting Services, independent petroleum
engineers, prepared natural gas, oil and NGL reserve estimates as of December
31, 2000. The reserves were prepared in accordance with guidelines established
by the Securities and Exchange Commission and, accordingly, were based on
existing economic and operating conditions. Oil and natural gas prices in
effect as of the reserve report date were used without any escalation except
in those instances where the sale is covered by contract, in which case the
applicable contract prices included fixed and determinable escalations were
used for the duration of the contract, and thereafter the year-end price was
used (See "Standardized Measure of Discounted Future Net Cash Flows and
Changes Therein Relating to Proved Oil and Natural Gas Reserves" below for a
discussion of the effect of the different prices on reserve quantities and
values.) Operating cost, production and ad valorem taxes and future
development costs were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present values
should not be construed as the current market value of the Company's oil and
natural gas reserves or the costs that would be incurred to obtain equivalent
reserves. Reserves are primarily located in the United States. Canadian
reserves are immaterial.
49
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated Reserves
Changes in the estimated net quantities of crude oil and natural gas
reserves, which are primarily located in the continental United States
(Canadian reserves are immaterial) are as follows:
Reserve Quantities
RESERVE ROLLFORWARD
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Natural gas (Mmcf)
Beginning of year.................................. 192,963 147,226 132,063
Revisions of previous estimates.................... 14,434 17,381 --
Extensions and discoveries......................... 17,923 -- 29,683
Purchases of reserves-in-place..................... 372,149 44,287 --
Sales of reserves-in-place......................... -- (5) --
Production......................................... (26,655) (15,926) (14,520)
------- ------- -------
Total proved, end of year........................ 570,814 192,963 147,226
======= ======= =======
Proved developed reserves........................ 444,865 135,327 118,295
======= ======= =======
Crude oil (Mbbl)
Beginning of year.................................. 15,281 17,983 24,536
Revisions of previous estimates.................... (787) (4,646) (5,886)
Purchases of reserves-in-place..................... 1,397 2,673 --
Sales of reserves-in-place......................... -- (5) --
Production......................................... (1,035) (724) (667)
------- ------- -------
Total proved, end of year........................ 14,856 15,281 17,983
======= ======= =======
Proved developed reserves........................ 9,391 9,954 9,829
======= ======= =======
Natural gas liquids (Mbbl)
Beginning of year.................................. 845 996 1,128
Revisions of previous estimates.................... 555 (168) --
Purchases of reserves-in-place..................... 296 146 --
Production......................................... (161) (129) (132)
------- ------- -------
Total proved, end of year........................ 1,535 845 996
======= ======= =======
Proved developed reserves........................ 813 838 908
======= ======= =======
Proved reserves equivalent end of year (Mmcfe):
Natural gas........................................ 570,814 192,963 147,226
Crude oil.......................................... 89,136 91,686 107,898
Natural gas liquids................................ 9,210 5,070 5,976
------- ------- -------
Total proved..................................... 669,160 289,719 261,100
======= ======= =======
Total proved developed........................... 506,089 200,079 182,717
======= ======= =======
</TABLE>
50
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standardized Measure
The Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Natural Gas Reserves ("Standardized
Measure") does not purport to present the fair market value of the Company's
oil and natural gas properties. An estimate of such value should consider,
among other factors, anticipated future prices of oil and natural gas, the
probability of recoveries in excess of existing proved reserves, the value of
probable reserves and acreage prospects, and perhaps different discount rates.
It should be noted that estimates of reserve quantities, especially from new
discoveries, are inherently imprecise and subject to substantial revision.
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed price contracts, to the estimated
future production of the year-end proved reserves. The product prices used in
calculating these reserves were $8.12, $3.15 and $2.33 per Mcfe for 2000, 1999
and 1998, respectively. These prices have varied widely and have a significant
impact on both the quantities and value of the proven reserves as the reduced
price causes wells to reach the end of their economic life much sooner and
also makes certain proved undeveloped locations uneconomical, both of which
reduce the reserves. These prices were adjusted by field to arrive at the
appropriate corporate net price.
Future cash inflows were reduced by estimated future production and
development costs based on year-end costs to determine pre-tax cash inflows.
Future income taxes were computed by applying the statutory tax rate to the
excess of pre-tax cash inflows over the Company's tax basis in the associated
proved oil and natural gas properties. Tax credits and net operating loss
carryforwards were also considered in the future income tax calculation.
Future net cash inflows after income taxes were discounted using a 10% annual
discount rate to arrive at Standardized Measure. The table below is in
thousands:
<TABLE>
<CAPTION>
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Future cash flows............................. $5,434,874 $913,485 $607,336
Future production and development costs....... (1,408,337) (462,822) (331,599)
Future income tax expense..................... (1,323,341) (104,715) (55,106)
---------- -------- --------
Future net cash flows......................... 2,703,196 345,948 220,631
10% annual discount for estimated timing of
cash flows................................... (1,633,904) (141,899) (92,212)
---------- -------- --------
Standardized measure of discounted future net
cash flows................................... $1,069,292 $204,049 $128,419
========== ======== ========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Net changes in price and production costs....... $ 468,720 $ 72,641 $ 3,199
Development costs incurred...................... 20,078 9,486 8,283
Revision of estimates........................... 62,462 (17,089) (21,708)
Changes in estimated future development costs... (25,307) (7,196) (13,763)
Purchase and sale of reserves, net.............. 828,327 61,919 1,715
Extensions, discoveries and improved recover.... 40,404 -- 18,246
Net change in income taxes...................... (464,565) (26,829) (7,871)
Sales of oil and gas net of production costs.... (71,560) (26,571) (24,346)
Accretion of discount........................... 20,405 12,842 14,765
Other........................................... (13,721) (3,573) 2,254
--------- -------- --------
Net increase (decrease)......................... $ 865,243 $ 75,630 $(19,226)
========= ======== ========
</TABLE>
51
<PAGE>
QUICKSILVER RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized cost for oil and gas properties at December 31, 2000 and 1999,
in thousands:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Proved oil and gas properties............................ $430,507 $223,746
Unproved oil and gas interests........................... 6,243 4,926
Accumulated depletion and depreciation................... (87,471) (65,075)
-------- --------
349,279 $163,597
======== ========
</TABLE>
Costs incurred in oil and gas property acquisition, exploration, and
development activities for the years ended December 31, 2000, 1999 and 1998,
in thousands:
<TABLE>
<CAPTION>
200 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Acquisition of properties.......................... $167,855 $40,272 $ 1,715
Development costs.................................. 20,078 9,486 8,283
Exploration costs.................................. 360 -- 1,095
-------- ------- -------
Total............................................ $188,293 $49,758 $11,093
======== ======= =======
</TABLE>
Results of operations from producing activities, for the years ended
December 31, 2000, 1999 and 1998, in thousands:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Oil and gas sales.................................. $108,772 $47,616 $42,080
Operating expense.................................. 37,212 18,771 17,122
Depletion expense.................................. 22,985 13,315 12,198
-------- ------- -------
48,575 15,530 12,760
-------- ------- -------
Income tax expense................................. 17,108 5,280 4,130
-------- ------- -------
Results of operations from producing activities
(excluding corporate overhead and interests
costs)............................................ $ 31,467 $10,250 $ 8,630
======== ======= =======
</TABLE>
52
<PAGE>
ITEM 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information set forth under Item 1--Election of Directors, in the
Company's proxy statement, for the annual meeting of stockholder's to be held
June 5, 2001 (the "Proxy Statement"), is incorporated herein by reference.
The following information is provided with respect to the executive officers
of the Company.
<TABLE>
<CAPTION>
Name Age Position (s) Held With Quicksilver
- ---- --- ----------------------------------
<S> <C> <C>
Thomas F. Darden........ 47 Chairman of the Board
Glenn Darden............ 45 President, Chief Executive Officer and Director
Bill M. Lamkin.......... 55 Executive Vice President and Chief Financial Officer
Jeff Cook............... 44 Senior Vice President--Operations
Houston Kauffman........ 46 Vice President--Manager of Acquisitions, Divestitures & Trades
Robert N. Wagner........ 37 Vice President--Engineering
Anne Darden Self........ 43 Vice President--Human Resources
Fred van Naerssen....... 59 Vice President and Chief Accounting Officer
D. Wayne Blair.......... 44 Vice President and Controller
MarLu Hiller............ 38 Treasurer
</TABLE>
The following biographies describe the business experience of our executive
officers.
THOMAS F. DARDEN has served on the Company's Board of Directors since
December 1997. Previously, he served as President of Mercury. While he was
President of Mercury, Mercury developed and acquired interests in over 1,200
producing wells in Michigan, Indiana, Kentucky, Wyoming, Montana, New Mexico
and Texas. A graduate of Tulane University with a BA in Economics in 1975, Mr.
Darden was employed by Mercury or its parent corporation, Mercury Production
Company, for 22 years. He became a director and the President of MSR on March
7, 1997. On January 1, 1998, he was named Chairman of the Board and Chief
Executive Officer of MSR. Mr. Darden became one of the Company's directors and
its President upon Quicksilver's formation in December 1997 and was elected
Chairman of the Board and Chief Executive Officer on March 4, 1999. Mr. Darden
became Chairman of the Board of the Company exclusively in November 1999.
GLENN DARDEN has served on the Company's Board of Directors since December
1997. Prior to that time, he served with Mercury for 18 years, and for the
last five of those 18 years was the Executive Vice President of Mercury. Prior
to working for Mercury, Mr. Darden worked as a geologist for Mitchell Energy
Corporation. He graduated from Tulane University in 1979 with a BA in Earth
Sciences. Mr. Darden became director and Vice President of MSR on March 7,
1997, and was named President and Chief Operating Officer of MSR on January 1,
1998. Mr. Darden served as Quicksilver's Vice President until he was elected
President and Chief Operating Officer on March 4, 1999. He became the Chief
Executive Officer of the Company in Novermber 1999.
BILL M. LAMKIN is a Certified Management Accountant and a Certified Cash
Manager with over 20 years of experience in the oil and gas industry. He
graduated from Texas Wesleyan University with a BBA in Accounting in 1968. He
served as Controller/Chief Financial Officer at Whittaker Corporation and
Sargeant Industries, Inc. between 1970 and 1978. He worked as Treasurer,
Controller, and Director of Financial Services at Union Pacific Resources
until he became the Company's Executive Vice President and Chief Financial
Officer when he joined the Company in June 1999.
53
<PAGE>
JEFF COOK became the Company's Senior Vice President-Operations in July
2000. From 1979 to 1981, he held the position of operations supervisor with
Western Company of North America. In 1981, he became a district production
superintendent for Mercury Exploration Company and became Vice President of
Operations in 1991 and Executive Vice President in 1998 before joining
Quicksilver. Mr. Cook graduated from Texas Christian University with a BA in
Business Administration in 1979.
HOUSTON KAUFFMAN is a professional landman having graduated from the
University of Texas in 1978 with a degree in petroleum land management. From
1979 to 1991, he held various staff and supervisory positions with Amoco
Production Company. After receiving his master's degree in business
administration from Houston Baptist University in 1991, he was a land manager
and ultimately land acquisition and divestment manager with CNG Producing
Company. He became manager of business development for Mercury Exploration
Company in 1995, and became Quicksilver's manager of acquisitions, divestments
and trades at Quicksilver's inception in December 1997. On March 4, 1999, Mr.
Kauffman was elected Vice President Manager of Acquisitions, Divestitures &
Trades, of Quicksilver.
ROBERT N. WAGNER has served as the Company's Vice President-Engineering
since July 1999. From January 1999 to July 1999, he was the Company's manager
of eastern region field operations. From November 1995 to January 1999, Mr.
Wagner held the position of district engineer with Mercury. Prior to 1995, Mr.
Wagner was with Mesa, Inc. for over 8 years and served as both drilling
engineer and production engineer. Mr. Wagner received a BS in Petroleum
Engineering from the Colorado School of Mines in Golden, Colorado in 1986.
ANNE DARDEN SELF became Quicksilver's Vice President-Human Resources in
November 2000. She previous held the position of Senior Vice President of
Human Resources for Mercury Exploration Company, where she had worked since
1992. From 1988 to 1991, she was with BancPLUS Savings as Vice President of
Human Resources. She worked from 1987 to 1988 as an Account Executive for NW
Ayer Advertising Agency. Prior to 1987, she spent several years in real estate
management. She attended Sweet Briar College and graduated from the University
of Texas in Austin in 1980 with a BA in history. Ms. Self was elected as one
of the Company's directors in September 1999.
FRED VAN NAERSSEN is a Certified Public Accountant with over 30 years
experience in public and industry accounting. He was with
PricewaterhouseCoopers for seven years before joining Union Pacific
Corporation in 1973. At Union Pacific he served in various capacities in the
financial field, including 13 years at Union Pacific Resources. Mr. van
Naerssen joined the Company in July 1999 after retiring from Union Pacific
Corporation.
D. WAYNE BLAIR is a Certified Public Accountant with over 20 years of
experience in the oil and gas industry. He graduated from Texas A&M University
in 1979 with a BBA in Accounting. He was employed by Sabine Corporation from
1980 through 1988 where he held the position of Assistant Controller. From
1988 through 1994, he served as Controller for a group of private businesses
involved in the oil and gas industry. Prior to joining Quicksilver in April
2000, he was the Controller for Mercury Exploration Company.
MARLU HILLER is a Certified Public Accountant with over 15 years of
experience in public and oil and gas accounting. She graduated from Baylor
University with a BBA in Accounting in 1985, and was with Ernst & Young for 3
years before joining Union Pacific Resources. At Union Pacific Resources she
served in various capacities, including financial reporting, financial system
implementations, and manager of accounting for Union Pacific Fuels, which was
Union Pacific Resources' marketing company. Ms. Hiller joined Quicksilver in
August of 1999 as Director of Financial Reporting and Planning and was named
Treasurer in May of 2000.
ITEM 11. Executive Compensation
The information set forth under "Executive Compensation" of the Proxy
Statement is incorporated herein by reference.
54
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under "Security Ownership of Management and
Certain Beneficial Holders" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions
The information set forth under "Transactions with Management and Certain
Stockholders" in the Proxy Statement is incorporated herein by reference.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements of the Company and the Report of the
Company's Independent Public Accountants thereon are included on pages
33 through 53 of this Form 10-K.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statement of Income for the years ended December 31, 2000,
1999 and 1998
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules:
[All schedules are omitted because the required information is
inapplicable or the information is presented in the Financial
Statements or the notes thereto.]
55
<PAGE>
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Sequential Description
----------- ----------------------
<C> <S>
2.1 Purchase and Sale Agreement, dated March 4, 2000, between CMS Oil and Gas Company
and Quicksilver Resources Inc. (filed as Exhibit 2.1 to the Company's Form 8-K
filed April 14, 2000 and included herein by reference).
3.1 Restated Certificate of Incorporation of Quicksilver Resources Inc. (filed as
Exhibit 4.1 to the Company's
Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by
reference).
*3.2 Certificate of Designation, Preferences and Rights of Preferred Stock.
3.3 Bylaws of Quicksilver Resources Inc. (filed as Exhibit 4.2 to the Company's Form
S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference).
*3.4 Amendment to Bylaws of Quicksilver Resources, Inc.
4.1 Form of Quicksilver Resources Inc. Common Stock Certificate (filed as Exhibit 4.3
to the Company's
Form S-4/A File No. 333-66709, filed January 20, 1999 and included herein by
reference).
4.2 Note Purchase Agreement, dated March 31, 2000, between the Company and the
Purchasers identified therein (filed as Exhibit 4.1 to the Company's Form 8-K
filed April 14, 2000 and included herein by reference).
10.1 Master Gas Purchase and Sale Agreement, dated March 1, 1999 by and between
Quicksilver Resources Inc. and Reliant Energy Services, Inc. (filed as Exhibit
10.10 to the Company's Form S-1 File No. 333-89229, filed October 18, 1999 and
included herein by reference).
10.2 Wells Agreement, (filed as an exhibit to the Registration Statement on Form S-4
File No. 333-29769, and included herein by reference).
10.3 Purchase and Sale Agreement, dated March 31, 1999, between Union Oil Company of
California
and Quicksilver Resources Inc. (filed as Exhibit 2.1 to the Company's Form 8-K
File No. 001-14837, filed May 28, 1999 and included herein by reference).
10.4 Amendment to Purchase and Sale Agreement, dated May 17, 1999, between Union Oil
Company of California and Quicksilver Resources Inc. (filed as Exhibit 2.2 to the
Company's Form 8-K File No. 001-14837, filed
May 28, 1999 and included herein by reference).
+10.5 Quicksilver Resources 1999 Stock Option and Retention Stock Plan. (filed as
Exhibit 10.28 to the Company's Form S-1 File No. 333-89229, filed October 18,
1999 and included herein by reference).
10.6 Third Amended and Restated Credit Agreement, dated as of March 31, 2000, among
Quicksilver Resources
Inc., as Borrower, Bank of America, N.A., as Administrative Agent, and the
financial institutions listed on Schedule 1 thereto (filed as Exhibit 10.1 to the
Company's Form 10-Q filed May 15, 2000 and included herein by reference).
10.7 First Amendment to Third Amended and Restated Credit Agreement, dated effective
as of April 24, 2000, among the parties described in Exhibit 10.6 above (filed as
Exhibit 10.2 to the Company's Form 10-Q filed
May 15, 2000 and included herein by reference).
*10.8 Second Amendment to Third Amended and Restated Credit Agreement, dated effective
as of August 31, 2000, among the parties described in Exhibit 10.6 above.
*10.9 Third Amendment to Third Amended and Restated Credit Agreement, dated effective
as of November 30, 2000, among the parties described in Exhibit 10.6 above.
10.10 Amended and Restated Purchase and Sale Agreement, dated as of March 31, 2000,
between Quicksilver Resources Inc., as Seller, and Mariner Gas LLC, as Buyer
(filed as Exhibit 10.3 to the Company's Form 10-Q filed May 15, 2000 and included
herein by reference).
*10.11 Agency Agreement, dated November 30, 2000, for the sale of up to 1,340,405 shares
of Common Stock of the Company.
*10.12 Agency Agreement, dated November 30, 2000, for the sale of up to 299,242 shares
of Common Stock of the Company.
*21.1 List of subsidiaries of Quicksilver Resources Inc.
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Holditch-Resevoir Technologies Consulting Services
27 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
+ Identifies management contracts and compensatory plans or arrangements.
(b) Reports on Form 8-K
No Form 8-K was filed in the last reporting period covered by this Form 10-K
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Quicksilver Resources Inc.
(the "Registrant")
Dated: March 27, 2001 /s/ Glenn Darden
by: _________________________________
Glenn Darden
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas F. Darden Chairman of the Board March 27, 2001
______________________________________
Thomas F. Darden
/s/ Glenn Darden President, Chief Executive March 27, 2001
______________________________________ Officer and Director
Glenn Darden
/s/ Bill M. Lamkin Executive Vice-President March 27, 2001
______________________________________ and Chief Financial
Bill M. Lamkin Officer
/s/ Fred Van Naerssen Vice-President and Chief March 27, 2001
______________________________________ Accounting Officer
Fred Van Naerssen
/s/ Anne Darden Self Vice-President--Human March 27, 2001
______________________________________ Resources and Director
Anne Darden Self
/s/ W. Yandell Rogers, III Director March 27, 2001
______________________________________
W. Yandell Rogers, III
/s/ Steven M. Morris Director March 27, 2001
______________________________________
Steven M. Morris
/s/ Mark Warner Director March 27, 2001
______________________________________
Mark Warner
/s/ D. Randall Kent Director March 27, 2001
______________________________________
D. Randall Kent
</TABLE>
57
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>CERTIFICATE OF DESIGNATION
<TEXT>
<PAGE>
Exhibit 3.2
QUICKSILVER RESOURCES INC.
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF PREFERRED STOCK
Quicksilver Resources Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
That, pursuant to authority conferred upon the Board of Directors by
the Restated Certificate of Incorporation of the Corporation, and pursuant to
the provisions of Section 151 of the Delaware General Corporation Law, said
Board of Directors, by unanimous consent effective December 15, 2000, adopted
the following resolutions providing for the Special Voting Stock described
therein.
RESOLVED that, in connection with that certain Support Agreement by and
between MGV Energy Inc., the Corporation and the other shareholders of MGV
Energy Inc., to be dated on or about the date hereof, in order to provide to the
holders of Exchangeable Shares (as defined in the Support Agreement) the same
voting rights as are applicable to holders of the Corporation's Common Stock
issuable upon exchange of the Exchangeable Shares, pursuant to the authority
vested in the Board in accordance with the Restated Certificate of Incorporation
of the Corporation and Section 151 of the General Corporation Law of the State
of Delaware, there shall be created a series of the Preferred Stock of the
Corporation, the designations, rights, preferences, powers, and the limitations,
qualifications and restrictions of which are as follows:
Special Voting Stock
--------------------
A series of Preferred Stock is hereby created designated as "Special
Voting Stock." The number of shares constituting such series shall be one (1).
The outstanding share of Special Voting Stock shall be entitled at any relevant
date to the number of votes equal to the Aggregate Equivalent Vote Amount, as
such term is defined in that certain Support Agreement, to be dated on or about
the date hereof, by and between MGV Energy Inc. ("MGV"), the Corporation and the
other shareholders of MGV, on all matters presented to the stockholders of the
Corporation. Upon the liquidation, dissolution or winding up of the Corporation,
the holder of the Special Voting Stock shall be entitled, prior and in
preference to any distribution to holders of Common Stock and after the
distribution to holders of any class or series of Preferred Stock ranking senior
to the Special Voting Stock of all amounts to which such holders are entitled to
receive the sum of $.01. Except as aforesaid, no dividends or distributions
shall be payable to the holder of Special Voting Stock. The Special Voting Stock
shall not be convertible into any other class or series of the capital stock or
into cash, property or other rights, and may not be redeemed. If the Special
Voting Stock shall be purchased or otherwise acquired by the Corporation, it
shall be deemed retired and shall be canceled and may not thereafter be reissued
or otherwise disposed of by the Corporation. So long as any "Exchangeable
Shares" (as that term is defined in the Support Agreement) shall be outstanding,
the number of shares comprising the Special Voting Stock shall not be increased
or decreased and no other terms of the Special Voting Stock shall be amended,
except upon the approval of the holder of the one share of Special Voting Stock.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF PREFERRED STOCK
Page 1
<PAGE>
IN WITNESS WHEREOF, I have hereunder set my hand this 20th day of
December, 2000.
QUICKSILVER RESOURCES INC.
By: /s/ Glenn Darden
-------------------------------------
Glenn Darden, President and
Chief Executive Officer
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF PREFERRED STOCK
Page 2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.4
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>AMENDMENTS TO THE BYLAWS OF QUICKSILVER RESOURCES
<TEXT>
<PAGE>
Exhibit 3.4
Amendments to the Bylaws of
Quicksilver Resources Inc.
November 30, 1999
BE IT RESOLVED that Section 5 of Article V of the By-Laws of the
Corporation is amended to read as follows:
Section 5. Duties of the Chairman of the Board. The Chairman of the
Board, if one is elected, shall preside at all meetings of shareholders
and directors, and, unless the President is designated by the Board of
Directors as the Chief Executive Officer of the Corporation, shall act
as the Chief Executive Officer of the Corporation, in which case he
shall have the general supervision of the affairs of the Corporation
and shall have general and active control of all of its business. The
Chief Executive Officer shall see that all orders and resolutions of
the Board of Directors and the stockholders are carried into effect.
The Chief Executive Officer shall have general authority to execute
bonds, deeds, contracts, and other instruments in the name of the
Corporation and affix the corporate seal thereto; to sign stock
certificates; to cause the employment or appointment of such employees
and agents of the Corporation as the proper conduct of operations may
require, and to fix their compensation, subject to the provisions of
the By-Laws; to remove or suspend any employee or agent who shall have
been employed or appointed under his authority or under authority of an
officer subordinate to him; to suspend for cause, pending final action
by the authority which shall have elected or appointed him, any officer
subordinate to the Chief Executive Officer; and, in general, to
exercise all powers and authority usually appertaining to the Chief
Executive Officer of a corporation.
BE IT FURTHER RESOLVED that Section 6 of Article V of the By-Laws of
the Corporation is amended to read as follows:
Section 6. Duties of the President. The President shall, in the absence
of the Chairman of the Board or if no Chairman of the Board is elected,
have all the powers and perform all the functions and duties
hereinabove assigned to the Chairman of the Board. If there is a
Chairman of the Board serving, but the President is designated as the
Chief Executive Officer, he shall have all the powers and perform all
the functions of that office as set forth in Section 5 above; but in
all events the President shall be the Chief Operating Officer of the
Corporation and responsible for the day-to-day management of its
business and shall perform such other functions and duties as may from
time to time be designated by the Board of Directors or by the Chairman
of the Board if he is the Chief Executive Officer.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>SECOND AM. TO THIRD AMENDED/RESTATED CREDIT AGR.
<TEXT>
<PAGE>
EXHIBIT 10.8
SECOND AMENDMENT TO
-------------------
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------------
This Second Amendment to Third Amended and Restated Credit Agreement
(this "Second Amendment") is entered into effective as the Effective Date (as
----------------
hereinafter defined) by and among QUICKSILVER RESOURCES INC., a Delaware
corporation ("Borrower"), BANK OF AMERICA, N.A., a national banking association,
--------
as Administrative Agent ("Administrative Agent") and each of the financial
--------------------
institutions a party hereto as Banks.
W I T N E S S E T H:
-------------------
WHEREAS, Borrower, Administrative Agent, Bank of America, N.A., BNP
Paribas (formerly Paribas), Fortis Capital Corp. (formerly MeesPierson Capital
Corp.), The Fuji Bank, Ltd., CIBC Inc., Comerica Bank - Texas, The Bank of Nova
Scotia, Credit Agricole Indosuez, National Bank of Canada, New York Branch,
Credit Lyonnais New York Branch and Bank United (collectively, the "Banks") are
-----
parties to that certain Third Amended and Restated Credit Agreement dated as of
March 31, 2000 (as amended, the "Credit Agreement") (unless otherwise defined
----------------
herein, all terms used herein with their initial letter capitalized shall have
the meaning given such terms in the Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement, the Banks have made a Loan
to Borrower and provided certain other credit accommodations to Borrower; and
WHEREAS, Borrower has requested that the Credit Agreement be amended in
certain respects as set forth herein; and
WHEREAS, subject to the terms and conditions herein contained, the
Banks have agreed to Borrower's request.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrower, Administrative Agent and the Banks hereby agree as follows:
SECTION 1. Amendments. In reliance on the representations, warranties,
----------
covenants and agreements contained in this Second Amendment, and subject to the
satisfaction of the conditions precedent set forth in Section 2 hereof, the
---------
Credit Agreement is hereby amended effective as of August 31, 2000 (which date
shall be referred to herein as the "Effective Date") in the manner provided in
--------------
this Section 1.
---------
1.1 Additional Definition. Section 2.1 of the Credit Agreement is
---------------------
amended to add thereto in alphabetical order the definition of "Second
------
Amendment" which shall read in full as follows:
- ---------
1
<PAGE>
"Second Amendment" means that certain Second Amendment to Third
Amended and Restated Credit Agreement dated effective as of August 31,
2000 among Borrower, Administrative Agent and the financial
institutions a party thereto as Banks.
1.2 Amendment to Definitions. The definitions of "Consolidated Net
------------------------ ----------------
Income," and "Loan Papers" set forth in Section 2.1 of the Credit Agreement are
- ------
amended to read in full as follows:
"Consolidated Net Income" means, for any Person as of any period, the
-----------------------
net income (or loss) of such Person and its Consolidated Subsidiaries for such
period determined in accordance with GAAP, but excluding: (a) the income of any
other Person (other than its Consolidated Subsidiaries) in which such Person or
any of its Subsidiaries has an ownership interest, unless received by such
Person or its Consolidated Subsidiaries in a cash distribution; (b) any after-
tax gains attributable to asset dispositions; (c) any non-cash gains, losses or
charges on any Hedging Agreement resulting from the requirements of SFAS 133 for
that period; and (d) to the extent not included in clauses (a), (b) and (c)
above, any after-tax (i) extraordinary gains (net of extraordinary losses) or
(ii) non-cash nonrecurring gains.
"Loan Papers" means this Agreement, the First Amendment, the Second
-----------
Amendment, the Notes, any Subsidiary Guaranty (which may hereafter be executed),
all Mortgages now or at any time hereafter delivered pursuant to Section 7.1,
-----------
the Collateral Assignments, any Borrower Pledge Agreement (which may hereafter
be executed), any Subsidiary Pledge Agreement (which may hereafter be executed),
the Subordination Agreements and all other certificates, documents or
instruments delivered in connection with this Agreement, as the foregoing may be
amended from time to time.
SECTION 2. Conditions Precedent. The effectiveness of the amendments to
--------------------
the Credit Agreement contained in Section 1 hereof is subject to the
---------
satisfaction of each of the following conditions precedent.
2.1 Subordinate Note Amendment. Administrative Agent shall have
--------------------------
received a fully executed copy of an amendment to the Subordinate Note
Agreement, pursuant to which the Subordinate Note Agreement is amended in a
manner substantially similar to the amendment to the Credit Agreement set forth
herein.
2.2 Fees and Expenses. Borrower shall have paid all reasonable fees
-----------------
and expenses of counsel to Administrative Agent incurred by Administrative Agent
in connection with the preparation, negotiation and execution of this Second
Amendment and all related documents.
SECTION 3. Representations and Warranties of Borrower. To induce the
------------------------------------------
Banks and Administrative Agent to enter into this Second Amendment, Borrower
hereby represents and warrants to Administrative Agent and the Banks as follows:
2
<PAGE>
3.1 Credit Agreement. Each representation and warranty of Borrower
----------------
and its Subsidiaries contained in the Credit Agreement and the other Loan Papers
is true and correct on the date hereof.
3.2 Authorization. The execution, delivery and performance by
-------------
Borrower of this Second Amendment are within Borrower's corporate powers, have
been duly authorized by all necessary corporate action, require no action by or
filing with, any governmental body, agency or official and do not violate or
constitute a default under any provision of applicable Law or Material Agreement
binding upon Borrower or any of its Subsidiaries or result in the creation or
imposition of any Lien upon any of the assets of Borrower or any of its
Subsidiaries other than the Liens securing the Obligations.
3.3 Binding Effect. This Second Amendment constitutes the valid and
--------------
binding obligation of Borrower enforceable in accordance with its terms, except
as (a) the enforceability thereof may be limited by bankruptcy, insolvency or
similar Laws affecting creditors rights generally, and (b) the availability of
equitable remedies may be limited by equitable principles of general
application.
3.4 No Defenses. Borrower has no defenses to payment, counterclaim or
-----------
rights of set-off with respect to the Obligations existing on the date hereof.
SECTION 4. Miscellaneous.
-------------
4.1 Reaffirmation of Loan Papers; Extension of Liens. Any and all of
------------------------------------------------
the terms and provisions of the Credit Agreement and the Loan Papers shall,
except as amended and modified hereby, remain in full force and effect. Borrower
hereby extends the Liens securing the Obligations until the Obligations have
been paid in full or are specifically released by Administrative Agent and the
Banks prior thereto, and agrees that the amendments and modifications herein
contained shall in no manner adversely affect or impair the Obligations or the
Liens securing payment and performance thereof.
4.2 Parties in Interest. All of the terms and provisions of this
-------------------
Second Amendment shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns.
4.3 Legal Expenses. Borrower hereby agrees to pay on demand all
--------------
reasonable fees and expenses of counsel to Administrative Agent incurred by
Administrative Agent in connection with the preparation, negotiation and
execution of this Second Amendment and all related documents.
4.4 Counterparts. This Second Amendment may be executed in
------------
counterparts, and all parties need not execute the same counterpart; however, no
party shall be bound by this Second Amendment until Borrower and Required Banks
have executed a counterpart hereof. Facsimiles shall be effective as originals.
3
<PAGE>
4.5 Complete Agreement. THIS SECOND AMENDMENT, THE CREDIT AGREEMENT
------------------
AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER
HEREOF.
4.6 Headings. The headings, captions and arrangements used in this
--------
Second Amendment are, unless specified otherwise, for convenience only and shall
not be deemed to limit, amplify or modify the terms of this Second Amendment,
nor affect the meaning thereof.
[Signature Pages Follow]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed by their respective Authorized Officers effective
as of the Effective Date.
BORROWER:
--------
QUICKSILVER RESOURCES INC., a Delaware corporation
By: /s/ Glenn Darden
----------------------------------
Glenn Darden, President
ADMINISTRATIVE AGENT:
--------------------
BANK OF AMERICA, N.A.
By: /s/ J. Scott Fowler
----------------------------------
J. Scott Fowler,
Managing Director
BANKS:
-----
BANK OF AMERICA, N.A.
By: /s/ J. Scott Fowler
----------------------------------
J. Scott Fowler,
Managing Director
5
<PAGE>
BNP PARIBAS
By: /s/ Michael H. Finzat
-------------------------------------
Name: Michael H. Finzat
-------------------------------------
Title: Vice President
-------------------------------------
By: /s/ Brian Malone
-------------------------------------
Name: Brian Malone
-------------------------------------
Title: Director
-------------------------------------
FORTIS CAPITAL CORP.
By: /s/ Christopher S. Parada
-------------------------------------
Name: Christopher S. Parada
-------------------------------------
Title: Vice President
-------------------------------------
By: /s/ Darrell W. Holley
-------------------------------------
Name: Darrell W. Holley
-------------------------------------
Title: Managing Director
-------------------------------------
CIBC INC.
By: /s/ M. Beth Miller
-----------------------------------
Name: M. Beth Miller
-----------------------------------
Title: Authorized Signatory
-----------------------------------
THE FUJI BANK, LTD.
By: /s/ Masatoshi Abe
-----------------------------------
Name: Masatoshi Abe
-----------------------------------
Title: Vice President and Manager
-----------------------------------
<PAGE>
COMERICA BANK - TEXAS
By: /s/ Michele L. Jones
-----------------------------------
Name: Michele L. Jones
-----------------------------------
Title: Vice President
-----------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
-----------------------------------
Name: F.C.H. Ashby
-----------------------------------
Title: Senior Manager Loan Operations
-----------------------------------
CREDIT AGRICOLE INDOSUEZ
By: ____________________________________
Name: ____________________________________
Title: ____________________________________
By: ____________________________________
Name: ____________________________________
Title: ____________________________________
NATIONAL BANK OF CANADA, NEW YORK BRANCH
By: /s/ Larry L. Sears
-----------------------------------
Name: Larry L. Sears
-----------------------------------
Title: Vice President & Manager
-----------------------------------
By: /s/ Doug Clark
-----------------------------------
Name: Doug Clark
-----------------------------------
Title: Vice President
-----------------------------------
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Allen A. Jani
-----------------------------------
Name: Allen A. Jani
-----------------------------------
Title: First Vice President
-----------------------------------
BANK UNITED
By: /s/ David W. Phillips
-----------------------------------
Name: David W. Phillips
-----------------------------------
Title: Vice President
-----------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.9
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>THIRD AM. TO THIRD AMENDED/RESTATED CREDIT AGR.
<TEXT>
<PAGE>
THIRD AMENDMENT TO
------------------
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------------
This Third Amendment to Third Amended and Restated Credit Agreement (this
"Third Amendment") is entered into effective as of the Effective Date (as
- ----------------
hereinafter defined) by and among QUICKSILVER RESOURCES INC., a Delaware
corporation ("Borrower"), BANK OF AMERICA, N.A., a national banking association,
--------
as Administrative Agent ("Administrative Agent") and each of the financial
--------------------
institutions a party hereto as Banks.
W I T N E S S E T H:
--------------------
WHEREAS, Borrower, Administrative Agent, Bank of America, N.A., BNP Paribas
(formerly Paribas), Fortis Capital Corp. (formerly MeesPierson Capital Corp.),
The Fuji Bank, Ltd., CIBC Inc., Comerica Bank - Texas, The Bank of Nova Scotia,
Credit Agricole Indosuez, National Bank of Canada, New York Branch, Credit
Lyonnais New York Branch and Bank United (collectively, the "Existing Banks")
--------------
are parties to that certain Third Amended and Restated Credit Agreement dated as
of March 31, 2000 (as amended, the "Credit Agreement") (unless otherwise defined
----------------
herein, all terms used herein with their initial letter capitalized shall have
the meaning given such terms in the Credit Agreement); and
WHEREAS, pursuant to the Credit Agreement, the Existing Banks have made a
Loan to Borrower and provided certain other credit accommodations to Borrower;
and
WHEREAS, prior to the execution of this Third Amendment, certain of the
Existing Banks (herein referred to as "Assigning Banks") have entered into
---------------
Assignment and Acceptance Agreements with Compass Bank ("Compass," and together
-------
with the Existing Banks, collectively, the "Banks"), pursuant to which such
-----
Assigning Banks assigned to Compass, and Compass (a) acquired from such
Assigning Banks a portion of each such Assigning Bank's Commitments and a
portion of the Loans and Letter of Credit Exposure held by each such Assigning
Bank under the Credit Agreement, (b) assumed and agreed to perform a portion of
each such Assigning Bank's obligations under the Credit Agreement and the other
Loan Papers, and (c) became a party to, and a "Bank" under, the Credit Agreement
and the other Loan Papers; and
WHEREAS, Schedule 1 attached hereto reflects the Commitments of each Bank
----------
after giving effect to the Assignment and Acceptance Agreements referenced
above, and, pursuant to Section 15.10 of the Credit Agreement, Schedule 1 to the
Credit Agreement is deemed amended and restated in the form of Schedule 1
----------
attached hereto; and
WHEREAS, Borrower has requested that the Banks (i) amend certain terms of
the Credit Agreement in certain respects, (ii) consent to certain transactions
more particularly described herein, and (iii) establish a Borrowing Base of
$210,000,000 to be effective as of the Effective Date and continuing until the
next Redetermination Date; and
WHEREAS, subject to the terms and conditions herein contained, the Banks
have agreed to Borrower's requests.
<PAGE>
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and confessed,
Borrower, Administrative Agent and the Banks hereby agree as follows:
SECTION 1. Amendments
----------
In reliance on the representations, warranties, covenants and agreements
contained in this Third Amendment, and subject to the satisfaction of the
conditions precedent set forth in Section 4 hereof, the Credit Agreement is
hereby amended effective as of November 30, 2000 (which date shall be referred
to herein as the "Effective Date") in the manner provided in this Section 1.
--------------
1.1 Additional Definitions
----------------------
. Section 2.1 of the Credit Agreement is amended to add thereto in
alphabetical order the definitions of "Falcon Seaboard Settlement Agreement,"
------------------------------------
"Mercury Asset Acquisition," "Mercury Asset Acquisition Agreement," "Mercury
------------------------- ----------------------------------- -------
Asset Acquisition Documents," "Mercury Assets," "Mercury Closing Documents,"
- --------------------------- -------------- -------------------------
"Mercury Closing Transactions," "Mercury Subordinate Debt," "Mercury Subordinate
---------------------------- ------------------------ -------------------
Note," "MGV/CIBC Credit Agreement," "MGV Investment Documents," "MGV Investment
- ---- ------------------------- ------------------------ --------------
Transactions," "MMI," "MMI/Compass Credit Agreement," "Other Mercury Acquisition
- ------------ --- ---------------------------- -------------------------
Debt" and "Third Amendment" which shall read in full as follows:
- ---- ---------------
"Falcon Seaboard Settlement Agreement" means that certain settlement
------------------------------------
agreement dated as of September 30, 1994, pursuant to which Mercury is obligated
to deliver certain gas volumes over a period of five (5) years as more
particularly described therein.
"Mercury Asset Acquisition" means the purchase by Borrower of the
-------------------------
Mercury Assets pursuant to the Mercury Asset Acquisition Agreement, which
purchase shall be on terms and conditions reasonably acceptable to
Administrative Agent and Required Banks.
"Mercury Asset Acquisition Agreement" means that certain Purchase and
-----------------------------------
Sale Agreement dated as of January 5, 2001, by and between Borrower and Mercury.
"Mercury Asset Acquisition Documents" means the Mercury Asset
-----------------------------------
Acquisition Agreement and all other agreements, deeds, conveyances, certificates
and other documents and instruments now or hereafter executed and delivered by
or between Borrower and Mercury pursuant to the Mercury Asset Acquisition
Agreement or in connection with the Mercury Asset Acquisition.
"Mercury Assets" means, collectively, the "Assets" as such term is
--------------
defined in the Mercury Asset Acquisition Agreement.
"Mercury Closing Documents" means the Mercury Asset Acquisition
-------------------------
Documents and all other agreements, deeds, conveyances, certificates and other
documents and instruments now or hereafter executed and delivered by and among
Borrower, Mercury or MMI pursuant to the Mercury Closing Transactions.
<PAGE>
"Mercury Closing Transactions" means the transactions to occur
----------------------------
pursuant to the Mercury Closing Documents, including, without limitation, (a)
the completion of the Mercury Asset Acquisition pursuant to the terms of the
Mercury Asset Acquisition Documents, and (b) the refinancing in full of all Debt
owed by MMI to Compass evidenced by the MMI/Compass Credit Agreement with the
proceeds of a Borrowing.
"Mercury Subordinate Debt" means all Debt of Borrower evidenced by the
------------------------
Mercury Subordinate Note which (a) does not, at any time, exceed $4,000,000 of
principal in the aggregate, (b) is unsecured, (c) has a stated maturity of no
earlier than December 31, 2005 and does not provide for or otherwise require any
mandatory redemption, repayment, defeasance, repurchase or other amortization
(except in accordance with a quarterly amortization schedule approved by
Required Banks) prior to the scheduled maturity, (d) does not provide for a non-
default rate of interest greater than nine percent (9%) per annum, and (e) is
fully subordinated to the Obligations pursuant to subordination provisions which
have been approved by Required Banks.
"Mercury Subordinate Note" means that certain promissory note to be
------------------------
executed and delivered by Borrower to Mercury in connection with the Mercury
Closing Transactions, which promissory note evidences the Mercury Subordinate
Debt.
"MGV/CIBC Credit Agreement" means that certain credit agreement
-------------------------
pursuant to which CIBC Inc. provided a credit facility to MGV in the original
principal amount of $2,200,000.
"MGV Investment Documents" means all agreements, conveyances,
------------------------
certificates and other documents and instruments now or hereafter executed and
delivered by or between Borrower and MGV in connection with the MGV Investment.
"MGV Investment Transactions" means the transactions to occur pursuant
---------------------------
to the MGV Investment Documents, including, without limitation, (a) the
completion of the MGV Investment pursuant to the terms of the MGV Investment
Documents, and (b) the refinancing in full of all Debt owed by MGV to CIBC Inc.
evidenced by the MGV/CIBC Credit Agreement with the proceeds of a Borrowing.
"MMI" means Mercury Michigan, Inc., a Michigan corporation.
---
"MMI/Compass Credit Agreement" means that certain Credit Agreement
----------------------------
dated as of June 15, 2000, as amended, pursuant to which Compass Bank provided a
credit facility to MMI in the original principal amount of $5,000,000.
"Other Mercury Acquisition Debt" means certain Debt of Mercury in the
------------------------------
maximum aggregate amount of $2,400,000 which is being assumed by Borrower in
connection with the Mercury Closing Transactions, $2,334,883 of which Debt
relates to the delivery of certain gas volumes over a period of five (5) years
in connection with the Falcon Seaboard Settlement Agreement.
<PAGE>
"Third Amendment" means that certain Third Amendment to Third Amended
---------------
and Restated Credit Agreement dated effective as of November 30, 2000 among
Borrower, Administrative Agent and the financial institutions a party thereto as
Banks.
1.2 Amendment to Definitions
------------------------
The definitions of "Loan Papers," "MGV," MGV Investment" and
----------- --- --------------
"Subsidiary" set forth in Section 2.1 of the Credit Agreement are amended to
----------
read in full as follows:
"Loan Papers" means this Agreement, the First Amendment, the Second
-----------
Amendment, the Third Amendment, the Notes, any Subsidiary Guaranty (which may
hereafter be executed), all Mortgages now or at any time hereafter delivered
pursuant to Section 7.1, the Collateral Assignments, any Borrower Pledge
Agreement (which may hereafter be executed), any Subsidiary Pledge Agreement
(which may hereafter be executed), the Subordination Agreements and all other
certificates, documents or instruments delivered in connection with this
Agreement, as the foregoing may be amended from time to time.
"MGV" means MGV Energy Inc., a corporation organized under the laws of
---
Canada.
"MGV Investment" means, collectively, (i) the initial investment by
--------------
Borrower of approximately $1,500,000 to purchase approximately ninety percent
(90%) of the ownership interests of MGV and (ii) the subsequent investment by
Borrower of considerations in an amount approximately equal to $2,100,000 to
purchase the remaining ten percent (10%) ownership interests of MGV.
"Subsidiary" means, for any Person, any corporation or other entity of
----------
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions (including that of a general partner) are at the time directly or
indirectly owned, collectively, by such Person and any Subsidiaries of such
Person. The term "Subsidiary" shall include Subsidiaries of Subsidiaries (and
so on). Unless otherwise expressly stated herein, Terra and MGV (after giving
effect to the consummation of the MGV Investment Transactions) are, and shall be
deemed, Subsidiaries of Borrower, and EAO, Kristen and TPC shall not be deemed
Subsidiaries of Borrower.
1.3 Amendment to Debt Covenant
--------------------------
Section 11.1 of the Credit Agreement is amended to read in full as
follows:
"SECTION 11.1. Incurrence of Debt. Borrower will not, nor
------------------
will Borrower permit any other Credit Party to, incur, become or
remain liable for any Debt other than (i) the Obligations, (ii)
the Subordinate Debt, (iii) Debt of Terra (but not guarantees of
such Debt by Borrower) that exists on the Closing Date in the
amount of approximately $2,100,000 which Debt is expressly being
retained by CMS pursuant to the terms of the CMS Acquisition
Agreement because it pertains to an asset excluded from the CMS
Acquisition, (iv) Debt of MGV evidenced by the MGV/CIBC Credit
Agreement which is being refinanced in full with proceeds of a
Borrowing
<PAGE>
upon the consummation of the MGV Investment Transactions, (v)
Debt of MMI evidenced by the MMI/Compass Credit Agreement which
is being refinanced in full with proceeds of a Borrowing upon the
consummation of the Mercury Closing Transactions, (vi) the
Mercury Subordinate Debt, (vii) Other Mercury Acquisition Debt,
and (viii) the guarantee by Borrower of the Cinnabar Marketing
Obligations; provided, that, in the event no Default, Event of
Default or Borrowing Base Deficiency has occurred which is
continuing, (a) Borrower may incur and remain liable for Non-
Recourse Debt to the extent such Non-Recourse Debt has been
specifically approved in writing by Required Banks, and (b)
Borrower and its Subsidiaries may incur and remain liable for
other Debt in an aggregate amount outstanding at any time not to
exceed $2,000,000."
1.4 Amendment to Restricted Payments Covenant
-----------------------------------------
Section 11.2 of the Credit Agreement as amended to read in full as
follows:
"SECTION 11.2. Restricted Payments. Borrower will not, nor
-------------------
will Borrower permit any other Credit Party to, directly or
indirectly, declare or pay, or incur any liability to declare or
pay, and Restricted Payment; provided, that, any Subsidiary or
Borrower that has provided a Subsidiary Guaranty, and all of the
Equity of which owned by Borrower has been pledged to
Administrative Agent pursuant to a Borrower Pledge Agreement, may
make Distributions to Borrower; provided, further that, in the
event no Default, Event of Default or Borrowing Base Deficiency
has occurred which is continuing, Borrower may (a) make regularly
scheduled payments of principal and interest on the Mercury
Subordinate Debt in accordance with the terms of the Mercury
Subordinate Note, and (b) repurchase, during the term of this
Agreement, a portion of its common stock, par value $.01 per
share, for an aggregate and cumulative purchase price of not more
than $5,000,000."
1.5 Amendment to Material Agreements Covenant
-----------------------------------------
Section 11.6 of the Credit Agreement is amended to read in full as
follows:
"SECTION 11.6. Amendments to Organizational Documents; Other
--------------------------------------
Material Agreements. Borrower will not, nor will Borrower permit
any other Credit Party to, enter into or permit any modification
or amendment of, or waive any material right or obligations of
any Person under, (a) its certificate or articles of
incorporation, bylaws, partnership agreement, regulations or
other organizational documents other than amendments,
modifications and waivers which could not, individually or in the
aggregate, result in a Material Adverse Change, (b) the Closing
Documents, (c) the Subordinate Note Documents, (d) the Section 29
Documents, (e) the Mercury Closing Documents, (f) the Mercury
Subordinate Note, or (g) the MGV Investment Documents; provided,
that,
<PAGE>
Borrower may enter into amendments to the Subordinate Note
Documents which do not provide for or have any of the following
effects: (i) increases the overall principal amount of the
Subordinate Debt beyond the $53,000,000 presently outstanding (as
reduced by any principal payments hereafter made with the express
written consent of Required Banks); (ii) increases the amount of
any scheduled payment of principal or interest on the Subordinate
Debt; (iii) hastens or accelerates the date upon which any
installment of principal or interest of any Subordinate Debt is
due or otherwise accelerates the amortization schedule with
respect to such Subordinate Debt; (iv) increases the rate of
interest accruing on the Subordinate Debt; (v) provides for the
payment of additional fees or for any increase in existing fees
in connection with any Subordinate Debt; or (vi) amends, modifies
or adds any performance obligation of Borrower to any Subordinate
Noteholder in a manner which requires Borrower to comply with
more restrictive financial ratios or is otherwise more onerous or
more restrictive to Borrower."
1.6 Amendment to Use of Proceeds Covenant
-------------------------------------
The first sentence of Section 11.7 of the Credit Agreement is
amended to read in full as follows:
"The proceeds of Borrowings will not be used for any purpose other
than (a) working capital, (b) to finance the acquisition, exploration
and development of Mineral Interests and related capital assets, (c)
to finance the Mercury Asset Acquisition, (d) to refinance the
obligations outstanding under the Existing Credit Agreement, (e) to
refinance the obligations outstanding under the MMI/Compass Credit
Agreement, and (f) to refinance the obligations outstanding under the
MGV/CIBC Credit Agreement."
1.7 Additional Mercury Subordinate Debt Covenant
--------------------------------------------
Article XI of the Credit Agreement is amended to add a new Section
11.16 thereto which shall read in full as follows:
"SECTION 11.16. Mercury Subordinate Debt. Borrower will not
------------------------
make any payment on or with respect to any Mercury Subordinate
Debt except as expressly permitted by the terms hereof and by the
terms of the Mercury Subordinate Note."
1.8 New Schedules
-------------
Schedules 1 and 2 attached to the Credit Agreement shall be
replaced in their entirety by Schedule 1 and 2, respectively, attached to this
---------- -
Third Amendment.
<PAGE>
SECTION 2. Consent and Waiver
------------------
Borrower has requested that Banks (i) consent to (a) the MGV Investment
Transactions, and (b) the Mercury Closing Transactions (as each term is defined
in the Credit Agreement as amended by this Third Amendment), and (ii) waive any
provision of the Credit Agreement and the other Loan Papers which prohibits such
transactions. In reliance on the representations, warranties, covenants and
agreements contained in the Credit Agreement and this Third Amendment, and
subject to the satisfaction of the conditions precedent set forth in Section 4
hereof, the Banks hereby (A) consent to (i) the MGV Investment Transactions, and
(ii) the Mercury Closing Transactions, and (B) waive any provision of the Credit
Agreement and the other Loan Papers which prohibits any such MGV Investment
Transaction or any such Mercury Closing Transaction.
The consents and waivers herein contained in this Section 2 are limited
---------
solely to (i) the MGV Investment Transactions, (ii) the Mercury Closing
Transactions, and (iii) the applicable provisions of the Credit Agreement which
prohibit such transactions. Nothing contained herein shall be deemed (a) a
consent to any action other than the MGV Investment Transactions and the
Mercury Closing Transactions, or (b) a waiver of any provisions of the Credit
Agreement or any other Loan Paper except to the extent such provision prohibits
any such MGV Investment Transaction or any such Mercury Closing Transaction.
SECTION 3. Borrowing Base
--------------
Borrower, Administrative Agent and each Bank agree that the Borrowing
Base in effect for the period from and after the Effective Date until the next
Redetermination thereafter shall be $210,000,000. Borrower, Administrative
Agent and the Banks agree that the Redetermination provided for in this Section
-------
3 shall not be construed to be a Special Redetermination for purposes of Section
- -
6.3 of the Credit Agreement.
SECTION 4. Conditions Precedent
--------------------
The effectiveness of (a) the amendments to the Credit Agreement
contained in Section 1 hereof, (b) the consents and waivers contained in Section
-------
2 hereof, and (c) the increase in the Borrowing Base contained in Section 3
- - ---------
hereof is subject to the satisfaction of each of the following conditions
precedent.
4.1 Closing Deliveries
------------------
Administrative Agent shall have received each of the following
documents, instruments and agreements, each of which shall be in form and
substance and executed in such counterparts as shall be acceptable to
Administrative Agent and each Bank:
(a) a Note payable to the order of each Bank (as applicable), each in
the amount of such Bank's Commitment after giving effect to the
Assignment and Acceptance Agreements referenced in the recitals
hereto;
(b) Mortgages duly executed and delivered by Borrower, together with
such other assignments, conveyances, amendments, agreements and other
writings
<PAGE>
including, without limitation, UCC-1 financing statements, in form and
substance satisfactory to Administrative Agent, pursuant to which
Borrower shall grant to Administrative Agent a first and prior lien,
subject only to Permitted Encumbrances, in and to certain of the
Mercury Assets (as such terms is defined in the Credit Agreement as
amended by this Third Amendment);
(c) a Borrower Pledge Agreement duly executed and delivered by
Borrower together with (i) certificates evidencing one-hundred percent
(100%) of the issued and outstanding Equity owned by Borrower of each
Subsidiary of Borrower (after giving effect to the MGV Investment
Transactions and the Mercury Closing Transactions) of every class,
which certificates shall be duly endorsed or accompanied by stock
powers executed in blank, and (ii) such financing statements executed
by Borrower as Administrative Agent shall request to evidence and
perfect the Liens granted pursuant to such Borrower Pledge Agreement;
(d) Subsidiary Guaranties duly executed and delivered by each
Subsidiary of Borrower (after giving effect to the MGV Investment
Transactions and the Mercury Closing Transactions);
(e) a copy of the articles or certificate of incorporation,
certificate of limited partnership, articles of organization or
comparable charter documents, and all amendments thereto, of each
Credit Party accompanied by a certificate that such copy is true,
correct and complete, and dated within ten (10) days of the Effective
Date (or within such other period as acceptable to Administrative
Agent), issued by the appropriate Governmental Authority of the
jurisdiction of incorporation or organization of each Credit Party,
and accompanied by a certificate of the Secretary or comparable
Authorized Officer of each Credit Party that such copy is true,
correct and complete on the Effective Date (or the date of
consummation of the MGV Investment Transactions or the Mercury Closing
Transactions, as applicable);
(f) a copy of the bylaws, partnership agreement, regulations,
operating agreement or comparable charter documents, and all
amendments thereto, of each Credit Party accompanied by a certificate
of the Secretary or comparable Authorized Officer of each Credit Party
that such copy is true, correct and complete as of the Effective Date
(or the date of consummation of the MGV Investment Transactions or the
Mercury Closing Transactions, as applicable);
(g) certain certificates and other documents issued by the
appropriate Governmental Authorities of such jurisdictions as
Administrative Agent has requested relating to the existence of each
Credit Party and to the effect that each Credit Party is in good
standing with respect to the payment of franchise and similar Taxes
and is duly qualified to transact business in such jurisdictions;
<PAGE>
(h) a certificate of incumbency of all officers of each Credit Party
who will be authorized to execute or attest to any Loan Paper, dated
the Effective Date (or the date any such Loan Paper is executed);
(i) copies of resolutions or comparable authorizations approving the
Loan Papers and authorizing the transactions contemplated by this
Third Amendment and the other Loan Papers, duly adopted by the Board
of Directors or comparable authority of each Credit Party accompanied
by certificates of the Secretary or comparable officer of each Credit
Party that such copies are true and correct copies of resolutions duly
adopted at a meeting of or (if permitted by applicable Law and, if
required by such Law, by the bylaws or other charter documents of such
Credit Party) by the unanimous written consent of the Board of
Directors of each Credit Party, and that such resolutions constitute
all the resolutions adopted with respect to such transactions, have
not been amended, modified, or revoked in any respect, and are in full
force and effect as of the Effective Date;
(j) an opinion of Cantey & Hanger, L.L.P., special counsel for
Borrower, dated the Effective Date (as supplemented on the date of
consummation of any MGV Investment Transaction and/or any Mercury
Closing Transaction) favorably opining as to the enforceability of
this Third Amendment and each of the other Loan Papers and otherwise
in form and substance satisfactory to Administrative Agent;
(k) opinions of applicable local counsel (including, without
limitation, Canadian counsel to MGV), dated the Effective Date (or the
date of execution and delivery of the applicable Loan Papers),
favorably opining as to the enforceability of the Mortgages, the
Subsidiary Guaranties and the other applicable Loan Papers, and
otherwise in form and substance satisfactory to Administrative Agent;
(l) a certificate signed by an Authorized Officer of Borrower stating
that (after giving effect to this Third Amendment, the MGV Investment
Transactions and the Mercury Closing Transactions), (i) the
representations and warranties contained in this Third Amendment and
the other Loan Papers are true and correct in all respects, (ii) no
Default of Event of Default has occurred and is continuing, and (iii)
all conditions set forth in Section 8.1 and Section 8.2 of the Credit
Agreement have been satisfied,
(m) a copy of each of the MGV Investment Documents and the Mercury
Closing Documents accompanied by a certificate executed by an
Authorized Officer of Borrower certifying that (i) such copies are
accurate and complete and represent the complete understanding and
agreement of the parties thereto, (ii) no material right or obligation
of any party thereto has been modified, amended or waived, and (iii)
subject only to funding of a Borrowing to be made hereunder, the MGV
Investment Transactions and the Mercury Closing Transactions have been
(or will be) consummated on the terms set forth in the MGV Investment
Documents and the Mercury Closing Documents; and
<PAGE>
(n) such other documents, instruments, agreements and actions as may
reasonably be required by Administrative Agent and any Bank.
4.2 Closing Transactions
--------------------
Subject only to disbursement and application of a Borrowing, the
MGV Investment Transactions and the Mercury Closing Transactions shall have
occurred (or Administrative Agent shall be satisfied that such transactions will
occur simultaneously therewith).
4.3 Closing Fees
------------
Borrower shall have paid to Administrative Agent for the ratable
benefit of each Bank, upon execution of this Third Amendment, a fee in the
aggregate amount of $75,000.
4.4 Subordinate Note Amendment
--------------------------
Administrative Agent shall have received a fully executed copy of
an amendment to the Subordinate Note Agreement, pursuant to which the
Subordinate Note Agreement is amended in a manner substantially similar to the
amendments to the Credit Agreement set forth herein.
4.5 Fees and Expenses
-----------------
Borrower shall have paid all reasonable fees and expenses of
counsel to Administrative Agent incurred by Administrative Agent in connection
with the preparation, negotiation and execution of this Third Amendment and all
related documents.
SECTION 5. Representations and Warranties of Borrower
------------------------------------------
To induce the Banks and Administrative Agent to enter into this Third
Amendment, Borrower hereby represents and warrants to Administrative Agent and
the Banks as follows:
5.1 Credit Agreement
----------------
Each representation and warranty of the Credit Parties contained in
the Credit Agreement and the other Loan Papers is true and correct on the date
hereof, and will be true and correct after giving effect to the MGV Investment
Transactions and the Mercury Closing Transactions.
5.2 Authorization
-------------
The execution, delivery and performance by Borrower of this Third
Amendment are within Borrower's corporate powers, have been duly authorized by
all necessary corporate action, require no action by or filing with, any
governmental body, agency or official and do not violate or constitute a default
under any provision of applicable Law or Material Agreement binding upon any
Credit Party or result in the creation or imposition of any Lien upon any of the
assets of any Credit Party other than the Liens securing the Obligations.
<PAGE>
5.3 Binding Effect
--------------
This Third Amendment constitutes the valid and binding obligation
of Borrower enforceable in accordance with its terms, except as (a) the
enforceability thereof may be limited by bankruptcy, insolvency or similar Laws
affecting creditors rights generally, and (b) the availability of equitable
remedies may be limited by equitable principles of general application.
5.4 No Defenses
-----------
Borrower has no defenses to payment, counterclaim or rights of set-
off with respect to the Obligations existing on the date hereof.
SECTION 6. Miscellaneous.
-------------
6.1 Reaffirmation of Loan Papers; Extension of Liens
------------------------------------------------
Any and all of the terms and provisions of the Credit Agreement and
the Loan Papers shall, except as amended and modified hereby, remain in full
force and effect. Borrower hereby extends the Liens securing the Obligations
until the Obligations have been paid in full or are specifically released by
Administrative Agent and the Banks prior thereto, and agrees that the amendments
and modifications herein contained shall in no manner adversely affect or impair
the Obligations or the Liens securing payment and performance thereof.
6.2 Parties in Interest
-------------------
All of the terms and provisions of this Third Amendment shall bind
and inure to the benefit of the parties hereto and their respective successors
and assigns.
6.3 Legal Expenses
--------------
Borrower hereby agrees to pay on demand all reasonable fees and
expenses of counsel to Administrative Agent incurred by Administrative Agent in
connection with the preparation, negotiation and execution of this Third
Amendment and all related documents.
6.4 Counterparts
------------
This Third Amendment may be executed in counterparts, and all
parties need not execute the same counterpart; however, no party shall be bound
by this Third Amendment until Borrower and all Banks have executed a counterpart
hereof. Facsimiles shall be effective as originals.
6.5 Complete Agreement
------------------
THIS THIRD AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN
PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS
<PAGE>
BETWEEN OR AMONG THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF.
6.6 Headings
--------
The headings, captions and arrangements used in this Third
Amendment are, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of this Third Amendment, nor affect
the meaning thereof.
[Signature Pages Follow]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed by their respective Authorized Officers effective as of the
Effective Date.
BORROWER:
---------
QUICKSILVER RESOURCES INC., a Delaware corporation
By: /s/ Glenn Darden
---------------------------------------
Glenn Darden, President
ADMINISTRATIVE AGENT:
--------------------
BANK OF AMERICA, N.A.
By: /s/ J. Scott Fowler
-----------------------------------------
J. Scott Fowler,
Managing Director
BANKS:
-----
BANK OF AMERICA, N.A.
By: /s/ J. Scott Fowler
-----------------------------------------
J. Scott Fowler,
Managing Director
BNP PARIBAS
By: /s/ Brian M. Malone
-----------------------------------------
Name: Brian M. Malone
-----------------------------------------
Title: Director
-----------------------------------------
By: /s/ Larry Robinson
-----------------------------------------
Name: Larry Robinson
-----------------------------------------
Title: Vice President
-----------------------------------------
[Signature Page]
<PAGE>
FORTIS CAPITAL CORP.
By: /s/ Christopher S. Parada
--------------------------------
Name: Christopher S. Parada
--------------------------------
Title: Vice President
--------------------------------
By: /s/ Darrell W. Holley
--------------------------------
Name: Darrell W. Holley
--------------------------------
Title: Managing Director
--------------------------------
CIBC INC.
By: /s/ M. Beth Miller
--------------------------------
Name: M. Beth Miller
--------------------------------
Title: Authorized Signatory
--------------------------------
THE FUJI BANK, LTD.
By: /s/ Masatoshi Abe
--------------------------------
Name: Masatoshi Abe
--------------------------------
Title: Vice President and Manager
--------------------------------
COMERICA BANK - TEXAS
By: /s/ Michele L. Jones
--------------------------------
Name: Michele L. Jones
--------------------------------
Title: Vice President
--------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
--------------------------------
Name: F.C.H. Ashby
--------------------------------
Title: Senior Manager Loan Operations
--------------------------------
[Signature Page]
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By: /s/ Brian Knezeak
--------------------------------
Name: Brian Knezeak
--------------------------------
Title: FVP, Manager
--------------------------------
By: /s/ Michael D. Willis
--------------------------------
Name: Michael D. Willis
--------------------------------
Title: VP, Credit Analysis
--------------------------------
NATIONAL BANK OF CANADA, NEW YORK BRANCH
By: /s/ Larry L. Sears
--------------------------------
Name: Larry L. Sears
--------------------------------
Title: Vice President & Manager
--------------------------------
By: /s/ Doug Clark
--------------------------------
Name: Doug Clark
--------------------------------
Title: Vice President
--------------------------------
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Philippe Soustra
--------------------------------
Name: Philippe Soustra
--------------------------------
Title: Senior Vice President
--------------------------------
BANK UNITED
By: /s/ David W. Phillips
--------------------------------
Name: David W. Phillips
--------------------------------
Title: Vice President
--------------------------------
COMPASS BANK
By: /s/ Dorothy Marchand
--------------------------------
Name: Dorothy Marchand
--------------------------------
Title: Sr. Vice President
--------------------------------
[Signature Page]
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>AGENCY AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.11
1,340,405 Shares of Common Stock
QUICKSILVER RESOURCES INC.
AGENCY AGREEMENT
----------------
November 30, 2000
BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
The undersigned stockholder (the "Selling Stockholder") of Quicksilver
Resources Inc., a corporation organized and existing under the laws of Delaware
(the "Company"), proposes, subject to the terms and conditions stated herein, to
-------
sell (the "Offering") through Bear, Stearns & Co. Inc., as agent (the "Agent"),
-------- -----
an aggregate of up to 1,340,405 shares (the "Shares") of the Company's common
------
stock, par value $.01 per share (the "Common Stock"). The Shares are more fully
------------
described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Agent that:
(a) The Company meets the requirements for use of Form S-3 and has filed
with the Securities and Exchange Commission (the "Commission") a registration
----------
statement, and may have filed an amendment or amendments thereto, on Form S-3
(Registration No. 333-49136), and related preliminary prospectuses, as
supplemented, for the registration under the Securities Act of 1933, as amended
(the "Securities Act"), of 1,639,437 shares of Common Stock, which registration
--------------
statement, as so amended, has been declared effective by the Commission and
copies of which have heretofore been delivered to the Agent. The registration
statement, as amended at the time it became effective, including the exhibits
and information (if any) deemed to be a part of the registration statement at
the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of
the rules and regulations of the Commission under the Securities Act (the
"Securities Act Regulations"), and any post-effective amendments thereto under
- ---------------------------
Rule 462(d) through the Closing Date (as defined below) is hereinafter called
the "Registration Statement." If the Company has filed or is required pursuant
----------------------
to the terms hereof to file a registration statement pursuant to Rule 462(b)
under the Securities Act Regulations registering additional shares of Common
Stock (a "Rule 462(b) Registration Statement"), then, and unless otherwise
----------------------------------
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement. Other than a Rule
462(b) Registration Statement, if any, which became effective upon filing, no
other document with respect to the Registration Statement has heretofore been
filed with the Commission (other than prospectuses filed
1
<PAGE>
pursuant to Rule 424(b) of the Securities Act Regulations, each in the form
heretofore delivered to the Agent). No stop order suspending the effectiveness
of the Registration Statement (including any Rule 462(b) Registration Statement)
has been issued and no proceeding for that purpose has been initiated or, to the
Company's knowledge, threatened by the Commission. The prospectus relating to
the Shares, in the form in which it is to be filed with the Commission pursuant
to Rule 424(b) of the Securities Act Regulations, is hereinafter referred to as
the "Prospectus," except that, subject to Sections 5(a) and 5(b) below, if any
----------
revised prospectus or prospectus supplement shall be provided to the Agent by
the Company for use in connection with the Offering which differs from the
Prospectus (whether or not such revised prospectus or prospectus supplement is
required to be filed by the Company pursuant to Rule 424(b) of the Securities
Act Regulations), the term "Prospectus" shall refer to such revised prospectus
or prospectus supplement, as the case may be, from and after the time it is
first provided to the Agent for such use. Any preliminary prospectus or
prospectus subject to completion included in the Registration Statement or filed
with the Commission as described in Rule 430A or Rule 424 of the Securities Act
is hereafter called a "Preliminary Prospectus." All references in this Agreement
----------------------
to the Registration Statement, the Rule 462(b) Registration Statement, a
Preliminary Prospectus and the Prospectus, or any amendments or supplements to
any of the foregoing, shall be deemed to include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
-----
(b) The Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto, at the time the Registration Statement became
effective, at the time any post-effective amendment to the Registration
Statement is filed with the Commission, at the time the Prospectus is first
filed with the Commission, at the time any supplement or amendment to the
Prospectus is filed with the Commission and as of the Closing Date, and
Additional Closing Date, if any (as hereinafter respectively defined), and the
Preliminary Prospectus, and any amendments thereof or supplements thereto, as of
the date thereof, complied and comply in all material respects with the
requirements of the Securities Act and the Securities Act Regulations, and did
not and as of the Closing Date, and Additional Closing Date, if any, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus, as of the date hereof (unless the term
"Prospectus" refers to a prospectus which has been provided to the Agent by the
Company for use in connection with the Offering which differs from the
Prospectus filed with the Commission pursuant to Rule 424(b) of the Securities
Act Regulations, in which case at the time it is first provided to the Agent for
such use) and on the Closing Date, and Additional Closing Date, if any, does not
and will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this Section (1)(b) shall not apply
to statements in or omissions from the Registration Statement or Prospectus made
in reliance upon and in conformity with information relating to the Agent
furnished to the Company in writing by the Agent expressly for use in the
Registration Statement or the Prospectus. Each Preliminary Prospectus and
Prospectus filed as part of the Registration Statement, as part of any amendment
thereto or pursuant to Rule 424 under the Securities Act Regulations, if filed
by electronic transmission pursuant to Regulation S-T under the Securities Act,
was identical to the copy thereof
2
<PAGE>
delivered to the Agent for use in connection with the offer and sales of the
Shares (except as may be permitted by Regulation S-T under the Securities Act).
There are no contracts or other documents required to be described in the
Prospectus or to be filed as exhibits to the Registration Statement under the
Securities Act that have not been described or filed therein as required, and
there are no business relationships or related-party transactions directly or
indirectly involving the Company, the Selling Stockholder or any other person
required to be described in the Prospectus that have not been described therein
as required.
(c) Deloitte & Touche LLP, who has certified certain financial
statements of the Company and has delivered its report with respect to the
Company's audited financial statements included in the Registration Statement,
the Prospectus and any Preliminary Prospectus, are independent public
accountants as required by the Securities Act and the Securities Act
Regulations. Weaver and Tidwell, L.L.P., who has certified certain financial
statements of predecessors of the Company, Mercury Exploration Company, Michigan
Gas Partners Limited Partnership and predecessor company acquisitions and who
has delivered its report with respect to such predecessor companies' audited
financial statements included in the Registration Statement, the Prospectus and
any Preliminary Prospectuses, are independent public accountants as required by
the Securities Act and Securities Act Regulations.
(d) Holditch-Reservoir Technologies Consulting Services ("Holditch"),
--------
petroleum engineers from whose reserve reports information is set forth in the
Registration Statement, the Prospectus and each Preliminary Prospectus, are
independent petroleum engineers with respect to the Company. The factual
information underlying the estimates of the reserves of the Company which was
provided by the Company to Holditch for purposes of preparing the reserve
information referenced in the Registration Statement, the Prospectus and each
Preliminary Prospectus (the "Reserve Information") including, without
-------------------
limitation, production, volumes, sales prices for production, contractual
pricing provisions under gas sales or marketing contracts, hedging arrangements,
incurred costs of operations and development, and working interest and net
revenue information relating to the Company's ownership interests in properties,
was true and correct in all material respects on the date such information was
furnished to Holditch and as of the date hereof; the estimates of future capital
expenditures and other future exploration and development costs supplied to
Holditch were prepared in good faith and with a reasonable basis. The
information provided to Holditch for purposes of preparing the Reserve
Information was prepared in accordance with customary industry practices.
Except as described in the Prospectus, the Company is not aware of any facts or
circumstances that would result in a material adverse change in its reserves in
the aggregate, or the aggregate present value of estimated future net revenues
or the standardized measure of discounted future net cash flows therefrom, as
described in the Prospectus and reflected in the Reserve Information. Estimates
of the reserves and the present value of the estimated future net revenues and
the discounted future net cash flows derived therefrom as described in the
Prospectus and reflected in the Reserve Information comply in all material
respects to the applicable requirements of Regulation S-X of the Securities Act
Regulations and Industry Guide 2 under the Securities Act.
3
<PAGE>
(e) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or otherwise) affairs or management of the Company, whether or not arising from
transactions in the ordinary course of business, and since the date of the
latest balance sheet presented in the Registration Statement and the Prospectus,
the Company has not incurred or undertaken any liabilities or obligations,
direct or contingent, which are material to the Company, except for liabilities
or obligations which are reflected in the Registration Statement and the
Prospectus.
(f) The Company (i) has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, (ii) has
all requisite corporate power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
to carry on its business as it is currently being conducted and as described in
the Registration Statement and the Prospectus and to own, lease and operate its
properties, (iii) has no subsidiaries other than MGV Energy, Inc., Beaver Creek
Pipeline, L.L.C., Cinnabar Energy Services Trading LLC and Terra Energy Ltd.
(the "Subsidiaries"), and (iv) is duly qualified and in good standing as a
------------
foreign corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification except, with respect to clauses (i) (as it relates to good
standing) and (iv), where the failure to be in good standing or so qualified
does not and could not reasonably be expected to (x) individually or in the
aggregate, result in a material adverse effect on the business, prospects,
properties, operations, condition (financial or otherwise), affairs or
management of the Company, (y) interfere with or adversely affect the
marketability of the Shares pursuant hereto or (z) in any manner draw into
question the validity of this Agreement (any of the events set forth in clauses
(x), (y) or (z), being referred to as a "Material Adverse Effect").
-----------------------
(g) Each of the Subsidiaries (i) has been duly organized and is validly
existing as a corporation, or limited liability company, as the case may be, in
good standing under the laws of the province or state of its organization, (ii)
has all requisite corporate or similar power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or governmental agencies
and bodies, to carry on its business as it is currently being conducted and as
described in the Registration Statement and the Prospectus and to own, lease and
operate its properties, (iii) has no subsidiaries and (iv) is duly qualified and
in good standing as a foreign corporation, or limited liability company, as the
case may be, authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification except, with respect to clauses (i) (as it relates to good
standing) and (iv), where the failure to be in good standing or so qualified
does not and could not reasonably be expected to result in a "Material Adverse
----------------
Effect".
- ------
(h) This Agreement and the transactions contemplated hereby have been
duly and validly authorized by the Company. This Agreement has been duly and
validly executed and delivered by the Company, and is the legal, valid, binding
agreement of the Company.
4
<PAGE>
(i) The execution, delivery, and performance of this Agreement, the
offering and sale of the Shares, and the consummation of the transactions
contemplated hereby and in the Prospectus do not and will not violate, conflict
with or constitute a breach of any of the terms and provisions of, or constitute
a default (or an event which with notice or lapse of time, or both, would
constitute a default) or require consent under, or result in the creation or
imposition of any lien, charge or encumbrance upon any properties or assets of
the Company, or result in an acceleration of any indebtedness of the Company
pursuant to (i) the Restated Certificate of Incorporation or By-Laws of the
Company, (ii) any bond, debenture, note, indenture, mortgage, deed of trust,
contract or other agreement or instrument to which the Company or any subsidiary
is a party or by which the Company or any of its subsidiaries or their
respective properties or assets are or may be bound, (iii) any statute, rule or
regulation applicable to the Company or any of its subsidiaries or any of their
respective properties or assets or (iv) any judgment, order or decree of any
court or governmental agency or authority having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties or assets. No
consent, approval, authorization, order, registration, filing, qualification,
license or permit of or with (x) any court or any governmental agency or
authority having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties or assets or (y) any other person is required for
(A) the execution, delivery and performance by the Company of this Agreement,
(B) the sale and delivery of the Shares to be sold and delivered by the Selling
Stockholder hereunder and the consummation of the transactions contemplated
hereby, except such as have been obtained under the Securities Act and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Agent.
(j) All of the outstanding shares of Common Stock (including the Shares
being sold hereunder by the Selling Stockholder) are duly authorized, validly
issued, fully paid and nonassessable and were not issued and are not now in
violation of or subject to any preemptive or similar rights. The Shares being
sold by the Selling Stockholder under this Agreement are duly authorized,
validly issued, fully paid and nonassessable. The capital stock of the Company
conforms to the description thereof contained in the Prospectus, or if the
Prospectus is not in existence, the most recent Preliminary Prospectus.
(k) Except as disclosed in the Prospectus, there are not currently, and
will not be as a result of the Offering, any outstanding subscriptions, rights,
warrants, calls, commitments of sale or options to acquire or instruments
convertible into or exchangeable for, any capital stock or other equity interest
of the Company or any of its subsidiaries (other than options issued pursuant to
the Company's stock option plans).
(l) There is (i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or foreign, now
pending or, to the best knowledge of the Company, threatened or contemplated to
which the Company is a party or to which the business or property of the Company
is subject, (ii) no statute, rule, regulation or order that has been enacted,
adopted or issued by any governmental agency or that has been proposed by any
governmental body and (iii) no injunction, restraining order or order of any
nature by a federal or
5
<PAGE>
state court or foreign court of competent jurisdiction to which the Company or
any of its subsidiaries is or may be subject or to which the business, assets,
or property of the Company or any of its subsidiaries are or may be subject,
that, in the case of clauses (i), (ii) and (iii) above, is required to be
disclosed in the Registration Statement and the Prospectus and which could,
individually or in the aggregate, result in a Material Adverse Effect.
(m) The Company has not directly or indirectly (i) taken (other than
through the actions, if any, of the Agent) any action designed to, or that might
reasonably be expected to, cause or result in or which constitutes or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares or (ii) since the filing of the Preliminary Prospectus (a) sold, bid for,
purchased or paid any person any compensation for soliciting purchases of,
shares of Common Stock or (b) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(n) The financial statements, together with the related notes, included
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) present fairly in all material respects the financial
position, results of operations, cash flows, and changes in stockholders' equity
of the Company or its predecessors, as applicable, as of and at the dates
indicated and for the periods specified. Such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, and comply with Regulation
S-X of the Securities Act Regulations.
(o) There are no holders of securities of the Company who, by reason of
the execution by the Company of this Agreement or the consummation by the
Company or the Selling Stockholder of the transactions contemplated hereby, have
the right to request or demand that the Company register under the Securities
Act or analogous foreign laws and regulations securities held by them, other
than such that have been duly exercised or waived.
(p) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, (i) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), or be subject to
----------------------
registration under the Investment Company Act, or (ii) a "holding company" or a
"subsidiary company" or an "affiliate" of a holding company within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
(q) The Common Stock is registered (including the Shares to be sold by
the Selling Stockholder hereunder) pursuant to Section 12(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and is listed for
------------
quotation on the American Stock Exchange, and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
American Stock Exchange, nor has the Company received any notification that the
Commission or the American Stock Exchange is contemplating terminating such
registration or listing.
6
<PAGE>
(r) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
(s) The Company is not (i) in violation of its Restated Certificate of
Incorporation or By-Laws, (ii) in breach or default (nor does any condition
exist that, with notice, the passage of time or both, would constitute a breach
or default) in the performance of any obligation, agreement or condition
contained in any bond, debenture, note, indenture, mortgage, deed of trust or
other agreement or instrument to which it is a party or by which it is bound or
to which any of its properties is subject, or (iii) in violation, in any
material respect, of any local, state or federal law, statute, ordinance, rule,
regulation, requirement, judgment or court decree applicable to the Company or
any of its subsidiaries or any of their respective assets or properties (whether
owned or leased).
(t) No action has been taken and no statute, rule, regulation or order
has been enacted, adopted or issued by any governmental agency that prevents the
sale of the Shares or prevents or suspends the use of the Prospectus; no
injunction, restraining order or order of any kind by a federal or
state court of competent jurisdiction has been issued that prevents or suspends
the sale of the Shares in any jurisdiction or that could adversely affect the
consummation of the transactions contemplated by this Agreement or the
Prospectus; and every request of any securities authority or agency of any
jurisdiction for additional information has been complied with in all material
respects.
(u) There is (i) no significant unfair labor practice complaint pending
against the Company nor, to the best knowledge of the Company, threatened
against it, before the National Labor Relations Board, any state or local labor
relations board or any foreign labor relations board, and no significant
grievance or significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company or, to the
best knowledge of the Company, threatened against it, (ii) no strike, labor
dispute, slowdown or stoppage pending against the Company or, to the best
knowledge of the Company, threatened against it and (iii) to the best knowledge
of the Company, no union representation question existing with respect to the
employees of the Company. To the best knowledge of the Company, no collective
bargaining organizing activities are taking place with respect to the Company.
The Company has not violated, in any material respect, (A) any federal, state or
local law or foreign law relating to discrimination in hiring, promotion or pay
of employees, (B) any applicable wage or hour laws or (C) any provision of the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
and published interpretations thereunder (collectively, "ERISA").
-----
(v) The Company is not in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials ("Environmental
-------------
Laws") and, to the best knowledge of the Company, the Company has received all
permits, licenses and other approvals required of it under applicable federal
and state occupational safety and health and environmental laws and regulations
to conduct its business, and the Company is in compliance with all terms and
conditions of any such permit, license or approval,
7
<PAGE>
except any such violation of law or regulation, failure to receive required
permits, licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals which would not, individually
or in the aggregate, be reasonably expected to have a Material Adverse Effect.
There has been no storage, disposal, generation, transportation, handling or
treatment of hazardous substances or solid wastes by the Company (or to the
knowledge of the Company any of its predecessors in interest) at, upon or from
any of the property now or previously owned or leased by the Company in
violation of any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit which would require remedial action by the Company under any
applicable law, ordinance, rule, regulation, order, judgment, decree or permit
except for those which have already been remedied, have been provided for
through escrow of a portion of the acquisition consideration, have been assumed
by a third party, or which would not result in, or which would not be reasonably
likely to result, individually or in the aggregate, in a Material Adverse
Effect. There has been no spill, discharge, leak, emission, injection, escape,
dumping or release of any kind onto such property or into the environment
surrounding such property of any solid wastes or hazardous substances due to or
caused by the Company, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which has already been remedied, has been
assumed by a third party, or which would not result, or which would not be
reasonably expected to result, individually or in the aggregate, in a Material
Adverse Effect. The terms "hazardous substances" and "solid wastes" shall have
the meanings set forth in any currently applicable local, state, and federal
laws or regulations with respect to environmental protection.
(w) The Company has (i) good and marketable title in fee simple to all
items of real property and defensible title to all personal property owned by
it, free and clear of all security interests, liens, charges, encumbrances,
equities, restrictions, claims and other defects, except such as are described
in the Prospectus or as would not have a Material Adverse Effect, and (ii)
peaceful and undisturbed possession of its properties under all material leases
to which it is a party as lessee. The Company has good and defensible title (x)
to its oil and gas properties, including its wells and its leasehold interests
therein, and (y) to its net revenue interests therein in accordance with such
leases, free and clear of all security interests, liens, charges, encumbrances,
equities, restrictions, claims and other defects, except such as are described
in the Prospectus or as would not have a Material Adverse Effect. The working
interests in oil and gas leases held by the Company reflect in all material
respects the right of the Company to explore or receive production from such
underlying leases, and the care taken by the Company with respect to acquiring
or otherwise procuring such leases was generally consistent with standard
industry practices for acquiring or procuring such leases. All material leases
to which the Company is a party are valid and binding, and no default by the
Company has occurred and is continuing thereunder and, to the best knowledge of
the Company, no material defaults by the landlord are existing under any such
lease that could result in a Material Adverse Effect.
(x) Except as described in the Prospectus (i) all royalties, rentals,
deposits and other amounts due on the oil and gas properties of the Company have
been properly and timely paid, and no proceeds from the sale or production
attributable to the oil and gas properties of the Company are currently being
held in suspense by any purchaser thereof, and (ii) there are no claims under
take-or-
8
<PAGE>
pay contracts pursuant to which natural gas purchasers have any make-up rights
affecting the interests of the Company in its oil and gas properties.
(y) As of the date hereof, the aggregate undiscounted monetary liability
of the Company for oil or natural gas taken or received under any operating or
other agreement relating to its oil and gas properties that permits any person
to receive any portion of the interest of the Company in oil and natural gas or
to receive cash or other payments to balance any disproportionate allocation of
oil or natural gas could not have a Material Adverse Effect.
(z) The Company has (i) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and has made all
declarations and filings with, all federal, state and local authorities, all
self-regulatory authorities and all courts and other tribunals (each an
"Authorization") necessary to engage in the business conducted by it in the
- --------------
manner described in the Prospectus, except as described in the Prospectus or
where failure to hold such Authorizations would not, individually or in the
aggregate, have a Material Adverse Effect and (ii) no reason to believe that any
governmental body or agency is considering limiting, suspending or revoking any
such Authorization. Except where the failure to be in full force and effect
would not have a Material Adverse Effect, all such Authorizations are valid and
in full force and effect, and the Company is in compliance in all material
respects with the terms and conditions of all such Authorizations and with the
rules and regulations of the regulatory authorities having jurisdiction with
respect thereto.
(aa) Neither the Company nor, to the best knowledge of the Company, any
of its officers, directors, partners, employees, agents or affiliates or any
other person acting on behalf of the Company, has, directly or indirectly, given
or agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, official or employee of
any governmental agency (domestic or foreign), instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is or may be in a position to help or
hinder the business of the Company (or assist the Company in connection with any
actual or proposed transaction), which (i) might subject the Company, or any
other individual or entity, to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (ii) if not given
in the past, might have had a Material Adverse Effect or (iii) if not continued
in the future, might have a Material Adverse Effect.
(bb) All material tax returns required to be filed by the Company in all
jurisdictions have been so filed. All taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due or claimed to be
due from such entities or that are due and payable have been paid, other than
those being contested in good faith through appropriate proceedings diligently
pursued and for which adequate reserves have been provided or those currently
payable without penalty or interest. To the knowledge of the Company, there are
no material proposed additional tax assessments against the Company or the
assets or property of the Company. The Company has made adequate (in the
opinion of the Company) charges, accruals and reserves in the applicable
financial statements included in the Prospectus in respect of all federal, state
and foreign income and franchise
9
<PAGE>
taxes for all periods presented therein as to which the tax liability of the
Company has not been finally determined.
(cc) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that: (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences thereto.
(dd) The Company maintains insurance covering its properties, operations,
personnel and businesses with institutions it believes to be financially
responsible. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the Company
and its business. The Company has not received notice from any insurer or agent
of such insurer that substantial capital improvements or other expenditures will
have to be made in order to continue such insurance. All such insurance is
outstanding and duly in force on the date hereof, subject only to changes made
in the ordinary course of business, consistent with past practice, which do not,
either individually or in the aggregate, materially alter the coverage
thereunder or the risks covered thereby. The Company has no reason to believe
that it will not be able (i) to renew its existing insurance coverage as and
when such policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted or as presently contemplated and at a cost that would not result in a
Material Adverse Effect.
(ee) The Company and any "employee benefit plan" (as defined under ERISA)
established or maintained by the Company or its "ERISA Affiliates" (as defined
below) are in compliance in all material respects with ERISA. "ERISA Affiliate"
---------------
means, with respect to the Company, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company is a member. No "reportable event" (as
----
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company
or any of its ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates, if such "employee
benefit plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA
Affiliates has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company or any of
its ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(ff) Subsequent to the respective dates as of which information is given
in the Prospectus and up to the Closing Date, except as set forth in the
Prospectus, (i) the Company has not incurred
10
<PAGE>
any liabilities or obligations, direct or contingent, that are or will be
material, either individually or in the aggregate, to the Company and its
subsidiaries taken as a whole, nor entered into any transaction not in the
ordinary course of business, (ii) there has not been, either individually or in
the aggregate, any change or development that could reasonably be expected to
result in a Material Adverse Effect, (iii) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock; and (iv) there has been no
material change in the capital stock, short-term debt or long-term debt of the
Company, except in each case as described in the Prospectus, or if the
Prospectus is not in existence the most recent Preliminary Prospectus.
(gg) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company, the Selling Stockholder or any
other person that would give rise to a valid claim against the Company, the
Selling Stockholder or the Agent for a brokerage commission, finder's fee or
like payment in connection with the sale of the Shares.
(hh) The statements (including the assumptions described therein)
included in the Prospectus (i) are within the coverage of Rule 175(b) under the
Securities Act to the extent such data constitute forward looking statements as
defined in Rule 175(c) and (ii) were made by the Company with a reasonable basis
and reflect the Company's good faith estimate of the matters described therein.
(ii) The Company has implemented Year 2000 compliance programs designed
to ensure that its computer systems and applications will function properly
beyond 1999. The Company believes that adequate resources have been allocated
for this purpose and expects the Company's Year 2000 date programs to be
completed on a timely basis, except as could not have a Material Adverse Effect.
(jj) The Company does not have any debt securities or preferred stock
which is rated by any "nationally recognized statistical rating organization" as
defined for purposes of Rule 436(g) under the Securities Act.
(kk) The Company has the power to submit, and pursuant to this Agreement
has legally, validly, effectively and irrevocably submitted, to the jurisdiction
of any federal or state court in the State of New York, County of New York, and
has the power to designate, appoint and empower and pursuant to this Agreement
has legally, validly, effectively and irrevocably designated, appointed and
empowered an agent for service of process in any suit or proceeding based on or
arising under this Agreement in any federal or state court in the State of New
York, County of New York, as provided in Section 14 hereof.
(ll) Each certificate signed by any officer of the Company and delivered
to the Agent or counsel for the Agent pursuant to this Agreement shall be deemed
to be a representation and warranty by the Company to the Agent as to the
matters covered thereby.
11
<PAGE>
2. Representations and Warranties of the Selling Stockholder. The Selling
---------------------------------------------------------
Stockholder represents and warrants to, and agrees with, the Agent that:
(a) The Selling Stockholder is the lawful owner of the Shares to be sold
by the Selling Stockholder hereunder and the Selling Stockholder has good and
marketable title to such Shares, free and clear of all liens, encumbrances,
equities and claims whatsoever, except for the restrictions on transfer
referenced by the legends on the certificates evidencing such Shares.
(b) The Selling Stockholder has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(c) No consent, approval, authorization or order of any court or
governmental agency or body is required to be obtained or made by the Selling
Stockholder for the consummation by the Selling Stockholder of the transactions
contemplated herein in connection with the sale of the Shares, except (i) such
as may be required as a result of the identity of the purchaser or purchasers of
the Shares, including filings required under Section 13 of the Exchange Act and
filings required under the Hart-Scott-Rodino Antitrust Improvement Act of 1978,
as amended (the "HSR Act"), (ii) such as may have been obtained under the
-------
Securities Act, (iii) such as may be required by the National Association of
Securities Dealers (the "NASD") and under the blue sky laws of any jurisdiction
----
in connection with the sale of the Shares by the Selling Stockholder, and (iv)
such other approvals as may be required under state securities laws.
(d) Neither the sale of the Shares being sold by the Selling Stockholder
nor the consummation of any other of the transactions herein contemplated by the
Selling Stockholder or the fulfillment of the terms hereof by the Selling
Stockholder will conflict with, result in a breach or violation of, or
constitute a default under any law or the terms of any indenture or other
agreement or instrument to which the Selling Stockholder is a party or bound, or
any judgement, order or decree applicable to the Selling Stockholder of any
court, regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Selling Stockholder.
(e) This Agreement has been duly authorized, executed and delivered by
or on behalf of the Selling Stockholder and is a valid and binding agreement of
the Selling Stockholder, enforceable against the Selling Stockholder in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
(f) Any certificate signed by the Selling Stockholder and delivered to
the Agent or counsel for the Agent in connection with the Offering shall be
deemed a representation and warranty by the Selling Stockholder, as to matters
covered thereby, to the Agent.
12
<PAGE>
(g) The information in the Prospectus under the caption "Selling
Stockholders," which specifically relates to such Selling Stockholder
(consisting of such Selling Stockholder's name and number of shares of Common
Stock beneficially owned by such Selling Stockholder both before and after the
offering contemplated hereby), will not on the date of the execution of this
Agreement or on any Closing Date, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(h) Upon sale, delivery of and payment for the Shares to be sold by
such Selling Stockholder pursuant to this Agreement and the removal by the
Company and its transfer agent of the restrictions on transfer referenced by the
legends on the certificates evidencing such Shares, the Selling Stockholder
shall have transferred such Shares, free and clear of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever, other than any such restriction on transfer, lien, encumbrance,
security interest, equity or claim created by this Agreement, the Agent or any
purchaser of such Shares or resulting from any actions taken by the Agent or any
such purchaser of the Shares.
The Company and the Selling Stockholder acknowledge that the Agent and, for
purposes of the opinions to be delivered to the Agent pursuant to Sections 8(b)
-------------
and 8(c) hereof, counsel to the Company, counsel to the Selling Stockholder and
----
counsel to the Agent, will rely upon the accuracy and truth of the foregoing
representations as to matters of fact and hereby consent to such reliance.
3. Appointment; Basic Terms; Compensation; Purchase, Sale and Delivery
-------------------------------------------------------------------
of the Shares.
- -------------
(a) The Agent is hereby appointed as the exclusive agent for the
Selling Stockholder during the Offering Period (as hereinafter defined) for the
purpose of finding purchasers for the Shares.
(b) The Offering shall commence on the date hereof, and shall continue
until December 31, 2000 (the "Offering Period"), subject to prior termination at
---------------
any time by the Selling Stockholder or the Agent. Any termination of the
Offering Period hereunder shall be effective on not less than three (3) business
days' written notice to the other parties to this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Agent confirms its acceptance of such appointment and agrees, on the terms and
conditions herein set forth, to use its reasonable best efforts, in accordance
with its customary practice, during the Offering Period to find prospective
purchasers of the Shares. The Selling Stockholder expressly acknowledges and
agrees that the Agent's obligations hereunder are on a reasonable best efforts
basis only and that the execution of this Agreement does not in any way
constitute a commitment by the Agent to purchase the Shares and does not ensure
the successful sale of the Shares or any portion thereof. The Agent shall have
the right to appoint one or more additional agents and/or selected dealers (who
shall be members of the NASD) to assist in finding purchasers for the Shares,
and any such additional agents or selected
13
<PAGE>
dealers may rely upon the representations and warranties and covenants of the
Company and the Selling Stockholder set forth in this Agreement.
(d) The procedure for executing sales of the Shares in the Offering
shall be as follows:
(i) The Agent shall from time to time notify the Selling
Stockholder by telephone as, if and when the Agent identifies a prospective
purchaser or purchasers for all or a portion of the Shares (in each case, a
"Block of Shares"), specifying in each case the number of Shares constituting
---------------
such Block of Shares and the price per Share for such Block of Shares that such
purchaser or purchasers may be willing to pay and any other conditions relevant
to the interest of such purchaser or purchasers therein.
(ii) Upon receipt of such telephonic notice from the Agent, the
Selling Stockholder shall promptly advise the Agent whether or not the price and
other conditions (if any) included in such notice are acceptable to the Selling
Stockholder. In the event that the price and other conditions (if any) included
in such notice are acceptable to the Selling Stockholder, the Selling
Stockholder and the Agent (or such purchaser or purchasers, acting through the
Agent) will execute corresponding sale and purchase transactions in the Shares.
None of the Selling Stockholder, the Agent or any purchaser shall be obligated
on any sale of purchase of the Shares except pursuant to a transaction executed
in accordance with the foregoing. The Agent shall have no liability or
obligation to the Selling Stockholder with respect to any transaction executed
by the Selling Stockholder directly with a purchaser, except under Sections 9
and 10 hereof. All transactions in the Shares hereunder will clear and settle
through the Agent or its affiliate, Bear Stearns Securities Corp.("BSSC").
----
(iii) The Company will pay all applicable state transfer taxes, if
any, involved in the transfer of any Shares to be purchased from the Selling
Stockholder and the Agent will pay any additional stock transfer taxes involved
in further transfers.
(e) The Selling Stockholder shall pay the Agent a 4% commission on the
gross proceeds of each sale of Shares in the Offering.
(f) The Agent's appointment and agency under this Agreement, shall begin
as of the date hereof and continue through and including the earlier of (i) the
final Closing (as such term is defined below) or (ii) upon the expiration or
termination of the Offering Period (the date on which such agency is terminated
being hereinafter referred to as the "Offering Termination Date"); provided,
however, that termination of the Offering Period shall not affect (x) the terms
and conditions of this Agreement as they apply to any sale or purchase of the
Shares previously executed pursuant to Section 3(d) hereof or (y) the provisions
of Sections 1, 7 and 9 through 17 of this Agreement, all of which shall continue
in effect after such Offering Termination Date. Subject to the foregoing, upon
the Offering Termination Date, the agency created by this Agreement shall
terminate.
(g) With respect to each sale of Shares executed by the Selling
Stockholder and the Agent or any purchaser pursuant to Section 3(d):
14
<PAGE>
(i) The Selling Stockholder hereby irrevocably constitutes and
appoints each of Stephen M. Parish, Wayne Stoltenberg, Gary Munowitz and any
other duly authorized officers of Bear, Stearns & Co. Inc. each with full power
and authority to act alone in any matter hereunder and with full power of
substitution, the true and lawful attorneys-in-fact of the Selling Stockholder
(individually an "Attorney" and collectively the "Attorneys"), with full power
-------- ---------
and authority in the name of, for and on behalf of, the Selling Stockholder with
respect to all matters arising in connection with the sale of the Shares by the
Selling Stockholder including, but not limited to, the power and authority on
behalf of the Selling Stockholder to take any and all of the following actions:
(A) To sell, assign, transfer and deliver to the purchaser(s)
thereof such Shares, (whether as one Block of Shares or as more than one Block
of Shares), such Shares to be represented by certificate(s) deposited by the
Selling Stockholder with BSSC, as custodian, at the purchase price per Share
agreed upon for the sale, after deducting all selling commissions and other
amounts payable by the Selling Stockholder hereunder;
(B) To instruct BSSC on all matters pertaining to the sale of the
Shares and the delivery of certificates therefor, including: (i) the transfer of
the Shares on the books of the Company in order to effect the sale of the Shares
(including designating the name or names in which new certificate(s) for Shares
are to be issued and the denominations thereof), (ii) the delivery to or for the
account of the purchaser(s) of the certificate(s) for the Shares against receipt
by BSSC of the purchase price to be paid therefor, (iii) the payment, out of the
proceeds (net of commissions) from the sale of the Shares, of any expense
incurred by the Selling Stockholder hereunder and any transfer taxes payable in
connection with the transfer of the Shares ("Transfer Taxes") and (iv) the
transmission to the Selling Stockholder of the proceeds, if any, from the sale
of the Shares (after deducting all selling commissions and other amounts payable
by the Selling Stockholder and the return to the Selling Stockholder, of new
certificate(s) representing the excess, if any, of the number of Shares
represented by certificate(s) deposited with BSSC over the number of Shares
sold.
(C) To incur or authorize the incurrence of any necessary or
appropriate expense in connection with the sale of the Shares and to determine
the amount of any Transfer Taxes payable in connection with the transfer of the
Shares;
(D) To make, execute, acknowledge and deliver all such other
contracts, stock powers, orders, receipts, notices, instructions, certificates,
letters and other writings, including, without limitation, communications with
the Commission, state securities commissions and the NASD, and in general to do
all things and to take all actions which the Attorneys, in their sole
discretion, may consider necessary or desirable in connection with the sale of
Shares, as fully as could the Selling Stockholder if present and acting;
(E) If necessary, to endorse (in blank or otherwise) on behalf of
the Selling Stockholder the certificate(s) representing the Shares, or a stock
power or powers attached to such
15
<PAGE>
certificate(s); and
(F) To sign such other certificates, documents and agreements and
take any and all other actions as the Attorneys may deem necessary or desirable
in connection with the consummation of the transactions contemplated by the this
Agreement.
(ii) Each Attorney may act alone in exercising the rights and
powers conferred on the Attorneys in this Power of Attorney, and the act of any
Attorney shall be the act of the Attorneys. Each Attorney is hereby empowered to
determine in his or her sole discretion the time or times when, the purpose for
and the manner in which any power herein conferred upon him or her shall be
exercised, and the conditions, provisions or covenants of any instrument or
document which may be executed by him or her pursuant hereto.
(iii) The Selling Stockholder agrees, if so requested, to provide
such other documentation as the Attorneys, the Company, the Agent or any of
their respective counsel may reasonably request to effectuate any of the
provisions hereof, all of the foregoing to be in form and substance reasonably
satisfactory in all respects to the party requesting such documentation.
(iv) This power of attorney and all authority conferred hereby are
granted and conferred subject to and in consideration of the interests of the
Attorneys, the Agent, the Company and the other Selling Stockholders in the
Offering, and for the purposes of completing the transactions contemplated by
this Agreement.
(v) This power of attorney is an agency coupled with an interest
and all authority conferred hereby shall be irrevocable and shall not be
withdrawn or terminated by any act of the Selling Stockholder or by operation of
law, or by the occurrence of any other event or events (including, without
limitation, the merger, consolidation, dissolution or liquidation of any
corporation or partnership) (any of the foregoing being hereinafter referred to
as an "Event"). If an Event shall occur after the sale of a Block of Shares is
approved by the Selling Stockholder pursuant to Section 3(d)(ii) but before
completion of such sale, then certificate(s) representing the Shares will be
delivered to the Agent by or on behalf of the Selling Stockholder in accordance
with the terms and conditions of this Agreement and any actions taken hereunder
by the Attorneys shall be as valid as if such Event had not occurred regardless
of whether or not the BSSC, the Attorneys, the Agent, or any one of them, shall
have received notice of such Event.
(h) With respect to each sale of Shares executed by the Selling
Stockholder, the Agent and any purchaser pursuant to Section 3(d), the Selling
Stockholder irrevocably authorizes and directs BSSC, as custodian, (i) to take
all necessary action to cause the Shares to be transferred on the books of the
Company into such names as the Agent shall have instructed, including
surrendering the certificate(s) representing the Shares to the transfer agent
for the Common Stock for cancellation, in exchange for new certificate(s) for
shares of Common Stock registered in such names and in such denominations as the
Agent shall have instructed, (ii) to deliver such new certificate(s) to the
Agent for the account of the purchaser(s) thereof, against payment for such
Shares at the purchase price per
16
<PAGE>
Share specified in accordance with this Agreement and to give receipt for such
payment, (iii) to deposit the same to the Selling Stockholder's account with
BSSC and draw upon such account to pay such Transfer Taxes as BSSC may be
instructed to pay by the Agent, and (iv) to hold for the account of the Selling
Stockholder, on the terms and conditions applicable to the Selling Stockholder's
account with BSSC, the excess, if any, of the amount received by BSSC as payment
for the Shares over the Transfer Taxes, if any.
(i) Notwithstanding anything to the contrary contained herein, the
Selling Stockholder may sell Shares to the Company, and the Company may purchase
Shares directly from the Selling Stockholder, in which case such Shares shall
not be subject to this Agreement, other than the provision for payment of
certain fees and expenses as set forth below, and no commissions shall be due
hereunder on the sale of such Shares by the Selling Stockholder to the Company;
provided, however, that the Selling Stockholder agrees that it shall pay BSSC or
the Agent, as applicable, usual and customary trading fees and expenses relating
to the transfer of such Shares.
4. Closing. A closing ("Closing") for the sale of Shares purchased in the
------- -------
Offering may be held on one or more occasions prior to the end of the Offering
Period. At each such Closing, payment of the proceeds of the Offering shall be
made by certified or bank check(s) or by wire transfer to the order of the
Selling Stockholder. The Agent may deduct its commissions and any other amounts
payable to the Agent by the Selling Stockholder from the net proceeds
deliverable to the Selling Stockholder.
5. Covenants of the Company. The Company covenants and agrees with the
------------------------
Agent that:
(a) (i) If the Registration Statement has not yet been declared effective
on the date of this Agreement, the Company will use its best efforts to cause
the Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on
Rule 434, the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.
(ii) The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening
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of any proceeding for that purpose. If the Commission shall propose or enter a
stop order at any time, the Company will use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain the lifting of such
order as soon as possible. The Company will not file any amendment to the
Registration Statement or any amendment of or supplement to the Prospectus
(including the prospectus required to be filed pursuant to Rule 424(b)or Rule
434) that differs from the prospectus on file at the time of the effectiveness
of the Registration Statement before or after the effective date of the
Registration Statement to which you shall reasonably object in writing after
being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is required
to be delivered under the Securities Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in the
judgment of the Agent or the Company, include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Securities Act or the Securities Act Regulations, the Company will
notify you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance satisfactory to you) which will
correct such statement or omission and will use its best efforts to have any
amendment to the Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Agent such number of copies of any
preliminary prospectus, the Prospectus, the Registration Statement, and all
amendments of and supplements to such documents, if any, as you may reasonably
request.
(d) The Company will endeavor in good faith, in cooperation with you, at
or prior to the time of effectiveness of the Registration Statement, to qualify,
if necessary, the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of such jurisdictions as you may
designate and to maintain such qualification in effect for so long as required
for the distribution thereof; except that in no event shall the Company be
obligated in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Securities Act Regulations) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement.
(f) Other than the Company's issuance of Common Stock, (i) pursuant to
any existing employee benefit plans, (ii) upon the exercise, conversion or
exchange of any currently outstanding
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stock options or warrants, (iii) in exchange for shares of MGV Energy, Inc.
currently held by minority shareholders thereof, or (iv) in a transaction
described in Rule 145(a)(2) or (3) promulgated under the Securities Act which is
exempt from registration under the Securities Act, during the period of 90 days
from the date hereof, the Company will not, and will not permit any of its
affiliates, directly or indirectly, to issue, sell, offer or agree to sell,
grant any option for the sale of, pledge, make any short sale or maintain any
short position, establish or maintain a "put equivalent position" (within the
meaning of Rule 16a-1(h) under the Exchange Act), enter into any swap,
derivative transaction or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock
(whether any such transaction is to be settled by delivery of Common Stock,
other securities, cash or other consideration) or otherwise dispose of, any
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock) or any interest therein or announce any intention
to do any of the foregoing without the prior written consent of the Agent.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
6. Covenants of the Selling Stockholder. The Selling Stockholder
------------------------------------
covenants and agrees with the Agent that:
(a) The Selling Stockholder will not take any action designed to or
which has constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(b) The Selling Stockholder will advise you promptly, and if requested
by you, will confirm such advice in writing, so long as delivery of a prospectus
relating to the Shares by an Agent or dealer may be required under the
Securities Act, of (i) any change in information in the Registration Statement
or the Prospectus relating to the Selling Stockholder, or (ii) any new material
information relating to the information stated in the Prospectus about the
Selling Stockholder which comes to the attention of the Selling Stockholder.
(c) The Selling Stockholder shall deposit the Shares in an account with
BSSC, as custodian, on or prior to the date hereof and, to the extent such
Shares have not previously been sold hereunder, shall maintain such Shares on
deposit in such account until the expiration of the Offering Period.
7. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholder hereunder, including
those in connection with (i) preparing, printing, duplicating, filing
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and distributing the Registration Statement, as originally filed and all
amendments thereof (including all exhibits thereto), any Preliminary Prospectus,
the Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and counsel), the
underwriting documents (including this Agreement) and all other documents
related to the public offering of the Shares (including those supplied to the
Agent in quantities as herein above stated), (ii) the transfer and delivery of
the Shares to the Agent, including any transfer or other taxes payable thereon
(iii) the qualification of the Shares under state or foreign securities or blue
sky laws, including the costs of printing and mailing a preliminary and final
"Blue Sky Survey" and the fees of counsel for the Agent and such counsel's
disbursements in relation thereto, (iv) filing fees of the Commission and the
NASD, and (v) the cost and charges of any transfer agent or registrar for the
Common Stock.
8. Conditions of Agent Obligations. The obligations of the Agent under
-------------------------------
Section 3 hereof shall be subject to the accuracy of the representations and
- ---------
warranties of the Company and the Selling Stockholder herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 8
"Closing Date" shall refer to the Closing Date for the Shares); to the absence
from any certificates, opinions, written statements or letters furnished to you
or to Jenkens & Gilchrist ("Agent's Counsel") pursuant to this Section 8 of any
misstatement or omission, to the performance by the Company or the Selling
Stockholder of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m., New York time, on the date of this Agreement, or at such later
time and date as shall have been consented to in writing by you; if the Company
shall have elected to rely upon Rule 430A or Rule 434 of the Securities Act
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 5(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of Cantey &
Hanger, L.L.P., counsel for the Company, dated the Closing Date addressed to the
Agent and in form and substance satisfactory to Agent's Counsel, to the effect
that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the state of Delaware. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned, leased
or licensed) or the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good standing
which will not in the aggregate have a Material Adverse Effect. The Company has
all requisite corporate or similar authority to own, lease and license its
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus.
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(ii) All of the outstanding shares of Common Stock (including the
Shares to be sold by the Selling Stockholder hereunder) are duly and validly
authorized and issued, are fully paid and nonassessable and were not issued in
violation of or subject to any preemptive rights, and no preemptive rights of
stockholders exist with respect to any of the Company=s Common Stock. The
Shares to be delivered by the Selling Stockholder on the Closing Date have been
duly and validly authorized, and are fully paid and nonassessable. The
certificates for the Common Stock are in due and proper form. The Common Stock
and the Shares conform to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(iii) The shares of Common Stock currently outstanding (including
the Shares to be sold by the Selling Stockholder hereunder) are listed on the
American Stock Exchange.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Company.
(v) There is no litigation or governmental or other action, suit,
proceeding or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or business
of, the Company, which is of a character required to be disclosed in the
Registration Statement and the Prospectus which has not been properly disclosed
therein.
(vi) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the Company do not
and will not violate, conflict with or constitute a breach of any of the terms
and provisions of, or constitute a default (or an event which with notice or
lapse of time, or both, would constitute a default), or result in the creation
or imposition of any lien, charge or encumbrance upon any properties or assets
of the Company or result in any acceleration of any indebtedness of the Company
pursuant to (A) any bond, debenture, note, indenture, mortgage, deed of trust,
contract or other agreement known to such counsel to which the Company is a
party or by which the Company or its properties or assets are or may be bound
(B) any statute, rule or regulation applicable to the Company or any of its
properties or assets or (C) to the best knowledge of such counsel, any judgment,
order or decree of any court or governmental agency or authority having
jurisdiction over the Company or any of its properties or assets. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any governmental agency or authority having
jurisdiction over the Company or its properties or assets is required for the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, except for (1) such as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Agent (as to which such counsel need express
no opinion) and (2) such as have been made or obtained under the Securities Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial statements
and other financial or statistical data
21
<PAGE>
included therein, as to which no opinion need be rendered) comply as to form in
all material respects with the requirements of the Securities Act and the
Securities Act Regulations.
(viii) The Registration Statement is effective under the Securities
Act, and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Securities Act Regulations have been made.
(ix) There are no holders of securities of the Company who, by
reason of the execution by the Company of this Agreement or the consummation by
the Company of the transactions contemplated hereby, have the right to request
or demand that the Company register under the Securities Act or analogous
foreign laws and regulations securities held by them, other than those such that
have been duly exercised or waived.
(x) The statements in the Prospectus which purport to summarize
the provisions of statutes, regulations, contracts, and other documents, insofar
as such statements constitute a summary of documents referred to therein or
matters of law, are, in all material respects, accurate summaries and fairly and
correctly present the information required to be shown with respect to such
matters and documents.
(xi) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or Prospectus which are not so filed or described as
required.
(xii) The Company has all approvals, licenses and permits required
to conduct its business lawfully, except where the failure to so possess would
not have a Material Adverse Effect.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Agent at which the contents of the Prospectus and related matters were
discussed and, no facts have come to the attention of such counsel which would
lead such counsel to believe that either the Registration Statement at the time
it became effective (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or
Rule 434, if applicable), or any amendment thereof made prior to the Closing
Date as of the date of such amendment, contained an untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
Prospectus as of its date (or any amendment thereof or supplement thereto made
prior to the Closing Date as of the date of such amendment or supplement) and as
of the Closing Date contained or contains an untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being
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<PAGE>
understood that such counsel need express no belief or opinion with respect to
the financial statements and other financial or statistical data included
therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the federal laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to Agent's
Counsel) of other counsel reasonably acceptable to Agent's Counsel, familiar
with the applicable laws; (B) as to federal regulatory issues, on the opinion of
special regulatory counsel; (C) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company and its subsidiaries, provided that copies of any such statements
or certificates shall be delivered to Agent's Counsel. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is being relied upon and for what purpose.
(c) The Selling Stockholder shall have caused its counsel to have
furnished to the Agent its opinion dated the Closing Date and addressed to the
Agent to the effect that:
(i) The Selling Stockholder has full right, power and authority to
sell, assign, transfer and deliver the Shares delivered by the Selling
Stockholder hereunder except for the restrictions on transfer referenced by the
legends on the certificates evidencing such Shares.
(ii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be obtained or
made by the Selling Stockholder for the consummation by the Selling Stockholder
of the transactions contemplated by this Agreement in connection with the sale
of the Shares except (i) such as may be required as a result of the identity of
the purchaser or purchasers of the Shares, including filings required under
Section 13 of the Exchange Act and filings required under the HSR Act, (ii) such
as may have been obtained and made under the Securities Act, (iii) such as may
be required by the NASD and under the blue sky laws of any jurisdiction in
connection with the sale of the Shares by the Selling Stockholder, and (iv) such
other approvals as may be required under state securities laws;
(iii) The execution, delivery and performance of this Agreement and
the consummation of the transactions therein and herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, (A) any statute, any rule, regulation or order of
any governmental agency or body applicable to the Selling Stockholder or any
court having jurisdiction over the Selling Stockholder or any of its properties
or (B) the constituent documents of the Selling Stockholder; and
(iv) This Agreement has been duly authorized, executed and delivered
by or on behalf of the Selling Stockholder.
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<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the federal laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to Agent's
Counsel) of other counsel reasonably acceptable to Agent's Counsel, familiar
with the applicable laws; (B) as to federal regulatory issues, on the opinion of
special regulatory counsel; (C) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Selling Stockholder and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Selling Stockholder and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to Agent's
Counsel. The opinion of such counsel for the Selling Stockholder shall state
that the opinion of any such other counsel is being relied upon and for what
purpose.
(d) All proceedings taken in connection with the sale of the Shares as
herein contemplated shall be satisfactory in form and substance to you and to
Agent's Counsel, and the Agent shall have received from said Agent's Counsel a
favorable opinion, dated as of the Closing Date with respect to the sale of the
Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Agent's Counsel such documents as they request for the purpose of enabling them
to pass upon such matters.
(e) At the Closing Date you shall have received a certificate of the
President and Chief Operating Officer and the Executive Vice President and Chief
Financial Officer of the Company, dated the Closing Date, to the effect that (i)
the condition set forth in subsection (a) of this Section 8 has been satisfied,
(ii) as of the date hereof and as of the Closing Date the representations and
warranties of the Company set forth in Section 1 hereof are accurate, (iii) as
of the Closing Date the obligations of the Company to be performed hereunder on
or prior thereto have been duly performed and (iv) subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, the Company has not sustained any material loss or interference with
its business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material adverse
change, or any development involving a material adverse change, in the business,
prospects, properties, operations, condition (financial or otherwise), affairs
or management of the Company, except in each case as described in or
contemplated by the Prospectus.
(f) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter from Deloitte & Touche LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Agent and in form and
-----
substance satisfactory to you, stating that, among other things: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the Securities Act Regulations and stating
that the information provided in response to Item 10 of the Registration
Statement is correct insofar as it relates to them, (ii) in their opinion, the
financial statements and schedules of the Company included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects
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<PAGE>
with the applicable accounting requirements of the Securities Act and the
applicable published rules and regulations of the Commission thereunder, (iii)
on the basis of procedures consisting of a reading of the latest available
unaudited interim financial statements of the Company, a reading of the minutes
of meetings and consents of the stockholders and Board of Directors of the
Company and the committees of such Board of Directors subsequent to December 31,
1999, inquiries of officers and other employees of the Company who have
responsibility for financial and accounting matters of the Company with respect
to transactions and events subsequent to December 31, 1999, a review of interim
financial information in accordance with the standards established by the
American Institute of Certified Public Accountants in Statement of Auditing
Standards No. 71, Interim Financial Information with respect to the nine month
period ended September 30, 2000 and other specified procedures and inquiries to
a date not more than five days prior to the date of such letter, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
financial statements and schedules of the Company presented in the Registration
Statement and the Prospectus, including the quarterly information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," do not comply as to form in all material respects
with the applicable accounting requirements of the Securities Act and, if
applicable, the Exchange Act and the applicable published rules and regulations
of the Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to September 30, 2000,
there were, as of the date of the most recently available monthly consolidated
financial statements of the Company, if any, and as of a specified date not more
than five days prior to the date of such letter, any changes in the capital
stock or long-term indebtedness of the Company or any decrease in the net
current assets or shareholders' equity of the Company, in each case as compared
with the amounts shown in the most recent balance sheet presented in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter; (C) that during the period from
October 1, 2000 to the date of the most recent available monthly financial
statements of the Company, if any, and to a specified date not more than five
days prior to the date of such letter, there was any decrease, as compared with
the corresponding period in the prior fiscal year, in total revenues, or total
or per share net income, except for decreases which the Registration Statement
and the Prospectus disclose have occurred or may occur or which are set forth in
such letter; (D) the unaudited pro forma income statements and balance sheets
presented in the Registration Statement and the Prospectus do not comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act and, if applicable, the Exchange Act and the applicable published
rules and regulations of the Commission thereunder, that such unaudited pro
forma income statements and balance sheets are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements; or (E) any other unaudited pro forma income
statement data or balance sheet items included in the Registration Statement or
Prospectus do not agree with the corresponding amounts in the pro forma income
statements or balance sheets included in the Registration Statement and
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<PAGE>
Prospectus; and (iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, and other financial information
pertaining to the Company set forth in the Registration Statement and the
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found them
to be in agreement.
(g) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter from Weaver and Tidwell, L.L.P., independent
accountants for predecessor entities to the Company, including Mercury
Exploration Company and Michigan Gas Partners Limited Partnership and certain
acquired properties (collectively, the APredecessor Entities@), dated,
respectively, as of the date of this Agreement and as of the Closing Date
addressed to the Agent and in form and substance satisfactory to you, stating
that, among other things: (i) they are independent certified public accountants
with respect to the Predecessor Entities within the meaning of the Securities
Act and the Securities Act Regulations and stating that the information provided
in response to Item 10 of the Registration Statement is correct insofar as it
relates to them; (ii) in their opinion, the financial statements and schedules
of the Predecessor Entities included in the Registration Statement and the
Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the applicable published rules and regulations of the Commission
thereunder; and (iii) they have compared specific dollar amounts, number of
shares, percentages of revenues and earnings, and other information pertaining
to the Predecessor Entities set forth in the Registration Statement and the
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent such amounts, numbers, percentages and information may
be derived from the general accounting records of the Company or the Predecessor
Entities from schedules furnished by the Company, and excluding any questions
requiring an interpretation by legal counsel, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement.
(h) The Selling Stockholder shall have furnished to the Agent a
certificate, signed by the Selling Stockholder, dated the Closing Date, to the
effect that the signer of such certificate has caused to be carefully examined
the portions of the Registration Statement, the Prospectus, any supplement to
the Prospectus and this Agreement that describe or pertain to the Selling
Stockholder and that the representations and warranties of the Selling
Stockholder in this Agreement are true and correct in all material respects on
and as of the Closing Date to the same effect as if made on the Closing Date.
(i) Prior to the Closing Date the Company and the Selling Stockholder
shall have furnished to you such further information, certificates and documents
as you may reasonably request.
(j) You shall have received from Holditch a letter, dated as of the
Closing Date, addressed to the Agent and in form and substance satisfactory to
you, stating, among other things (i) they are independent petroleum engineers
with respect to the Company, and (ii) nothing has come
26
<PAGE>
to their attention that would lead them to conclude that the Reserve Information
referenced in the Registration Statement or the Prospectus is inaccurate or
incomplete in any material respect.
If any of the conditions specified in this Section 8 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Agent's Counsel
pursuant to this Section 8 shall not be in all material respects reasonably
satisfactory in form and substance to you and to Agent's Counsel, all
obligations of the Agent hereunder may be canceled by you at, or at any time
prior to, the Closing Date. Notice of such cancellation shall be given to the
Company and the Selling Stockholder in writing, or by telephone, telex or
telegraph, confirmed in writing.
9. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Agent and each
person, if any, who controls the Agent within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), to which it may become subject under the Securities
Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement for the registration of the Shares, as
originally filed or any amendment thereof, or any related Preliminary Prospectus
or the Prospectus, or in any amendment thereof or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company will not be liable
in any such case to the extent but only to the extent that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Agent through you expressly for
use therein.
(b) The Selling Stockholder agrees to indemnify and hold harmless the
Agent and each person, if any, who controls the Agent within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), to which it may become
subject under the Securities Act, the Exchange Act or otherwise, that arise out
of or are based upon the inclusion in the Registration Statement, as originally
filed or any amendment thereof, or any related Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, of any untrue
statement relating to the Selling Stockholder or alleged untrue statement or any
omission or alleged omission relating to the Selling Stockholder
27
<PAGE>
made therein in reliance upon and in conformity with written information
furnished to the Company or the Agent by the Selling Stockholder expressly for
use therein. The Company and the Agent acknowledge that the statement relating
to the Selling Stockholder set forth under the caption "Selling Stockholders" in
the Prospectus constitute the only information furnished in writing by or on
behalf of the Selling Stockholder expressly for use in the Registration
Statement relating to the Shares as originally filed or in any amendment
thereof, any related Preliminary Prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
(c) The Agent agrees to indemnify and hold harmless the Company, each of
the directors of the Company, each of the officers of the Company who shall have
signed the Registration Statement and each other person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act and the Selling Stockholder, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or severally, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Agent through you
expressly for use therein; provided, however, that in no case shall the Agent be
liable or responsible for any amount in excess of the commission applicable to
the Shares sold by the Agent hereunder. This indemnity will be in addition to
any liability which the Agent may otherwise have, including under this
Agreement. The Company and the Agent acknowledge that the statements set forth
under the caption "Sale of Shares" in the Prospectus constitute the only
information furnished in writing by or on behalf of the Selling Stockholder
expressly for use in the Registration Statement relating to the Shares as
originally filed or in any amendment thereof, any related Preliminary Prospectus
or the Prospectus or in any amendment thereof or supplement thereto, as the case
may be.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 9, except to the extent such
failure prejudiced the indemnifying party). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement
28
<PAGE>
thereof, the indemnifying party will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability or claims
that are the subject matter of such proceeding.
10. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 9 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, then upon the
occurrence of such circumstance, the Company and the Selling Stockholder, on the
one hand, and the Agent, on the other hand, shall contribute to the aggregate
losses, claims, damages, liabilities and expenses of the nature contemplated by
such indemnification provision (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting in the
case of losses, claims, damages, liabilities and expenses suffered by the
Company any contribution received by the Company from persons, other than the
Agent, who may also be liable for contribution, including persons who control
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) as incurred to which the Company, the
Selling Stockholder and the Agent may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Company, the
Selling Stockholder and the Agent from the Offering or, if such allocation is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company, the Selling Stockholder and the Agent in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Stockholder, on
the one hand, and the Agent, on the other hand, shall be deemed to be in the
same proportion as (x) the total proceeds from the Offering (net of
29
<PAGE>
commissions but before deducting expenses) received by the Selling Stockholder,
and (y) the commissions received by the Agent, respectively. The relative fault
of the Company, the Selling Stockholder and of the Agent shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholder or the
Agent and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Selling Stockholder and the Agent agree that it would not be just and equitable
if contribution pursuant to this Section 10 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this Section 10, (i) in no case shall the Agent be liable or responsible for
any amount in excess of the commissions applicable to the Shares sold by the
Agent hereunder, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 10 and the
preceding sentence, the Agent shall not be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that the Agent has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 10, each person, if any, who controls the
Agent within the meaning of Section 15 of the Securities Act or Section 20(a) of
the Exchange Act shall have the same rights to contribution as the Agent, and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to clauses (i) and (ii) of this Section 10. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties, notify each party or
parties from whom contribution may be sought, but the omission to so notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have under this Section 10 or
otherwise, except to the extent such failure prejudiced such party. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
withheld. Notwithstanding anything in this Agreement to the contrary, the
liability of the Selling Stockholder under the Selling Stockholder's
representations and warranties contained in Section 2 hereof and under the
indemnity and contribution agreements contained in this Section 10 shall be
limited to an amount equal to the net purchase price of the Shares received by
the Selling Stockholder.
11. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Agent, the Company and the
Selling Stockholder contained in this Agreement, including representations of
the Company and the Selling Stockholder in Section 1 and 2, the agreements
contained in Sections 5, the indemnity agreements contained in Section 9, the
contribution agreements contained in Section 10 and the agreements contained in
Section 14, shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of
30
<PAGE>
the Agent or any controlling person thereof or by or on behalf of the Company,
any of its officers and directors or any controlling person thereof or on behalf
of the Selling Stockholder, and shall survive delivery of and payment for the
Shares to and by the Agent. The representations contained in Section 1 and the
agreements contained in Sections 5, 9, 12(d) and 14 hereof shall survive the
termination of this Agreement, including termination pursuant to Section 12
hereof.
12. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you, the Company and the Selling Stockholder shall have received notification of
the effectiveness of the Registration Statement or (ii) the execution of this
Agreement. To the extent that any Shares remain unsold hereunder at the
expiration of the Offering Period, this Agreement shall thereupon terminate
without liability to the Company, the Selling Stockholder or the Agent except as
herein expressly provided. Until this Agreement becomes effective as aforesaid,
it may be terminated by the Company and the Selling Stockholder by notifying you
or by you by notifying the Company or the Selling Stockholder. Notwithstanding
the foregoing, the provisions of this Section 12 and of Sections 1, 7 and 9
through 17 hereof shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general; or (B) if trading on the New York or American Stock Exchanges shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required, on
the New York or American Stock Exchanges by the New York or American Stock
Exchanges or by order of the Commission or any other governmental authority
having jurisdiction; or (C) if a banking moratorium has been declared by a state
or federal authority or if any new restriction materially adversely affecting
the distribution of the Shares or the Additional Shares, as the case may be,
shall have become effective; or (D) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(ii) if there shall have been such change in political, financial or economic
conditions if the effect of any such event in (i) or (ii) as in your judgment
makes it impracticable or inadvisable to proceed with the offering, sale and
delivery of the Shares or the Additional Shares, as the case may be, on the
terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 12 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 12(a) hereof or (ii) Section 12(b) hereof), or if the sale
of the Shares provided for herein is not consummated because any condition to
the obligations of the Agent set forth herein is not satisfied or because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholder to perform any agreement
31
<PAGE>
herein or comply with any provision hereof, the Company or the Selling
Stockholder, as applicable, will, subject to demand by you, reimburse the Agent
for all reasonable out-of-pocket expenses (including the reasonable fees and
expenses of their counsel), incurred by the Agent in connection herewith.
13. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and, if sent to the Agent,
shall be mailed, delivered, or telexed or telegraphed and confirmed in writing,
Bear, Stearns & Co. Inc., 245 Park Avenue, New York, NY 10167, Attention:
______________, with a copy to: Jenkens & Gilchrist, a Professional Corporation,
1445 Ross Avenue, Suite 3200, Dallas, Texas 75202, Attention: L. Steven Leshin,
Esq.; if sent to the Company, shall be mailed, delivered, or telegraphed and
confirmed in writing to the Company, 777 West Rosedale Street, Suite 300, Fort
Worth, Texas 76104, Attention: Chief Financial Officer, with a copy to Cantey &
Hanger, LLP, 801 Cherry Street, Suite 2100, Fort Worth, Texas 76102, Attention:
Dean A. Tetirick, Esq.; or, if sent to the Selling Stockholder to Joint Energy
Development Limited Partnership, c/o Enron North America Corp., 1400 Smith
Street, Houston, Texas 77002.
14. Consent to Jurisdiction; Waiver of Immunities; Appointment of
-------------------------------------------------------------
Agent for Service.
- -----------------
(a) The Company and the Selling Stockholder:
(i) irrevocably submit to the nonexclusive jurisdiction of any New
York State or federal court sitting in the State of New York, County of New York
and any appellate court from any thereof in any action, suit or proceeding
arising out of or relating to this Agreement or any other document delivered in
connection herewith and irrevocably waives any immunity from such action or
proceeding it may otherwise enjoy in the aforementioned courts;
(ii) irrevocably agree that all claims in respect of any such
action or proceeding may be heard and determined in such New York State court or
in such federal court; and
(iii) irrevocably waive, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or
proceeding.
(iv) The parties hereto waive all rights to trial by jury in any
action, suit or proceeding brought to resolve any dispute whether sounding in
contract, tort or otherwise, between the parties arising out of, connected with,
related to, or incidental to the relationship established between them in
connection with this Agreement or the transactions contemplated herein.
(v) Any and all legal process, summons, notices and documents that
may be served on a party hereto in any action, suit or proceeding brought
against it, with respect to such party's obligations, liabilities or any other
matter arising out of or relating to this Agreement or any other document
delivered in connection herewith may be served on such party by certified mail
or physical delivery to such party at the address for such party specified in
Section 13 hereof.
- ----------
32
<PAGE>
(b) Nothing in this Section 14 shall affect the right of any
person to serve legal process in any other manner permitted by law or affect the
right of any person to bring any action or proceeding against the Company or its
properties in the courts of other jurisdictions.
(c) The provisions of this Section 14 shall survive any
termination of this Agreement, in whole or in part.
15. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, the Agent, the Company, the Selling Stockholder and the
controlling persons, directors, officers and others referred to in Sections 9
and 10, and their respective successors and assigns, and no other person shall
have or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provision herein
contained. The term "successors and assigns" shall not include a purchaser, in
its capacity as such, of Shares from the Agent.
16. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York for contracts made and to
be fully performed in such state without regard to principles of conflicts of
law.
17. Counterparts. This Agreement may be executed and delivered
------------
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
33
<PAGE>
If the foregoing correctly sets forth the understanding between you, the
Company and the Selling Stockholder, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
THE COMPANY: QUICKSILVER RESOURCES INC.
By: /s/ Glenn Darden
--------------------------------------
Name: Glenn Darden
--------------------------------------
Title: President
--------------------------------------
THE SELLING STOCKHOLDER: JOINT ENERGY DEVELOPMENT INVESTMENTS
LIMITED PARTNERSHIP
By: Enron Capital Management Limited Partnership,
its General Partner
By: Enron Capital Corp., its General Partner
By: /s/ Jesse E. Neyman
--------------------------------------
Name: Jesse E. Neyman
--------------------------------------
Title: Vice President
--------------------------------------
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, N.Y. 10167
By: /s/ Stephen Straty
---------------------------
Name: Stephen Straty
---------------------------
Title: Senior Managing Director
---------------------------
34
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>AGENCY AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.12
299,242 Shares of Common Stock
QUICKSILVER RESOURCES INC.
AGENCY AGREEMENT
----------------
November 30, 2000
BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
The undersigned stockholder (the "Selling Stockholder") of Quicksilver
Resources Inc., a corporation organized and existing under the laws of Delaware
(the "Company"), proposes, subject to the terms and conditions stated herein, to
-------
sell (the "Offering") through Bear, Stearns & Co. Inc., as agent (the "Agent"),
-------- -----
an aggregate of up to 299,242 shares (the "Shares") of the Company's common
------
stock, par value $.01 per share (the "Common Stock"). The Shares are more fully
------------
described in the Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Agent that:
(a) The Company meets the requirements for use of Form S-3 and has filed
with the Securities and Exchange Commission (the "Commission") a registration
----------
statement, and may have filed an amendment or amendments thereto, on Form S-3
(Registration No. 333-49136), and related preliminary prospectuses, as
supplemented, for the registration under the Securities Act of 1933, as amended
(the "Securities Act"), of 1,639,437 shares of Common Stock, which registration
--------------
statement, as so amended, has been declared effective by the Commission and
copies of which have heretofore been delivered to the Agent. The registration
statement, as amended at the time it became effective, including the exhibits
and information (if any) deemed to be a part of the registration statement at
the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of
the rules and regulations of the Commission under the Securities Act (the
"Securities Act Regulations"), and any post-effective amendments thereto under
- ---------------------------
Rule 462(d) through the Closing Date (as defined below) is hereinafter called
the "Registration Statement." If the Company has filed or is required pursuant
----------------------
to the terms hereof to file a registration statement pursuant to Rule 462(b)
under the Securities Act Regulations registering additional shares of Common
Stock (a "Rule 462(b) Registration Statement"), then, and unless otherwise
----------------------------------
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement. Other than a Rule
462(b) Registration Statement, if any, which became effective upon filing, no
other document with respect to the
1
<PAGE>
Registration Statement has heretofore been filed with the Commission (other than
prospectuses filed pursuant to Rule 424(b) of the Securities Act Regulations,
each in the form heretofore delivered to the Agent). No stop order suspending
the effectiveness of the Registration Statement (including any Rule 462(b)
Registration Statement) has been issued and no proceeding for that purpose has
been initiated or, to the Company's knowledge, threatened by the Commission. The
prospectus relating to the Shares, in the form in which it is to be filed with
the Commission pursuant to Rule 424(b) of the Securities Act Regulations, is
hereinafter referred to as the "Prospectus," except that, subject to Sections
----------
5(a) and 5(b) below, if any revised prospectus or prospectus supplement shall be
provided to the Agent by the Company for use in connection with the Offering
which differs from the Prospectus (whether or not such revised prospectus or
prospectus supplement is required to be filed by the Company pursuant to Rule
424(b) of the Securities Act Regulations), the term "Prospectus" shall refer to
such revised prospectus or prospectus supplement, as the case may be, from and
after the time it is first provided to the Agent for such use. Any preliminary
prospectus or prospectus subject to completion included in the Registration
Statement or filed with the Commission as described in Rule 430A or Rule 424 of
the Securities Act is hereafter called a "Preliminary Prospectus." All
----------------------
references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a Preliminary Prospectus and the Prospectus, or any
amendments or supplements to any of the foregoing, shall be deemed to include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
-----
(b) The Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto, at the time the Registration Statement became
effective, at the time any post-effective amendment to the Registration
Statement is filed with the Commission, at the time the Prospectus is first
filed with the Commission, at the time any supplement or amendment to the
Prospectus is filed with the Commission and as of the Closing Date, and
Additional Closing Date, if any (as hereinafter respectively defined), and the
Preliminary Prospectus, and any amendments thereof or supplements thereto, as of
the date thereof, complied and comply in all material respects with the
requirements of the Securities Act and the Securities Act Regulations, and did
not and as of the Closing Date, and Additional Closing Date, if any, will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus, as of the date hereof (unless the term
"Prospectus" refers to a prospectus which has been provided to the Agent by the
Company for use in connection with the Offering which differs from the
Prospectus filed with the Commission pursuant to Rule 424(b) of the Securities
Act Regulations, in which case at the time it is first provided to the Agent for
such use) and on the Closing Date, and Additional Closing Date, if any, does not
and will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this Section (1)(b) shall not apply
to statements in or omissions from the Registration Statement or Prospectus made
in reliance upon and in conformity with information relating to the Agent
furnished to the Company in writing by the Agent expressly for use in the
Registration Statement or the Prospectus. Each Preliminary Prospectus and
Prospectus filed as part of the Registration Statement, as part of any amendment
thereto or pursuant to Rule 424 under the Securities Act Regulations, if filed
by electronic
2
<PAGE>
transmission pursuant to Regulation S-T under the Securities Act, was identical
to the copy thereof delivered to the Agent for use in connection with the offer
and sales of the Shares (except as may be permitted by Regulation S-T under the
Securities Act). There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement under the Securities Act that have not been described or filed therein
as required, and there are no business relationships or related-party
transactions directly or indirectly involving the Company, the Selling
Stockholder or any other person required to be described in the Prospectus that
have not been described therein as required.
(c) Deloitte & Touche LLP, who has certified certain financial statements
of the Company and has delivered its report with respect to the Company's
audited financial statements included in the Registration Statement, the
Prospectus and any Preliminary Prospectus, are independent public accountants as
required by the Securities Act and the Securities Act Regulations. Weaver and
Tidwell, L.L.P., who has certified certain financial statements of predecessors
of the Company, Mercury Exploration Company, Michigan Gas Partners Limited
Partnership and predecessor company acquisitions and who has delivered its
report with respect to such predecessor companies' audited financial statements
included in the Registration Statement, the Prospectus and any Preliminary
Prospectuses, are independent public accountants as required by the Securities
Act and Securities Act Regulations.
(d) Holditch-Reservoir Technologies Consulting Services ("Holditch"),
--------
petroleum engineers from whose reserve reports information is set forth in the
Registration Statement, the Prospectus and each Preliminary Prospectus, are
independent petroleum engineers with respect to the Company. The factual
information underlying the estimates of the reserves of the Company which was
provided by the Company to Holditch for purposes of preparing the reserve
information referenced in the Registration Statement, the Prospectus and each
Preliminary Prospectus (the "Reserve Information") including, without
-------------------
limitation, production, volumes, sales prices for production, contractual
pricing provisions under gas sales or marketing contracts, hedging arrangements,
incurred costs of operations and development, and working interest and net
revenue information relating to the Company's ownership interests in properties,
was true and correct in all material respects on the date such information was
furnished to Holditch and as of the date hereof; the estimates of future capital
expenditures and other future exploration and development costs supplied to
Holditch were prepared in good faith and with a reasonable basis. The
information provided to Holditch for purposes of preparing the Reserve
Information was prepared in accordance with customary industry practices.
Except as described in the Prospectus, the Company is not aware of any facts or
circumstances that would result in a material adverse change in its reserves in
the aggregate, or the aggregate present value of estimated future net revenues
or the standardized measure of discounted future net cash flows therefrom, as
described in the Prospectus and reflected in the Reserve Information. Estimates
of the reserves and the present value of the estimated future net revenues and
the discounted future net cash flows derived therefrom as described in the
Prospectus and reflected in the Reserve Information comply in all material
respects to the applicable requirements of Regulation S-X of the Securities Act
Regulations and Industry Guide 2 under the Securities Act.
3
<PAGE>
(e) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or otherwise) affairs or management of the Company, whether or not arising from
transactions in the ordinary course of business, and since the date of the
latest balance sheet presented in the Registration Statement and the Prospectus,
the Company has not incurred or undertaken any liabilities or obligations,
direct or contingent, which are material to the Company, except for liabilities
or obligations which are reflected in the Registration Statement and the
Prospectus.
(f) The Company (i) has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, (ii) has
all requisite corporate power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
to carry on its business as it is currently being conducted and as described in
the Registration Statement and the Prospectus and to own, lease and operate its
properties, (iii) has no subsidiaries other than MGV Energy, Inc., Beaver Creek
Pipeline, L.L.C., Cinnabar Energy Services Trading LLC and Terra Energy Ltd.
(the "Subsidiaries"), and (iv) is duly qualified and in good standing as a
------------
foreign corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires such
qualification except, with respect to clauses (i) (as it relates to good
standing) and (iv), where the failure to be in good standing or so qualified
does not and could not reasonably be expected to (x) individually or in the
aggregate, result in a material adverse effect on the business, prospects,
properties, operations, condition (financial or otherwise), affairs or
management of the Company, (y) interfere with or adversely affect the
marketability of the Shares pursuant hereto or (z) in any manner draw into
question the validity of this Agreement (any of the events set forth in clauses
(x), (y) or (z), being referred to as a "Material Adverse Effect").
-----------------------
(g) Each of the Subsidiaries (i) has been duly organized and is validly
existing as a corporation, or limited liability company, as the case may be, in
good standing under the laws of the province or state of its organization, (ii)
has all requisite corporate or similar power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or governmental agencies
and bodies, to carry on its business as it is currently being conducted and as
described in the Registration Statement and the Prospectus and to own, lease and
operate its properties, (iii) has no subsidiaries and (iv) is duly qualified and
in good standing as a foreign corporation, or limited liability company, as the
case may be, authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification except, with respect to clauses (i) (as it relates to good
standing) and (iv), where the failure to be in good standing or so qualified
does not and could not reasonably be expected to result in a "Material Adverse
----------------
Effect".
- ------
(h) This Agreement and the transactions contemplated hereby have been duly
and validly authorized by the Company. This Agreement has been duly and validly
executed and delivered by the Company, and is the legal, valid, binding
agreement of the Company.
4
<PAGE>
(i) The execution, delivery, and performance of this Agreement, the
offering and sale of the Shares, and the consummation of the transactions
contemplated hereby and in the Prospectus do not and will not violate, conflict
with or constitute a breach of any of the terms and provisions of, or constitute
a default (or an event which with notice or lapse of time, or both, would
constitute a default) or require consent under, or result in the creation or
imposition of any lien, charge or encumbrance upon any properties or assets of
the Company, or result in an acceleration of any indebtedness of the Company
pursuant to (i) the Restated Certificate of Incorporation or By-Laws of the
Company, (ii) any bond, debenture, note, indenture, mortgage, deed of trust,
contract or other agreement or instrument to which the Company or any subsidiary
is a party or by which the Company or any of its subsidiaries or their
respective properties or assets are or may be bound, (iii) any statute, rule or
regulation applicable to the Company or any of its subsidiaries or any of their
respective properties or assets or (iv) any judgment, order or decree of any
court or governmental agency or authority having jurisdiction over the Company
or any of its subsidiaries or any of their respective properties or assets. No
consent, approval, authorization, order, registration, filing, qualification,
license or permit of or with (x) any court or any governmental agency or
authority having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties or assets or (y) any other person is required for
(A) the execution, delivery and performance by the Company of this Agreement,
(B) the sale and delivery of the Shares to be sold and delivered by the Selling
Stockholder hereunder and the consummation of the transactions contemplated
hereby, except such as have been obtained under the Securities Act and such
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Agent.
(j) All of the outstanding shares of Common Stock (including the Shares
being sold hereunder by the Selling Stockholder) are duly authorized, validly
issued, fully paid and nonassessable and were not issued and are not now in
violation of or subject to any preemptive or similar rights. The Shares being
sold by the Selling Stockholder under this Agreement are duly authorized,
validly issued, fully paid and nonassessable. The capital stock of the Company
conforms to the description thereof contained in the Prospectus, or if the
Prospectus is not in existence, the most recent Preliminary Prospectus.
(k) Except as disclosed in the Prospectus, there are not currently, and
will not be as a result of the Offering, any outstanding subscriptions, rights,
warrants, calls, commitments of sale or options to acquire or instruments
convertible into or exchangeable for, any capital stock or other equity interest
of the Company or any of its subsidiaries (other than options issued pursuant to
the Company's stock option plans).
(l) There is (i) no action, suit or proceeding before or by any court,
arbitrator or governmental agency, body or official, domestic or foreign, now
pending or, to the best knowledge of the Company, threatened or contemplated to
which the Company is a party or to which the business or property of the Company
is subject, (ii) no statute, rule, regulation or order that has been enacted,
adopted or issued by any governmental agency or that has been proposed by any
governmental body and (iii) no injunction, restraining order or order of any
nature by a federal or
5
<PAGE>
state court or foreign court of competent jurisdiction to which the Company or
any of its subsidiaries is or may be subject or to which the business, assets,
or property of the Company or any of its subsidiaries are or may be subject,
that, in the case of clauses (i), (ii) and (iii) above, is required to be
disclosed in the Registration Statement and the Prospectus and which could,
individually or in the aggregate, result in a Material Adverse Effect.
(m) The Company has not directly or indirectly (i) taken (other than
through the actions, if any, of the Agent) any action designed to, or that might
reasonably be expected to, cause or result in or which constitutes or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares or (ii) since the filing of the Preliminary Prospectus (a) sold, bid for,
purchased or paid any person any compensation for soliciting purchases of,
shares of Common Stock or (b) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(n) The financial statements, together with the related notes, included in
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) present fairly in all material respects the financial position, results
of operations, cash flows, and changes in stockholders' equity of the Company or
its predecessors, as applicable, as of and at the dates indicated and for the
periods specified. Such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, and comply with Regulation S-X of the
Securities Act Regulations.
(o) There are no holders of securities of the Company who, by reason of the
execution by the Company of this Agreement or the consummation by the Company or
the Selling Stockholder of the transactions contemplated hereby, have the right
to request or demand that the Company register under the Securities Act or
analogous foreign laws and regulations securities held by them, other than such
that have been duly exercised or waived.
(p) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, (i) an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), or be subject to
----------------------
registration under the Investment Company Act, or (ii) a "holding company" or a
"subsidiary company" or an "affiliate" of a holding company within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
(q) The Common Stock is registered (including the Shares to be sold by the
Selling Stockholder hereunder) pursuant to Section 12(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and is listed for
------------
quotation on the American Stock Exchange, and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
American Stock Exchange, nor has the Company received any notification that the
Commission or the American Stock Exchange is contemplating terminating such
registration or listing.
6
<PAGE>
(r) The Company has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby.
(s) The Company is not (i) in violation of its Restated Certificate of
Incorporation or By-Laws, (ii) in breach or default (nor does any condition
exist that, with notice, the passage of time or both, would constitute a breach
or default) in the performance of any obligation, agreement or condition
contained in any bond, debenture, note, indenture, mortgage, deed of trust or
other agreement or instrument to which it is a party or by which it is bound or
to which any of its properties is subject, or (iii) in violation, in any
material respect, of any local, state or federal law, statute, ordinance, rule,
regulation, requirement, judgment or court decree applicable to the Company or
any of its subsidiaries or any of their respective assets or properties (whether
owned or leased).
(t) No action has been taken and no statute, rule, regulation or order has
been enacted, adopted or issued by any governmental agency that prevents the
sale of the Shares or prevents or suspends the use of the Prospectus; no
injunction, restraining order or order of any kind by a federal or state court
of competent jurisdiction has been issued that prevents or suspends the sale of
the Shares in any jurisdiction or that could adversely affect the consummation
of the transactions contemplated by this Agreement or the Prospectus; and every
request of any securities authority or agency of any jurisdiction for additional
information has been complied with in all material respects.
(u) There is (i) no significant unfair labor practice complaint pending
against the Company nor, to the best knowledge of the Company, threatened
against it, before the National Labor Relations Board, any state or local labor
relations board or any foreign labor relations board, and no significant
grievance or significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company or, to the
best knowledge of the Company, threatened against it, (ii) no strike, labor
dispute, slowdown or stoppage pending against the Company or, to the best
knowledge of the Company, threatened against it and (iii) to the best knowledge
of the Company, no union representation question existing with respect to the
employees of the Company. To the best knowledge of the Company, no collective
bargaining organizing activities are taking place with respect to the Company.
The Company has not violated, in any material respect, (A) any federal, state or
local law or foreign law relating to discrimination in hiring, promotion or pay
of employees, (B) any applicable wage or hour laws or (C) any provision of the
Employee Retirement Income Security Act of 1974, as amended, and the regulations
and published interpretations thereunder (collectively, "ERISA").
-----
(v) The Company is not in violation of any federal or state law or
regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials ("Environmental
-------------
Laws") and, to the best knowledge of the Company, the Company has received all
permits, licenses and other approvals required of it under applicable federal
and state occupational safety and health and environmental laws and regulations
to conduct its business, and the Company is in compliance with all terms and
conditions of any such permit, license or approval, except any such violation of
law or regulation, failure to receive required permits, licenses or other
7
<PAGE>
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals which would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect. There has been no
storage, disposal, generation, transportation, handling or treatment of
hazardous substances or solid wastes by the Company (or to the knowledge of the
Company any of its predecessors in interest) at, upon or from any of the
property now or previously owned or leased by the Company in violation of any
applicable law, ordinance, rule, regulation, order, judgment, decree or permit
which would require remedial action by the Company under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit except for those
which have already been remedied, have been provided for through escrow of a
portion of the acquisition consideration, have been assumed by a third party, or
which would not result in, or which would not be reasonably likely to result,
individually or in the aggregate, in a Material Adverse Effect. There has been
no spill, discharge, leak, emission, injection, escape, dumping or release of
any kind onto such property or into the environment surrounding such property of
any solid wastes or hazardous substances due to or caused by the Company, except
for any such spill, discharge, leak, emission, injection, escape, dumping or
release which has already been remedied, has been assumed by a third party, or
which would not result, or which would not be reasonably expected to result,
individually or in the aggregate, in a Material Adverse Effect. The terms
"hazardous substances" and "solid wastes" shall have the meanings set forth in
any currently applicable local, state, and federal laws or regulations with
respect to environmental protection.
(w) The Company has (i) good and marketable title in fee simple to all
items of real property and defensible title to all personal property owned by
it, free and clear of all security interests, liens, charges, encumbrances,
equities, restrictions, claims and other defects, except such as are described
in the Prospectus or as would not have a Material Adverse Effect, and (ii)
peaceful and undisturbed possession of its properties under all material leases
to which it is a party as lessee. The Company has good and defensible title (x)
to its oil and gas properties, including its wells and its leasehold interests
therein, and (y) to its net revenue interests therein in accordance with such
leases, free and clear of all security interests, liens, charges, encumbrances,
equities, restrictions, claims and other defects, except such as are described
in the Prospectus or as would not have a Material Adverse Effect. The working
interests in oil and gas leases held by the Company reflect in all material
respects the right of the Company to explore or receive production from such
underlying leases, and the care taken by the Company with respect to acquiring
or otherwise procuring such leases was generally consistent with standard
industry practices for acquiring or procuring such leases. All material leases
to which the Company is a party are valid and binding, and no default by the
Company has occurred and is continuing thereunder and, to the best knowledge of
the Company, no material defaults by the landlord are existing under any such
lease that could result in a Material Adverse Effect.
(x) Except as described in the Prospectus (i) all royalties, rentals,
deposits and other amounts due on the oil and gas properties of the Company have
been properly and timely paid, and no proceeds from the sale or production
attributable to the oil and gas properties of the Company are currently being
held in suspense by any purchaser thereof, and (ii) there are no claims under
take-or-pay contracts pursuant to which natural gas purchasers have any make-up
rights affecting the interests
8
<PAGE>
of the Company in its oil and gas properties.
(y) As of the date hereof, the aggregate undiscounted monetary liability
of the Company for oil or natural gas taken or received under any operating or
other agreement relating to its oil and gas properties that permits any person
to receive any portion of the interest of the Company in oil and natural gas or
to receive cash or other payments to balance any disproportionate allocation of
oil or natural gas could not have a Material Adverse Effect.
(z) The Company has (i) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and has made all
declarations and filings with, all federal, state and local authorities, all
self-regulatory authorities and all courts and other tribunals (each an
"Authorization") necessary to engage in the business conducted by it in the
- --------------
manner described in the Prospectus, except as described in the Prospectus or
where failure to hold such Authorizations would not, individually or in the
aggregate, have a Material Adverse Effect and (ii) no reason to believe that any
governmental body or agency is considering limiting, suspending or revoking any
such Authorization. Except where the failure to be in full force and effect
would not have a Material Adverse Effect, all such Authorizations are valid and
in full force and effect, and the Company is in compliance in all material
respects with the terms and conditions of all such Authorizations and with the
rules and regulations of the regulatory authorities having jurisdiction with
respect thereto.
(aa) Neither the Company nor, to the best knowledge of the Company, any of
its officers, directors, partners, employees, agents or affiliates or any other
person acting on behalf of the Company, has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, official or employee of
any governmental agency (domestic or foreign), instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is or may be in a position to help or
hinder the business of the Company (or assist the Company in connection with any
actual or proposed transaction), which (i) might subject the Company, or any
other individual or entity, to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (ii) if not given
in the past, might have had a Material Adverse Effect or (iii) if not continued
in the future, might have a Material Adverse Effect.
(bb) All material tax returns required to be filed by the Company in all
jurisdictions have been so filed. All taxes, including withholding taxes,
penalties and interest, assessments, fees and other charges due or claimed to be
due from such entities or that are due and payable have been paid, other than
those being contested in good faith through appropriate proceedings diligently
pursued and for which adequate reserves have been provided or those currently
payable without penalty or interest. To the knowledge of the Company, there are
no material proposed additional tax assessments against the Company or the
assets or property of the Company. The Company has made adequate (in the
opinion of the Company) charges, accruals and reserves in the applicable
financial statements included in the Prospectus in respect of all federal, state
and foreign income and franchise taxes for all periods presented therein as to
which the tax liability of the Company has not been finally
9
<PAGE>
determined.
(cc) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that: (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences thereto.
(dd) The Company maintains insurance covering its properties, operations,
personnel and businesses with institutions it believes to be financially
responsible. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the Company
and its business. The Company has not received notice from any insurer or agent
of such insurer that substantial capital improvements or other expenditures will
have to be made in order to continue such insurance. All such insurance is
outstanding and duly in force on the date hereof, subject only to changes made
in the ordinary course of business, consistent with past practice, which do not,
either individually or in the aggregate, materially alter the coverage
thereunder or the risks covered thereby. The Company has no reason to believe
that it will not be able (i) to renew its existing insurance coverage as and
when such policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business as now
conducted or as presently contemplated and at a cost that would not result in a
Material Adverse Effect.
(ee) The Company and any "employee benefit plan" (as defined under ERISA)
established or maintained by the Company or its "ERISA Affiliates" (as defined
below) are in compliance in all material respects with ERISA. "ERISA Affiliate"
---------------
means, with respect to the Company, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations thereunder
(the "Code") of which the Company is a member. No "reportable event" (as
----
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company
or any of its ERISA Affiliates. No "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates, if such "employee
benefit plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company nor any of its ERISA
Affiliates has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company or any of
its ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(ff) Subsequent to the respective dates as of which information is given in
the Prospectus and up to the Closing Date, except as set forth in the
Prospectus, (i) the Company has not incurred any liabilities or obligations,
direct or contingent, that are or will be material, either individually or
10
<PAGE>
in the aggregate, to the Company and its subsidiaries taken as a whole, nor
entered into any transaction not in the ordinary course of business, (ii) there
has not been, either individually or in the aggregate, any change or development
that could reasonably be expected to result in a Material Adverse Effect, (iii)
the Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock; and (iv) there has been no material change in the capital stock,
short-term debt or long-term debt of the Company, except in each case as
described in the Prospectus, or if the Prospectus is not in existence the most
recent Preliminary Prospectus.
(gg) Except pursuant to this Agreement, there are no contracts, agreements
or understandings between the Company, the Selling Stockholder or any other
person that would give rise to a valid claim against the Company, the Selling
Stockholder or the Agent for a brokerage commission, finder's fee or like
payment in connection with the sale of the Shares.
(hh) The statements (including the assumptions described therein) included
in the Prospectus (i) are within the coverage of Rule 175(b) under the
Securities Act to the extent such data constitute forward looking statements as
defined in Rule 175(c) and (ii) were made by the Company with a reasonable basis
and reflect the Company's good faith estimate of the matters described therein.
(ii) The Company has implemented Year 2000 compliance programs designed to
ensure that its computer systems and applications will function properly beyond
1999. The Company believes that adequate resources have been allocated for this
purpose and expects the Company's Year 2000 date programs to be completed on a
timely basis, except as could not have a Material Adverse Effect.
(jj) The Company does not have any debt securities or preferred stock which
is rated by any "nationally recognized statistical rating organization" as
defined for purposes of Rule 436(g) under the Securities Act.
(kk) The Company has the power to submit, and pursuant to this Agreement
has legally, validly, effectively and irrevocably submitted, to the jurisdiction
of any federal or state court in the State of New York, County of New York, and
has the power to designate, appoint and empower and pursuant to this Agreement
has legally, validly, effectively and irrevocably designated, appointed and
empowered an agent for service of process in any suit or proceeding based on or
arising under this Agreement in any federal or state court in the State of New
York, County of New York, as provided in Section 14 hereof.
(ll) Each certificate signed by any officer of the Company and delivered to
the Agent or counsel for the Agent pursuant to this Agreement shall be deemed to
be a representation and warranty by the Company to the Agent as to the matters
covered thereby.
11
<PAGE>
2. Representations and Warranties of the Selling Stockholder. The
---------------------------------------------------------
Selling Stockholder represents and warrants to, and agrees with, the Agent that:
(a) The Selling Stockholder is the lawful owner of the Shares to be sold by
the Selling Stockholder hereunder and the Selling Stockholder has good and
marketable title to such Shares, free and clear of all liens, encumbrances,
equities and claims whatsoever, except for the restrictions on transfer
referenced by the legends set forth on the certificates evidencing the Shares.
(b) The Selling Stockholder has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
(c) No consent, approval, authorization or order of any court or
governmental agency or body is required to be obtained or made by the Selling
Stockholder for the consummation by the Selling Stockholder of the transactions
contemplated herein, in connection with the sale of the Shares, except (i) such
as may be required as a result of the identity of the purchaser or purchasers of
the Shares, including filings required under Section 13 of the Exchange Act and
filings required under the Hart-Scott-Rodino Antitrust Improvement Act of 1978,
as amended (the "HSR Act"), (ii) such as may have been obtained under the
-------
Securities Act, (iii) such as may be required by the National Association of
Securities Dealers (the "NASD") and under the blue sky laws of any jurisdiction
----
in connection with the sale of the Shares by the Selling Stockholder, and (iv)
such other approvals may be required under state securities laws.
(d) Neither the sale of the Shares being sold by the Selling Stockholder
nor the consummation of any other of the transactions herein contemplated by the
Selling Stockholder or the fulfillment of the terms hereof by the Selling
Stockholder will conflict with, result in a breach or violation of, or
constitute a default under any law or the terms of any indenture or other
agreement or instrument to which the Selling Stockholder is a party or bound, or
any judgement, order or decree applicable to the Selling Stockholder of any
court, regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Selling Stockholder.
(e) This Agreement has been duly authorized, executed and delivered by or
on behalf of the Selling Stockholder and is a valid and binding agreement of the
Selling Stockholder, enforceable against the Selling Stockholder in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
(f) Any certificate signed by the Selling Stockholder and delivered to the
Agent or counsel for the Agent in connection with the Offering shall be deemed a
representation and warranty by the Selling Stockholder, as to matters covered
thereby, to the Agent.
12
<PAGE>
(g) The information in the Prospectus under the caption "Selling
Stockholders," which specifically relates to such Selling Stockholder
(consisting of such Selling Stockholder's name and number of shares of Common
Stock beneficially owned by such Selling Stockholder both before and after the
offering contemplated hereby), will not on the date of the execution of this
Agreement or on any Closing Date, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(h) Upon sale, delivery of and payment for the Shares to be sold by such
Selling Stockholder pursuant to this Agreement, and the removal by the Company
and its transfer Agent of the restrictions on transfer referenced by the legends
on the certificates evidencing such Shares, the Selling Stockholder shall have
transferred such Shares, free and clear of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever, other than any
such restriction on transfer, lien, encumbrance, security interest, equity or
claim created by this Agreement, the Agent or any purchaser of such Shares or
resulting from any actions taken by the Agent or any such purchaser of the
Shares.
The Company and the Selling Stockholder acknowledge that the Agent and, for
purposes of the opinions to be delivered to the Agent pursuant to Sections 8(b)
-------------
and 8(c) hereof, counsel to the Company, counsel to the Selling Stockholder and
----
counsel to the Agent, will rely upon the accuracy and truth of the foregoing
representations as to matters of fact and hereby consent to such reliance.
3. Appointment; Basic Terms; Compensation; Purchase, Sale and Delivery
-------------------------------------------------------------------
of the Shares.
-------------
(a) The Agent is hereby appointed as the exclusive agent for the Selling
Stockholder during the Offering Period (as hereinafter defined) for the purpose
of finding purchasers for the Shares.
(b) The Offering shall commence on the date hereof, and shall continue
until December 31, 2000 (the "Offering Period"), subject to prior termination at
---------------
any time by the Selling Stockholder or the Agent. Any termination of the
Offering Period hereunder shall be effective on not less than three (3) business
days' written notice to the other parties to this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, but subject to the terms and conditions herein set forth, the Agent
confirms its acceptance of such appointment and agrees, on the terms and
conditions herein set forth, to use its reasonable best efforts, in accordance
with its customary practice, during the Offering Period to find prospective
purchasers of the Shares. The Selling Stockholder expressly acknowledges and
agrees that the Agent's obligations hereunder are on a reasonable best efforts
basis only and that the execution of this Agreement does not in any way
constitute a commitment by the Agent to purchase the Shares and does not ensure
the successful sale of the Shares or any portion thereof. The Agent shall have
the right to appoint one or more additional agents and/or selected dealers (who
shall be members of the NASD) to assist in finding purchasers for the Shares,
and any such additional agents or selected
13
<PAGE>
dealers may rely upon the representations and warranties and covenants of the
Company and the Selling Stockholder set forth in this Agreement.
(d) The procedure for executing sales of the Shares in the Offering shall
be as follows:
(i) The Agent shall from time to time notify the Selling Stockholder
by telephone as, if and when the Agent identifies a prospective purchaser or
purchasers for all or a portion of the Shares (in each case, a "Block of
--------
Shares"), specifying in each case the number of Shares constituting such Block
of Shares and the price per Share for such Block of Shares that such purchaser
or purchasers may be willing to pay and any other conditions relevant to the
interest of such purchaser or purchasers therein.
(ii) Upon receipt of such telephonic notice from the Agent, the
Selling Stockholder shall promptly advise the Agent whether or not the price and
other conditions (if any) included in such notice are acceptable to the Selling
Stockholder. In the event that the price and other conditions (if any) included
in such notice are acceptable to the Selling Stockholder, the Selling
Stockholder and the Agent (or such purchaser or purchasers, acting through the
Agent) will execute corresponding sale and purchase transactions in the Shares.
None of the Selling Stockholder, the Agent or any purchaser shall be obligated
on any sale of purchase of the Shares except pursuant to a transaction executed
in accordance with the foregoing. The Agent shall have no liability or
obligation to the Selling Stockholder with respect to any transaction executed
by the Selling Stockholder directly with a purchaser, except under Sections 9
and 10 hereof. All transactions in the Shares hereunder will clear and settle
through the Agent or its affiliate, Bear Stearns Securities Corp.("BSSC").
----
(iii) The Company will pay all applicable state transfer taxes, if
any, involved in the transfer of any Shares to be purchased from the Selling
Stockholder and the Agent will pay any additional stock transfer taxes involved
in further transfers.
(e) The Selling Stockholder shall pay the Agent a 4% commission on the
gross proceeds of each sale of Shares in the Offering.
(f) The Agent's appointment and agency under this Agreement, shall begin as
of the date hereof and continue through and including the earlier of (i) the
final Closing (as such term is defined below) or (ii) upon the expiration or
termination of the Offering Period (the date on which such agency is terminated
being hereinafter referred to as the "Offering Termination Date"); provided,
-------------------------
however, that termination of the Offering Period shall not affect (x) the terms
and conditions of this Agreement as they apply to any sale or purchase of the
Shares previously executed pursuant to Section 3(d) hereof or (y) the provisions
of Sections 1, 7 and 9 through 17 of this Agreement, all of which shall continue
in effect after such Offering Termination Date. Subject to the foregoing, upon
the Offering Termination Date, the agency created by this Agreement shall
terminate.
(g) With respect to each sale of Shares executed by the Selling Stockholder
and the Agent or any purchaser pursuant to Section 3(d):
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(i) The Selling Stockholder hereby irrevocably constitutes and
appoints each of Stephen M. Parish, Wayne Stoltenberg, Gary Munowitz and any
other duly authorized officers of Bear, Stearns & Co. Inc. each with full power
and authority to act alone in any matter hereunder and with full power of
substitution, the true and lawful attorneys-in-fact of the Selling Stockholder
(individually an "Attorney" and collectively the "Attorneys"), with full power
-------- ---------
and authority in the name of, for and on behalf of, the Selling Stockholder with
respect to all matters arising in connection with the sale of the Shares by the
Selling Stockholder including, but not limited to, the power and authority on
behalf of the Selling Stockholder to take any and all of the following actions:
(A) To sell, assign, transfer and deliver to the purchaser(s) thereof
such Shares, (whether as one Block of Shares or as more than one Block of
Shares), such Shares to be represented by certificate(s) deposited by the
Selling Stockholder with BSSC, as custodian, at the purchase price per Share
agreed upon for the sale, after deducting all selling commissions and other
amounts payable by the Selling Stockholder hereunder;
(B) To instruct BSSC on all matters pertaining to the sale of the
Shares and the delivery of certificates therefor, including: (i) the transfer of
the Shares on the books of the Company in order to effect the sale of the Shares
(including designating the name or names in which new certificate(s) for Shares
are to be issued and the denominations thereof), (ii) the delivery to or for the
account of the purchaser(s) of the certificate(s) for the Shares against receipt
by BSSC of the purchase price to be paid therefor, (iii) the payment, out of the
proceeds (net of commissions) from the sale of the Shares, of any expense
incurred by the Selling Stockholder hereunder and any transfer taxes payable in
connection with the transfer of the Shares ("Transfer Taxes") and (iv) the
--------------
transmission to the Selling Stockholder of the proceeds, if any, from the sale
of the Shares (after deducting all selling commissions and other amounts payable
by the Selling Stockholder and the return to the Selling Stockholder, of new
certificate(s) representing the excess, if any, of the number of Shares
represented by certificate(s) deposited with BSSC over the number of Shares
sold.
(C) To incur or authorize the incurrence of any necessary or
appropriate expense in connection with the sale of the Shares and to determine
the amount of any Transfer Taxes payable in connection with the transfer of the
Shares;
(D) To make, execute, acknowledge and deliver all such other
contracts, stock powers, orders, receipts, notices, instructions, certificates,
letters and other writings, including, without limitation, communications with
the Commission, state securities commissions and the NASD, and in general to do
all things and to take all actions which the Attorneys, in their sole
discretion, may consider necessary or desirable in connection with the sale of
Shares, as fully as could the Selling Stockholder if present and acting;
(E) If necessary, to endorse (in blank or otherwise) on behalf of the
Selling Stockholder the certificate(s) representing the Shares, or a stock power
or powers attached to such
15
<PAGE>
certificate(s); and
(F) To sign such other certificates, documents and agreements and take
any and all other actions as the Attorneys may deem necessary or desirable in
connection with the consummation of the transactions contemplated by the this
Agreement.
(ii) Each Attorney may act alone in exercising the rights and powers
conferred on the Attorneys in this Power of Attorney, and the act of any
Attorney shall be the act of the Attorneys. Each Attorney is hereby empowered
to determine in his or her sole discretion the time or times when, the purpose
for and the manner in which any power herein conferred upon him or her shall be
exercised, and the conditions, provisions or covenants of any instrument or
document which may be executed by him or her pursuant hereto.
(iii) The Selling Stockholder agrees, if so requested, to provide
such other documentation as the Attorneys, the Company, the Agent or any of
their respective counsel may reasonably request to effectuate any of the
provisions hereof, all of the foregoing to be in form and substance reasonably
satisfactory in all respects to the party requesting such documentation.
(iv) This power of attorney and all authority conferred hereby are
granted and conferred subject to and in consideration of the interests of the
Attorneys, the Agent, the Company and the other Selling Stockholders in the
Offering, and for the purposes of completing the transactions contemplated by
this Agreement.
(v) This power of attorney is an agency coupled with an interest and
all authority conferred hereby shall be irrevocable and shall not be withdrawn
or terminated by any act of the Selling Stockholder or by operation of law, or
by the occurrence of any other event or events (including, without limitation,
the merger, consolidation, dissolution or liquidation of any corporation or
partnership) (any of the foregoing being hereinafter referred to as an "Event").
-----
If an Event shall occur after the sale of a Block of Shares is approved by the
Selling Stockholder pursuant to Section 3(d)(ii) but before completion of such
sale, then certificate(s) representing the Shares will be delivered to the Agent
by or on behalf of the Selling Stockholder in accordance with the terms and
conditions of this Agreement and any actions taken hereunder by the Attorneys
shall be as valid as if such Event had not occurred regardless of whether or not
the BSSC, the Attorneys, the Agent, or any one of them, shall have received
notice of such Event.
(h) With respect to each sale of Shares executed by the Selling
Stockholder, the Agent and any purchaser pursuant to Section 3(d), the Selling
Stockholder irrevocably authorizes and directs BSSC, as custodian, (i) to take
all necessary action to cause the Shares to be transferred on the books of the
Company into such names as the Agent shall have instructed, including
surrendering the certificate(s) representing the Shares to the transfer agent
for the Common Stock for cancellation, in exchange for new certificate(s) for
shares of Common Stock registered in such names and in such denominations as the
Agent shall have instructed, (ii) to deliver such new certificate(s) to the
Agent for the account of the purchaser(s) thereof, against payment for such
Shares at the purchase price per
16
<PAGE>
Share specified in accordance with this Agreement and to give receipt for such
payment, (iii) to deposit the same to the Selling Stockholder's account with
BSSC and draw upon such account to pay such Transfer Taxes as BSSC may be
instructed to pay by the Agent, and (iv) to hold for the account of the Selling
Stockholder, on the terms and conditions applicable to the Selling Stockholder's
account with BSSC, the excess, if any, of the amount received by BSSC as payment
for the Shares over the Transfer Taxes, if any.
(i) Notwithstanding anything to the contrary contained herein, the
Selling Stockholder may sell Shares to the Company, and the Company may purchase
Shares directly from the Selling Stockholder, in which case such Shares shall
not be subject to this Agreement, other than the provision for payment of
certain fees and expenses as set forth below, and no commissions shall be due
hereunder on the sale of such Shares by the Selling Stockholder to the Company;
provided, however, that the Selling Stockholder agrees that it shall pay BSSC or
the Agent, as applicable, usual and customary trading fees and expenses relating
to the transfer of such Shares.
4. Closing. A closing ("Closing") for the sale of Shares purchased in the
------- -------
Offering may be held on one or more occasions prior to the end of the Offering
Period. At each such Closing, payment of the proceeds of the Offering shall be
made by certified or bank check(s) or by wire transfer to the order of the
Selling Stockholder. The Agent may deduct its commissions and any other amounts
payable to the Agent by the Selling Stockholder from the net proceeds
deliverable to the Selling Stockholder.
5. Covenants of the Company. The Company covenants and agrees with the
------------------------
Agent that:
(a) (i) If the Registration Statement has not yet been declared effective
on the date of this Agreement, the Company will use its best efforts to cause
the Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the Prospectus
is otherwise required under Rule 424(b) or Rule 434, the Company will file the
Prospectus (properly completed if Rule 430A has been used) pursuant to Rule
424(b) or Rule 434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to rely on
Rule 434, the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.
(ii) The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto become effective, (ii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iii) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to the
Registration Statement or the Prospectus, (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the threatening,
of any proceedings therefor, (v) of the receipt of any comments from the
Commission and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening
17
<PAGE>
of any proceeding for that purpose. If the Commission shall propose or enter a
stop order at any time, the Company will use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain the lifting of such
order as soon as possible. The Company will not file any amendment to the
Registration Statement or any amendment of or supplement to the Prospectus
(including the prospectus required to be filed pursuant to Rule 424(b)or Rule
434) that differs from the prospectus on file at the time of the effectiveness
of the Registration Statement before or after the effective date of the
Registration Statement to which you shall reasonably object in writing after
being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is required to
be delivered under the Securities Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Agent or the Company, include an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the
Securities Act or the Securities Act Regulations, the Company will notify you
promptly and prepare and file with the Commission an appropriate amendment or
supplement (in form and substance satisfactory to you) which will correct such
statement or omission and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two signed copies of the
Registration Statement, including exhibits and all amendments thereto, and the
Company will promptly deliver to each of the Agent such number of copies of any
preliminary prospectus, the Prospectus, the Registration Statement, and all
amendments of and supplements to such documents, if any, as you may reasonably
request.
(d) The Company will endeavor in good faith, in cooperation with you, at or
prior to the time of effectiveness of the Registration Statement, to qualify, if
necessary, the Shares for offering and sale under the securities laws relating
to the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Securities Act Regulations) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement.
(f) Other than the Company's issuance of Common Stock, (i) pursuant to any
existing employee benefit plans, (ii) upon the exercise, conversion or exchange
of any currently outstanding
18
<PAGE>
stock options or warrants, (iii) in exchange for shares of MGV Energy, Inc.
currently held by minority shareholders thereof, or (iv) in a transaction
described in Rule 145(a)(2) or (3) promulgated under the Securities Act which is
exempt from registration under the Securities Act, during the period of 90 days
from the date hereof, the Company will not, and will not permit any of its
affiliates, directly or indirectly, to issue, sell, offer or agree to sell,
grant any option for the sale of, pledge, make any short sale or maintain any
short position, establish or maintain a "put equivalent position" (within the
meaning of Rule 16a-1(h) under the Exchange Act), enter into any swap,
derivative transaction or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock
(whether any such transaction is to be settled by delivery of Common Stock,
other securities, cash or other consideration) or otherwise dispose of, any
Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock) or any interest therein or announce any intention
to do any of the foregoing without the prior written consent of the Agent.
(g) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or any
national securities exchange.
6. Covenants of the Selling Stockholder. The Selling Stockholder
------------------------------------
covenants and agrees with the Agent that:
(a) The Selling Stockholder will not take any action designed to or which
has constituted or which might reasonably be expected to cause or result, under
the Exchange Act or otherwise, in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares.
(b) The Selling Stockholder will advise you promptly, and if requested by
you, will confirm such advice in writing, so long as delivery of a prospectus
relating to the Shares by an Agent or dealer may be required under the
Securities Act, of (i) any change in information in the Registration Statement
or the Prospectus relating to the Selling Stockholder, or (ii) any new material
information relating to the information stated in the Prospectus about the
Selling Stockholder which comes to the attention of the Selling Stockholder.
(c) The Selling Stockholder shall deposit the Shares in an account with
BSSC, as custodian, on or prior to the date hereof and, to the extent such
Shares have not previously been sold hereunder, shall maintain such Shares on
deposit in such account until the expiration of the Offering Period.
7. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholder hereunder, including
those in connection with (i) preparing, printing, duplicating, filing
19
<PAGE>
and distributing the Registration Statement, as originally filed and all
amendments thereof (including all exhibits thereto), any Preliminary Prospectus,
the Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's accountants and counsel), the
underwriting documents (including this Agreement) and all other documents
related to the public offering of the Shares (including those supplied to the
Agent in quantities as herein above stated), (ii) the transfer and delivery of
the Shares to the Agent, including any transfer or other taxes payable thereon
(iii) the qualification of the Shares under state or foreign securities or blue
sky laws, including the costs of printing and mailing a preliminary and final
"Blue Sky Survey" and the fees of counsel for the Agent and such counsel's
disbursements in relation thereto, (iv) filing fees of the Commission and the
NASD, and (v) the cost and charges of any transfer agent or registrar for the
Common Stock. Notwithstanding the foregoing, the Selling Stockholder agrees to
pay its portion of actual out of pocket costs incurred in filing of the
Registration Statement up to a maximum of $1,000 for registration and filing
fees and $4,500 for legal fees.
8. Conditions of Agent Obligations. The obligations of the Agent under
-------------------------------
Section 3 hereof shall be subject to the accuracy of the representations and
- ---------
warranties of the Company and the Selling Stockholder herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 8
"Closing Date" shall refer to the Closing Date for the Shares); to the absence
from any certificates, opinions, written statements or letters furnished to you
or to Jenkens & Gilchrist ("Agent's Counsel") pursuant to this Section 8 of any
misstatement or omission, to the performance by the Company or the Selling
Stockholder of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later than
5:30 p.m., New York time, on the date of this Agreement, or at such later time
and date as shall have been consented to in writing by you; if the Company shall
have elected to rely upon Rule 430A or Rule 434 of the Securities Act
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 5(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of Cantey &
Hanger, L.L.P., counsel for the Company, dated the Closing Date addressed to the
Agent and in form and substance satisfactory to Agent's Counsel, to the effect
that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of Delaware. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned, leased
or licensed) or the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good standing
which will not in the aggregate have a Material Adverse Effect. The Company has
all requisite corporate or similar
20
<PAGE>
authority to own, lease and license its
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus.
(ii) All of the outstanding shares of Common Stock (including the
Shares to be sold by the Selling Stockholder hereunder) are duly and validly
authorized and issued, are fully paid and nonassessable and were not issued in
violation of or subject to any preemptive rights, and no preemptive rights of
stockholders exist with respect to any of the Company=s Common Stock. The
Shares to be delivered by the Selling Stockholder on the Closing Date have been
duly and validly authorized, and are fully paid and nonassessable. The
certificates for the Common Stock are in due and proper form. The Common Stock
and the Shares conform to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(iii) The shares of Common Stock currently outstanding (including the
Shares to be sold by the Selling Stockholder hereunder) are listed on the
American Stock Exchange.
(iv) This Agreement has been duly and validly authorized, executed and
delivered by the Company.
(v) There is no litigation or governmental or other action, suit,
proceeding or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or business
of, the Company, which is of a character required to be disclosed in the
Registration Statement and the Prospectus which has not been properly disclosed
therein.
(vi) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the Company do not
and will not violate, conflict with or constitute a breach of any of the terms
and provisions of, or constitute a default (or an event which with notice or
lapse of time, or both, would constitute a default), or result in the creation
or imposition of any lien, charge or encumbrance upon any properties or assets
of the Company or result in any acceleration of any indebtedness of the Company
pursuant to (A) any bond, debenture, note, indenture, mortgage, deed of trust,
contract or other agreement known to such counsel to which the Company is a
party or by which the Company or its properties or assets are or may be bound
(B) any statute, rule or regulation applicable to the Company or any of its
properties or assets or (C) to the best knowledge of such counsel, any judgment,
order or decree of any court or governmental agency or authority having
jurisdiction over the Company or any of its properties or assets. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any governmental agency or authority having
jurisdiction over the Company or its properties or assets is required for the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, except for (1) such as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Agent (as to which such counsel need express
no opinion) and (2) such as have been made or obtained under the Securities Act.
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<PAGE>
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial statements
and other financial or statistical data included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Securities Act and the Securities Act Regulations.
(viii) The Registration Statement is effective under the Securities
Act, and, to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission and all filings required by Rule 424(b) of the
Securities Act Regulations have been made.
(ix) There are no holders of securities of the Company who, by reason
of the execution by the Company of this Agreement or the consummation by the
Company of the transactions contemplated hereby, have the right to request or
demand that the Company register under the Securities Act or analogous foreign
laws and regulations securities held by them, other than those such that have
been duly exercised or waived.
(x) The statements in the Prospectus which purport to summarize the
provisions of statutes, regulations, contracts, and other documents, insofar as
such statements constitute a summary of documents referred to therein or matters
of law, are, in all material respects, accurate summaries and fairly and
correctly present the information required to be shown with respect to such
matters and documents.
(xi) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or Prospectus which are not so filed or described as
required.
(xii) The Company has all approvals, licenses and permits required
to conduct its business lawfully, except where the failure to so possess would
not have a Material Adverse Effect.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Agent at which the contents of the Prospectus and related matters were
discussed and, no facts have come to the attention of such counsel which would
lead such counsel to believe that either the Registration Statement at the time
it became effective (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or
Rule 434, if applicable), or any amendment thereof made prior to the Closing
Date as of the date of such amendment, contained an untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the
22
<PAGE>
statements therein not misleading, or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of the
date of such amendment or supplement) and as of the Closing Date contained or
contains an untrue statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief or
opinion with respect to the financial statements and other financial or
statistical data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the federal laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to Agent's
Counsel) of other counsel reasonably acceptable to Agent's Counsel, familiar
with the applicable laws; (B) as to federal regulatory issues, on the opinion of
special regulatory counsel; (C) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company and its subsidiaries, provided that copies of any such statements
or certificates shall be delivered to Agent's Counsel. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is being relied upon and for what purpose.
(c) The Selling Stockholder shall have caused its counsel to have furnished
to the Agent its opinion dated the Closing Date and addressed to the Agent to
the effect that:
(i) The Selling Stockholder has full right, power and authority to
sell, assign, transfer and deliver the Shares delivered by the Selling
Stockholder hereunder, except for the restrictions on transfer referenced by the
legends set forth on the certificates evidencing such Shares.
(ii) No consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required to be obtained or made
by the Selling Stockholder for the consummation by the Selling Stockholder of
the transactions contemplated by this Agreement in connection with the sale of
the Shares except (i) such as may be required as a result of the identity of the
purchaser or purchasers of the Shares, including filings required under Section
13 of the Exchange Act and filings required under the HSR Act, (ii) such as may
have been obtained and made under the Securities Act, (iii) such as may be
required by the NASD and under the blue sky laws of any jurisdiction, in
connection with the sale of the Shares by the Selling Stockholder, and (iv) such
other approvals as may be required under state securities laws;
(iii) The execution, delivery and performance of this Agreement and
the consummation of the transactions therein and herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, (A) any statute, any rule, regulation or order of
any governmental agency or body applicable to the Selling Stockholder or any
court having jurisdiction over the Selling Stockholder or any of its properties
or (B) any agreement or instrument to which the Selling Stockholder is a party
or by which the Selling Stockholder is bound or to which any of the properties
of the Selling Stockholder is subject, which agreements or instruments have been
identified to such counsel by the Selling Stockholder as being material to the
Selling Stockholder, or (C) the constituent documents of the Selling
Stockholder; and
23
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(iv) This Agreement has been duly authorized, executed and delivered
by or on behalf of the Selling Stockholder.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the federal laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to Agent's
Counsel) of other counsel reasonably acceptable to Agent's Counsel, familiar
with the applicable laws; (B) as to federal regulatory issues, on the opinion of
special regulatory counsel; (C) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Selling Stockholder and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Selling Stockholder and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to Agent's
Counsel. The opinion of such counsel for the Selling Stockholder shall state
that the opinion of any such other counsel is being relied upon and for what
purpose.
(d) All proceedings taken in connection with the sale of the Shares as
herein contemplated shall be satisfactory in form and substance to you and to
Agent's Counsel, and the Agent shall have received from said Agent's Counsel a
favorable opinion, dated as of the Closing Date with respect to the sale of the
Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Agent's Counsel such documents as they request for the purpose of enabling them
to pass upon such matters.
(e) At the Closing Date you shall have received a certificate of the
President and Chief Operating Officer and the Executive Vice President and Chief
Financial Officer of the Company, dated the Closing Date, to the effect that (i)
the condition set forth in subsection (a) of this Section 8 has been satisfied,
(ii) as of the date hereof and as of the Closing Date the representations and
warranties of the Company set forth in Section 1 hereof are accurate, (iii) as
of the Closing Date the obligations of the Company to be performed hereunder on
or prior thereto have been duly performed and (iv) subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, the Company has not sustained any material loss or interference with
its business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material adverse
change, or any development involving a material adverse change, in the business,
prospects, properties, operations, condition (financial or otherwise), affairs
or management of the Company, except in each case as described in or
contemplated by the Prospectus.
(f) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter from Deloitte & Touche LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Agent and in form and
-----
substance satisfactory to you, stating that, among other things: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the
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Securities Act and the Securities Act Regulations and stating that the
information provided in response to Item 10 of the Registration Statement is
correct insofar as it relates to them, (ii) in their opinion, the financial
statements and schedules of the Company included in the Registration Statement
and the Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the applicable published rules and regulations of the Commission
thereunder, (iii) on the basis of procedures consisting of a reading of the
latest available unaudited interim financial statements of the Company, a
reading of the minutes of meetings and consents of the stockholders and Board of
Directors of the Company and the committees of such Board of Directors
subsequent to December 31, 1999, inquiries of officers and other employees of
the Company who have responsibility for financial and accounting matters of the
Company with respect to transactions and events subsequent to December 31, 1999,
a review of interim financial information in accordance with the standards
established by the American Institute of Certified Public Accountants in
Statement of Auditing Standards No. 71, Interim Financial Information with
respect to the nine month period ended September 30, 2000 and other specified
procedures and inquiries to a date not more than five days prior to the date of
such letter, nothing has come to their attention that would cause them to
believe that: (A) the unaudited financial statements and schedules of the
Company presented in the Registration Statement and the Prospectus, including
the quarterly information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations," do not comply as
to form in all material respects with the applicable accounting requirements of
the Securities Act and, if applicable, the Exchange Act and the applicable
published rules and regulations of the Commission thereunder or that such
unaudited consolidated financial statements are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus; (B) with respect to the period
subsequent to September 30, 2000, there were, as of the date of the most
recently available monthly consolidated financial statements of the Company, if
any, and as of a specified date not more than five days prior to the date of
such letter, any changes in the capital stock or long-term indebtedness of the
Company or any decrease in the net current assets or shareholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet presented in the Registration Statement and the Prospectus, except
for changes or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; (C)
that during the period from October 1, 2000 to the date of the most recent
available monthly financial statements of the Company, if any, and to a
specified date not more than five days prior to the date of such letter, there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or total or per share net income, except for decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; (D) the unaudited pro forma
income statements and balance sheets presented in the Registration Statement and
the Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and, if applicable, the
Exchange Act and the applicable published rules and regulations of the
Commission thereunder, that such unaudited pro forma income statements and
balance sheets are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement and the
Prospectus or that the pro forma
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<PAGE>
adjustments have not been properly applied to the historical amounts in the
compilation of those statements; or (E) any other unaudited pro forma income
statement data or balance sheet items included in the Registration Statement or
Prospectus do not agree with the corresponding amounts in the pro forma income
statements or balance sheets included in the Registration Statement and
Prospectus; and (iv) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings, and other financial information
pertaining to the Company set forth in the Registration Statement and the
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found them
to be in agreement.
(g) At the time this Agreement is executed and at the Closing Date, you
shall have received a letter from Weaver and Tidwell, L.L.P., independent
accountants for predecessor entities to the Company, including Mercury
Exploration Company and Michigan Gas Partners Limited Partnership and certain
acquired properties (collectively, the APredecessor Entities@), dated,
respectively, as of the date of this Agreement and as of the Closing Date
addressed to the Agent and in form and substance satisfactory to you, stating
that, among other things: (i) they are independent certified public accountants
with respect to the Predecessor Entities within the meaning of the Securities
Act and the Securities Act Regulations and stating that the information provided
in response to Item 10 of the Registration Statement is correct insofar as it
relates to them; (ii) in their opinion, the financial statements and schedules
of the Predecessor Entities included in the Registration Statement and the
Prospectus and covered by their opinion therein comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the applicable published rules and regulations of the Commission
thereunder; and (iii) they have compared specific dollar amounts, number of
shares, percentages of revenues and earnings, and other information pertaining
to the Predecessor Entities set forth in the Registration Statement and the
Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent such amounts, numbers, percentages and information may
be derived from the general accounting records of the Company or the Predecessor
Entities from schedules furnished by the Company, and excluding any questions
requiring an interpretation by legal counsel, and other appropriate procedures
specified by you set forth in such letter, and found them to be in agreement.
(h) The Selling Stockholder shall have furnished to the Agent a
certificate, signed by the Selling Stockholder, dated the Closing Date, to the
effect that the signer of such certificate has caused to be carefully examined
the portions of the Registration Statement, the Prospectus, any supplement to
the Prospectus and this Agreement that describe or pertain to the Selling
Stockholder and that the representations and warranties of the Selling
Stockholder in this Agreement are true and correct in all material respects on
and as of the Closing Date to the same effect as if made on the Closing Date.
(i) Prior to the Closing Date the Company and the Selling Stockholder shall
have furnished to you such further information, certificates and documents as
you may reasonably request.
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(j) You shall have received from Holditch a letter, dated as of the
Closing Date, addressed to the Agent and in form and substance satisfactory to
you, stating, among other things (i) they are independent petroleum engineers
with respect to the Company, and (ii) nothing has come to their attention that
would lead them to conclude that the Reserve Information referenced in the
Registration Statement or the Prospectus is inaccurate or incomplete in any
material respect.
If any of the conditions specified in this Section 8 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Agent's Counsel
pursuant to this Section 8 shall not be in all material respects reasonably
satisfactory in form and substance to you and to Agent's Counsel, all
obligations of the Agent hereunder may be canceled by you at, or at any time
prior to, the Closing Date. Notice of such cancellation shall be given to the
Company and the Selling Stockholder in writing, or by telephone, telex or
telegraph, confirmed in writing.
9. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Agent and each
person, if any, who controls the Agent within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), to which it may become subject under the Securities
Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims,
damages or expenses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement for the registration of the Shares, as
originally filed or any amendment thereof, or any related Preliminary Prospectus
or the Prospectus, or in any amendment thereof or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company will not be liable
in any such case to the extent but only to the extent that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Agent through you expressly for
use therein.
(b) The Selling Stockholder agrees to indemnify and hold harmless the Agent
and each person, if any, who controls the Agent within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or
27
<PAGE>
litigation), to which it may become subject under the Securities Act, the
Exchange Act or otherwise, that arise out of or are based upon the inclusion in
the Registration Statement, as originally filed or any amendment thereof, or any
related Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, of any untrue statement relating to the Selling Stockholder
or alleged untrue statement or any omission or alleged omission relating to the
Selling Stockholder made therein in reliance upon and in conformity with written
information furnished to the Company or the Agent by the Selling Stockholder
expressly for use therein. The Company and the Agent acknowledge that the
statements relating to the Selling Stockholder set forth under the caption
"Selling Stockholders" in the Prospectus constitute the only information
furnished in writing by or on behalf of the Selling Stockholder expressly for
use in the Registration Statement relating to the Shares as originally filed or
in any amendment thereof, any related Preliminary Prospectus or the Prospectus
or in any amendment thereof, any related Preliminary Prospectus or the
Prospectus or in any amendment thereof or supplement thereto, as the case may
be.
(c) The Agent agrees to indemnify and hold harmless the Company, each of
the directors of the Company, each of the officers of the Company who shall have
signed the Registration Statement and each other person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act and the Selling Stockholder, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), jointly or severally, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Agent through you
expressly for use therein; provided, however, that in no case shall the Agent be
liable or responsible for any amount in excess of the commission applicable to
the Shares sold by the Agent hereunder. This indemnity will be in addition to
any liability which the Agent may otherwise have, including under this
Agreement. The Company and the Selling Stockholder acknowledge that the
statements set forth under the caption "Sale of Shares" in the Prospectus
constitute the only information furnished in writing by or on behalf of the
Agent expressly for use in the Registration Statement relating to the Shares, as
originally filed or in any amendment thereof, any related Preliminary Prospectus
or the Prospectus or in any amendment thereof or supplement thereto, as the case
may be.
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(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 9, except to the extent such
failure prejudiced the indemnifying party). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
or claims that are the subject matter of such proceeding.
10. Contribution. In order to provide for contribution in circumstances
------------
in which the indemnification provided for in Section 9 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, then upon the occurrence of such
circumstance, the Company and the Selling Stockholder, on the one hand, and the
Agent, on the other hand, shall contribute to the aggregate losses, claims,
damages, liabilities and expenses of the nature contemplated by such
indemnification provision (including any investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Agent, who may
also be liable for contribution, including persons who control the Company
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company, the Selling
Stockholder and the Agent may be subject, in such proportions as is appropriate
to reflect the relative benefits received by the Company, the
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Selling Stockholder and the Agent from the Offering or, if such allocation is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company, the Selling Stockholder and the Agent in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Stockholder, on
the one hand, and the Agent, on the other hand, shall be deemed to be in the
same proportion as (x) the total proceeds from the Offering (net of commissions
but before deducting