-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B7w7hY0CYCOCPba0V3M8xsTeCgs+ktNaeAgTIjm2yAnTS+3OcJkZP7b66RtQthSp 4HG/mDpNLa+ioeTH2hV2QQ== 0000930661-99-002392.txt : 19991019 0000930661-99-002392.hdr.sgml : 19991019 ACCESSION NUMBER: 0000930661-99-002392 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19991018 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: S-1 SEC ACT: SEC FILE NUMBER: 333-89229 FILM NUMBER: 99730024 BUSINESS ADDRESS: STREET 1: 1619 PENNSYLVANIA AVE CITY: FORT WORTH STATE: TX ZIP: 76104 BUSINESS PHONE: 8178773151 MAIL ADDRESS: STREET 1: 1619 PENNSYLVANIA AVE CITY: FORT WORTH STATE: TX ZIP: 76104 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on October 18, 1999 Registration No. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- Quicksilver Resources Inc. (Exact name of registrant as specified in its charter)
Delaware 1311 75-2756163 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
1619 Pennsylvania Avenue Fort Worth, Texas 76104 (817) 877-3151 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Bill Lamkin Executive Vice President, Chief Financial Officer Quicksilver Resources Inc. 1619 Pennsylvania Avenue Fort Worth, Texas 76104 (817) 877-3151 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to:
Dean A. Tetirick, Esq. L. Steven Leshin, Esq. Cantey & Hanger, L.L.P. Jenkens & Gilchrist, P.C. 801 Cherry Street, Suite 2100 1445 Ross Avenue, Suite 3200 Fort Worth, Texas 76102 Dallas, Texas 75202 (817) 877-2800 (214) 855-4500
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Proposed Maximum Maximum Offering Aggregate Amount of Title of Each Class of Securities Amount to be Price Per Offering Registration to be Registered Registered (1) Share (2) Price (2) Fee - --------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share.... 8,050,000 $6.3125 $50,815,625 $14,126.74 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
(1) Includes 1,050,000 shares which the underwriters have an option to purchase to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) on the basis of the high and low prices of common stock reported on the American Stock Exchange on October 13, 1999. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 18, 1999 PROSPECTUS 7,000,000 Shares [Logo] Quicksilver Resources Inc. Common Stock ------------ We are offering for sale 7,000,000 shares of common stock of Quicksilver Resources Inc. All of the shares are being sold by us. Our common stock is traded on the American Stock Exchange under the symbol "KWK". On October 13, 1999, the last reported sales price of our common stock on the American Stock Exchange was $6.375 per share. We are an independent energy company engaged in the acquisition, development, exploration, production and sale of natural gas and crude oil and the gathering, processing and transmission of natural gas. Our producing properties are principally in the states of Michigan, Wyoming and Montana. See "Risk Factors" beginning on page 9 to read about some of the risks that you should consider before buying shares of our common stock. Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------
Per Share Total --------- ----- Public offering price........................................... $ $ Underwriting discounts and commissions.......................... $ $ Proceeds, before expenses, to us................................ $ $
------------ The underwriters may also purchase up to an additional 1,050,000 shares of our common stock from us at the public offering price less the underwriting discount. The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares to purchasers on , 1999. ------------ Bear, Stearns & Co. Inc. Dain Rauscher Wessels a division of Dain Rauscher Incorporated Morgan Keegan & Company, Inc. The date of this prospectus is October , 1999. [Maps of Michigan, Wyoming and Montana will be shown here, in each case depicting our reserves, present value of cash flows from estimated proved reserves, acreage and well data.] TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 9 Forward-Looking Statements............................................... 17 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Price Range of Common Stock.............................................. 19 Capitalization........................................................... 20 Selected Historical and Pro Forma Consolidated Financial Data............ 21 Selected Historical Financial Data of Predecessors....................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 25 Business and Properties.................................................. 32 Management............................................................... 42 Certain Transactions..................................................... 46 Security Ownership of Management and Certain Beneficial Holders.......... 49 Description of Capital Stock............................................. 51 Underwriting............................................................. 55 Legal Matters............................................................ 57 Experts.................................................................. 57 Where You Can Find More Information...................................... 57 Glossary of Oil and Gas Terms............................................ 59 Index to Financial Statements............................................ F-1 Report of Independent Petroleum Engineers................................ A-1
---------------- In this prospectus, the terms "Quicksilver," "we," "our," and "us" refer to Quicksilver Resources Inc. and, where appropriate, to our predecessors: Mercury Exploration Company; Quicksilver Energy, L.C.; Michigan Gas Partners Limited Partnership; and MSR Exploration Ltd. The term "you" refers to a prospective investor. We have included definitions of technical terms important to an understanding of our business under "Glossary of Oil and Gas Terms" on page 59. You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this prospectus may only be accurate on the date of this prospectus. i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in the common stock offered through this prospectus. You should read the entire prospectus carefully, especially the risks of investing in the common stock discussed under "Risk Factors". Quicksilver Resources Inc. We are an independent energy company engaged in the acquisition, development, exploration, production and sale of natural gas and crude oil and the gathering, processing and transmission of natural gas. Our producing properties are located principally in the states of Michigan, where we are the largest independent natural gas producer, Wyoming and Montana. We acquired our first properties in Canada in August 1999. Over the past four years, we have significantly increased our proved reserves and production. We have accomplished this growth primarily through the acquisition of reserves in well- established producing areas followed by aggressive exploitation and development drilling and the purchase of additional interests in those or nearby similar properties. Our properties are located in well-established producing areas that have long productive histories and typically exhibit low annual decline rates. We have established a high quality reserve base that is primarily located in Michigan and the Rocky Mountain states of Montana and Wyoming. As of September 1, 1999, we had proved reserves of 364 Bcfe, of which approximately 58% were natural gas and 42% were crude oil and condensate, with an estimated PV-10 value of $348.6 million. The average prices used in this calculation were $2.75 per Mcf of gas and $19.32 per barrel of oil, which takes into account all applicable hedging arrangements and basis and quality differentials. Approximately 66% of our proved reserve volumes are classified as proved developed and we are the operator of the proved reserves that constitute approximately 92% of our PV-10 value. Our production for the twelve months ended June 30, 1999, on a pro forma basis, was 19.8 Bcfe, assuming the acquisition of producing properties from Unocal on May 17, 1999 had occurred as of January 1, 1999. Approximately 84% of this production was natural gas. Based on our proved reserves as of September 1, 1999, we had a reserve life of 18.4 years. As of September 1, 1999, we had interests in 1,623 gross (769 net) producing wells and were the operator of approximately 69% of the gross wells. No individual well accounts for a significant amount of our production. Since 1995, we have experienced significant growth in reserves and production and achieved high drilling success rates. We have increased our reserves by 139% from 152 Bcfe on December 31, 1995 to 364 Bcfe as of September 1, 1999, and we have done this at an average acquisition, development and finding cost of $0.62 per Mcfe. In 1998, we have replaced 154% of our production through extensions and discoveries at an average cost of $0.32 per Mcfe. Average daily production has increased by 202% from 17.5 Mmcfe in 1996 to 52.9 Mmcfe in 1999. Our average daily production for August 1999 was approximately 60.0 Mmcfe. Since 1996, we have participated in the drilling of 132 gross (61 net) wells and have achieved a success rate of 98%. Since 1996, 86% of our drilling has been classified as development and 14% has been classified as exploratory. The following table sets forth the total amount we spent to acquire and develop our proved reserves and the amount of such reserves on an Mcfe basis, from October 1995 to September 1, 1999:
Average Cost Costs Mmcfe Per Mcfe -------------- -------------- ------------ (in thousands) (in thousands) Acquisition of producing properties................... $146,730 353,114 $0.42 Exploration and development of properties................... 16,160 49,799 0.32 -------- ------- Total....................... $162,890 402,913 $0.40 ======== ======= =====
1 We were formed in December 1997 for the purpose of combining natural gas and crude oil properties owned by Mercury Exploration Company, Quicksilver Energy, L.C., referred to in this prospectus as QELC, and Michigan Gas Partners Limited Partnership. Effective January 1, 1998, Michigan Gas Partners was merged into us and assets and liabilities of Mercury and QELC were transferred to and assumed by us. Later, in March 1999, we became the surviving company in a merger with MSR, a publicly-traded company. Although we are a new company, we, through our principal predecessor, Mercury, have operated in the oil and gas industry since 1963. Our Strengths We believe that our historical success and future prospects are directly related to our unique combination of strengths, including the following: High Quality Property Base. Approximately 80% of our production revenue results from the sale of natural gas, and our properties are characterized by long reserve lives and predictable well production profiles. Based on current production from 769 net producing wells, the average reserve-to-production index, determined by dividing our proved reserves by our annual production, for our proved reserves at September 1, 1999 was 18.4 years. In general, these properties have extensive production histories and still contain significant reserves and production enhancement opportunities. We are principally engaged in activities in two core areas and the producing fields within these areas are in close proximity to each other, allowing for substantial economies of scale in production and cost-effective application of advanced reservoir management techniques. Our natural gas is primarily produced and sold in Michigan, which imports approximately 75% of its gas supply and has prices slightly higher than standard industry benchmarks. Significant Inventory of Exploitation and Development Opportunities. We have generated an inventory of approximately 1,035 potential drilling locations within our existing properties, of which 590 have been classified as proved undeveloped locations. In addition, we have over 260 recompletion and workover opportunities within our existing property base. This inventory should continue to support future net reserve additions and production growth over the next several years. Experience and Success with Acquisition and Exploitation. We employ a disciplined acquisition program to augment our core properties and expand our reserve base. Our engineering and geoscience professionals use their expertise and experience, gained through the management of existing core properties, to target acquisition opportunities in the same geographic area or in areas with similar geological and reservoir characteristics. Following an acquisition, these professionals implement development programs to enhance production, increase revenues and reduce costs. Experienced Technical Team. We have greater technical expertise than most independent companies our size. Our technical team has a significant number of engineering and geo-science professionals who have held very senior positions with major oil and gas exploration and production companies. Among others, our team includes: the former Chief Petrophysical Engineer in Shell's corporate headquarters, who was formerly the president of the Society of Professional Engineers; one of Shell's former senior engineers, who was responsible for most of Shell's western U.S. thermal recovery projects and also designed and implemented the world's largest enhanced oil recovery project; and one of Shell's former senior geologists, who was responsible for much of Shell's technical reservoir and geological engineering training provided to Shell's technical professionals. Others on our team are senior geologists and senior engineers from larger independent oil and gas companies, and they have spent years working the areas on which we focus. We have achieved success in the areas in which we operate because of the depth of our technical team and their high levels of experience. 2 Operational Control. We believe that controlling the operations of our properties, including facilities related to gathering, transportation, processing and marketing, is critical to our success in acquiring and exploiting producing properties. As of September 1, 1999, we were the operator of properties representing approximately 92% of the PV-10 value from our estimated proved reserves. Control over operations provides several advantages that enhance our ability to increase the value of our property base. Operational control allows us to have greater control over the timing, scope and level of expenditures associated with exploitation and development drilling activities and other field operations. Given the level of expertise our technical team has with our property base, we believe we are able to conduct these activities in a cost-effective manner, lowering our overall finding, development and operating costs. In particular, our significant operational control over gathering, transportation, processing and marketing facilities associated with our Michigan properties allows us to lower operating costs and increase the net price received for our production. Our Strategy Our business strategy focuses on growth in value per share through development of our existing property base, the selective acquisition of high- quality, long-lived producing properties, managing our exposure to commodity price volatility, reducing operating costs, improving efficiency and increasing production and reserves. Exploit Existing Property Base. A principal component of our strategy is the increase of production and reserves through aggressive management of operations and low-risk development drilling. Our principal properties possess geological and reservoir characteristics that make them well-suited for production increases through exploitation activity and development drilling. We regularly review operations and mechanical data on operated properties to determine if actions can be taken to reduce operating costs or increase production. These actions include installing, repairing and upgrading lifting equipment, redesigning equipment to improve production from different zones, modifying gathering and other surface facilities and conducting restimulations and recompletions. Pursue Complementary Acquisitions. We seek 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 more efficient field operations. While we are continually evaluating opportunities to acquire properties in or near our existing core areas in Michigan, Wyoming and Montana, we also evaluate acquisitions outside our existing core areas that possess the characteristics to become a new core area. We target acreage that would expose us to high potential prospects located in areas that are geologically similar to neighboring areas with large developed fields. While we believe that many of the well-established North American producing basins possess such opportunities, we seek properties in areas that provide the potential to establish meaningful reserves and production. In addition, we believe that larger oil and gas companies will continue to sell domestic onshore properties and that this will present opportunities for us to grow our reserves and production on a cost-effective basis. Manage Commodity Price Risk. To help ensure a level of predictability in the prices received for our product and, therefore, the resulting cash flow, we have natural gas sales contracts, of up to 10 years in length, and financial hedges in place for approximately 70% of our production volumes of natural gas and crude oil. Our strategy is to seek arrangements that provide a guaranteed minimum price that assures acceptable rates of return on that portion of our production committed under those contracts. As incremental production is added or contracts or financial instruments expire, we will continue to enter into similar contracts for up to 70% of our production, when favorable terms are available. We believe our commodity risk management strategy helps to ensure a base level of cash flow to execute our drilling and exploitation program, meet our debt service requirements, and pursue acquisition opportunities, even in times of weakness in the prices of natural gas and crude oil. 3 Participate in Exploration Activities. We will continue to focus the bulk of our activities on lower risk exploitation activity and development drilling. However, we may allocate up to 10% of our future capital budgets to exploration projects. We have a significant inventory of exploration projects and over 100,000 net undeveloped acres. Some of this acreage overlays coal deposits that we believe are possible prospects for coal bed methane gas development, which is extensive in surrounding areas with similar coal deposits. We are particularly interested in exploration activity that has the ability to create a sizable amount of follow-on development drilling and exploitation activity, such as the development of coal bed methane reserves, to which our technical and operational expertise is well suited. Since we have already established the acreage position, we intend to involve industry partners in the initial capital intensive higher risk phases of the exploration activity, while maintaining our ability to participate in any subsequent lower risk development and exploitation activities. Recent Developments MSR Merger. In early 1999, our stockholders approved our merger with MSR. The merger was completed on March 4, 1999. As a result of the merger, we acquired all of MSR's interests in oil and gas mineral leases, gas gathering pipeline systems and producing wells located principally in the states of Montana and Texas. MSR's Montana properties acquired in the merger fit strategically with some of our adjoining properties. Reliant Energy Agreement. In May 1999, Reliant Energy Services, Inc., the wholesale trading and marketing organization of the Reliant Energy Wholesale Group, entered into a long-term agreement to purchase natural gas from us. Reliant is a large, investment grade transporter and marketer of energy products. Terms of the agreement call for us to supply 25,000 Mmbtu of natural gas per day at $2.49 per Mmbtu, or 91 billion Btu of gas over a 10-year period. Approximately two-thirds of these volumes will be our production with the balance supplied by third parties. This contract provides a predictable revenue stream for a portion of our natural gas production and access to additional markets for our natural gas. Unocal Acquisition. On May 17, 1999, we completed a purchase from Unocal Corporation's Spirit Energy 76 unit of substantially all of Unocal's natural gas and crude oil assets in Michigan. The assets purchased, consisting of ownership interests in the Garfield Unit and the Beaver Creek Unit, include approximately 20,000 net leasehold acres and about 13.0 Mmcfe per day of production. As a result of the acquisition, we increased our ownership in fields we already controlled, obtained assets which complemented existing assets and increased our total production substantially. Our ownership in the Garfield Unit increased from 54% to 99%. The purchase price for the Unocal acquisition was $30 million, consisting of $27 million in cash, adjusted to $25.8 million cash at closing, and 404,381 unregistered shares of our common stock. The stock portion of the purchase price was placed in escrow and may be distributed to Unocal over a three-year period, subject to downward adjustment in correlation to costs, expenses, and liabilities which may be incurred during this period. Beaver Creek Pipeline, L.L.C. In June 1999, we and Mercury Michigan, Inc., an affiliate of our largest stockholder, formed Beaver Creek Pipeline, L.L.C. We and Mercury Michigan, Inc. each acquired a 50% interest in Beaver Creek. Beaver Creek purchased from Dow Chemical a 125-mile natural gas pipeline extending from our Beaver Creek field in northern Michigan to the Midland, Michigan industrial corridor. A number of large end-use customers, including Dow Chemical, are located in the area of the pipeline and we expect demand for natural gas to significantly increase due to increasing industrial activity and power generation in the area. We expect this pipeline acquisition to decrease our transportation expenses and, as a result, increase the net prices we receive for our natural gas. 4 MGV Energy Acquisition. On August 26, 1999, we purchased a 89.5% interest in MGV Energy, Inc., which is a Calgary-based natural gas production company, for $1.6 million. MGV is involved in a joint venture relationship with Pan Canadian, one of the largest independent oil and gas companies in Canada. Under the arrangement, MGV identifies acquisition and development prospects for Pan Canadian within a 36,000 square mile area of mutual interest primarily in southern Alberta. Should Pan Canadian decide to acquire a submitted prospect, MGV has a right to participate in the acquisition at up to a 20% level. MGV is free to pursue on its own any prospects outside of the area of mutual interest and also may take 100% of any prospect within the area of mutual interest which Pan Canadian rejects. MGV recently made its first acquisition of an interest in 375 existing gas wells in southern Alberta, Canada, incurring approximately $2.3 million of debt to finance its purchase. MGV acquired current daily net production of 1.2 Mmcf and 10.1 Bcf of proved reserves. Our Executive Offices Our principal executive offices are located at 1619 Pennsylvania Avenue in Fort Worth, Texas 76104, and our telephone number is (817) 877-3151. The Offering Common stock offered.................. 7,000,000 shares(1) Common stock to be outstanding after the offering......................... 19,888,500 shares(1)(2) Use of proceeds....................... We intend to use all of the net proceeds from this offering to repay a portion of our existing debt. American Stock Exchange symbol........ KWK
- -------- (1) Excludes a 30-day option granted to the underwriters to purchase up to 1,050,000 additional shares of common stock to cover over-allotments, if any. (2) Excludes 1,152,857 shares of common stock issuable upon exercise of outstanding warrants and vested stock options, 6,400 shares to be issued to four of our non-employee directors as compensation for services in 1998 and 404,381 contingently issuable shares held in trust in connection with the Unocal property acquisition. Risk Factors For a description of some of the risks that you should consider before buying shares of our common stock, see "Risk Factors" beginning on page 9. 5 Summary Historical and Pro Forma Consolidated Financial Data The following table gives a summary of our historical and pro forma consolidated financial data. You should read the data with our consolidated financial statements and pro forma and unaudited financial statements included elsewhere in this prospectus. The pro forma adjustments give effect to the purchase of properties from Unocal on May 17, 1999 and the purchase of the remaining minority interest in MSR on March 4, 1999 as if those purchases had occurred at the beginning of each period presented. The pro forma adjustments include revenues and operating expenses attributed to those properties, as well as depletion charges based on our purchase price, and interest on the debt incurred to acquire the properties. The net losses of MSR attributed to minority interest owners are reversed in the pro forma amounts.
Six Months Ended Year Ended June 30, December 31, -------------------------- ----------------- (unaudited) Pro Pro Forma(1) Forma(1) 1999 1999 1998 1998 1998 -------- ------- ------- --------- ------- (in thousands, except per share data) Statement of Operations Data: Revenues: Natural gas and oil revenues... $22,947 $19,747 $21,709 $51,798 $42,080 Other income................... 2,150 2,150 1,376 3,607 3,607 ------- ------- ------- ------- ------- Total revenues............... 25,097 21,897 23,085 55,405 45,687 Expenses: Lease operating expenses....... 10,273 9,381 9,057 20,451 17,781 Depreciation, depletion and amortization.................. 7,392 6,129 6,043 16,231 12,365 General and administrative..... 1,836 1,836 548 1,430 1,430 Provision for doubtful accounts...................... 1,350 1,350 - - - Interest expense............... 4,453 3,738 3,660 8,844 6,698 ------- ------- ------- ------- ------- Total expenses............... 25,304 22,434 19,308 46,956 38,274 Income (loss) before income taxes and minority interest.... (207) (537) 3,777 8,449 7,413 ------- ------- ------- ------- ------- Minority interest............... - 141 268 - 758 ------- ------- ------- ------- ------- Income (loss) before income taxes.......................... (207) (396) 4,045 8,449 8,171 Income tax provision (benefit).. (69) (135) 1,459 3,383 3,286 ------- ------- ------- ------- ------- Net income (loss)............... (138) (261) 2,586 5,066 4,885 ======= ======= ======= ======= ======= Basic and diluted earnings (loss) per share............... $ (0.01) $ (0.02) $ 0.22 $ 0.44 $ 0.42 ======= ======= ======= ======= ======= Weighted average number of shares outstanding--basic and diluted........................ 12,417 12,417 11,511 11,511 11,511 ======= ======= ======= ======= ======= Other Data: EBITDA(2)...................... $11,638 $ 9,330 $13,480 $33,524 $26,476 Net cash provided by operating activities.................... 2,191 11,148 16,335 Net cash used in investing activities.................... (31,097) (7,638) (16,097) Net cash provided by (used in) financing activities.......... 28,769 (3,576) (607) Capital expenditures........... 31,097 7,638 16,097
6
June 30, 1999 ----------------------- (unaudited) Actual As Adjusted(3) -------- -------------- (in thousands) Balance Sheet Data: Cash and cash equivalents............................. $ 157 $ Total assets.......................................... 177,684 Long-term debt and other long-term liabilities........ 115,837 Total equity.......................................... 42,723
- -------- (1) See "Selected Historical and Pro Forma Consolidated Financial Data". (2) EBITDA means earnings before interest, income taxes, depreciation, depletion and amortization, and impairment of natural gas and oil properties. EBITDA is not a calculation based upon generally accepted accounting principles. EBITDA should not be considered as an alternative to net income as an indicator of our operating performance, or as an alternative to cash flow as a better measure of liquidity. EBITDA measures presented in this prospectus may not be comparable to other similarly titled measures reported by other companies. We believe EBITDA is a widely accepted financial indicator of a company's ability to incur and service debt and to fund capital expenditures. In evaluating EBITDA, we believe that investors should consider, among other things, the amount by which EBITDA exceeds interest costs, how EBITDA compares to principal repayments on debt and how EBITDA compares to capital expenditures for each period. (3) The "as adjusted" balance sheet data: . gives effect to the application of the $ million of estimated net proceeds from the sale of common stock in this offering to repay a portion of our debt; and . assumes an offering price for our common stock equal to the last reported sales price appearing on the cover page of this prospectus. Please read "Use of Proceeds". 7 Summary Reserve Information The table below presents our summary reserve information as of September 1, 1999. Estimates of proved reserves are based on the September 1, 1999 reserve report prepared by Holditch-Reservoir Technologies Consulting Services, a Schlumberger company, our independent petroleum engineering consultants. Appendix A to this prospectus contains a letter prepared by Holditch summarizing the reserve report. For additional information relating to our natural gas and oil reserves, please read "Business and Properties--Natural Gas and Crude Oil Reserves" and note 11 of the notes to our December 31, 1998 consolidated financial statements. As of September 1, 1999, our PV-10 value was $348.6 million. For purposes of this calculation, the August 31, 1999 New York Mercantile Exchange prices on this date of $2.83 per Mmbtu of natural gas and $22.86 per barrel of crude oil were used. These NYMEX prices were then adjusted for volumes subject to long- term contracts and financial hedges and all applicable basis and quality differentials. After taking into account such adjustments, the average actual prices used to calculate our PV-10 value were $2.75 per Mmbtu for natural gas and $19.32 per barrel for crude oil and condensate. Please read note 11 of the notes to our December 31, 1998 consolidated financial statements.
As of September 1, 1999 ------------ Estimated proved reserves: Natural gas (Mmcf)............................................... 217,124 Oil and condensate (Mbbls)....................................... 24,483 Total (Mmcfe).................................................... 364,022 Proved developed reserves as a percentage of proved reserve volumes......................................................... 66% PV-10 value (in thousands)....................................... $348,567
Summary Operating Data The following table presents information regarding the production volumes of, average sales prices received for and average production costs associated with our sales of natural gas and crude oil for the periods indicated. The pro forma adjustments give effect to the purchase of properties from Unocal on May 17, 1999 as if the purchases had occurred at the beginning of the period presented.
Six Months Ended June 30, --------------------- Year Ended Pro Forma December 31, 1999 1999 1998 1998 --------- ----- ----- ------------ Production: Natural gas (Mmcf)......................... 8,460 7,381 7,741 15,315 Crude oil and condensate (Mbbls)........... 347 288 370 667 Total (Mmcfe).............................. 10,542 9,109 9,961 19,317 Average sales price per unit: Natural gas (per Mcf)...................... $ 2.19 $2.20 $2.31 $ 2.33 Crude oil and condensate (per Bbl)......... 12.80 12.09 10.39 9.55 Total (per Mcfe)........................... 2.17 2.17 2.18 2.17 Expenses (per Mcfe): Lease operating............................ $ 0.97 $1.03 $0.91 $ 0.92 General and administrative................. 0.17 0.20 0.06 0.07 Depreciation, depletion and amortization... 0.70 0.67 0.61 0.64
8 RISK FACTORS Investing in our common stock will provide you with an equity ownership in our company. Your investment will be subject to risks inherent in our business. The trading price of your shares will be affected by the performance of our business relative to, among other things, competition, market conditions and general economic and industry conditions. The value of your investment may decrease, resulting in a loss. You should carefully consider the following factors as well as other information contained in this prospectus before deciding to invest in shares of our common stock. This prospectus contains forward-looking statements. See "Forward-Looking Statements." Our actual results may differ materially from those projected in the forward-looking statements as a result of any number of factors, including the risk factors set forth below. Because we have a limited operating history, our future operating results are difficult to forecast, and our failure to sustain profitability in the future could adversely affect the market price of our common stock. Although our predecessors operated for years in the oil and gas industry prior to our formation, we began operations in 1998, and have a limited operating history in our current form upon which you may base your evaluation of our performance. As a result of our recent formation and our brief operating history, the operating results from the properties contributed by Mercury Exploration Company and others to us when we were formed may not indicate what our future results will be. We cannot assure you that we will maintain the current level of revenues, natural gas and crude oil reserves or production we now attribute to the properties contributed to us when we were formed. Any future growth of our natural gas and crude oil reserves, production and operations could place significant demands on our financial, operational and administrative resources. Our failure to sustain profitability in the future could adversely affect the market price of our common stock. Natural gas and crude oil prices fluctuate widely, and low prices could have a material adverse impact on our business. Our revenues, profitability and future growth depend on prevailing natural gas and crude oil prices. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. The amount we can borrow under our credit facility is subject to periodic redetermination based in part on changing expectations of future prices. Lower prices may also reduce the amount of natural gas and crude oil that we can economically produce. Prices for natural gas and crude oil fluctuate widely. For example, natural gas and crude oil prices declined significantly in 1998 and, for an extended period of time, remained substantially below prices obtained in previous years. Among the factors that can cause this fluctuation are: . the level of consumer product demand; . weather conditions; . domestic and foreign governmental regulations; . the price and availability of alternative fuels; . political conditions in oil and gas producing regions; . the domestic and foreign supply of oil and gas; . the price of foreign imports; and . overall economic conditions. 9 Reserve estimates depend on many assumptions that may turn out to be inaccurate and any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. The process of estimating oil and gas reserves is complex. It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this prospectus. Please read "Business and Properties--Natural Gas and Crude Oil Reserves". In order to prepare these estimates we must project production rates and timing of development expenditures. We must also analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions such as natural gas and crude oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of natural gas and crude oil reserves are inherently imprecise. Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and crude oil reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this prospectus. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing natural gas and crude oil prices and other factors, many of which are beyond our control. At September 1, 1999, approximately 34% of our estimated proved reserves were undeveloped. Undeveloped reserves, by their nature, are less certain. Recovery of undeveloped reserves requires significant capital expenditures and successful drilling operations. The reserve data assumes that we will make significant capital expenditures to develop our reserves. Although we have prepared estimates of our natural gas and crude oil reserves and the costs associated with these reserves in accordance with industry standards, we cannot assure you that the estimated costs are accurate, that development will occur as scheduled or that the actual results will be as estimated. You should not assume that the present value of future net revenues referred to in this prospectus and the information incorporated by reference is the current market value of our estimated oil and gas reserves. In accordance with Securities and Exchange Commission requirements, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs as of the date of the estimate. Any changes in consumption by gas purchasers or in governmental regulations or taxation will also affect actual future net cash flows. The timing of both the production and the expenses from the development and production of oil and gas properties will affect the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor, which is required by the Securities and Exchange Commission to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate discount factor. The effective interest rate at various times and the risks associated with us or the oil and gas industry in general will affect the accuracy of the 10% discount factor. We may have difficulty financing our planned growth. We have experienced and expect to continue to experience substantial capital expenditure and working capital needs, particularly as a result of our property acquisition and development drilling activities. In the future, we will require additional financing, in addition to cash generated from our operations, to fund our planned growth. If revenues decrease as a result of lower natural gas or crude oil prices or otherwise, we may have limited ability to expend the capital necessary to replace our reserves or to maintain production at current levels, resulting in a decrease in production over time. If our cash flow from operations is not sufficient to satisfy our capital expenditure requirements, we cannot be certain that additional financing will be available to us on 10 acceptable terms or at all. In the event additional capital resources are unavailable, we may curtail our acquisition, development drilling and other activities or be forced to sell some of our assets on an untimely or unfavorable basis. We are vulnerable to operational hazards, transportation dependencies, regulatory risks, and other uninsured risks associated with our activities. The oil and gas business involves operating hazards such as well blowouts, craterings, explosions, uncontrollable flows of crude oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks, any of which could cause us to experience substantial losses. Also, the availability of a ready market for our natural gas and crude oil production depends on the proximity of reserves to, and the capacity of, natural gas and crude oil gathering systems, pipelines and trucking or terminal facilities. Federal and state regulation of oil and gas production and transportation, tax and energy policies, changes in supply and demand and general economic conditions all could adversely affect our ability to produce and market our natural gas and crude oil. In addition, we may be liable for environmental damage caused by previous owners of property purchased and leased by us. As a result of operating hazards, regulatory risks and other uninsured risks, we could incur substantial liabilities to third parties or governmental entities, the payment of which could reduce or eliminate funds available for exploration, development or acquisitions. According to customary industry practices, we maintain insurance against some, but not all, of such risks and losses. The occurrence of an event that is not covered, or not fully covered, by insurance could have a material adverse effect on our business, financial condition and results of operations. In addition, pollution and environmental risks generally are not fully insurable. We may be unable to make additional acquisitions of producing properties or successfully integrate them into our operations. Our growth in recent years has been due in significant part to acquisitions of producing properties. We expect to continue to evaluate and, where appropriate, pursue acquisition opportunities on terms our management considers to be favorable to us. We cannot assure you that we will be able to identify suitable acquisitions in the future, or that we will be able to finance these acquisitions on favorable terms or at all. In addition, we compete against other companies for acquisitions, and we cannot assure you that we will be successful in the acquisition of any material property interests. Further, we cannot assure you that any future acquisitions that we make will be integrated successfully into our operations or will achieve desired profitability objectives. The successful acquisition of producing properties requires an assessment of recoverable reserves, exploration potential, future oil and gas prices, operating costs, potential environmental and other liabilities and other factors beyond our control. These assessments are necessarily inexact and their accuracy inherently uncertain, and such a review may not reveal all existing or potential problems, nor will it necessarily permit us to become sufficiently familiar with the properties to fully assess their merits and deficiencies. Inspections may not always be performed on every well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. In addition, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties, which may be substantially different in operating and geological characteristics or geographic location than existing properties. While our current operations are located primarily in Michigan, Montana, Wyoming and Canada, we cannot assure you that we will not pursue acquisitions or properties located in other locations. 11 The failure to replace our reserves could adversely affect our production and cash flows. Our future success depends upon our ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both. In order to increase reserves and production, we must continue our development drilling and recompletion programs or undertake other replacement activities. Our current strategy is to maintain our focus on low-cost operations while increasing our reserve base, production and cash flow through acquisitions of producing properties where we can utilize our experience as a low-cost operator and use available cash flows to continue to exploit our existing properties. We cannot assure you, however, that our planned development projects and acquisition activities will result in significant additional reserves or that we will have continuing success drilling productive wells at low finding and development costs. Furthermore, while our revenues may increase if prevailing oil and gas prices increase significantly, our finding costs for additional reserves could also increase. For a discussion of our reserves, see "Business and Properties--Natural Gas and Crude Oil Reserves". We cannot control the activities on properties we do not operate. Other companies operate some of the properties in which we have an interest. As a result, we have a limited ability to exercise influence over operations for these properties or their associated costs. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence operations and associated costs could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities. As a result, the success and timing of our drilling and development activities on properties operated by others depend upon a number of factors that are outside of our control, including: . timing and amount of capital expenditures; . the operator's expertise and financial resources; . approval of other participants in drilling wells; and . selection of technology. The loss of key personnel could adversely affect our ability to operate. Our operations are dependent on a relatively small group of key management and technical personnel. We cannot assure you that these individuals will remain with us for the immediate or foreseeable future. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on us. Competition in our industry is intense, and we are smaller and have a more limited operating history than most of our competitors. We compete with major and independent oil and gas companies for property acquisitions. We also compete for the equipment and labor required to operate and develop these properties. Most of our competitors have substantially greater financial and other resources than we do. In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which would adversely affect our competitive position. These competitors may be able to pay more for exploratory prospects and productive natural gas and oil properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to explore for oil and gas prospects and to acquire additional properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties and to complete transactions in this highly competitive environment. In addition, many of our competitors have been operating for a much longer time than we have and have demonstrated the ability to operate through industry cycles. Furthermore, the oil and gas industry competes with other industries in supplying the energy and fuel needs of industrial, commercial, and other consumers. 12 Leverage materially affects our operations. As of September 30, 1999, our long-term debt was $117,074,000, including $114,850,000 outstanding under our bank credit facility and $2,224,000 of subsidiary and other debt. We had no additional available borrowing capacity under our bank credit facility. The borrowing base limitation on our credit facility is periodically redetermined. Upon a redetermination, we could be forced to repay a portion of our bank debt. We may not have sufficient funds to make such repayments. On December 1, 1999, the borrowing base will be reviewed and we could be required to repay up to $20,000,000 of the outstanding balance if the borrowing base is reduced. As of September 30, 1999, $114,850,000 was outstanding under the credit facility. Our level of debt affects our operations in several important ways, including the following: . a large portion of our cash flow from operations is used to pay interest on borrowings; . the covenants contained in the agreements governing our debt limit our ability to borrow additional funds or to dispose of assets; . the covenants contained in the agreements governing our debt may affect our flexibility in planning for, and reacting to, changes in business conditions; . a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes; . our leveraged financial position may make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures; . any debt that we incur under our credit facility will be at variable rates, making us vulnerable to increases in interest rates; and . a high level of debt will affect our flexibility in planning for or reacting to changes in market conditions. In addition, we may significantly alter our capitalization in order to make future acquisitions or develop our properties. These changes in capitalization may significantly increase our level of debt. A higher level of debt increases the risk that we may default on our debt obligations. Our ability to meet debt obligations and to reduce our level of debt depends on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. If we are unable to repay our debt at maturity out of cash on hand, we could attempt to refinance the debt or repay the debt with the proceeds of an equity offering. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our debt or that future borrowing or equity financing will be available to pay or refinance the debt. The terms of our debt may also prohibit us from taking these actions. Factors that will affect our ability to raise cash through an offering or our capital stock or a refinancing of our debt include financial market conditions and our market value and operations performance at the time of the offering or other financing. We cannot assure you that any offering or refinancing can be successfully completed. Several companies have entered into purchase contracts with us for a significant part of our production and if they default on these contracts, we could be materially and adversely affected. Several long-term contracts for the sale of a significant portion of our natural gas production are currently in place and account for a significant portion of our total revenues. We cannot assure you that the other parties to these contracts will continue to perform under the contracts. If the other parties were to default, it could have a material adverse effect on our cash flows for the period in which the default occurred. 13 Our activities are regulated by complex laws and regulations, including environmental regulations, that can adversely affect the cost, manner or feasibility of doing business. Oil and gas operations are subject to various federal, state, and local government laws and regulations which may be changed from time to time in response to economic or political conditions. Matters that are typically regulated include: . discharge permits for drilling operations; . drilling bonds; . reports concerning operations; . spacing of wells; . unitization and pooling of properties; . environmental protection; and . taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity to conserve supplies of natural gas and crude oil. We also are subject to changing and extensive tax laws, the effects of which cannot be predicted. The development, production, handling, storage, transportation and disposal of natural gas and crude oil, by-products, and other substances and materials produced or used in connection with oil and gas operations are subject to laws and regulations primarily relating to protection of human health and the environment. The discharge of natural gas, crude oil or pollutants into the air, soil or water may give rise to significant liabilities on our part to the government and third parties and may result in the assessment of civil or criminal penalties or require us to incur substantial costs of remediation. Legal requirements frequently are changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We cannot assure you that existing laws or regulation, as currently interpreted or reinterpreted in the future, or future laws or regulations, will not materially adversely affect our business, results of operations and financial condition. Hedging our production may result in losses. To reduce our exposure to fluctuations in the prices of natural gas and crude oil, we have entered into long-term gas contracts and hedging arrangements. These hedging arrangements expose us to risk of financial loss in some circumstances including the following: . our production is less than expected; . there is a change in the expected difference between the underlying price in the hedging agreement and actual prices received; . the other parties to the hedging contracts fail to perform their contract obligations; or . a sudden unexpected event materially impacts natural gas or crude oil prices. In addition, these hedging arrangements may limit the benefit we would receive from increases in the prices for natural gas and crude oil. Furthermore, if we choose not to engage in hedging arrangements in the future, we may be more adversely affected by changes in natural gas and crude oil prices than our competitors who engage in hedging arrangements. 14 A small number of existing stockholders control our company, which could limit your ability to influence the outcome of stockholder votes. Members of the Darden family, together with Mercury and QELC, companies primarily owned by the members of the Darden family, beneficially own on the date of this prospectus approximately 77.1% of our common stock, and will own approximately 51.4% after the offering, assuming that the over-allotment option is not exercised by the underwriters. As a result, these entities and individuals will be able to control the outcome of stockholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our charter or bylaws and the approval of mergers and other significant corporate transactions. A large number of our outstanding shares may be sold into the market in the near future which could cause the market price of our common stock to drop significantly, even if our business is doing well. Our shares that are eligible for future sale may have an adverse affect on the price of our stock. After this offering, approximately 19,888,500 shares of common stock will be outstanding, assuming the underwriters' over-allotment option is not exercised. In addition, options and warrants to purchase 1,152,857 shares are outstanding, all of which are exercisable. These options and warrants are exercisable at prices ranging from $8.75 to $33.75 per share. Approximately 8,400,000 shares, assuming that the over-allotment option is not exercised by the underwriters, will be freely tradeable without substantial restriction or the requirement of future registration under the Securities Act. Our officers and directors who are stockholders and a number of other stockholders have entered into lock-up agreements under which they have agreed not to offer or sell any shares of common stock or similar securities for a period of 180 days from the date of this prospectus without the prior written consent of Bear Stearns, on behalf of the underwriters; however, Bear Stearns may at any time waive the terms of these lock-up agreements as specified in the underwriting agreement. Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then current market price of the common stock could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities. Our certificate of incorporation contains provisions that could discourage an acquisition or change of control. Our certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire control of us, even if that change of control might be beneficial to stockholders. Please read "Description of Capital Stock". Our computer systems and the computer systems of our business partners may not be Year 2000 compliant, which may cause system failures and disruptions adversely affecting our operations. The "Year 2000" issue is a general term used to refer to the business implications of the arrival of the new millennium. In simple terms, on January 1, 2000, all computer hardware and software systems that use the two-digit year convention could fail completely or create erroneous data as a result of the system failing to recognize the two-digit internal date "00" as representing the Year 2000. Our computer systems and the computer systems of our business partners may not be Year 2000 compliant, which may cause system failures and disruptions adversely affecting our operations. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance". We cannot assure you that our internal operations do not have any material issues with respect to Year 2000 compliance. In addition, we may not properly identify all potential problems or all potentially affected systems or remedy all problems in our systems. Furthermore, the Year 2000 issue also affects our customers, our suppliers and other third parties with whom we do business. The failure of any of these entities to become 15 Year 2000 compliant could adversely affect our operations. The most reasonably likely "worst case" impacts would be: . impairment of our ability to deliver our production to, or receive payment from, third parties gathering and/or purchasing our production from affected facilities; . impairment of the ability of third-party suppliers or service companies to provide needed materials or services to our planned or ongoing operations, necessitating deferral or shut-in of exploration, development or production operations; . impairment of our ability to receive and process data, which would hinder our ability to conduct development drilling and exploitation activities; and . our inability to execute financial transactions with our banks or other third parties whose systems fail or malfunction. 16 FORWARD-LOOKING STATEMENTS Some of the statements contained in this prospectus under "Prospectus Summary," "Risk Factors," "Managements' Discussion and Analysis of Financial Condition and Results of Operations" and "Business and Properties" that relate to our business and the industry in which we operate are forward-looking. Statements or assumptions related to or underlying such forward-looking statements include, without limitation, statements regarding: . the quality of our properties with regard to, among other things, the existence of reserves in economic quantities; . our ability to increase our reserves through exploration and development; . the number of locations to be drilled and the time frame within which they will be drilled; . future prices of natural gas and crude oil; . anticipated domestic demand for natural gas; and . the adequacy of our capital resources and liquidity. Actual results may differ materially from those suggested by the forward- looking statements for various reasons, including those discussed under "Risk Factors". 17 USE OF PROCEEDS We estimate that the net proceeds to us from the sale of the 7,000,000 shares of common stock in this offering will be approximately $ million ($ million if the underwriters' over-allotment option is exercised in full), at an assumed public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses of $ . We intend to use all of the net proceeds to repay a portion of our outstanding debt under our credit facility. At September 30, 1999, we had $114,850,000 outstanding under our credit facility. The weighted average interest rate for outstanding borrowings under our credit facility as of September 30, 1999 was 7.5%. The credit facility has a maturity of March 4, 2004. We have used borrowings under our current credit facility to refinance prior debt, fund a portion of our acquisitions and for other corporate purposes. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings, if any, for the operation and development of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our current credit facility prohibits us from paying cash dividends on our common stock. Any future dividends may also be restricted by any loan agreements which we may enter into from time to time. 18 PRICE RANGE OF COMMON STOCK Since March 4, 1999, our common stock has been traded on the American Stock Exchange under the symbol "KWK." The following table sets forth the high and low closing prices for our common stock as reported on the American Stock Exchange for the period from March 4, 1999 through October 13, 1999.
High Low ------- ------- First quarter 1999 (beginning March 4, 1999)............. $ 7 5/8 $ 7 1/4 Second quarter 1999...................................... 7 3/8 6 1/8 Third quarter 1999....................................... 7 3/8 6 1/2 Fourth quarter 1999 (through October 13, 1999)........... 6 1/2 5 7/8
On October 13, 1999, the last reported sales price of our common stock on the American Stock Exchange was $6.375 per share. As of September 1, 1999, there were approximately 400 stockholders of record of our common stock. 19 CAPITALIZATION The following table presents our capitalization as of June 30, 1999 on two bases: . on a historical basis; and . on a pro forma basis as adjusted to reflect our anticipated use of the estimated net proceeds of this offering at an assumed offering price of $ per share. You should read the table together with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this prospectus.
June 30, 1999 ----------------------- Actual As Adjusted -------- ----------- (in thousands) Total debt.............................................. $114,975(1) $ Stockholders' equity.................................... 42,723(2) (2) -------- Total capitalization.................................. 157,698 ========
- -------- (1) In addition, on August 26, 1999, our subsidiary, MGV Energy, incurred an additional $2,125,000 of long-term debt. (2) Does not reflect the 404,381 contingently issuable shares of unregistered common stock currently held in escrow to be released over a three year period in connection with the acquisition of properties from Unocal (see note 2 of the condensed notes to our consolidated financial statements for the six months ended June 30, 1999) or 6,400 shares to be issued to four of our non-employee directors as compensation for services in 1998. 20 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following table gives a summary of our selected historical and pro forma consolidated financial data for the six months ended June 30, 1999 and 1998 and for the year ended December 31, 1998. Balance sheet data only is also presented for the year ended December 31, 1997. You should read the data with our consolidated financial statements and unaudited financial statements included elsewhere in this prospectus. The pro forma adjustments give effect to the purchase of properties from Unocal on May 17, 1999 and the purchase of the remaining minority interest in MSR on March 4, 1999 as if those purchases had occurred at the beginning of each period presented. The pro forma adjustments include revenues and operating expenses attributed to those properties, as well as depletion charges based on our purchase price, and interest on the debt incurred to acquire the properties. The net losses of MSR attributed to minority interest owners are reversed in the pro forma amounts.
Six Months Ended June 30, Year Ended December 31, --------------------------- ------------------------- (unaudited) Pro Pro Forma(1) Forma(1) 1999 1999 1998 1998 1998 -------- -------- ------- ------------------------- (in thousands, except per share data) Statement of Operations Data: Revenues: Natural gas and oil revenues.............. $22,947 $ 19,747 $21,709 $ 51,798 $ 42,080 Other income........... 2,150 2,150 1,376 3,607 3,607 ------- -------- ------- ----------- ------------ Total revenues....... 25,097 21,897 23,085 55,405 45,687 Expenses: Lease operating expenses.............. 10,273 9,381 9,057 20,451 17,781 Depreciation, depletion and amortization...... 7,392 6,129 6,043 16,231 12,365 General and administrative........ 1,836 1,836 548 1,430 1,430 Provision for doubtful accounts.............. 1,350 1,350 - - - Interest expense....... 4,453 3,738 3,660 8,844 6,698 ------- -------- ------- ----------- ------------ Total expenses....... 25,304 22,434 19,308 46,956 38,274 Income (loss) before income taxes and minority interest...... (207) (537) 3,777 8,449 7,413 ------- -------- ------- ----------- ------------ Minority interest....... - 141 268 - 758 ------- -------- ------- ----------- ------------ Income (loss) before income taxes........... (207) (396) 4,045 8,449 8,171 Income tax provision (benefit).............. (69) (135) 1,459 3,383 3,286 ------- -------- ------- ----------- ------------ Net income (loss)....... $ (138) $ (261) $ 2,586 $ 5,066 $ 4,885 ======= ======== ======= =========== ============ Basic and diluted earnings (loss) per share.................. $ (0.01) $ (0.02) $ 0.22 $ 0.44 $ 0.42 ======= ======== ======= =========== ============ Weighted average number of shares outstanding-- basic and diluted...... 12,417 12,417 11,511 11,511 11,511 ======= ======== ======= =========== ============ Other Data: EBITDA(2).............. $11,638 $ 9,330 $13,480 $ 33,524 $ 26,476 Net cash provided by operating activities.. 2,191 11,148 16,335 Net cash used in investing activities.. (31,097) (7,638) (16,097) Net cash provided by (used in) financing activities............ 28,769 (3,576) (607) Capital expenditures... 31,097 7,638 16,097
21
June 30, December 31, ----------------- ----------------- 1999 1998 1998 1997 -------- -------- -------- -------- (unaudited) (in thousands) Balance Sheet Data: Cash and cash equivalents................ $ 157 $ 577 $ 294 $ 643 Current assets........................... 8,517 6,940 8,821 2,497 Total assets............................. 177,684 145,763 144,600 133,912 Short-term debt.......................... 30 70,480 67 161 Other current liabilities................ 4,141 8,513 7,463 1,954 Long-term debt and other long-term liabilities............................. 115,837 12,962 86,310 87,336 Total equity............................. 42,723 36,254 32,588 27,852
- -------- (1) Pro forma adjustments give effect to the purchase of properties from Unocal on May 17, 1999 and the purchase of the remaining minority interest in MSR on March 4, 1999 as if those acquisitions had occurred at the beginning of each period presented, as follows:
Six Months Ended Year Ended June 30, December 31, 1999 1998 ---------------- ------------ Revenues......................................... $3,200 $9,718 Operating expenses............................... 892 2,670 Depletion and depreciation....................... 1,263 3,866 Interest on acquisition debt..................... 715 2,146 Reversal of minority interest in MSR............. (141) (758) Tax effect of pro forma adjustments.............. (66) (97) ------ ------ Net income effect of pro forma adjustments....... $ 123 $ 181 ====== ======
(2) EBITDA means earnings before interest, income taxes, depreciation, depletion and amortization, and impairment of natural gas and crude oil properties. EBITDA is not a calculation based upon generally accepted accounting principles. EBITDA should not be considered as an alternative to net income as an indicator of our operating performance, or as an alternative to cash flow as a better measure of liquidity. EBITDA measures presented in this prospectus may not be comparable to other similarly titled measures reported by other companies. We believe EBITDA is a widely accepted financial indicator of a company's ability to incur and service debt and to fund capital expenditures. In evaluating EBITDA, we believe that investors should consider, among other things, the amount by which EBITDA exceeds interest costs, how EBITDA compares to principal repayments on debt and how EBITDA compares to capital expenditures for each period. 22 SELECTED HISTORICAL FINANCIAL DATA OF PREDECESSORS Set forth below, in separate tables, is summary selected historical financial data of our predecessors: Mercury, QELC, Michigan Gas Partners and MSR. The financial data of our predecessors is for fiscal periods ended in 1997, 1996 and 1995 and is derived from the predecessors' audited consolidated financial statements and related notes presented elsewhere in this prospectus. We do not believe that presentation of this financial data of our predecessors in combined form provides useful comparative data because of the differing fiscal periods of the predecessors and because only a portion of Mercury's assets were contributed to us as part of our formation in 1998. Further, we do not consider separate financial data for fiscal periods ended in 1994 to be material to us or useful for comparative purposes. MERCURY EXPLORATION COMPANY (includes Quicksilver Energy, L.C.) (in thousands, except for per share data)
Fiscal Years Ended Three Months Ended September 30, December 31, -------------------------- 1997 1997 1996 1995 ------------------ -------- ------- ------- Statements of Operations Data: Revenues...................... $ 11,049 $ 41,328 $17,388 $ 6,703 Net income.................... 2,354 5,115 2,248 1,463 Net income per common share... 9.38 20.38 8.96 5.83 Weighted average shares outstanding.................. 251 251 251 251 Cash dividends................ - - - - Other Information: Capital expenditures.......... $ 27,750 $ 54,231 $19,779 $ 2,227 September 30, December 31, -------------------------- 1997 1997 1996 1995 ------------ -------- ------- ------- Balance Sheet Data: Working capital (deficit)..... $ (9,324) $(13,133) $(5,813) $(5,068) Total assets.................. 126,506 102,880 50,186 28,743 Long-term debt................ 65,275 47,174 19,560 2,150 Stockholders' equity.......... 17,670 15,316 10,427 6,988
MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP (in thousands)
Year Ended December 31, ----------------------- 1997 1996 1995 ------ ------- ------- Statements of Operations Data: Revenues............................................. $3,021 $ 3,368 $ 1,930 Net income (loss).................................... 19 (617) (613) Other Information: Capital expenditures................................. $ 13 $ 132 $ 4,837 Balance Sheet Data: Working capital...................................... $ 343 $ 261 $ 324 Total assets......................................... 9,835 10,551 13,160 Long-term debt....................................... - - - Partners' capital ................................... 9,453 10,313 13,025
23 MSR EXPLORATION LTD. For the Period from Inception on March 7, 1997, to December 31, 1997 (in thousands) 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
24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We engage in the acquisition, exploration, production and sale of natural gas, crude oil and condensate and the gathering, processing and transmission of natural gas. We pursue our business through the acquisition of oil and gas mineral leases, gas gathering systems and producing natural gas and crude oil properties. Based upon the specifics of each lease, as well as geological and engineering interpretations, we develop our inventory of leases by drilling wells, redrilling wells or recompleting existing wells located on those leases for the recovery of the reserves located there. We currently have an interest in natural gas and crude oil mineral leases, gas gathering pipeline systems and wells producing natural gas and crude oil that are located principally in the states of Michigan, Wyoming and Montana. We evaluate other opportunities for the development of reserves and related assets as they become available and, in some circumstances, may explore opportunities in regions other than those in which we are currently involved. We are not a user or refiner of the natural gas or crude oil produced, except as needed in the operation of wells that produce natural gas. Once extracted from the ground, we connect the natural gas production to a pipeline gathering system and store the crude oil in storage tanks located close to the producing field for collection by crude oil purchasers. We own or hold working interests in 1,623 gross producing wells (769 net wells). We also hold interests in properties that contain proved undeveloped natural gas and crude oil reserves that require additional drilling, workovers, waterflooding or other forms of enhancement in order to become productive. We were formed as a Delaware corporation in December 1997 to combine oil and gas properties in a reorganization and merger. On January 1, 1998, we, Mercury, QELC, Michigan Gas Partners, Trust Company of the West and Joint Energy Development Investments Limited Partnership, an affiliate of Enron Corp. referred to below as JEDI, entered into an agreement and plan of reorganization and merger to combine some of the oil and gas properties owned by Mercury, QELC and Michigan Gas Partners by causing Michigan Gas Partners to be merged into us and by causing some of the assets and liabilities of Mercury and QELC to be transferred to and assumed by us. We were the surviving corporation of the merger. In early 1999, our stockholders approved the merger of MSR into us. In the merger, stockholders of MSR received approximately 2,577,700 shares of our common stock. As a result of the merger, MSR ceased to exist, and all of its assets and liabilities were transferred to us. The merger was accounted for, in part, as a pooling of interest. As a result, our financial statements have been combined with those of MSR. The merged net assets attributable to minority interest stockholders were reported as a minority interest at December 31, 1998. This minority interest was acquired in March 1999 and was accounted for under the purchase method of accounting. On May 17, 1999, we completed the purchase from Unocal of substantially all of Unocal's natural gas and crude oil assets in Michigan. The assets purchased, consisting of ownership interests in the Garfield Unit and the Beaver Creek Unit, included approximately 20,000 net leasehold acres and about 13,000 Mcfe production per day. Our ownership in the Garfield Unit increased from 54% to 99%. Revenues attributable to the purchased assets were $9,718,000 in 1998 and operating expenses totaled $2,670,000, resulting in operating income and cash flow of $7,048,000, before depreciation, depletion, administrative and interest expense. The sales price for gas realized by Unocal of $1.98 per Mcf was $0.35 per Mcf lower than the average price we received in 1998. For the four months ended April 30, 1999, we estimate that Unocal reported $3,200,000 total revenues comprised of $2,240,000 in natural gas sales and $960,000 in crude oil sales. Direct operating expenses were an estimated $892,000. For further information on the Unocal acquisition, see condensed notes to consolidated financial statements (unaudited) for the six months ended June 30, 1999 and 1998. 25 We use the full-cost method of accounting for our investments in properties. Under this method, all costs of exploration, development and acquisition of oil and gas reserves are capitalized into separate country-by-country "full-cost pools" as incurred. Properties in each pool are depleted and charged to operations using the unit-of-production method, based on a ratio of current production to total proved reserves. To the extent that the capitalized costs, net of accumulated depreciation, depletion and amortization, less deferred taxes, exceed the PV-10 value of proved natural gas and crude oil reserves and the lower of cost or fair value of unproved properties, the excess costs are charged to operations. If a write-down were required, it would result in a non- cash charge to earnings but would not have an impact on cash flows. Liquidity and Capital Resources Cash Flow. We believe that our cash flows from operations are adequate to meet the requirements of our business. However, future cash flows are subject to a number of variables, including our level of production and prices, and we cannot assure you that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures. Our principal operating sources of cash include sales of natural gas and crude oil, as well as revenues from transportation and processing of natural gas. Our net cash provided by operations for the six months ended June 30, 1999 was $2,191,000, compared to $11,148,000 for the same period last year. The reduction resulted from lower earnings, a $2,500,000 account receivable we did not collect and the repayment of $3,107,000 of current liabilities owed to Mercury. Our net cash used in investing for the six months ended June 30, 1999 was $31,097,000, including $25,800,000 for the Unocal property acquisition. Investing activities were comprised primarily of additions to oil and gas properties through acquisitions and development and additions of field service assets. For the six months ended June 30, 1999, we spent $31,097,000 for capital investments. For the rest of 1999, we expect to spend approximately $12,700,000. We have budgeted approximately $30,000,000 in 2000 for capital investments. Our activities have been financed through a combination of operating cash flow and bank borrowings. Our primary source of financing has been borrowing the under our credit facility. We believe we will have sufficient cash flow from operations, borrowings under our credit facility and proceeds from this stock offering to meet our obligations and operating needs. Credit Facilities. As part of the merger with MSR on March 4, 1999, we entered into a new five-year credit facility agreement. Our then existing debt of $73,993,000 and $10,848,000 from MSR was transferred into the new credit facility. The credit facility permits us to obtain revolving credit loans and to issue letters of credit for our own account from time to time in a total amount not to exceed the lesser of $200,000,000 or the borrowing base. Under an amendment to the credit facility dated May 17, 1999, the borrowing base is $115,000,000 and is subject to semi-annual determination and other redeterminations based upon a variety of factors, including the PV-10 value of our reserves. On December 1, 1999, the borrowing base will be reviewed and we could be required to repay up to $20,000,000 of the outstanding balance if the borrowing base is reduced. As of September 30, 1999, $114,850,000 was outstanding under the credit facility. At our option, loans may be prepaid, and revolving credit commitments may be reduced, in whole or in part at any time in specified minimum amounts. We can designate the interest rate on amounts outstanding at either the London Interbank Offered Rate (LIBOR) + 2.375% or at bank prime. The collateral for this loan agreement consists of substantially all of our existing assets and any future reserves acquired. The loan agreement contains a number of dividend restrictions and restrictive covenants which, among other things, require the maintenance of a minimum current ratio. Market Risk. We sell approximately 70% of our natural gas under long-term, fixed price contracts and swap agreements and, therefore, benefit from significant predictability of our natural gas revenues. Commodity market price fluctuations affect those natural gas volumes that are not sold under contract and also affect our crude oil sales that are not hedged. In April 1999, we entered into a contract to swap 7,500 Mmbtu per day at $2.40 per Mmbtu. The contract, which expires in April 2004, increased our revenues by an insignificant amount in the second quarter of 1999. 26 In addition, we have entered into interest rate swap agreements covering $50,000,000 of our debt. These agreements convert floating rate debt to 5.7% fixed rate debt. Interest expense increased $61,000 over the six months ended June 30, 1999 as a result of these rate swaps. Inflation and Changes in Prices. Our revenues and the value of our oil and gas properties have been and will be affected by changes in natural gas and crude oil prices. Our ability to maintain current borrowing capacity and to obtain additional capital on attractive terms is also substantially dependent on natural gas and crude oil prices. These prices are subject to significant seasonal and other fluctuations that are beyond our ability to control or predict. During 1999, we have received an average of $12.09 per barrel of crude oil and $2.20 per Mcf of gas. Although some costs and expenses are affected by the level of inflation, inflation has not had a significant effect in 1999. Should conditions in the industry improve, causing an increase in competition resulting in a relative shortage of oilfield supplies and/or services, inflationary cost pressures may resume. Results of Operations Our revenue, profitability, and future rate of growth are dependent upon prevailing prices for oil and gas, which, in turn, depend upon numerous factors such as economic, political, and regulatory developments as well as competition from other sources of energy. The energy markets historically have been highly volatile, and future decreases in prices could have an adverse effect on our financial position, results of operations, quantities of reserves that may be economically produced, and access to capital. Due to our limited existence, comparisons of our and our predecessors' results of operations may not be meaningful. Results of operations for the six months ended June 30, 1999 and the twelve months ended December 31, 1998 include MSR's results. The 1997 results of operations are from our predecessors and include MSR's from its inception March 7, 1997 through December 31, 1997; Mercury's for the fiscal year ended September 30, 1997; and Michigan Gas Partners' for the year ended December 31, 1997. A significant portion of Mercury's assets and associated revenue and expenses, which result primarily from contract operating and maintenance, were not conveyed to us at the time of our formation. You should read the following discussion and analysis together with our consolidated financial statements and the related notes and with our audited combined consolidated financial statements and the related notes for the fiscal year ended December 31, 1998 and the audited financial statements of our predecessors for the years ended in 1997 and 1996. Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998 Revenues. Total revenues for the six months ended June 30, 1999 were $21,897,000, a 5% decrease from the $23,085,000 of total revenues for the same period in 1998. Natural gas sales for the 1999 period were $16,264,000, a 9% decrease from 1998 revenues of $17,865,000. Sales volumes decreased from 7,741,000 Mcf to 7,381,000 Mcf as the result of over-allocation of natural gas to us in 1998 and the lack of production during workover projects at the Garfield Unit. During the first six months of 1999, we sold our natural gas at an average price of $2.20 per Mcf compared to $2.31 in the 1998 period. Crude oil sales during the first half of 1999 of $3,483,000 were down 9% from the 1998 period. A 16% increase in average prices was more than offset by a 22% decrease in volumes. Shutting-in of wells in Wyoming during the period of historically low oil prices caused the drop in crude oil production volumes. Other income increased from higher processing and transportation fees. Expenses. Total expenses for the first half of 1999 were $22,434,000, a 16% increase over 1998. Operating expenses of $9,381,000 increased 4% over 1998 as the result of an increase in workovers and the settlement of a joint interest billing dispute. Depletion and depreciation expense of $6,129,000 was slightly 27 higher than in 1998 as the decrease in sales volumes was more than offset by a higher depletion cost per unit. A $1,350,000 provision for doubtful accounts was established in the first quarter of 1999 to provide for amounts due from a natural gas purchaser that declared bankruptcy. General and administrative expenses of $1,836,000 increased significantly over the 1998 period, reflecting the higher costs associated with being a larger, public company. Interest expense rose to $3,738,000 from higher debt levels in 1999, primarily as a result of the Unocal acquisition. Net Income (Loss). We reported a net loss of $261,000 during the first half of 1999 compared to net income of $2,586,000 in 1998. Lower revenues and higher expenses, including the provision for doubtful accounts and the general and administrative expense increase, resulted in the loss. Year Ended December 31, 1998 Compared With Predecessors' 12 Month Periods Ended September 30, 1997 and December 31, 1997 Revenue. Total oil and gas revenues for the 12 months ended December 31, 1998 were $45,687,000, an increase of 25% over $36,588,000 of combined predecessor revenue for 1997. Natural gas revenues for the 1998 period were $35,713,000, approximately 31% higher than 1997 predecessor natural gas revenues of $27,264,000. Natural gas sales volumes for the 1998 period were 15,315,000 Mcf, a 29% increase over 11,854,000 Mcf in 1997. Average natural gas sale prices declined from $2.30 per Mcf in the 1997 period to $2.13 in 1998. For 1998, approximately 84% of our product sales were natural gas. A majority of our natural gas production was sold under long-term contracts with approximately 35% under one- to three-year contracts and 60% under 10-year contracts. Crude oil revenues for 1998 were $6,367,000, a 31% decrease from $9,171,000 of predecessor revenues for the same period in 1997. Crude oil production in the 1998 period was 667,000 barrels compared to 619,000 predecessor barrels, an increase of 8%. The average crude oil sales price for 1998 was $9.55 per barrel, compared to an average price of $14.62 per barrel in 1997, a decrease of 35%. Interest and Other Income. Interest and other income for the year ended December 31, 1998 was $3,607,000 and primarily consisted of $1,632,000 from the sale of tax credits and $1,879,000 from transportation and processing of natural gas. Minority Interest. The minority interest in net loss of MSR for 1998 was $758,000. This was the minority interest's 53.5% share of MSR's before tax net loss of approximately $1,416,000. As described in the footnotes to the financial statements, this minority interest relates to the portion of the merger with MSR that was accounted for under the purchase method of accounting. Expenses. Operating expenses for the year ended December 31, 1998 were $17,781,000, or $0.92 per Mcfe, a 5% decrease compared to $18,786,000 or $1.20 per Mcfe of predecessor operating expenses for the same period in 1997. Depreciation and depletion expense was $12,365,000, or approximately $0.64 per Mcfe, compared to $7,093,000 for 1997. General and administrative expense was $1,430,000, or approximately $0.07 per Mcfe, compared to $1,941,000 for 1997. Interest expense was $6,698,000, compared to $5,561,000 for 1997. Our interest rate averaged approximately 7.4%. Income Tax Expense. Income taxes for the year ended December 31, 1998 consisted of $950,000 due currently and deferred taxes of $2,336,000. The effective tax rate was 40%. Net Income. Net income for the year ended December 31, 1998 was $4,885,000 or $0.42 per share, which was approximately 10% of total revenues. 28 Management's Discussion and Analysis of Financial Condition and Results of Operations--Mercury Exploration Company Results of Operations The following discussion and analysis should be read in conjunction with Mercury's statement of income contained elsewhere in this prospectus. Year Ended September 30, 1997 Compared With Year Ended September 30, 1996 Mercury acquired the Shell Michigan properties on November 14, 1996. The results of operations of these properties have been included in Mercury's results since November 1, 1996. Unless otherwise indicated, the changes in operating results were primarily the result of the acquisition of these properties. Revenues. Total oil and gas revenues for the 1997 period were $41,328,000, an increase of 138% compared to $17,388,000 for the 1996 period. In 1997, $32,714,000 of the revenues were related to the sale of natural gas and crude oil, compared to $11,771,000 for the 1996 period. Sales volumes for 1997 were 12,864,000 Mcfe, sold at an average price of $2.54 per Mcfe, compared to 4,332,000 Mcfe sold in the 1996 period at an average price of $2.72 per Mcfe. This increase in sales was principally due to the purchase of the Shell Michigan properties. The remainder of the revenues for 1997, of approximately $8,614,000, as well as $5,617,000 in 1996, resulted from contract field services and gas marketing. Costs and Expenses. Total costs and expenses for the 1997 period were $24,156,000, a 69% increase compared to $14,265,000 for the 1996 period. Production expenses for the 1997 period were $16,454,000, or $1.28 per Mcfe, and a 38% increase compared to $11,907,000, or $2.75 per Mcfe. General and administrative expenses for 1997 were $1,784,000, a 30% increase compared to $1,372,000 for 1996. Depreciation and depletion for the 1997 period was $5,918,000, or $0.45 per Mcfe, compared to $986,000, or $0.23 per Mcfe, for 1996. Interest Expense. Interest expense for the nine months ended September 30, 1997 was $5,414,000 compared to $1,620,000 for the 1996 period. Almost all of the increase in interest expense relates to the approximately $57,000,000 borrowed to purchase the Shell Michigan properties. Other Income and Expenses. Excluding interest expense noted above, the remainder of other income totals $1,738,000 for the 1997 period, a decrease of $254,000, or 13%, from $1,992,000 for 1996. Most of the change is attributable to the $279,000 decrease in equity in partnership income. The decrease in net income from the partnerships was primarily due to higher operating costs. Income. Income before minority interest and income taxes was $13,496,000 for the 1997 period compared to $3,495,000 for 1996. These amounts include 100% of the results of operations of QELC, of which 52% is owned by Mercury. The minority interest in income of subsidiaries principally applies to QELC. Earnings. Net income was $5,115,000, or $20.38 per share, for the 1997 period compared to $2,248,000, or $8.96 per share, for 1996. Most of the increase relates to the acquisition of the Shell Michigan properties. Liquidity and Capital Resources Cash Flow from Operating Activities. Mercury's net cash flow from operations for the year ended September 30, 1997 was $15,356,000, compared to $3,951,000 for the same period in 1996. The increase was principally attributable to the Shell Michigan properties. Cash Flow from Investing Activities. Mercury's net cash used for investing activities during the twelve months ended September 30, 1997 totaled $53,578,000. Of this amount, $54,231,000 was for capital expenditures, which were principally used for the acquisition of the Shell Michigan properties. 29 Cash Flow from Financing Activities. For the year ended September 30, 1997, cash provided by financing activities totaled $39,794,000. Mercury borrowed $94,323,000 and repaid $54,529,000 of debt. On October 9, 1997, Mercury completed the acquisition of the Destec properties in Michigan from ECT Enocene Enterprises II, Inc. The properties consist of 143 wells with combined proved reserves of approximately 30.8 Bcfe. The purchase price was approximately $23,500,000, which was paid in cash provided primarily by bank debt. Effective January 1, 1998, Mercury exchanged most of its natural gas and crude oil producing properties and most of its long-term debt for our common stock. Three Months Ended December 31, 1997 Compared With Three Months Ended December 31, 1996 Revenues. Total oil and gas revenues for the three months ended December 31, 1997 were $11,049,000, an increase of 10% compared to $10,016,000 for the 1996 period. In 1997, $9,456,000 of the revenues related to the sale of natural gas and crude oil, compared to $8,178,000 for the 1996 period. Sales volumes for the 1997 period were 4,342,800 Mcfe sold at an average price of $2.18 per Mcfe, compared to 3,177,000 Mcfe sold in the 1996 period at an average price of $2.58 per Mcfe. The increase in natural gas and crude oil sales was primarily due to the purchase of the Shell Michigan and the Destec properties. The remainder of the revenues, approximately $1,593,000 for the 1997 period and $1,838,000 in 1996, was from natural gas and crude oil contract operations, providing services such as field operations, well supervision, well maintenance, and gas marketing. Costs and Expenses. Total costs and expenses for the 1997 period were $7,734,000, an increase of 28% over $6,039,000 for the 1996 period. Generally, the increase in expense is the result of the acquisition of the Destec and Shell Michigan properties. The Destec results have been included since October 1, 1997, and Shell Michigan since November 1, 1996. Operating expenses for the three months ended December 31, 1997, were $4,736,000 or $1.09 per Mcfe, compared to $4,114,000, or $1.30 per Mcfe for the 1996 period. A portion of the improvement in cost per unit of sales was due to economies of scale. The recent acquisitions included mostly producing natural gas properties. Natural gas properties generally cost less to operate on a per unit of sales basis than do oil properties. Depletion and depreciation expense for the 1997 period was $2,466,000, or $0.57 per Mcfe, compared to $1,479,000 or $0.47 per Mcfe, for 1996. The increase in 1997 was due to Mercury's property acquisitions. General and administrative expenses for the 1997 period were $532,000, a 19% increase over $446,000 for the 1996 period, largely attributable to the increased size of Mercury's asset base. Other Income and Expense. Interest expense for the three months ended December 31, 1997 was $1,879,000, an increase of 39% over $1,353,000 for the 1996 period. The increase in interest expense primarily was due to the increase in debt related to Mercury's property acquisitions. During the 1997 period, Mercury received a settlement on a lawsuit in the amount of $2,781,000, which was included in other income. The other income items for the 1997 period totaled $652,000, down slightly compared to $750,000 for 1996. Income. Income before income taxes and minority interest was $4,869,000 for the 1997 period compared to $3,374,000 in 1996. These amounts include 100% of the results of operations of QELC. The minority interest in income of subsidiary of $1,277,000 for the 1997 period and $1,422,000 for 1996 primarily applies to QELC. Income taxes were calculated using a statutory rate of 34%. Earnings. Net income was $2,354,000, or $9.38 per share, for the 1997 period, compared to $1,279,000, or $5.10 per share, for 1996. Most of the increase in earnings relates to the recent property acquisitions. 30 Year 2000 Compliance We have developed a Year 2000 Plan to address the Year 2000 issue created by computer programs and applications that use two digit rather than four digit date fields to designate a year. As a result, computer equipment, software, and devices with embedded technology that are date-sensitive may be unable to recognize or may misinterpret the actual date. This could result in a system failure or miscalculations causing disruptions of operations. We have assessed our information technology, referred to as "IT," and our non-IT systems. We believe that all of our computer equipment and software as well as our operational and control systems are currently Year 2000 compliant. We are also monitoring the compliance efforts of the significant suppliers, customers, and service providers with whom we do business and whose IT and non- IT systems interface with ours to ensure that they will be Year 2000 compliant. Management believes that ongoing communications with and assessment of the compliance efforts of these third parties will minimize any noncompliance risks. Although we do not expect to experience significant operational problems due to the Year 2000 issue, we cannot assure you that this issue will not materially impact our results of operations or adversely affect our relationship with customers or vendors. The inability of third parties to complete their Year 2000 resolution in a timely fashion could materially impact our results of operations and cash flows. The effect of non-compliance by third parties is not determinable. The most reasonably likely "worst case" impacts would be: . impairment of our ability to deliver our production to, or receive payment from, third parties gathering and/or purchasing our production from affected facilities; . impairment of the ability of third-party suppliers or service companies to provide needed materials or services to our planned or ongoing operations, necessitating deferral or shut-in of exploration, development or production operations; . impairment of our ability to receive and process data, which would hinder our ability to generate development drilling and exploitation activities; and . our inability to execute financial transactions with our banks or other third parties whose systems fail or malfunction. We do not anticipate significant operational or financial problems due to the Year 2000 issue. However, there are currently no commercially reasonable alternatives to our current IT and non-IT systems. As a result, contingency plans would include working with vendors, suppliers and various third parties to remedy any Year 2000-related problems as quickly as possible. Costs incurred to date for Year 2000 compliance have been insignificant and we expect the remaining costs to be minimal. 31 BUSINESS AND PROPERTIES General We are an independent energy company engaged in the acquisition, development, exploration, production and sale of natural gas and crude oil and the gathering, processing and transmission of natural gas. Our producing properties are located principally in the states of Michigan, where we are the largest independent natural gas producer, Wyoming and Montana. We acquired our first properties in Canada in August 1999. Over the past four years, we have significantly increased our proved reserves and production. We have accomplished this growth primarily through the acquisition of reserves in well- established producing areas followed by aggressive exploitation and development drilling and the purchase of additional interests in those or nearby similar properties. Our properties are located in well-established producing areas that have long productive histories and typically exhibit low annual decline rates. We have established a high quality reserve base that is primarily located in Michigan and the Rocky Mountain states of Montana and Wyoming. As of September 1, 1999, we had proved reserves of 364 Bcfe, of which approximately 58% were natural gas and 42% were crude oil and condensate, with an estimated PV-10 value of $348.6 million. The average prices used in this calculation were $2.75 per Mcf of gas and $19.32 per barrel of oil, which takes into account all applicable hedging arrangements and basis and quality differentials. Approximately 66% of our proved reserve volumes are classified as proved developed and we are the operator of the proved reserves that constitute approximately 92% of our PV-10 value. Our production for the twelve months ended June 30, 1999, on a pro forma basis, was 19.8 Bcfe, assuming the acquisition of producing properties from Unocal on May 17, 1999 had occurred as of January 1, 1999. Approximately 84% of this production was natural gas. Based on our proved reserves as of September 1, 1999, we had a reserve life of 18.4 years. As of September 1, 1999, we had interests in 1,623 gross (769 net) producing wells and were the operator of approximately 69% of the gross wells. No individual well accounts for a significant amount of our production. Since 1995, we have experienced significant growth in reserves and production and achieved high drilling success rates. We have increased our reserves by 139% from 152 Bcfe on December 31, 1995 to 364 Bcfe as of September 1, 1999, and we have done this at an average acquisition, development and finding cost of $0.62 per Mcfe. In 1998, we have replaced 154% of our production through extensions and discoveries at an average cost of $0.32 per Mcfe. Average daily production has increased by 202% from 17.5 Mmcfe in 1996 to 52.9 Mmcfe in 1999. Our average daily production for August 1999 was approximately 60.0 Mmcfe. Since 1996, we have participated in the drilling of 132 gross (61 net) wells and have achieved a success rate of 98%. Since 1996, 86% of our drilling has been classified as development and 14% has been classified as exploratory. We were formed in December 1997 for the purpose of combining natural gas and crude oil properties owned by Mercury, QELC and Michigan Gas Partners. Effective January 1, 1998, Michigan Gas Partners was merged into us and assets and liabilities of Mercury and QELC were transferred to and assumed by us. Later, in March 1999, we became the surviving company in a merger with MSR. Although we are a new company, we, through our principal predecessor, Mercury, have operated in the oil and gas industry since 1963. Our Strengths We believe that our historical success and future prospects are directly related to our unique combination of strengths, including the following: . our high quality property base; . our significant inventory of exploitation and development opportunities; . our experience and success with acquisition and exploitation; 32 . our experienced technical team; and . our high degree of operational control. Our Strategy Our business strategy focuses on growth in value per share through development of our existing property base, the selective acquisition of high- quality, long-lived producing properties, managing our exposure to commodity price volatility, reducing operating costs, improving efficiency and increasing production and reserves. The key elements of our strategy are to: . exploit our existing property base; . pursue complementary acquisitions; . manage commodity price risk; and . participate in exploration activities. Antrim Shale Versus Conventional Natural Gas The majority of our natural gas reserves are in the Antrim Shale formation. The Antrim Shale is a thick blanket formation, generally found from 500 feet to 2,200 feet in depth, which underlies much of northern and western Michigan. Natural gas reserves in the Antrim are developed and produced using methodology which is very similar to that used in developing and producing coal bed methane reserves. Typically, commercial natural gas and crude oil are found in a porous, permeable layer of rock, to which hydrocarbons have migrated, which is surrounded by a non-permeable layer or barrier of rock which then traps the hydrocarbons until extracted. The Antrim Shale is fairly porous with naturally occurring fracturing. As in coal bed methane production, when wells are drilled and placed on production, they initially produce significant quantities of water; as water is taken out of the reservoir, the reservoir pressure decreases and the natural gas leaves (desorbs from) the shale and can flow to the wellbore. The ability of the Antrim Shale to produce commercial quantities of natural gas depends on the amount of gas originally in the shale, the level of natural fracturing (permeability) through which the natural gas released can flow to the wellbore and the amount that the reservoir pressure can be reduced to promote the release of gas from the shale. Description of Our Properties We own significant interests in the following properties: Michigan Reserve and Production Data
Reserve Data Estimated Daily as of Production Data September 1, 1999 for August 1999 -------------------- -------------------- Gas Oil Total Gas Oil Total (Bcf) (Mmbbls) (Bcfe) (Mmcf) (Bbls) (Mmcfe) ----- ------- ----- ----- ----- ------ Producing Formation: Antrim Shale...................... 108.2 - 108.2 15.9 - 15.9 Prairie du Chien.................. 80.9 0.6 84.5 28.6 227 29.9 Other............................. 9.4 2.8 26.2 0.5 563 3.9 ----- ----- ----- ----- ---- ----- Total........................... 198.5 3.4 218.9 45.0 790 49.7 ===== ===== ===== ===== ==== =====
33 The Antrim Shale. The Antrim Shale underlies a large percentage of our 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 6,300 wells drilled in the trend and the approximately 500 wells we have drilled suggest typical per well reserves of 600 Mmcf to 800 Mmcf and a total productive life of more than 20 years, with an average reserve life of 15 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. They remain at these levels for one to two years and then decline 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 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 us 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. In addition, 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%. 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. As of September 1, 1999, we own interests in 781 Antrim wells and operate 404 of these wells, or 52% of our total Antrim wells. Our average net production during August 1999 was 15.9 Mmcf per day. Since 1996 we have drilled 115 Antrim wells and successfully completed 114 for a success rate of 99%. We have 120 identified Antrim drilling locations of which 81 are currently classified as proved undeveloped locations. In 1998 we drilled 49 gross (37.7 net) Antrim wells, successfully completing all of them, and as of September 1, 1999 we have drilled four gross (four net) Antrim wells, all of which were successfully completed. In the remainder of 1999 we expect to drill 28 gross (28 net) wells for a cost of approximately $4.9 million, and in 2000 we have budgeted for the drilling of 53 gross (33.5 net) Antrim wells at a cost of approximately $7.4 million. The Prairie du Chien. Our Prairie du Chien 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. As a result of the Unocal acquisition in May 1999, we own an average working interest of 92%, on a Bcfe basis, in the wells comprising our PdC reserves. We operate over 90% of these reserves. Our PdC production is well established. Three development wells have been drilled in recent years to increase production from existing fields. As a result of some of this work and the Unocal acquisition, we have identified 14 additional proved undeveloped locations. In addition, there are numerous proved non-producing zones in existing wellbores that provide recompletion opportunities, allowing us to maintain or, in some cases, increase production from our PdC wells as currently producing reservoirs deplete. As of September 1, 1999, we had 53 gross (32.6 net) PdC wells producing 29.9 Mmcfe per day. For the rest of 1999 and 2000 we have budgeted $50,000 and $690,000, respectively, for various workovers and recompletions on our PdC wells, and we plan to spend $5.2 million in 2000 to drill four new wells. Richfield/Detroit River. The Unocal acquisition included 1,123 producing oil wells in the Beaver Creek field, which is being waterflooded in the Devonian Richfield formation. Additional interests were also acquired 34 in the nearby Garfield Richfield field, which has seven producing oil wells. Our average daily production from the Richfield formation is approximately 3.5 Mmcfe. We have budgeted $2.4 million to drill ten new Richfield wells and $5.1 million to drill and recomplete 36 Detroit River wells in 2000. Rocky Mountain Region Our Rocky Mountain properties are located in Montana and Wyoming, and our production, which is primarily crude oil, is from well-established producing formations at depths ranging from 1,000 feet to 11,000 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/Morrow at 8,400 feet to 9,000 feet. Our Rocky Mountain producing properties possess significant development drilling, secondary recovery and other exploitation opportunities. As of September 1, 1999, our Rocky Mountain proved reserves were 21 Mmbbls of crude oil and 5.9 Bcf of natural gas, for total equivalent reserves of 131.7 Bcfe. In 1998, our daily production averaged 9.5 Mmcfe, and during the month of August 1999 our daily production averaged 8.7 Mmcfe. In 1998 we drilled no wells in the area; however, we spent $160,000 on various exploitation projects. In 1999, we have spent $400,000 on the drilling of five gross (4.7 net) wells, four of which were successful. We have also spent approximately $200,000 on various exploitation activities. We are currently conducting an active exploitation program on several of our Rocky Mountain fields that involves recompletions in existing wells. For the rest of 1999, we expect to spend approximately $2.2 million on various exploitation projects. In 2000 we have budgeted $4.9 million for the drilling of 40 gross (40 net) wells and $3.7 million for exploitation activities. South Casper Creek Steamflood Project In October 1995, we 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. Our 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 minimal cost. While the project is economically viable at current crude oil prices, we have excluded this project from our reserve report and are studying our options in light of the project's sensitivity to long-term oil prices. Canada We believe that a number of producing areas in Canada offer excellent opportunities for acquisition and exploitation oriented companies such as ourselves. Our purchase of MGV, a Calgary-based independent energy company, provides a vehicle for us to evaluate and selectively participate in such opportunities. MGV's main strength lies in conducting detailed reservoir engineering studies over producing fields to identify remaining reserves not currently being exploited by the current operator. MGV's technical staff has developed proprietary reservoir analysis software designed to integrate large amounts of engineering and geologic data to identify such opportunities. Additionally, MGV has an arrangement with Pan Canadian 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 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 Pan Canadian participates, and a 100% interest if Pan Canadian declines. MGV recently made its first acquisition of 375 existing gas wells in southern Alberta with net daily production of 1.2 Mmcf and 10.1 Bcf of proved reserves. We believe MGV will allow us to methodically build a reserve and production base in Canada in a fashion similar to the development of our Michigan reserves. 35 Exploration Activities We have interests in 19 exploratory prospects located in Montana and Wyoming. Eleven are crude oil prospects and the remaining eight are natural gas prospects. These prospects are located in the Crazy Mountain Basin, the Big Horn Basin, and the Montana Thrust Belt. Our interest in these prospects ranges from 25% to 50%, with 50% being our most common interest. The target depths of these prospects range from 3,000 feet to 19,500 feet, with 7,000 feet being the average depth. We believe that several of these prospects have significant reserve potential and that we can test many of them at a relatively low cost. Big Horn Basin. The Big Horn Basin is located in northern Wyoming and southern Montana. Several of the prospects in the Big Horn are known to contain oil, however, the oil is a low gravity, heavy crude. Due to the low gravity of the oil, pressures at the wellbore required to produce the oil are high, resulting in high levels of water production. We believe that drilling horizontal wells would reduce the pressure required to produce the oil and decrease associated water production. A producing horizontal well on one of these prospects is currently being evaluated, and the other prospects will be developed based on the results of this well. Crazy Mountain Basin. The Crazy Mountain Basin is located in south central Montana and is an extension of the Big Horn Basin. Our prospects are approximately 30 miles from existing production and consist of two Fort Union coal bed methane prospects and a deep Frontier prospect. The two Fort Union prospects are less than 4,000 feet deep and were identified by a well drilled on our acreage in 1996, which encountered numerous thin gassy coal beds between 500 feet and 4,500 feet. The Frontier prospect, which is at a depth of 14,600 feet, is designed to test the Big Elk member of the Frontier formation. We have 3-D seismic data over this prospect and have identified several large geologic structures. Montana Thrust Belt. The Montana Thrust Belt is located in western Montana. These prospects target fractured rocks of the Mississippian Madison formation, which has been over-thrust from the west by older Pre-Cambrian rocks. We believe the geologic environment is similar to the Alberta Foothills area that has significant reserves and production. We have five prospects in the Thrust Belt area. Natural Gas and Crude Oil Reserves The following table presents our estimated net proved natural gas and crude oil reserves and the present value of our reserves at September 1, 1999 and December 31, 1998, in each case based on a reserve report prepared by Holditch. Appendix A to this prospectus contains a letter prepared by Holditch summarizing the reserve report. The PV-10 values shown in the table are not intended to represent the current market value of the estimated natural gas and crude oil reserves we own. For further information concerning the PV-10 values of these proved reserves, please read note 11 of the notes to our December 31, 1998 consolidated financial statements.
September 1, December 31, 1999 1998 ------------ ------------ Proved reserves: Oil (Mbbl).................................. 24,483 17,983 Natural gas (Mmcf).......................... 217,124 153,202 Total (Mmcfe)............................... 364,022 261,100 Proved developed reserves: Oil (Mbbl).................................. 15,180 9,829 Natural gas (Mmcf).......................... 149,130 123,743 Total (Mmcfe)............................... 240,210 182,717 Estimated future net cash flows before income taxes........................................ $620,881 $275,737 PV-10 value................................... $348,567 $160,495
The process of estimating natural gas and crude oil reserves is complex. It requires various assumptions, including assumptions relating to natural gas and crude oil prices, drilling and operating expenses, capital 36 expenditures, production taxes and availability of funds. Production rates and timing of development expenditures must be projected. Reserve estimates require an analysis of available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. Therefore, estimates of natural gas and crude oil reserves are inherently imprecise. Actual future production, natural gas and crude oil prices, revenues, production taxes, development expenditures, operating expenses and quantities of recoverable natural gas and crude oil reserves most likely will vary from our estimates. Any significant variance could materially affect the estimated quantities and present value of reserves shown in this prospectus. In addition, estimates of proved reserves may be adjusted to reflect production history, results of exploration and development, prevailing natural gas and crude oil prices and other factors that are beyond our control. Recovery of undeveloped reserves generally requires significant capital expenditures and successful drilling operations. The reserve data assumes that we will make these expenditures. Although reserve estimates and the associated development costs are prepared in accordance with industry standards, the estimated costs may be inaccurate, development may not occur as scheduled and results may not be as predicted. You should not assume that the PV-10 value of our reserves referred to in this prospectus is the current market value of our estimated natural gas and crude oil reserves. In accordance with Securities and Exchange Commission requirements, we generally base the PV-10 value on prices and costs on the date of the estimate. Actual future prices and costs may differ materially from those used in the estimate. Volumes, Prices and Operating Expenses The following table presents information regarding the production volumes of, average sales prices received for, and average production costs associated with, our sales of natural gas and crude oil for the periods indicated. Pro forma adjustments give effect to the purchase of properties from Unocal on May 17, 1999 as if the purchase had occurred at the beginning of 1999.
Six Months Ended June 30, ---------------------------- Year Ended Pro Forma December 31, 1999 1999 1998 1998 ------------------- -------- ------------ Production: Natural gas (Mmcf)................. 8,460 7,381 7,741 15,315 Oil and condensate (Mbbls)......... 347 288 370 667 Total (Mmcfe) ..................... 10,542 9,109 9,961 19,317 Average sales price unit: Natural gas (per Mcf).............. $ 2.19 $ 2.20 $ 2.31 $ 2.33 Oil and condensate (per Bbl)....... 12.80 12.09 10.39 9.55 Total (per Mcfe)................... 2.17 2.17 2.18 2.17 Expenses (per Mcfe): Lease operating.................... $ 0.97 $ 1.03 $ 0.91 $ 0.92 General and administrative......... 0.17 0.20 0.06 0.07 Depreciation, depletion and amortization...................... 0.70 0.67 0.61 0.64
37 Development, Exploration and Acquisition Capital Expenditures The following table presents information regarding our net costs incurred in the purchase of proved and unproved properties and in exploration and development activities.
Six Months Ended June 30, Year Ended December 31, -------------- ----------------------- 1999 1998 1998 ------- ------ ----------------------- (in thousands) Acquisition costs........................ $25,807 $1,670 $ 1,715 Exploration.............................. - 370 1,095 Development.............................. 3,048 4,864 8,283 ------- ------ ------- Total costs incurred................... $28,855 $6,904 $11,093 ======= ====== =======
Drilling Activity The following table shows our drilling activity for the six months ended June 30, 1999 and for the year ended December 31, 1998. In the table, "gross" refers to the total wells in which we have a working interest and "net" refers to gross wells multiplied by our working interest in such wells.
Six Months Ended Year Ended June 30, December 31, ------------------- -------------- 1999 1998 1998 --------- --------- -------------- Gross Net Gross Net Gross Net ----- --- ----- --- ------- ------ Exploration Wells: Productive.................................. - - 6.0 6.0 9.0 9.0 Non-productive.............................. - - - - 1.0 0.5 --- --- ---- --- ------ ------ Total..................................... - - 6.0 6.0 10.0 9.5 === === ==== === ====== ====== Development Wells: Productive.................................. 8.0 7.2 15.0 7.4 41.0 29.7 Non-productive.............................. 1.0 0.9 - - - - --- --- ---- --- ------ ------ Total..................................... 9.0 8.1 15.0 7.4 41.0 29.7 === === ==== === ====== ======
Productive Wells The following table sets forth the number of productive natural gas and crude oil wells in which we owned an interest as of September 1, 1999:
Total Productive Wells ----------------------- Gross Net ------------ ---------- Natural gas....................................... 1,120 297 Crude oil......................................... 503 472 ------------ ---------- Total........................................... 1,623 769 ============ ==========
Productive wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and crude oil wells awaiting connection to production facilities. 38 Acreage Data The following table presents information regarding our developed and undeveloped lease acreage as of September 1, 1999. Developed acreage refers to acreage within producing units and undeveloped acreage refers to acreage that has not been placed in producing units.
Developed Undeveloped Acreage Acreage Total --------------- --------------- --------------- Gross Net Gross Net Gross Net ------- ------- ------- ------- ------- ------- Michigan........................ 120,370 37,949 25,932 19,608 146,302 57,557 Montana......................... 77,328 76,488 274,105 143,447 351,433 219,935 Canada.......................... 59,494 4,743 9,648 197 69,142 4,940 Wyoming......................... 7,285 6,702 56,608 38,632 63,893 45,334 ------- ------- ------- ------- ------- ------- Total......................... 264,477 125,882 366,293 201,884 630,770 327,766 ======= ======= ======= ======= ======= =======
Marketing We have typically marketed the natural gas and crude oil produced from our properties through normal channels for these products. We generally sell our crude oil at local field prices paid by the principal purchasers of crude oil. The majority of our natural gas production is sold under long-term contracts of up to 10 years in length and is transported in intrastate pipelines. Both natural gas and crude oil are purchased by refineries, major oil companies, public utilities, industrial customers and other users and processors of petroleum products. We are not confined to, or dependent upon, any one purchaser or small group of purchasers. Accordingly, the loss of a single purchaser, or a few purchasers, would not have a long-term material effect on our business because there are numerous purchasers in the areas in which we sell our production. In September 1999, purchases by the following companies exceeded 10% of our total oil and gas revenues: CMS Energy, Coenergy Trading Company, Reliant Energy Resources Corp. and Unocal Energy Trading Inc. Competition We face competition from other oil and gas companies in all aspects of our business, including acquisition of producing properties and oil and gas leases, marketing of oil and gas, and obtaining goods, services and labor. Many of our competitors have substantially larger financial and other resources. Factors that affect our ability to acquire producing properties include available funds, available information about the property and our standards established for minimum projected return on investment. Because gathering systems are the only practical method for the intermediate transportation of natural gas, competition for natural gas delivery is presented by other pipelines and gas gathering systems. Competition is also presented by alternative fuel sources, including heating oil and other fossil fuels. Because of the long-lived nature of our natural gas and crude oil reserves, our ownership interest in Beaver Creek Pipeline, L.L.C., and our expertise in developing our reserves, we believe that we are competing effectively in the market. Regulation Federal Regulation of Transportation of Natural Gas. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated by the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978 and the regulations promulgated by the Federal Energy Regulatory Commission. In the past, the federal government has regulated the prices at which natural gas could be sold. Deregulation of natural gas sales by producers began with the enactment of the Natural Gas Policy Act. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining Natural Gas Act and Natural Gas Policy Act price and non-price controls affecting producer sales of natural gas effective January 1, 1993. Congress could, however, reenact price controls in the future. 39 Our sales of natural gas are affected by the availability, terms and cost of pipeline transportation. The price and terms for access to pipeline transportation remain subject to extensive federal regulation. Beginning in April 1992, the Federal Energy Regulatory Commission issued Order No. 636 and a series of related orders, which required interstate pipelines to provide open- access transportation on a basis that is equal for all natural gas suppliers. The Federal Energy Regulatory Commission has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. Although Order No. 636 does not directly regulate our production and marketing activities, it does affect how buyers and sellers gain access to the necessary transportation facilities and how we and our competitors sell natural gas in the marketplace. The courts have largely affirmed the significant features of Order No. 636 and the numerous related orders, although some appeals remain pending and the Federal Energy Regulatory Commission continues to review and modify its regulations regarding the transportation of natural gas. We cannot predict what action the Federal Energy Regulatory Commission will take on these matters, nor can we accurately predict whether the Federal Energy Regulatory Commission's actions will achieve the goal of increasing competition in markets in which our natural gas is sold. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers, gatherers and marketers. Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the Federal Energy Regulatory Commission and the courts. The natural gas industry historically has been very heavily regulated; therefore, we cannot assure you that the less stringent regulatory approach recently pursued by the Federal Energy Regulatory Commission and Congress will continue. Federal Regulation of Transportation of Oil. Sales of crude oil, condensate and natural gas liquids by us are not currently regulated and are made at market prices. Effective as of January 1, 1995, the Federal Energy Regulatory Commission implemented regulations establishing an indexing system for transportation rates for interstate common carrier oil pipelines. These rates are generally indexed to inflation, subject to conditions and limitations. These regulations may, over time, tend to increase transportation costs or reduce wellhead prices for crude oil. However, we do not believe that these regulations affect us any differently than other natural gas producers, gatherers and marketers. State Regulation. Our oil and gas operations are subject to various types of regulation at the state and local levels. These regulations require drilling permits, regulate the methods for developing new fields and the spacing and operating of wells and waste prevention, and sometimes impose production limitations. These regulations may limit our production from wells and the number of wells or locations we can drill. Some states have adopted regulations with respect to gathering systems. These regulations have not had a material effect on the operation of our gathering systems, but we cannot predict whether any future regulations in this area may have a material impact on our gathering systems. Federal, State and Indian Leases. Our operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, including nondiscrimination statutes. We must conduct our operations on these leases pursuant to permits and authorization and other regulations issued by the Bureau of Land Management, Minerals Management Service and other agencies. Environmental Regulations. Our operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Our exploration and production operations and facilities for gathering, treating, processing and handling hydrocarbons and related exploration and production wastes are subject to stringent environmental regulation. These laws and regulations sometimes require government approvals before activities occur, limit or prohibit activities because of protected areas or species, impose substantial liabilities for pollution and provide penalties for non-compliance. As with the industry generally, compliance with existing and anticipated regulations increases our overall cost of business. These regulations, however, generally affect us and our competitors similarly. Environmental laws and regulations are subject to frequent change, and we are not able to predict the costs or other impacts of environmental regulation on our future operations. 40 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 some classes of persons that are considered to have contributed to the release or threat of release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Our operations are also subject to regulation of air emissions under the Clean Air Act and comparable state and local requirements. Implementation of these laws could lead to the gradual imposition of new air pollution control requirements on our operations. As a result, we may incur capital expenditures over the next several years to upgrade our air pollution control equipment. We do not believe that our operations would be materially affected by any such requirements, nor do we expect such requirements to be any more burdensome to us than to other companies our size involved in natural gas and oil exploration and production activities. In addition, legislation has been proposed in Congress from time to time that would reclassify some natural gas and oil exploration and production wastes as "hazardous wastes," which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If Congress were to enact this legislation, it could increase our operating costs, as well as those of the natural gas and oil industry in general. Initiatives to further regulate the disposal of natural gas and oil wastes are also pending in some states, and these various initiatives could have a similar impact on us. The Clean Water Act imposes restrictions and controls on the discharge of oil and gas wastes and other forms of pollutants into waters of the United States. Federal law also imposes strict liability on owners of facilities for consequences of an oil spill where the spill is in navigable waters or along shorelines. These laws impose penalties for unauthorized discharges and substantial liability for costs of removal and damages resulting from an unauthorized discharge. State laws for the control of water pollution provide similar penalties and liabilities. The cost of compliance with water pollution laws has not historically been material to our operations. There can be no assurance that changes in federal, state or local water pollution laws and programs will not materially adversely affect our operations in the future. Our management believes that we are in substantial compliance with current environmental laws and regulations that affect us and that continued compliance with these requirements will not have a material adverse impact on us. Employees At September 30, 1999, we had 19 full-time employees. We believe that our relationships with our employees are satisfactory. None of our employees is covered by a collective bargaining agreement. From time to time, we use the services of independent consultants and contractors to perform various professional services, particularly in the areas of construction, design, well- site surveillance, permitting and environmental assessment. Independent contractors usually perform field and on-site production operation services for us, including pumping, maintenance, dispatching, inspection and testing. In addition, Mercury provides accounting services to us under a management agreement. See "Certain Transactions--Mercury Operating Agreement". Legal Proceedings From time to time, we may be a party to various legal proceedings. We currently are not a party to any material litigation. 41 MANAGEMENT Executive Officers and Directors The following table sets forth the names, ages and positions of our executive officers and directors as of October 1, 1999.
Name Age Position ---- --- -------- Thomas F. Darden................. 46 Chairman of the Board, Chief Executive Officer Glenn M. Darden.................. 44 President, Chief Operating Officer and Director Bill Lamkin...................... 54 Executive Vice President, Chief Financial Officer Houston Kauffman................. 45 Vice President-Acquisitions Fred van Naerssen................ 58 Vice President and Controller Robert N. Wagner................. 35 Vice President-Engineering Frank Darden..................... 72 Director D. Randall Kent.................. 73 Director Steven M. Morris................. 47 Director W. Yandell Rogers III............ 36 Director Anne Darden Self................. 42 Director Mark Warner...................... 36 Director
The following biographies describe the business experience of our executive officers and directors. THOMAS F. DARDEN has served on our board 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 had been 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 has been one of our directors and our President since our inception in December 1997 and was elected Chairman of the Board and Chief Executive Officer on March 4, 1999. GLENN M. DARDEN has served on our board since December 1997. He also served with Mercury for 18 years, and for the last five years was the Executive Vice President of that company. 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 a 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 has been one of our directors since our inception in December 1997. He served as our Vice President until he was elected President and Chief Operating Officer on March 4, 1999. BILL 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. Beginning in 1978, he worked as Treasurer, Controller, and then Director of Financial Services at Union Pacific Resources until he became our Executive Vice President and Chief Financial Officer when he joined us in June 1999. HOUSTON KAUFFMAN is a professional landman and 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 in 1995 and is now our manager of acquisitions, divestments and trades. On March 4, 1999, Mr. Kauffman was elected our Vice President-Acquisitions. 42 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 us in July 1999 after retiring from Union Pacific Corporation. ROBERT N. WAGNER has served as our Vice President-Engineering since July 1999. From January 1999 to July 1999, he was our 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. and served as both a drilling engineer and production engineer. Mr. Wagner received a BS in Petroleum Engineering from the Colorado School of Mines in Golden, Colorado in 1987. FRANK DARDEN is a registered professional engineer and Chairman of the Board of Mercury. He founded Mercury's parent corporation and has served as its Chairman of the Board since 1965 and as Chairman of Mercury since its founding in 1978. Mr. Darden began his career in the oil and gas business with Humble Oil and Refining Company in 1948. From 1954 through 1955, he was retained by Empresa Colombiana de Petroleos to organize an engineering department and guide the company's planning for the secondary recovery program in the La Cira Field in the Magdelena Valley of Colombia. From 1956 through 1964, Mr. Darden served as Manager of Operations for Newmont Oil Company, the energy subsidiary of Newmont Mining Corporation, and as Executive Vice President and director of Yucca Water Company. He was a director of MSR from March 7, 1997, until MSR's merger with us. Mr. Darden became one of our directors upon our formation in December 1997. D. RANDALL KENT is a retired Vice President of the General Dynamics Corporation. He joined General Dynamics/Fort Worth Division in 1949 and served in various engineering management positions, including Vice President and Chief Engineer of the F-16 Fighter Program. Following his retirement in 1991, Mr. Kent served as a consultant to the Lockheed-Martin Corporation. He graduated from Louisiana State University in 1947 with a BS in Mechanical Engineering, and from Cornell University in 1949 with an MS in engineering. Mr. Kent was elected a director of MSR in 1997 and, upon the merger of MSR with us, became one of our directors. STEVEN M. MORRIS is a Certified Public Accountant and President of Morris & Co., a private investment firm in Houston, Texas. From 1988 to 1991, he was Vice President of Finance for ITEX Enterprises, Inc. From 1981 to 1988, Mr. Morris was Financial Vice President of Hanson Minerals Company, a Houston-based oil and gas exploration company. From 1978 to 1981, he was a partner in the certified public accounting firm of Haley & Morris. He served as Senior Accountant with the Houston office of Arthur Young and Company from 1974 to 1977. Mr. Morris was elected a director of MSR in October 1994. Upon the merger of MSR with us on March 4, 1999, Mr. Morris became one of our directors. W. YANDELL ROGERS III has served as Vice President and General Manager of Ridgway's, Inc., based in Houston, Texas, since July 1997. For more than five years prior, he served as Regional Manager for Ridgway's, the largest privately held reprographics firm in the U.S., with more than 60 locations nationwide. He graduated from Southern Methodist University in 1987 with a BBA in Finance. Mr. Rogers was elected a director of MSR in 1997 and, upon the merger of MSR into us, became one of our directors. ANNE DARDEN SELF is currently Senior Vice President of Human Resources for Mercury, where she has worked since 1992. From 1988 to 1991, she was with BancPLUS Savings Association in Houston, Texas. She was employed as Marketing Director and then spent three years 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 our directors in September 1999. 43 MARK WARNER is currently a director of Domestic Energy Finance for Enron North America Corp. in Houston, Texas, where he has worked since 1995. He received a Bachelor's degree in Geological Engineering from the University of Missouri-Rolla in 1985 and a Master's degree in Petroleum Engineering from the University of Oklahoma in 1987. From 1987 to 1989, he was a reservoir engineer with Marathon Oil Company in Lafayette, Louisiana. From 1989 to 1993, he served as Manager of Petroleum Engineering for Remington Oil Company (formerly Box Energy) in Dallas, Texas. In 1995, he received an MBA from Southern Methodist University in Dallas. Mr. Warner currently serves as a member of the board of directors of HV Marine Services, Inc. Mr. Warner was elected as one of our directors at our 1999 meeting of stockholders. Thomas F. Darden, Glenn M. Darden, and Anne Darden Self are siblings. Frank Darden is their father. Committees of the Board of Directors Our audit committee currently consists of Messrs. Morris, Kent, Rogers and Warner. The audit committee reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the selection of our independent accountants, the scope of the annual audit, fees to be paid to the independent accountants, the performance of our independent accountants and our accounting practices. Our compensation committee currently consists of Messrs. Morris, Kent, Rogers and Warner. This committee's responsibilities include establishment of salaries, incentives and other forms of compensation for our officers and other employees and administration of our incentive compensation and benefit plans. Compensation Committee Interlocks and Insider Participation To date, no member of our compensation committee has served as an officer or employee of our company or any of our subsidiaries. No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or its compensation committee. Compensation of Directors Directors receive no cash remuneration for serving on the board of directors but are reimbursed for reasonable expenses incurred by them in attending board and committee meetings. On May 25, 1999, our board of directors approved the issuance of $10,000 of our common stock to each of Messrs. Frank Darden, Steven Morris, Randall Kent and Yandell Rogers, III as compensation for their services during 1998. Based upon the average of the high and low closing prices of our common stock on that date, we plan to issue 1,600 shares of our common stock to each of these non-employee directors prior to or shortly after completion of this offering. Executive Compensation Neither our Chairman of the Board nor any of our other officers received any compensation during 1998. The following table sets forth the names of our executive officers, the date each began employment with us and the current annual salary of each officer.
Date of Name Employment Annual Salary ---- ------------- ------------- Thomas F. Darden.............................. December 1997 $150,000 Glenn M. Darden............................... December 1997 $150,000 Houston Kauffman.............................. March 1999 $105,000 Bill Lamkin................................... May 1999 $135,000 Fred van Naerssen............................. July 1999 $120,000 Robert N. Wagner.............................. July 1999 $100,000
44 Bonus Arrangements In addition to their salaries, our executive officers are eligible for bonuses each year equal to up to 100% of their salary. The bonuses vest over a three year period at the rate of 50% in the year of award, and 25% in each of the two years following. As much as 75% of each bonus is payable in cash, at the option of the officer, and the remainder is payable in shares of our common stock. Bonus awards are based on our achievement of growth targets. The employee must be employed at the time of vesting to receive the bonus. 1999 Stock Option and Retention Stock Plan Our Board of Directors adopted our 1999 Stock Option and Retention Stock Plan on October 4, 1999. We plan to submit the stock option plan to our stockholders for approval at their next annual meeting, expected to be held in the second quarter of 2000. The stock option plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights and retention stock awards to our key employees. The purpose of the stock option plan is to: . strengthen our ability to reward performance which enhances long-term stockholder value; . increase employee stock ownership through performance based compensation plans; and . strengthen our ability to attract and retain an outstanding employee and executive team. We have reserved 1.3 million shares of common stock for issuance under the stock option plan. As of the date of this prospectus, no shares had been issued under the stock option plan, and no options or grants under the stock option plan are outstanding. Shares of common stock subject to options issued under the stock option plan which expire or terminate prior to exercise will be available for future issuance under the stock option plan. The Board's Compensation Committee administers the stock option plan. The stock option plan administrator has discretion to determine which eligible individuals are to receive option grants or other awards, and the terms and conditions of such options or other awards. The exercise price for options granted under the stock option plan may be paid: . in cash; . by surrender to us at the time of exercise of shares of common stock already owned by and issued to the optionee; or . by authorizing us to withhold common stock otherwise issuable on exercise of the option. Shares surrendered to or withheld by us will be valued at the fair market price of the shares on the date the option is exercised. 45 CERTAIN TRANSACTIONS Our Formation We were organized in December 1997 for the purpose of combining natural gas and crude oil properties owned by Michigan Gas Partners, Mercury and QELC. At the time of our formation, Mercury was the sole general partner of Michigan Gas Partners and JEDI, an affiliate of Enron, was the sole limited partner. The membership interests in QELC are owned by Mercury and members of the Darden family: Frank Darden, Thomas F. Darden, Glenn Darden and Anne Darden Self. The Darden family also owns, directly or indirectly, substantially all of the stock of Mercury. Effective January 1, 1998, Michigan Gas Partners was merged into us and various assets and liabilities of Mercury and QELC were transferred to and assumed by us. All of the debt owed by QELC to Trust Company of the West and by Mercury and QELC to Bank of America was also assumed by us and restructured as part of our formation. As a result of the merger of Michigan Gas Partners into us, the separate existence of Michigan Gas Partners ceased and we became the owner of Michigan Gas Partners' Michigan natural gas and crude oil properties. All of the partnership interests of JEDI in Michigan Gas Partners were converted into the right to receive 1,340,405 shares of our common stock. The interests of Mercury in Michigan Gas Partners were canceled without payment of any consideration and all shares of our common stock outstanding prior to the merger, consisting of 1,000 shares held by QELC, were canceled without payment of any consideration. Mercury transferred to us all of its oil and gas properties in the states of Michigan, Montana and Wyoming, except for some of its excluded Michigan properties. As consideration for the transfer, we assumed the liabilities of Mercury relating to the transferred properties, including debt in the amount of $34,600,000 owed by Mercury to Bank of America under a credit agreement dated January 31, 1997. We also issued 3,251,820 shares of our common stock to Mercury. In addition, at Mercury's request, 74,135 shares of our common stock to which Mercury was entitled under the merger agreement were issued to Mercury's employee, Jeff Cook, as part of his agreed compensation. QELC transferred all of its oil and gas properties in the states of Michigan and Montana to us as part of our formation. As consideration for this transfer, we assumed the liabilities of QELC relating to the transferred properties and debt in the amount of approximately $39,600,000 owed by QELC to TCW and Bank of America under credit agreements dated November 14, 1996. We issued an additional 3,030,860 shares of our common stock to QELC. Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self and Jack L. Thurber transferred to us the contractual after payout or net profits interests owned by those individuals in some of the assets of Mercury or QELC that were transferred to us in our formation. As consideration for those transfers of contractual rights, we issued 242,922 shares of our common stock to each of Frank Darden, Thomas F. Darden, Glenn Darden and Anne Darden Self and 301,488 shares of our common stock to Mr. Thurber. We satisfied our debt assumed from QELC and owed to TCW under a credit agreement dated November 14, 1996 by paying $17,075,000 in cash to TCW and issuing 1,340,405 shares of our common stock to TCW, in exchange for a $10,000,000 credit. Mercury later purchased all of the shares of our common stock issued to TCW and TCW is no longer a shareholder of ours. Bank of America financed the prepayment of the debt to TCW pursuant to the terms of a credit agreement, dated April 9, 1998, between us, Bank of America, as Agent, and other financial institutions named in our credit agreement. Mercury's and QELC's debt to Bank of America that was assumed by us was restructured under our credit agreement. The numbers of our shares referred to in the above discussion have been adjusted to reflect a stock dividend which was declared in February 1999 as part of our merger with MSR described below. 46 MSR Merger In early 1999, our stockholders approved the merger of MSR into us pursuant to the terms of an agreement and plan of merger dated September 1, 1998. The merger was completed on March 4, 1999. Pursuant to the MSR merger agreement and 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 us as the surviving corporation of the merger, and all the debts, liabilities and duties of MSR became ours; . 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 our common stock. The exchange ratio was determined pursuant to arm's-length negotiations between us and the disinterested directors of MSR. We issued a total of 2,577,694 shares to the MSR stockholders in this merger. At the time of the merger, Messrs. Thomas and Glenn Darden were each an officer and director of ours and of MSR. Frank Darden was an officer and director of ours and also a director of MSR. The Darden family and its affiliated companies also owned approximately 43.7% of the outstanding MSR common stock. In the merger, these MSR shares held by the Darden family were converted into 1,128,002 shares of our common stock. In addition, Thomas and Glenn Darden collectively owned options to purchase 228,570 shares of MSR common stock at an exercise price of $0.875 per share, which were converted into options to purchase 22,857 shares of our common stock at a purchase price of $8.75 per share. Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self, Mercury, Jack Thurber and Jeff Cook also collectively owned immediately exercisable warrants to acquire an aggregate of 5,500,000 shares of MSR common stock at an exercise price of $1.25 per share, as well as warrants for an aggregate of 5,500,000 shares of MSR common stock at an exercise price of $2.00 per share. All of the warrants were converted into warrants to acquire a number of shares of our common stock, at adjusted prices, in a manner similar to the conversion of the options described above. Paribas, a former lender to MSR, also held warrants to acquire MSR shares at the time of the MSR merger. These warrants were converted into warrants to acquire 28,000 of our shares at an exercise price of $33.75 per share and 5,750 of our shares at an exercise price of $.10 per share. The second of the two warrants expires on October 31, 2002 and is exercisable only after the closing price per share of our common stock on the American Stock Exchange reaches $10.00. Prior to the MSR merger, our bank debt was guaranteed by Mercury, Mercury Production Company, and QELC. The bank debt was also secured by pledges of the MSR stock and our stock owned by the Darden family, Mercury and QELC. As a condition to the merger, the bank debt was restructured so as not to require those guarantees and pledges. Patrick Montalban Mr. Patrick Montalban was a director and officer of MSR until his resignation as an officer on December 31, 1998. Pursuant to a severance agreement with MSR, Mr. Montalban continued to receive compensation from us, totaling $54,453, for a period of seven months following his resignation. Mr. Montalban remained as a director of MSR until completion of the MSR merger. Mercury Operating Agreement Prior to the MSR merger, we had no direct employees other than our top manager and officers. Instead, our businesses were managed under a management agreement entered into with Mercury in April 1998. According to the management agreement, Mercury was responsible for the supervision and management of our day-to-day operations. These services included administrative and management activities. In addition, Mercury 47 acted as the operator of our oil and gas properties in Michigan, Wyoming and Montana. We paid Mercury a fee based on the number of hours each Mercury employee spent on activities relating to our business, less overhead expenses paid by MSR under any joint operating agreements. In addition, we reimbursed Mercury for specified out of pocket expenses. Upon completion of the merger, the prior management agreement terminated. We and Mercury entered into a new agreement, which replaced the prior management agreement. Under the new agreement, Mercury provides accounting services to us and operates our oil and gas properties, including the daily activities of producing oil and/or gas from individual wells and leases, and continues to provide services as an operator under existing operating agreements. Mercury's compensation consists of payments and overhead reimbursements to which it or we are entitled as operator under existing and future operating agreements for the properties. Mercury was paid $787,000 under the management agreement during the first six months of 1999 and it is anticipated an additional $1,200,000 will be paid during the remainder of 1999. During the first half of 1999 we reimbursed Mercury or one of its affiliates for office rent, computer services, marketing services, interest on debt and other administrative costs not covered under the management agreement in the amount of $274,000, and it is anticipated an additional $175,000 will be paid during the remainder of 1999. Under the terms of our management agreement with Mercury, Mercury pays accounts payable attributable to our operations and we then reimburse Mercury on a regular basis. At any point in time, the average balance of the amount we owe to Mercury as reimbursement ranges from $2,100,000 to $2,500,000. During the six months ended June 30, 1999, we paid $3,107,000 for repayment of current liabilities owed to Mercury. We are not charged interest on this amount by Mercury. Beaver Creek Pipeline In June 1999, we and Mercury Michigan, Inc., an affiliate of our largest stockholder, formed Beaver Creek Pipeline, L.L.C. We and Mercury Michigan, Inc. each acquired a 50% interest in Beaver Creek. Beaver Creek purchased from Dow Chemical a 125-mile natural gas pipeline extending from our Beaver Creek field in northern Michigan to the Midland, Michigan industrial corridor. Because of this pipeline's proximity to our Michigan reserves, we use it for the transmission of our natural gas production and pay customary fees to Beaver Creek Pipeline, L.L.C. for the transmission. The terms for transmission of our natural gas production are no less favorable to us than could be obtained from unaffiliated third parties. 48 SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL HOLDERS The following table presents information regarding beneficial ownership of our common stock as of September 1, 1999, and as adjusted to reflect the sale of common stock in this offering, assuming there is no exercise of the over- allotment option by the underwriters. The number of shares considered to be outstanding for purposes of the percentages shown in the table does not include 404,381 contingently issuable shares of unregistered common stock currently held in escrow to be released over a three year period in connection with the acquisition of properties from Unocal or a total of 6,400 shares to be issued to four of our non-employee directors prior to or shortly after completion of this offering. The table presents the beneficial ownership for: . each of our directors; . each of our executive officers named in "Executive Compensation"; . each person who we know owns beneficially more than 5% of our common stock; . all our executive officers and directors as a group; and . the Darden family as a group. Unless otherwise indicated in the footnotes, each person listed has sole voting and dispositive power over the shares indicated as owned by that person, and the address of each stockholder is the same as our address.
Shares Beneficially Shares Beneficially Owned Before the Owned After the Offering Offering ------------------- ------------------- Executive Officers, Number of Directors and 5% Shares Stockholders Number Percent Offered Number Percent ------------------- ------------ ------------------- ------------ ---------- Directors Frank Darden (1)(2)..... 464,043 3.6% - 464,043 2.3% Glenn M. Darden (1)..... 495,850 3.8 - 495,850 2.5 Thomas F. Darden (1).... 501,110 3.9 - 501,110 2.5 Anne Darden Self (1).... 467,373 3.6 - 467,373 2.3 Steven M. Morris (2)(3)................. 299,632 2.3 - 299,632 1.5 D. Randall Kent (2)..... 4,600 * - 4,600 * W. Yandell Rogers III (2).................... 6,600 * - 6,600 * Mark Warner (4)......... - * - - * Executive Officers not named above Houston Kauffman........ 3,900 * - 3,900 * Bill Lamkin............. - * - - * Fred van Naerssen....... - * - - * Robert N. Wagner........ 1,000 * - 1,000 * Directors and Executive Officers as a Group (5).............. 2,233,878 16.7 - 2,233,878 11.0 Holders of 5% or more not named above Mercury Exploration Company (6)(7)......... 5,808,927 43.1 - 5,808,927 28.4 Quicksilver Energy, L.C. (8).................... 3,030,861 23.5 - 3,030,861 15.2 Joint Energy Development Investments Limited Partnership (7)........ 1,340,405 10.4 - 1,340,405 6.7 Darden Family Group (9).................... 10,757,934 77.1 - 10,757,934 51.4
- -------- *Indicates less than 1%. 49 (1) Does not include shares beneficially owned by Mercury or QELC. See footnotes 3, 4 and 5 below. Does include with respect to each person 110,000 shares subject to immediately exercisable warrants. Also includes with respect to each of Thomas F. Darden and Glenn M. Darden 11,428 shares subject to immediately exercisable options. Also includes with respect to each of Thomas F. Darden and Glenn M. Darden 18,660 and 15,250 shares respectively, for which each is co-trustee for family member trusts. Also includes with respect to Frank Darden 2,000 shares owned by his spouse. (2) Number of shares indicated includes 1,600 shares to be issued to this non- employee director as compensation for service during 1998. The address of Steven M. Morris is 952 Echo Lane, Suite 335, Houston, Texas 77024. The address of D. Randall Kent is 4421 Tamworth Road, Fort Worth, Texas 76116. The address of W. Yandell Rogers III is 5711 Hillcroft, Houston, Texas 77036. (3) Number of shares indicated includes 120,922 shares owned of record by Pozo Resources, Inc., which shares are beneficially owned by Mr. Morris. (4) Mr. Warner was designated by JEDI as director under the Stockholder's Agreement dated April 9, 1998 between JEDI, us and others. The address for Mark Warner is 1400 Smith Street, Houston, Texas, 77002. (5) Includes 440,000 shares subject to immediately exercisable warrants, 22,856 shares subject to immediately exercisable options and a total of 6,400 shares to be issued to four non-employee directors. Does not include shares beneficially owned by Mercury or QELC. (6) Number of shares indicated includes 594,000 shares subject to immediately exercisable warrants. Each of Frank Darden, Thomas F. Darden, Glenn M. Darden and Anne Darden Self are directors and shareholders of Mercury and share voting and investment power with respect to the 5,808,927 shares of our common stock beneficially owned by Mercury. Each of these persons disclaims beneficial ownership of all such shares. (7) Does not reflect the effect, if any, of the right of Mercury to require JEDI to transfer a portion of JEDI's shares to Mercury under a stock transfer agreement. See "Description of Capital Stock--Stock Transfer Agreement". (8) Each of Frank Darden, Thomas F. Darden, Glenn M. Darden and Anne Darden Self are members of QELC and share voting and investment power with respect to the 3,030,861 shares of our common stock beneficially owned by QELC. Each such person disclaims beneficial ownership of those shares. (9) The Darden Family Group includes Darden family members, QELC, Mercury and affiliates of Mercury which presently control 9,701,077, representing 75.3% of the outstanding shares, and beneficially approximately 10,757,934, representing 77.1% of our outstanding shares. 50 DESCRIPTION OF CAPITAL STOCK The description of our capital stock below is only a summary and is not intended to be complete. For a complete description of our capital stock, we urge you to read our restated certificate of incorporation and bylaws, which have been filed with the Securities and Exchange Commission. Our authorized capital stock consists of 40,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. As of September 1, 1999, we had outstanding 12,888,500 shares of common stock. No shares of preferred stock were outstanding. On completion of this offering, we will have outstanding 19,888,500 shares of common stock, or 20,938,500 shares if the underwriters' over-allotment option is exercised. The outstanding share figures shown above do not include 404,381 contingently issuable shares held in trust in connection with our acquisition of properties from Unocal or a total of 6,400 shares to be issued to four of our non-employee directors prior to or shortly after completion of this offering. Common Stock Subject to the preferential rights of any outstanding series of preferred stock, the holders of our common stock are entitled to one vote per share on all matters voted on by stockholders, including in the election of directors. Our certificate of incorporation does not provide for cumulative voting in the election of directors or grant preemptive rights with respect to future issuances of our common stock. We may in the future, however, enter into contracts with stockholders to grant holders preemptive rights. Subject to any preferential rights of any series of preferred stock outstanding, the holders of our common stock are entitled to dividends, if any, as may be declared from time to time by our board from funds legally available to pay dividends and, upon liquidation, are entitled to receive a pro rata share of all of our assets that are available for distribution to stockholders. All our common stock is fully paid and nonassessable. Exchange Listing Our common stock is listed on the American Stock Exchange and trades under the symbol "KWK". Transfer Agent The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services. Preferred Stock Our preferred stock may be issued from time to time in one or more series without stockholder approval. With regard to the preferred stock, our board may determine: . the preferences; . conversion or other rights; . voting powers; . restrictions; . limitations on dividends; and . qualifications and terms and conditions of redemption. As a result, without stockholder approval, our board could authorize the issuance of preferred stock with voting, conversion and other rights that could dilute the voting power and other rights of the holders of common stock. Our board has not authorized any shares of preferred stock. 51 Stockholders Agreement We, Mercury, QELC, the Darden family, Jeff Cook, Jack Thurber, TCW, JEDI and Mercury Production Company, owner of 100% of Mercury, entered into a Stockholders Agreement dated April 9, 1998, which was later amended on September 1, 1998. On July 15, 1999, TCW transferred all of its shares of our common stock to Mercury and TCW no longer has any rights or obligations under the Stockholders Agreement. Mercury has succeeded to those rights and obligations. Many provisions of the Stockholders Agreement expired when our stock became publicly traded on March 4, 1999. Provisions that remain in effect include: . an agreement by all parties not to transfer their shares of our common stock prior to March 4, 2000; and . an obligation by Mercury, QELC and the Darden family to provide a right of first refusal to JEDI in the event any of them then decide to transfer any of their stock and to provide JEDI with a proportionate right to join in any such transfers. In addition, each of JEDI and Mercury, as long as it holds any of our common stock, has the right to elect a number of members of our board of directors representing a percentage of the entire board that is as close as possible to the percentage of outstanding shares of our common stock held by it, but in no case less than one. The Stockholders Agreement does not apply to any transfer by Mercury to its employees, independent consultants or directors of options to purchase from Mercury shares of our common stock not to exceed 200,000 shares or to transfers by Mercury of our shares pursuant to the exercise of such options. We are bound by certain covenants contained in the Stockholders Agreement concerning the conduct of our business, including a requirement to deliver specific information about us to JEDI as long as it owns any of our common stock. The other parties to the Stockholders Agreement have agreed to vote their shares of our common stock to cause us not to breach those covenants as long as JEDI holds any of our common stock. Registration Rights We, JEDI and Mercury, as a result of its purchase of shares from TCW in July 1999, are parties to a registration rights agreement, dated as of April 9, 1998. The registration rights agreement provides each of JEDI and Mercury with demand registration rights and "piggyback" registration rights. No more than three demands may be made by JEDI or Mercury. In connection with registration of JEDI's or Mercury's shares of our common stock under the registration rights agreement, we are responsible for all registration expenses such as registration and filing fees and fees and disbursements to our counsel. JEDI and Mercury are responsible for selling expenses, including underwriting fees, discounts and selling commissions. On the second and third occasions of the exercise of demand registration rights by JEDI, JEDI is also responsible for registration expenses. In connection with this offering, JEDI and Mercury have waived their rights to include their shares in this offering and have agreed not to demand a registration of their shares for 180 days from the date of this prospectus. Warrants to acquire shares of our common stock held by Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self, Mercury, the Estate of Jack Thurber, Jeff Cook and Paribas provide each of the holders of the warrants with "piggyback" registration rights covering the warrant shares. One of the warrants held by Paribas also provides Paribas with demand registration rights covering the warrant shares. See "Certain Transactions--MSR Merger" for more information regarding the warrants. In connection with this offering, all of the warrant holders have waived their right to include their shares in this offering and Paribas has agreed not to demand a registration of its warrant shares for 180 days from the date of this prospectus. 52 Stock Transfer Agreement To preserve the economic consequences of provisions of the Michigan Gas Partners partnership agreement, which would have allowed Mercury's interest in Michigan Gas Partners to increase from 10% to 85% upon JEDI's receipt of distributions from the partnership equal to the amount invested by JEDI plus a specified rate of return, Mercury and JEDI are parties to a stock transfer agreement which provides Mercury with the right to require JEDI to transfer to Mercury a portion of the 1,340,405 shares of our common stock that JEDI received in our formation. This portion is the number of shares of our common stock having an aggregate "market value" equal to 85% of the excess of the "market value" of JEDI's shares of our common stock over the amount of $20,995,205, plus interest compounded at a monthly rate of 1.530948% from September 9, 1999. "Market value" is the average of the high and low sale prices of our common stock on the American Stock Exchange over thirty trading days, subject to adjustments for trading by Mercury or any of its affiliates and for volumes of trading below or above specified parameters. Mercury may request the transfer on only one occasion prior to the first anniversary of the date on which our common stock became publicly traded. Agreement Regarding Warrants Mercury, the Darden family and JEDI are parties to an agreement regarding warrants concerning warrants held by Mercury and the Darden family to acquire a total of 517,000 shares of our common stock at an exercise price of $12.50 per share. See "Certain Transactions -- MSR Merger" for more information regarding the warrants. Mercury and the Darden family have agreed that they will not exercise their warrants until either: . the market value of our common stock owned by JEDI exceeds $20,995,200; . JEDI no longer owns any of our common stock; or . JEDI consents to the exercise in writing. Business Combinations under Delaware Law We are a Delaware corporation and are governed by Section 203 of the Delaware General Corporation Law. Section 203 prevents an interested stockholder, which is a person who owns 15% or more of our outstanding voting stock, from engaging in business combinations with us for three years following the time that the person becomes an interested stockholder. These restrictions do not apply if: . before the person becomes an interested stockholder, our board of directors approves the transaction in which the person becomes an interested stockholder or the business combination; . upon completion of the transaction that results in the person becoming an interested stockholder, the interested stockholder owns at least 85% of our outstanding voting stock at the time the transaction began, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . following the transaction in which the person became an interested stockholder, the business combination is approved by our board of directors and authorized at an annual or special meeting of our stockholders, and not by written consent, by the affirmative vote of at least two-thirds of our outstanding voting stock not owned by the interested stockholder. In addition, the law does not apply to interested stockholders who became interested stockholders before our common stock was listed on the American Stock Exchange. Delaware law defines the term "business combination" to encompass a wide variety of transactions with, or caused by, an interested stockholder, including mergers, asset sales and other transactions in which the interested stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders. This law could have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock. 53 Limitation of Liability and Indemnification of Officers and Directors Limitation of Liability. Delaware law authorizes corporations to limit or eliminate the personal liability of their officers and directors to them and their stockholders for monetary damages for breach of officers' and directors' fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, officers and directors must exercise an informed business judgment based on all material information reasonably available to them. Absent the limitations authorized by Delaware law, officers and directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Delaware law enables corporations to limit available relief to equitable remedies such as injunction or rescission. Our certificate of incorporation limits the liability of our directors to us or our stockholders to the fullest extent permitted by Delaware law. Specifically, our directors will not be personally liable for monetary damages for breach of a director's fiduciary duty in such capacity, except for liability: . for any breach of the director's duty of loyalty to us or our stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or . for any transaction from which the director derived an improper personal benefit. Indemnification. Delaware law also authorizes corporations to indemnify its officers, directors, employees and agents for liabilities, other than liabilities to the corporation, arising because that individual was an officer, director, employee or agent of the corporation so long as the individual acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation and not unlawful. Our bylaws provide that our officers and directors will be indemnified by us for liabilities arising because such individual was one of our officers or directors to the fullest extent permitted by Delaware law. Our bylaws also provide that we may, by action of our board of directors, provide similar indemnification to our employees and agents. These provisions in our certificate of incorporation and our bylaws may reduce the likelihood of derivative litigation against our officers and directors and may discourage or deter our stockholders or management from bringing a lawsuit against our officers and directors for breach of their duty of care, even though the action, if successful, might otherwise have benefitted us and our stockholders. These provisions in our certificate of incorporation and bylaws do not alter the liability of our officers and directors under federal securities laws and do not affect the right to sue under federal securities laws for violations thereof. 54 UNDERWRITING Subject to the terms and conditions of the underwriting agreement dated , 1999, between us and the underwriters, the underwriters named below, who are represented by Bear, Stearns & Co. Inc.; Dain Rauscher Wessels, a division of Dain Rauscher Incorporated; and Morgan Keegan & Company, Inc. have severally agreed to purchase from us the respective numbers of shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus.
Number of Underwriters Shares ------------ --------- Bear, Stearns & Co. Inc......................................... Dain Rauscher Wessels........................................... Morgan Keegan & Company, Inc.................................... --- Total......................................................... ===
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares included in this offering are subject to approval of legal matters by their counsel and to customary conditions, including the effectiveness of the registration statement, the continuing correctness of our representations to them, the receipt of "comfort letters" from our accountants and no occurrence of an event that would have a material adverse effect on our business. The underwriters are obligated to purchase all the shares, other than those covered by the over- allotment option described below, if they purchase any of the shares. We have granted to the underwriters an option, exercisable for 30 days from the date of the underwriting agreement, to purchase up to 1,050,000 additional shares at the public offering price less the underwriting fees. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise the option, each underwriter will become obligated, subject to conditions, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. The underwriters propose initially to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share on sales to other dealers. After the offering of the shares to the public, the representatives of the underwriters may change the public offering price and such concessions. Holders of 91% of our issued and outstanding shares of common stock have agreed pursuant to lock-up agreements not to sell or offer to sell or otherwise dispose of any shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of Bear Stearns. 55 In addition, we have agreed with the underwriters not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus and continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Bear Stearns. These agreements do not apply to issuances or sales of common stock by us pursuant to any existing employee benefit plans or upon conversion or exchange of any currently outstanding convertible or exchangeable securities. In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain, or otherwise affect the market price of our common stock. Specifically, the underwriters may over-allot shares of our common stock in connection with this offering, thereby creating a short position in our common stock for their own account. In addition, to cover over-allotments or to stabilize the market price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. The representatives, on behalf of the underwriters, also may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. These transactions may be made on the American Stock Exchange, in the over-the-counter market or otherwise. The underwriters are not required to engage in these activities and, if begun, may end any of these activities at any time. In connection with this offering, some of the underwriters and selling group members who are qualified market markers on the American Stock Exchange may engage in passive market making transactions in our common stock on the American Stock Exchange according to Rule 103 of Regulation M under the Securities Exchange Act, during the business day prior to the pricing of the offering and before the start of offers or sales of our common stock, passive market markers must comply with volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of such security. If all independent bids are lowered below the passive market makers' bid, however, the bid must then be lowered when specific purchase limits are exceeded. We have agreed to indemnify the underwriters against a number of liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make as a result of these liabilities. The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. From time to time, Bear Stearns and its affiliates have provided, and may continue to provide in the future, investment banking, general financing, and banking services to us and our affiliates, for which they have received, and expect to receive, customary compensation. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting discounts and commissions payable by us.................. $ $ $ $ Expenses payable by us.. $ $ $ $
Our shares of common stock are listed on the American Stock Exchange under the symbol "KWK." 56 LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed on for us by Cantey & Hanger, L.L.P., Fort Worth, Texas. Certain legal matters relating to the common stock offered by this prospectus will be passed on for the underwriters by Jenkens & Gilchrist, P.C., Dallas, Texas. EXPERTS Our audited combined consolidated balance sheets as of December 31, 1998 and 1997, and the related combined consolidated statement of income, stockholders' equity and cash flows for the year ended December 31, 1998, the consolidated balance sheet of MSR and subsidiaries as of December 31, 1997, and the related consolidated statement of operations, stockholders' equity and cash flows for the period from inception March 7, 1997 to December 31, 1997, and the statement of revenues and direct operating expenses of the Unocal Corporation's Spirit Energy 76 unit interests for the year ended December 31, 1998 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The audited consolidated balance sheet of Mercury as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997, the audited consolidated balance sheet of Mercury as of December 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the three-months then ended, the balance sheets of Michigan Gas Partners as of December 31, 1997 and 1996, and the related statements of operation, partners' capital and cash flows for each of the three years in the period ended December 31, 1997, the statement of revenues and direct operating expenses/Shell Michigan properties acquired of Mercury for the years ended September 30, 1996 and 1995, and the statements of revenues and direct operating expenses/Destec Michigan properties acquired of Mercury for the years ended September 30, 1997 and 1996 included in this prospectus have been audited by Weaver and Tidwell, L.L.P., independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The estimated reserve evaluations and related calculations of Holditch, independent petroleum engineering consultants, included in this prospectus have been included in reliance on the authority of said firm as experts in petroleum engineering. WHERE YOU CAN FIND MORE INFORMATION This prospectus is part of a registration statement we have filed with the Securities and Exchange Commission relating to our common stock. As permitted by Securities and Exchange Commission rules, this prospectus does not contain all of the information we have included in the registration statement and the accompanying exhibits and schedules we filed with the Securities and Exchange Commission. You may refer to the registration statement, exhibits and schedules for more information about us and our common stock. You can read and copy the registration statement, exhibits and schedules at the Securities and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Securities and Exchange Commission's regional offices located at Seven World Trade Center, New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois 60661. You can obtain information about the operation of the Securities and Exchange Commission's Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. The address of that site is http://www.sec.gov. 57 We are required to file current reports, quarterly reports, annual reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy those reports, proxy statement and other information at the Securities and Exchange Commission's Public Reference Room and regional offices or through its Internet site. We currently furnish and intend to continue to furnish our stockholders with annual reports that will include a description of our operations and audited consolidated financial statements certified by an independent public accounting firm. 58 GLOSSARY OF OIL AND GAS TERMS The following are abbreviations and definitions of certain terms commonly used in the oil and gas industry and this Prospectus: Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in this prospectus in reference to crude oil or other liquid hydrocarbons. Bcf. One billion cubic feet of natural gas. Bcfe. One billion cubic feet of natural gas equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Btu or British Thermal Unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Completion. The installation of permanent equipment for the production of natural gas or oil, or in the case of a dry hole, the reporting of abandonment to the appropriate agency. Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reserve. Developed acreage. The number of acres that are allocated or assignable to productive wells or wells capable of production. Development well. A well drilled into a proved natural gas or oil reservoir to the depth of a stratigraphic horizon known to be productive. Exploratory well. A well drilled to find and produce natural gas or oil reserves that are not proved, to find a new reservoir in a field previously found to be productive of natural gas or crude oil in another reservoir or to extend a known reservoir. Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic level. Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons. Mcf. One thousand cubic feet of natural gas. Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Mmbbls. One million barrels of crude oil or other liquid hydrocarbons. Mmbtu. One million British Thermal Units. Mmcf. One million cubic feet of natural gas. Mmcf/d. One million cubic feet of gas per day. Mmcfe. One million cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. Productive well. A well that is found to be capable of producing sufficient quantities of oil and gas so that proceeds from the sale of the production are greater than production expenses and taxes. 59 Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of oil and natural gas. Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved reserves. The estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves. Reserves that are expected to be recovered from new wells on developed acreage where the subject reserves cannot be recovered without drilling additional wells. PV-10 value. The estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10%. These amounts are calculated net of estimated production costs and future development costs, using prices and costs in effect as of a certain date, without escalation and without giving effect to non-property related expenses, such as general and administrative expenses, debt service, future income tax expense, or depreciation, depletion, and amortization. Recompletion. The completion of an existing well for production from a formation that exists behind the casing of the well. Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. Royalty interest. An interest in a natural gas and oil property entitling the owner to a share of natural gas and oil production free of costs of production. Secondary recovery. A method of natural gas and oil recovery in which energy sources from outside of the reservoir are used. Standardized measure. The estimated future net cash flows from proved natural gas and oil reserves computed using prices and costs, at a specific date, after income taxes and discounted at 10%. Steamflood. The injection of steam into a reservoir to heat the oil and facilitate its production. Tcf. One trillion cubic feet of natural gas. Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of natural gas and oil regardless of whether such acreage contains proved reserves. Waterflood. The injection of water into a reservoir to fill pores vacated by produced fluids, which maintains reservoir pressure and assists production. Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production. Workover. Operations on a producing well to restore or increase production. 60 QUICKSILVER RESOURCES INC. INDEX TO FINANCIAL STATEMENTS
Page ---- QUICKSILVER RESOURCES INC. Independent Auditors' Report............................................. F-3 Combined Consolidated Balance Sheets December 31, 1998 and 1997.......... F-4 Combined Consolidated Statement of Income for the Year ended December 31, 1998.................................................................... F-5 Combined Consolidated Statement of Stockholder's Equity for the Year ended December 31, 1998................................................. F-6 Combined Consolidated Statement of Cash Flows for the Year ended December 31, 1998................................................................ F-7 Notes to Combined Consolidated Financial Statements for the Year ended December 31, 1998....................................................... F-8 Condensed Consolidated Balance Sheets June 30, 1999 (Unaudited) and December 31, 1998....................................................... F-20 Condensed Consolidated Statements of Operations for the Six Months ended June 30, 1999 and 1998 (Unaudited)...................................... F-21 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998 (Unaudited)...................................... F-22 Condensed Notes to Consolidated Financial Statements for the Six Months ended June 30, 1999 and 1998............................................ F-23 PREDECESSOR FINANCIAL STATEMENTS
MSR EXPLORATION LTD. AND SUBSIDIARIES Independent Auditors' Report............................................. F-27 Consolidated Balance Sheet at December 31, 1997.......................... F-28 Consolidated Statement of Operations for the Period ended December 31, 1997.................................................................... F-29 Consolidated Statement of Stockholders' Equity for the Period ended December 31, 1997....................................................... F-30 Consolidated Statement of Cash Flows for the Period ended December 31, 1997.................................................................... F-31 Notes to Consolidated Financial Statements............................... F-32 MERCURY EXPLORATION COMPANY--TRANSITION REPORTS Independent Auditors' Report............................................. F-46 Consolidated Balance Sheets at September 30, 1997 and 1996............... F-47 Consolidated Statements of Income for the Years ended September 30, 1997, 1996 and 1995........................................................... F-48 Consolidated Statements of Stockholders' Equity for the Years ended September 30, 1997, 1996 and 1995....................................... F-49 Consolidated Statements of Cash Flows for the Years ended September 30, 1997, 1996 and 1995..................................................... F-50 Notes to Consolidated Financial Statements............................... F-52 MERCURY EXPLORATION COMPANY--TRANSITION REPORTS Independent Auditors' Report............................................. F-63 Consolidated Balance Sheet at December 31, 1997.......................... F-64 Consolidated Statement of Income for the Three Months ended December 31, 1997.................................................................... F-65 Consolidated Statement of Stockholders' Equity for the Three Months ended December 31, 1997....................................................... F-66 Consolidated Statement of Cash Flows for the Three Months ended December 31, 1997................................................................ F-67 Notes to Consolidated Financial Statements............................... F-68 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP Independent Auditors' Report............................................. F-78 Balance Sheet at December 31, 1997 and 1996.............................. F-79 Statement of Operations for the Years ended December 31, 1997, 1996 and 1995.................................................................... F-80 Statement of Partners' Capital for the Years ended December 31, 1997, 1996 and 1995........................................................... F-81 Statement of Cash Flows for the Years ended December 31, 1997, 1996 and 1995.................................................................... F-82 Notes to Financial Statements............................................ F-83
F-1 QUICKSILVER RESOURCES INC.
Page ---- ACQUISITION BY QUICKSILVER RESOURCES INC.
Independent Auditors' Report--Unocal Corporation's Spirit Energy 76 unit interests................................................................ F-87 Statement of Revenues and Direct Operating Expenses Unocal Corporation's Spirit Energy 76 unit interests for the year ended December 31, 1998..... F-88 Notes to Statement of Reserves and Direct Operating Expenses for the year ended December 31, 1998.................................................. F-89 ACQUISITIONS BY PREDECESSOR
Independent Auditors' Report--Shell Michigan Properties acquired of Mercury Exploration Company years ended September 30, 1996 and 1995..... F-91 Statement of Revenues and Direct Operating Expenses Shell Michigan Properties--acquired years ended September 30, 1996 and 1995............ F-92 Notes to Financial Statements............................................ F-93 Independent Auditors' Report--Destec Michigan Properties acquired of Mercury Exploration Company years ended September 30, 1997 and 1996..... F-95 Statement of Revenues and Direct Operating Expenses--Destec Michigan Properties--acquired years ended September 30, 1997 and 1996............ F-96 Notes to Financial Statements............................................ F-97
F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Quicksilver Resources Inc. Fort Worth, Texas We have audited the accompanying combined consolidated balance sheets of Quicksilver Resources Inc. (the Company) as of December 31, 1998 and 1997, and the related combined consolidated statement of income, stockholders' equity and cash flows for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Fort Worth, Texas March 29, 1999 F-3 QUICKSILVER RESOURCES INC. COMBINED CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 In thousands, except for share and per share data
1998 1997 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents.................................. $ 294 $ 643 Accounts receivable........................................ 7,776 1,167 Inventories and other current assets....................... 751 687 -------- -------- Total current assets..................................... 8,821 2,497 Properties, plant, and equipment--net ("full cost").......... 134,810 131,060 Other assets................................................. 969 355 -------- -------- $144,600 $133,912 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt.......................... $ 67 $ 161 Accounts payable........................................... 5,772 1,362 Accrued liabilities........................................ 1,691 592 -------- -------- Total current liabilities................................ 7,530 2,115 Long-term debt............................................... 84,972 84,656 Unearned revenue............................................. 1,338 2,680 Deferred income taxes........................................ 11,953 9,617 Minority interest in MSR Exploration Ltd..................... 6,219 6,992 STOCKHOLDERS' EQUITY Preferred stock, par value $0.01 Authorized 10,000,000 shares.............................. Issued and outstanding-none............................... - - Common Stock, par value $0.01 Authorized 40,000,000 shares.............................. Issued and outstanding 11,510,800......................... 115 115 Additional paid in capital................................... 27,574 27,723 Retained earnings............................................ 4,899 14 -------- -------- Total stockholders' equity............................... 32,588 27,852 -------- -------- $144,600 $133,912 ======== ========
The accompanying notes are an integral part of these financial statements. F-4 QUICKSILVER RESOURCES INC. COMBINED CONSOLIDATED STATEMENT OF INCOME For the Year Ended December 31, 1998 In thousands, except for per share data REVENUES Gas sales............................................................ $35,713 Oil sales............................................................ 6,367 Other income......................................................... 3,607 ------- Total revenues..................................................... 45,687 ------- EXPENSES Operating expenses................................................... 17,781 Depletion and depreciation........................................... 12,365 General and administrative........................................... 1,430 Interest............................................................. 6,698 ------- Total expenses..................................................... 38,274 ------- Income before income taxes and minority interest....................... 7,413 ------- Minority interest in net loss of MSR Exploration Ltd................... 758 ------- Income before income taxes............................................. 8,171 ------- Income tax expense Current.............................................................. 950 Deferred............................................................. 2,336 ------- Total income tax expense........................................... 3,286 ------- Net income............................................................. $ 4,885 ======= Basic and diluted earnings per share................................... $ 0.42 ======= Basic and diluted weighted average number of shares outstanding........ 11,511 =======
The accompanying notes are an integral part of these financial statements. F-5 QUICKSILVER RESOURCES INC. COMBINED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Year Ended December 31, 1998 In thousands
Common Stock ------------- Paid in Capital Total In Excess Retained Stockholders' Shares Amount Of Par Earnings Equity ------ ------ --------- -------- ------------- Inception January 1, 1998....... 100 $ 1 $27,851 $ - $27,852 Stock dividend retroactively applied........................ 10,211 102 (102) - Merger with MSR Exploration Ltd., shares under common control for merger effective on March 4, 1999, retroactively applied........................ 1,200 12 (26) 14 - ------ ---- ------- ------ ------- Adjusted balance January 1, 1998........................... 11,511 115 27,723 14 27,852 Stock registration fees......... (149) (149) Net income...................... 4,885 4,885 ------ ---- ------- ------ ------- Balance December 31, 1998....... 11,511 $115 $27,574 $4,899 $32,588 ====== ==== ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-6 QUICKSILVER RESOURCES INC COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS For the Year Ended December 31, 1998 In thousands OPERATING ACTIVITIES: Net income.......................................................... $ 4,885 Charges and credits to net income not affecting cash Depletion and depreciation........................................ 12,365 Deferred income taxes............................................. 2,336 Recognition of unearned revenues.................................. (1,342) Change in minority interest in subsidiary......................... (758) Amortization of deferred loan costs............................... 66 Changes in assets and liabilities Accounts receivable............................................... (6,609) Inventory and other assets........................................ (97) Accounts payable.................................................. 4,410 Accrued liabilities............................................... 1,099 -------- Net cash from (Used for) operating activities......................... 16,355 -------- INVESTING ACTIVITIES: Acquisition of properties and equipment............................. (16,097) -------- Net cash from (used for) investing activities......................... (16,097) -------- FINANCING ACTIVITIES: Notes payable, bank proceeds........................................ 10,493 Principal payments on long-term debt................................ (10,271) Deferred financing costs............................................ (680) Stock registration fees............................................. (149) -------- Net cash from (used for) financing activities......................... (607) -------- Net increase (decrease) in cash....................................... (349) Cash at beginning of period........................................... 643 -------- Cash at end of period................................................. $ 294 ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest expense.................................. $ 5,617 ======== Cash payments for income taxes...................................... $ 600 ========
The accompanying notes are an integral part of these financial statements. F-7 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended December 31, 1998 1. Business Combination Formation of Quicksilver 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 ("JEDI"), 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. 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. The reserves were 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 stockholders. In the business combination, the surviving corporation issued 1,340,405 (13% of the outstanding) shares of common stock, $.01 par value, for all JEDI partnership interests in Michigan Gas Partners. Mercury did not receive consideration for its partnership interests in Michigan Gas Partners. Quicksilver issued 3,325,955 shares of common stock to Mercury in exchange for certain Mercury oil and gas properties in Michigan and Wyoming, and Quicksilver assumed debts related to the oil and gas properties transferred from Mercury. Quicksilver also issued 3,030,860 shares of Quicksilver common stock to QELC in exchange for all of QELC's oil and gas properties in Michigan and Wyoming. In addition, Quicksilver assumed debts related to QELC's oil and gas producing properties. Quicksilver issued 1,273,176 shares of common stock to individuals for their interests in the assets of Mercury and QELC to be transferred to Quicksilver in the business combination. Quicksilver satisfied debt owed to TCW under a credit agreement dated November 14, 1996 between TCW and QELC, by paying $17,075,000 in cash to TCW and by issuing 1,340,404 (13% of the outstanding) shares of common stock to TCW in exchange for a $10,000,000 credit on the debt. The formation of Quicksilver was accounted for under provisions of Accounting Principal Board Opinion Number 16 (APB 16) "Business Combinations". Under APB 16, Mercury and QELC were considered companies under common control and were accounted for at historical cost. The merger of Michigan Gas Partners into Quicksilver was accounted for using the purchase method with a fair value of $10 million. The fair value of Michigan Gas Partners was based on the conversion of the $10,000,000 of debt of TCW for 13% of Quicksilver's common shares which was the same percentage issued to the partners of Michigan Gas Partners. Michigan Gas Partners' net book value was $8,884,000 at January 1, 1998. All of the valuation adjustment was assigned to oil and gas properties. An amount of $1,116,000 was allocated to Michigan Gas Partners' book value of producing oil and gas properties to complete the accounting. Merger of MSR Exploration Ltd. with and Into Quicksilver On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd. ("MSR"). ABP 16, provides that exchanges or transfers of net assets between companies under common control must be accounted for at F-8 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) historical cost in a manner similar to that of pooling of interest accounting. Furthermore, APB 16 indicates that the purchase method of accounting should be used if the effect of a transfer or exchange is to acquire all of the outstanding shares held by minority interests. Prior to the merge, QELC, Mercury, and the principal stockholders of Mercury, comprised of the Darden family (the "Mercury Group"), controlled Quicksilver though their approximate 74% ownership of Quicksilver. The Mercury Group was considered to control MSR because the Mercury Group and two other individuals affiliated with Mercury own approximately 46.5% of the MSR common stock, controlled MSR's executive committee of its board of directors, and held warrants to purchase 11 million shares of MSR common stock. Accordingly, Quicksilver was considered the "accounting acquiror" and transferred approximately 46.5% of MSR's net assets to Quicksilver at historical cost. The remainder of MSR's net assets, approximately 53.5% that relate to minority interests, will be valued and recorded based on the purchase method of accounting in 1999. Although the merger did not occur until 1999, MSR's financial statements have been combined with the Company's as the entities were under common control. Also, a minority interest has been reflected on the December 31, 1998, balance sheet and statement of income since the merger occurred subsequent to year end. 2. Mergers and Acquisitions On March 4, 1999, the Company completed the MSR merger. 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 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 24,857 shares and 1,133,750 shares, respectively. The minority interest reflected on the Company's balance sheet and statement of income is approximately 53.5% of MSR's net assets and results of operations for the period. The Company's financial statements have been restated for the period prior to the business combination to include the combined financial results of the Company and MSR. Total revenues, income (loss) before income taxes, and net income for the year ended December 31, 1998, for the individual companies prior to the merger are as follows in thousands:
Quicksilver MSR Resources Exploration Inc. Ltd. Total ----------- ----------- ------- Total Revenues.............................. $41,873 $ 3,814 $45,687 Income (loss) before income taxes........... $ 8,829 $(1,416) $ 7,413 Net income (loss)........................... $ 5,559 $ (674) $ 4,885
There were no significant intercompany transactions between the Company and MSR Exploration Ltd. 3. Significant Accounting Policies The nature of operations and other significant accounting policies are as follows: Nature of Operations Quicksilver Resources Inc. was formed to own various oil and gas properties in the states of Michigan and Wyoming. Substantially all of the Company's revenue is derived from the production and sale of natural gas, crude oil, condensate, and plant products. F-9 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Accounts Receivable The Company's customers are large oil and natural gas purchasers. The Company does not require collateral, and receivables are generally due in 30-60 days. Management considers all accounts receivable current and collectible; accordingly, no allowance for doubtful accounts has been established. Major Customers At December 31, 1998, three purchasers accounted for approximately 21%, 19%, and 17%, respectively, of the Company's total consolidated oil and gas sales. The Company 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. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market and consist of crude oil in tanks and well equipment spares and supplies. 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. 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: Gas processing plants and gathering systems--over fifteen to twenty years Other equipment--over ten years Building--over forty 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 F-10 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 recognized revenue as quantities of oil and gas are sold or volumes of gas are transported to the buyer, and utilizes the sales method of accounting for oil and gas imbalances. The Company's net imbalance was immaterial at December 31, 1998. Environmental Compliance and Remediation Environmental compliance costs, including on going maintenance and monitoring, are expensed as incurred. Environmental remediation costs, which improve the condition of a property, are capitalized. Deferred Charges Financing charges related to the acquisition of debt are deferred and amortized on a straight line basis over the term of that debt. Joint Venture Operations Certain of the Company's exploration and development activities relating to oil and gas are conducted jointly with others. The accompanying financial statements reflect only the Company's proportionate interest in such activities. Income Taxes Income taxes provide for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes primarily related to differences between the basis of properties, plant, and equipment for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Cash Equivalents and Time Deposits The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investments with an original maturity in excess of three months are considered to be time deposits. 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. F-11 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Earnings per Share In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per share" ("EPS") which established new standards for computing and presenting EPS. SFAS No. 128 replaced the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Earnings per share amounts for 1998 have been presented to conform to the SFAS No. 128 requirements. Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general- purpose statements. It requires (a) classification of items of other comprehensive income by their nature in a financial statement and (b) display of the accumulated balance of other comprehensive income separate from retained earnings and additional paid-in surplus in the equity section of the statement of financial position. The Company adopted SFAS No. 130 on January 1, 1998. Net income and comprehensive income are the same. SFAS 131, "Disclosures About Segments of an Enterprise and Related Information," became effective for fiscal years beginning after December 15, 1997. This statement establishes standards for defining and reporting business segments. The Company adopted SFAS No. 131 on January 1, 1998. As substantially all of the Company's revenue is derived from the production and sale of natural gas, crude oil, condensate and plant products, which are operated as one segment, this standard did not have a significant impact on the Company's financial statements. The FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was originally effective for fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. Management is currently evaluating the effect of adopting SFAS No. 133 on the Company's financial statements. Certain Reclassifications Certain reclassifications have been made for presentation adopted in 1999. Revenues have been restated to remove marketing and processing deductions which are now reflected as operating expenses. F-12 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Properties, Plants, and Equipment Capitalized costs are shown below in thousands.
December 31, 1998 December 31, 1997 ----------------- ----------------- Proved oil and gas properties............. $178,128 $166,843 Unproved oil and gas interests.............. 3,584 3,216 Accumulated depletion and depreciation....... (53,225) (41,217) -------- -------- $128,487 $128,842 Other equipment......... 10,064 5,620 Accumulated depreciation........... $ (3,741) $ (3,402) -------- -------- $134,810 $131,060 ======== ========
5. Other Assets Other assets, in thousands, consist of:
December 31, 1998 December 31, 1997 ----------------- ----------------- Deferred loan cost....................... $755 $118 Less accumulated amortization............ (91) (4) ---- ---- Net deferred loan costs.................. 664 114 Environmental escrow bonds............... 305 241 ---- ---- $969 $355 ==== ====
6. Notes Payable and Long-Term Debt Long-term debt, in thousands, consists of:
December 31, 1998 December 31, 1997 ----------------- ----------------- Notes payable to a bank (7.1% at December 31, 1998)............ $84,841 $84,453 Various loans............................ 198 364 ------- ------- 85,039 84,817 Less current maturities................ (67) (161) ------- ------- $84,972 $84,656 ======= =======
Long-term debt maturities are as follows, in thousand of dollars:
Periods Ending December 31, 1998 -------------- ----------------- 1998....................................................... $ - 1999....................................................... 67 2000....................................................... 20 2001....................................................... 20 2002....................................................... 4 2003....................................................... 4 Thereafter................................................. 84,924 ------- $85,039 =======
As part of merger of the Company with MSR on March 4, 1999, the Company entered into a new five year Credit Facility agreement. The existing debt of $73,993,000 and $10,848,000 from Quicksilver and MSR was transferred into the new Credit Facility. The Credit Facility permits the Company to obtain revolving credit F-13 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) loans and to issue letters of credit for the account of the Company from time to time in an aggregate amount not to exceed $200 million. The Borrowing Base is currently $85 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 oil and gas production. 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. The Company can designate the interest rate on amounts outstanding at either the London Interbank Offered Rate (LIBOR) + 1.65% or bank prime. On March 4, 1999, the Company locked in its interest rate at 7.38% for the next six months. The collateral for this loan agreement consists of substantially all of the existing assets of the Company and any future reserves acquired. The loan agreement contains certain dividend restrictions and restrictive covenants, which, among other things, require the maintenance of a minimum current ratio, net worth, and debt service ratio. The Company currently is in compliance with all such restrictions. 7. 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, 1998, and December 31, 1997 are as follows, in thousands:
1998 1997 ------- ------- Deferred tax assets Tax credit sale and unearned income....................... $ 3,811 $ 4,597 Net operating loss carryforwards.......................... 2,500 2,301 Investment tax credits.................................... - 171 ------- ------- Total deferred tax assets............................... $ 6,311 $ 7,069 Deferred tax liabilities Properties, plant, and equipment.......................... $18,264 $16,686 ------- ------- Net deferred tax liabilities.......................... $11,953 $ 9,617 ======= =======
No valuation allowance is required because the deferred tax assets will be utilized by the reversal of the deferred tax liabilities. As the deferred tax liabilities reverse and create taxable income, the tax assets will offset this tax liability. The provisions for income taxes for the year ended December 31, 1998 are as follows, in thousands: United States Federal Current............................................................. $ 950 Deferred............................................................ 2,336 ------ $3,286 ======
A reconciliation of the statutory federal income tax rate and the effective tax rate for the year ended December 31, 1998 is as follows: U.S. federal statutory tax rate........................................ 34.0% Statutory reduction of net operating loss carryforwards................ 6.2% ---- Effective income tax rate.............................................. 40.2% ====
F-14 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under Internal Revenue Code Section 382, a change of ownership was deemed to have occurred for MSR. Due to the limitations imposed by Section 382, a portion of MSR's net operating losses could not be utilized. However, starting in 1999, the Company has approximately $7,500,000 of net operating loss carryforwards available from MSR to reduce future U.S. taxable income. These U.S. net operating loss carryforwards will begin to expire in 2001. 8. Unearned Revenues The Quicksilver Properties include certain properties which carry IRS code Section 29 income tax benefits. Code Section 29 allows a credit against regular federal income tax liability for certain eligible gas production. During 1997 these credits were conveyed through the sale of the working interests to a bank. The agreement with the bank provided that the Company would receive cash, payment for future production on the properties, and payment for a portion of tax credits taken by the bank. The agreement included a fixed payment note which provides for the Company to receive a minimum of approximately $7 million plus interest for the future production on the properties. A portion of the initial cash payment represented an advance payment for the first eighteen months of tax benefits. As of December 31, 1998 and December 31, 1997, a balance of $1,338,000 and $2,680,000 respectively, in unearned revenues existed as a result of the cash consideration received in excess of the tax benefit earned. At December 31, 1998 and December 31, 1997, $538,000 and $2,005,000 respectively, of the unearned revenues represented advance payments on tax benefits, which will be recognized as earned through 1999. The balance of $800,000 will remain unearned until the tax benefits of the IRS Code Section 29 expire at December 31, 2002. 9. Stockholders' Equity The Company is authorized to issue 40 million shares of common stock with a par value of one cent ($0.01) and 10 million shares of preferred stock with a par value of one cent ($0.01). At December 31, 1998, the Company had 100,000 shares of common stock outstanding. As part of the merger with MSR, the Company agreed to exchange one share of its common stock for each 10 shares of MSR common stock. To effect the exchange ratio, the present shareholders of the Company will be issued an additional 10,210,800 shares in the form of a stock dividend. Upon completion of the merger the founding shareholders will own 10,310,800 (80%) of the shares of the Company and former MSR shareholders will own approximately 2,577,700 (20%) of the common shares of the Company. All references in the financial statements to numbers of shares and per share amounts have been restated to reflect the stock dividend. The Company currently has 11,510,800 shares of common stock outstanding. MSR's outstanding options and warrants were converted into options and warrants to purchase Company common stock. As a result of the merger, the Company has outstanding warrants to purchase common stock of 550,000 shares at $12.50 per share, 550,000 shares at $20.00 per share, 28,000 shares at $33.75 per share, and 5,750 shares at $0.10 per share and options to purchase 24,857 shares of common stock at $8.75 per share. Stock Option Plan Pursuant to the merger agreement with MSR, the Company converted the outstanding options of MSR into options to purchase Quicksilver common shares. During 1997, an aggregate of 24,857 shares were granted under MSR's plan at an exercise price of $8.75 per share. Options are totally vested and must be exercised within five years of the date of grant. No additional options will be granted under the plan. F-15 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Related Party Transactions When the Company was formed on January 1, 1998, it entered into a Management Agreement (the Management Agreement) for Mercury Exploration Company (Mercury) to act as operator of the Company's oil and gas properties in Michigan, Wyoming and Montana under a joint operating agreement. The Company has no operating employees; Mercury performs all operations on behalf of the Company. In its capacity as operator, Mercury pays all costs and expenses of operations and distributes all net revenues associated with the Company's properties. The Company reimburses Mercury for its actual cost for direct and indirect expenses incurred by Mercury for the benefit of the Company and its properties. The indirect expenses for which Mercury is reimbursed include employee compensation, office rent, office supplies, and employee benefits. During 1998, the Company paid Mercury a total of approximately $1.2 million under the management agreement. Mercury generally allocated its expenses among the Company and other entities for which Mercury's services are provided by multiplying the aggregate amount of indirect expenses incurred by Mercury by the time that the employees of Mercury spend on managing Quicksilver properties and dividing by the aggregate time that the employees of Mercury spend on all the entities for which Mercury provides similar services. Management believes the allocated method and amounts are reasonable. Mercury owns 3,899,822 (30.3%) shares of the Company's common stock, and three of Mercury's directors--Frank Darden, Thomas Darden, and Glenn Darden-- are also directors and officers of the Company. 11. Supplemental Information for Oil and Gas Producing Activities (Unaudited) The Company's proved oil and gas reserves at December 31, 1998, have been estimated by Holditch-Reservoir Technologies Consulting Services and at December 31, 1997, by Citadel Engineering, Ltd. and Mercury in accordance with guidelines established by the Securities and Exchange Commission ("SEC"). Accordingly, the following reserve estimates are based upon existing economic and operating conditions. There are numerous uncertainties inherent in establishing quantities of proved reserves. The following reserve data represent estimates only and should not be construed as being exact. In addition, the present values should not be construed as the current market value of the Company's oil and gas properties or the cost that would be incurred to obtain equivalent reserves. F-16 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Estimated Reserves Changes in the estimated net quantities of crude oil and natural gas reserves, all of which are located in the continental United States, are as follows: Reserve Quantities
Oil Gas ------ ------- (Mbbl) (Mmcf) Proved reserves As of January 1, 1997..................................... 21,137 100,918 Purchase of reserves.................................... 3,646 50,701 Revisions of previous estimates......................... 686 332 Production for 1997..................................... (933) (13,117) ------ ------- As of January 1, 1998..................................... 24,536 138,834 Purchase of reserves.................................... - - Revision of estimates................................... (5,886) - Extensions and discoveries.............................. - 29,683 Production for 1998..................................... (667) (15,315) ------ ------- As of December 31, 1998................................... 17,983 153,202 ====== ======= Proved Developed Reserves As of January 1, 1997..................................... 5,335 91,729 As of January 1, 1998..................................... 8,932 119,669 As of December 31, 1998................................... 9,829 123,743
Standardized Measure The following tables present the Company's standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves and were computed using reserve valuations based on regulations prescribed by the SEC. These regulations provide that the oil, condensate, and gas price structure utilized to project future net cash flows reflects current prices at each date presented and have been escalated only when known and determinable price changes are provided by contract. Future production, development, and net abandonment costs are based on current costs without escalation. The resulting net future cash flows have been discounted to their present values based on a 10% annual discount factor for the years ended December 31, 1998 and 1997, in thousands of dollars. F-17 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 1997 --------- --------- Future cash flows....................................... $ 607,336 $ 629,499 Future production and development costs................. (331,599) (300,273) Future income tax expense............................... (55,106) (46,733) --------- --------- Future net cash flows................................... 220,631 282,493 10% annual discount for estimated timing of cash flows.. (92,212) (134,848) --------- --------- Standardized measure of discounted future net cash flows.................................................. $ 128,419 $ 147,645 ========= =========
Changes in Standardized Measure of Discounted Future Net Cash Flows
1998 1997 -------- -------- Net changes in price and production costs................. $ 3,199 $ (5,362) Development costs incurred................................ 8,283 3,303 Revision of estimates..................................... (21,708) 2,908 Changes in estimated future development costs............. (13,763) (1,654) Purchases of reserves..................................... 1,715 32,247 Extensions, discoveries and improved recovery, net of future production and development costs.................. 18,246 - Net changes in income taxes............................... (7,871) 13,519 Sales of oil and gas net of production costs.............. (24,346) (28,013) Accretion of discount..................................... 14,765 11,558 Other..................................................... 2,254 (10,217) -------- -------- Net increase (decrease)................................... $(19,226) $ 18,289 ======== ========
Estimated future cash inflows are computed by applying year end prices of oil and gas to year end quantities of proved developed reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves in future years, based on year end costs and assuming continuation of existing economic conditions. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows do not necessarily represent management's assessment of future profitability or future cash flow to the Company. Costs incurred in oil and gas property acquisition, exploration, and development activities for the year ended December 31, 1998, in thousands: Acquisition of properties........................................... $ 1,715 Exploration costs................................................... 1,095 Development costs................................................... 8,283 ------- Total............................................................. $11,093 =======
F-18 QUICKSILVER RESOURCES INC. NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Capitalized cost for oil and gas properties at December 31, 1998 and 1997, in thousands:
1998 1997 -------- -------- Proved oil and gas properties............................ $178,128 $166,843 Unproved oil and gas interests........................... 3,584 3,216 Accumulated depletion and depreciation................... (53,225) (41,217) -------- -------- $128,487 $128,842 ======== ========
Results of operations from producing activities, for the year ended December 31, 1998, in thousands: Oil and gas sales................................................ $ 38,923 Operating expenses............................................... (14,577) Depletion and depreciation....................................... (12,198) -------- 12,148 Income taxes..................................................... (4,130) -------- Results of operations from producing activities (excluding corporate overhead and interests costs)......................... $ 8,018 ========
F-19 QUICKSILVER RESOURCES INC. CONDENSED CONSOLIDATED BALANCE SHEETS In thousands, except for share and per share amounts
June 30, 1999 December 31, 1998 ------------- ----------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents.................... $ 157 $ 294 Accounts receivable, net of allowance for doubtful accounts of $1,350 at June 30, 1999........................................ 7,609 7,776 Inventories and other current assets......... 751 751 -------- -------- Total current assets....................... 8,517 8,821 Properties, plant and equipment--net ("full cost")........................................ 167,478 134,810 Other assets................................... 1,689 969 -------- -------- $177,684 $144,600 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt............ $ 30 $ 67 Accounts payable............................. 2,665 5,772 Accrued liabilities.......................... 1,476 1,691 -------- -------- Total current liabilities.................. 4,171 7,530 Long-term debt................................. 114,945 84,972 Unearned revenue............................... 892 1,338 Deferred income taxes.......................... 14,953 11,953 Minority interest in MSR Exploration Ltd....... - 6,219 STOCKHOLDERS' EQUITY Preferred stock, par value $0.01 Authorized 10,000,000 shares, issued and outstanding--none......................... - - Common stock, $.01 par value Authorized 40,000,000 shares, issued and outstanding 12,888,500 and 11,510,800..... 129 115 Paid in capital in excess of par value....... 37,956 27,574 Retained earnings............................ 4,638 4,899 -------- -------- Total stockholders' equity................. 42,723 32,588 -------- -------- $177,684 $144,600 ======== ========
The accompanying notes are an integral part of these financial statements. F-20 QUICKSILVER RESOURCES INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Six Months Ended June 30, 1999 and 1998 In thousands, except for per share data
1999 1998 ------- ------- (unaudited) REVENUE Gas sales.................................................. $16,264 $17,865 Oil sales.................................................. 3,483 3,844 Other income............................................... 2,150 1,376 ------- ------- Total revenues........................................... 21,897 23,085 ------- ------- EXPENSES Operating expenses......................................... 9,381 9,057 Depletion and depreciation................................. 6,129 6,043 Provision for doubtful accounts............................ 1,350 - General and administrative................................. 1,836 548 Interest................................................... 3,738 3,660 ------- ------- Total expenses........................................... 22,434 19,308 ------- ------- Income (loss) before income taxes and minority interest...... (537) 3,777 Minority interest in net loss of MSR Exploration Ltd......... 141 268 ------- ------- Income (loss) before income taxes............................ (396) 4,045 Income taxes (benefit)....................................... (135) 1,459 ------- ------- Net income (loss)............................................ (261) $ 2,586 ======= ======= Basic and diluted earnings per share......................... $ (0.02) $ 0.22 ======= ======= Basic and diluted weighted average number of shares outstanding for the periods................................. 12,417 11,511 ======= =======
The accompanying notes are an integral part of this financial statement. F-21 QUICKSILVER RESOURCES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1999 and 1998 In thousands
1999 1998 ----------- ------- (unaudited) OPERATING ACTIVITIES Net income (loss)....................................... $ (261) $ 2,586 Charges and credits to net income not affecting cash Depletion and depreciation............................ 6,129 6,043 Deferred income taxes................................. (135) 1,459 Recognition of unearned revenue....................... (446) (723) Minority interest in loss of subsidiary............... (141) (268) Amortization of deferred loan costs................... 182 - Provision for doubtful accounts....................... 1,350 - Charges in assets and liabilities Accounts receivable................................... (1,183) (4,477) Inventory, prepaid expenses and other................. 18 (31) Accounts payable...................................... (3,107) 4,948 Accrued liabilities................................... (215) 1,611 -------- ------- NET CASH FROM OPERATING ACTIVITIES........................ 2,191 11,148 -------- ------- INVESTING ACTIVITIES Acquisition of properties and equipment................. (31,097) (7,638) -------- ------- NET CASH USED FOR INVESTING ACTIVITIES.................... (31,097) (7,638) -------- ------- FINANCING ACTIVITIES Notes payable, bank proceeds............................ 33,231 6,850 Principal payments on long-term debt.................... (3,295) (10,182) Deferred financing costs................................ (871) (244) Stock registration fees................................. (296) - -------- ------- NET CASH FROM (USED FOR) FINANCING ACTIVITIES............. 28,769 (3,576) -------- ------- NET DECREASE IN CASH...................................... (137) (66) CASH AT BEGINNING OF PERIOD............................... 294 643 -------- ------- CASH AT END OF PERIOD..................................... $ 157 $ 577 ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest expense...................... $ 3,547 $ 1,918 ======== ======= Cash payments for income taxes.......................... $ - $ - Common stock used for acquisition of minority interest in MSR................................................. 1,377 - ======== =======
The accompanying notes are an integral part of these financial statements. F-22 QUICKSILVER RESOURCES INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Six Months ended June 30, 1999 and 1998 1. Accounting Policies and Disclosures In the opinion of management of Quicksilver Resources Inc. (Quicksilver or the "Company"), the Company's Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal, recurring accruals) necessary to present fairly the financial position of the Company as of June 30, 1999, and the results of operations and cash flows for the three and six months ended June 30, 1999, and June 30, 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1998. The results of operations for the three-and six-month periods ended June 30, 1999, are not necessarily indicative of the operating results to be expected for the full fiscal year. Certain reclassifications have been made for presentation adopted in 1999. Revenues have been restated to remove marketing and processing deductions which are now reflected as operating expenses. Merger of MSR Exploration Ltd. with and into Quicksilver On March 4, 1999, Quicksilver completed a merger with MSR Exploration Ltd. (the "MSR merger"). Accounting Principles Board Opinion (APB) No. 16 provides that exchanges or transfers of net assets between companies under common control be accounted for at historical cost in a manner similar to that of pooling of interest accounting. Furthermore, APB 16 indicates that the purchase method of accounting should be used if the effect of a transfer or exchange is to acquire all of the outstanding shares held by minority interests. Prior to the merger Quicksilver Energy, L.C., Mercury Exploration Company, and the principal stockholders of Mercury Exploration Company, comprised of the Darden family (the "Mercury Group"), controlled Quicksilver through their approximate 74% ownership of Quicksilver. The Mercury Group was considered to control MSR because the Mercury Group and two other individuals affiliated with Mercury owned approximately 46.5% of MSR's common stock, controlled MSR's executive committee of its board of directors, and held warrants to purchase 11 million shares of MSR common stock. Accordingly, Quicksilver was considered the "accounting acquirer" and transferred approximately 46.5% of MSR's net assets to Quicksilver at historical cost. The remainder of MSR's net assets, the approximate 53.5% related to minority interests, was valued and recorded based on the purchase method of accounting in March 1999. Although the merger did not occur until 1999, MSR's financial statements as of December 31, 1998, and June 30, 1998, have been combined with the Company's since the entities were under common control. 2. Mergers and Acquisitions MSR Merger On March 4, 1999, the Company completed the MSR merger. The merger qualified as a tax-free exchange and was accounted for in part as a pooling of interests 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 one share of the Company's common stock for ten shares of MSR common stock (the merger exchange ratio). MSR's outstanding common stock options and warrants were converted into Quicksilver common stock options and warrants to purchase approximately 24,857 shares and 1,133,750 shares, respectively. The minority interest reflected on the Company's December 31, 1998 balance sheet and statements of operations is approximately 53.5% of MSR's net assets and results of operations for the periods prior to March 4, 1999. F-23 QUICKSILVER RESOURCES INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued) For the Six Months ended June 30, 1999 and 1998 Unocal Property Acquisition On May 17, 1999, the Company and Union Oil Company of California ("Unocal") completed the previously announced purchase by the Company from Unocal of substantially all of Unocal's natural gas and crude oil assets in Michigan. The assets purchased, consisting of ownership interests in the Garfield unit and the Beaver Creek unit, include approximately 20,000 net leasehold acres and about 13,000 Mcfe production per day. Quicksilver's ownership in Garfield increased to 99% from 54%. The purchase price for the Unocal acquisition consisted of $27 million in cash, subject to certain adjustments, which resulted in a final purchase price of $25.8 million cash and 404,381 unregistered shares of the Company's common stock. The stock component of the purchase price was placed in escrow and will be distributed to Unocal over a three-year period, subject to downward adjustment in correlation to certain costs, expenses, and liabilities incurred during this period. The purchase price was determined in an arms length negotiation with Unocal following a competitive bid process. The Company financed the cash portion of the purchase price with borrowings under a bank credit facility, which permits the Company to obtain revolving credit loans and to issue letters of credit from time to time in an aggregate amount not to exceed the lesser of a borrowing base limitation or $200 million. Lenders under the bank credit facility include NationsBank, N.A., Frost National Bank, and Paribas. 3. Long-Term Debt
June 30, 1999 December 31, 1998 ------------- ----------------- (unaudited) Long-term debt, in thousands, consists of: Notes payable to banks (7.38% at June 30, 1999 and 7.1% at December 31, 1998)............... $ 84,867 $84,841 Line of credit (7.015% at June 30, 1999)................ 30,000 Various loans.............................. 108 198 -------- ------- 114,975 85,039 Less current maturities.................... (30) (67) -------- ------- $114,945 $84,972 ======== =======
Long-term debt maturities are as follows, in thousands of dollars:
Periods Ending June 30, 1999 December 31, 1998 -------------- ------------- ----------------- (unaudited) 1999......................................... $ 30 $ 67 2000......................................... 720 20 2001......................................... 20 20 2002......................................... 4 4 2003......................................... 4 4 Thereafter................................... 114,197 84,924 -------- ------- $114,975 $85,039 ======== =======
F-24 QUICKSILVER RESOURCES INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued) For the Six Months ended June 30, 1999 and 1998 As part of the merger of the Company with MSR on March 4, 1999, the Company entered into a new five year Credit Facility agreement. The existing debt of $73,993,000 and $10,848,000 from, respectively, Quicksilver and MSR was transferred into the new Credit Facility. The Credit Facility 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 the lesser of $200 million on the Borrowing Bases. Under an amendment to the Credit Facility dated May 17, 1999 the Borrowing Base is $115 million at June 30, 1999 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. 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. The Company can designate the interest rate on amounts outstanding at either the London Interbank Offered Rate (LIBOR) + 2.375%, or at bank prime rate. On March 4, 1999, the Company locked in its interest rate at 7.38% for six months. The collateral for this loan agreement consists of substantially all of the existing assets of the Company and any future reserves acquired. The loan agreement contains certain dividend restrictions and restrictive covenants, which, among other things, require the maintenance of a minimum current ratio. The Company currently is in compliance with all such restrictions. 4. Unearned Revenues The Quicksilver properties include certain properties which carry IRS code Section 29 income tax benefits. Code Section 29 allows a credit against regular federal income tax liability for certain eligible natural gas production. During 1997, these credits were conveyed through the sale of the working interests to a bank. The agreement with the bank provided that the Company would receive cash payment for future production on the properties and payment for a portion of the tax credits taken by the bank. The agreement included a fixed payment note which provides for the Company to receive a minimum of approximately $7 million plus interest for the future production on the properties. A portion of the initial cash payment represented an advance payment for the first eighteen months of tax benefits. As of June 30, 1999, and December 31, 1998, a balance of $892,000 and $1,338,000, respectively, in unearned revenues existed as a result of the cash consideration received in excess of the tax benefit earned. 5. Stockholders' Equity The Company is authorized to issue 40 million shares of common stock with a par value of one cent ($0.01) and 10 million shares of preferred stock with a par value of one cent ($0.01). As part of the merger with MSR Exploration Ltd., the Company agreed to exchange one share of its common stock for each ten shares of MSR common stock. To effect the exchange ratio, the founding stockholders of the Company were issued an additional 10,210,800 shares, prior to the merger, in the form of a stock dividend. Upon completion of the merger, the founding stockholders owned 10,310,800 (80%) of the shares of the Company and former MSR shareholders owned approximately 2,577,700 (20%) of the common shares of the Company. A total of 1,200,000 shares of MSR common stock were held under common control, and 1,377,700 shares were held by minority shareholders. All references to numbers of shares and per share amounts in the financial statements dated prior to the effective date of the merger, March 4, 1999, have been restated to reflect the stock dividend plus 1,200,000 shares held under common control or a total of 11,510,800 common shares. The Company now has 12,888,500 shares of common stock outstanding. As part of the Unocal Property addition, the Company placed 404,381 unregistered shares in escrow (see note 2 and 6). Outstanding options F-25 QUICKSILVER RESOURCES INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--(Continued) For the Six Months ended June 30, 1999 and 1998 and warrants for MSR stock were converted into options and warrants to purchase Company common stock. As a result of the merger, the Company has outstanding warrants to purchase common stock of 550,000 shares at $12.50 per share, 550,000 shares at $20.00 per share, 28,000 shares at $33.75 per share, and 5,750 shares at $0.01 per share, and options to purchase 24,857 shares of common stock at $8.75 per share. Such options and warrants are anti-dilutive at June 30, 1999 and therefore are not included in earnings per share. 6. Contingencies The Company's customers are large natural gas and crude oil purchasers. The Company does not generally require collateral, and receivables are usually due and collected in 30 to 60 days. On March 10, 1999, one of the Company's natural gas purchasers filed for protection under Chapter 11 of the Federal Bankruptcy Code. Management considers a portion of the approximately $2,450,000 account receivable associated with this purchaser to be uncollectible; accordingly, an allowance for doubtful accounts of $1,350,000 was established in the first quarter and remains in place at June 30, 1999. All contracts with that purchaser have been terminated, and the gas has been recontracted with a credit-worthy purchaser. The Company believes that based on information currently available regarding the bankruptcy proceeding, the net receivable will be recovered. In connection with the purchase of certain properties from Unocal (see note 2), the Company placed 404,381 unregistered shares of Company common stock in escrow. These shares will be distributed to Unocal over a three-year period, subject to downward adjustment pending the resolution of certain contingencies. Such shares, which are not considered outstanding at June 30, 1999, will become outstanding as they are distributed following the resolution of the contingencies. F-26 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of MSR Exploration Ltd. and Subsidiaries Fort Worth, Texas We have audited the accompanying consolidated balance sheet of MSR Exploration Ltd. and subsidiaries (the Company) as of December 31, 1997, and the related consolidated statement of operations, stockholders' equity and cash flows for the period from inception March 7, 1997 to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 1997, and the results of its operations and its cash flows for the period from inception March 7, 1997 to December 31, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Fort Worth, Texas March 25, 1998 (December 18, 1998 as to Note 12) F-27 MSR EXPLORATION LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1997 ASSETS Cash and cash equivalents....................................... $ 528,000 Time deposits................................................... 59,000 Accounts receivable............................................. 507,000 Inventories..................................................... 248,000 Prepaid expenses................................................ 32,000 ----------- Total current assets.......................................... 1,374,000 PROPERTIES, PLANT AND EQUIPMENT--NET ("full cost")................ 24,234,000 OTHER ASSETS...................................................... 355,000 ----------- LIABILITIES AND STOCKHOLDERS' EQUITY $25,963,000 =========== CURRENT LIABILITIES Current portion of long-term debt............................... $ 88,000 Accounts payable................................................ 652,000 Accrued liabilities............................................. 592,000 ----------- Total current liabilities..................................... 1,332,000 ----------- LONG-TERM DEBT.................................................... 10,560,000 ----------- DEFERRED INCOME TAXES............................................. 1,001,000 STOCKHOLDERS' EQUITY Common stock, $0.01 par value Authorized 50,000,000 shares, issued and outstanding 25,777,014................................................... 258,000 Paid in capital in excess of par value.......................... 12,812,000 Foreign currency translation adjustment......................... (30,000) Retained earnings............................................... 30,000 ----------- 13,070,000 ----------- $25,963,000 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-28 MSR EXPLORATION LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For the Period from Inception, March 7, 1997 to December 31, 1997 REVENUE Oil sales...................................................... $ 257,000 Gas sales...................................................... 570,000 Interest and other income...................................... 27,000 ----------- Total revenues............................................... 854,000 ----------- EXPENSES Operating expenses............................................. 228,000 Production taxes............................................... 68,000 Depletion and depreciation..................................... 220,000 General and administrative..................................... 146,000 Interest....................................................... 147,000 ----------- Total expenses............................................... 809,000 ----------- Income before income taxes....................................... 45,000 Income tax (expense) benefit..................................... (15,000) ----------- Net income..................................................... $ 30,000 =========== Basic and diluted earnings per share............................. $ - =========== Basic weighted average number of shares outstanding for the period.......................................................... 14,801,000 =========== Diluted weighted average number of shares outstanding for the period.......................................................... 14,838,000 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-29 MSR EXPLORATION LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Period from Inception, March 7, 1997 to December 31, 1997
Cumulative Paid in Foreign Total Common Stock Capital Currency Stock- ------------------- in Excess Translation Retained holders' Shares Amount of Par Adjustment Earnings Equity ---------- -------- ----------- ----------- -------- ----------- Inception March 7, 1997 Issuance of shares in exchange for oil and gas properties....... 12,000,000 $120,000 $ 337,000 $ - $ - $ 457,000 Merger--Issuance of shares in exchange for Old MSR shares (Note 1)..................... 13,777,014 138,000 12,400,000 12,538,000 Warrants payable--60,000 warrants issued in payment of bank commitment fee......... 75,000 75,000 Translation adjustments............ (30,000) (30,000) Net income.............. 30,000 30,000 ---------- -------- ----------- -------- ------- ----------- Balance at December 31, 1997................... 25,777,014 $258,000 $12,812,000 $(30,000) $30,000 $13,070,000 ========== ======== =========== ======== ======= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-30 MSR EXPLORATION LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the Period from Inception, March 7, 1997 to December 31, 1997 OPERATING ACTIVITIES Net income....................................................... $ 30,000 Charges and credits to net loss not affecting cash Depletion and depreciation..................................... 220,000 Deferred income taxes.......................................... 15,000 Changes in assets and liabilities Receivables.................................................... 236,000 Inventories and prepaid expenses............................... (22,000) Accounts payable and accrued liabilities....................... (153,000) ----------- NET CASH FROM (USED FOR) OPERATING ACTIVITIES...................... 326,000 ----------- INVESTING ACTIVITIES Property, plant and equipment expenditures....................... (592,000) Cash received in merger.......................................... 350,000 Change in cumulative foreign currency translation................ (30,000) ----------- NET CASH FROM (USED FOR) INVESTING ACTIVITIES...................... (272,000) ----------- FINANCING ACTIVITIES Principal payments on long-term debt............................. 10,575,000 Proceeds from debt borrowings.................................... (10,040,000) Payment of financing costs....................................... (61,000) ----------- NET CASH FROM (USED FOR) FINANCING ACTIVITIES...................... 474,000 ----------- CASH AT END OF PERIOD.............................................. $ 528,000 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-31 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of MSR Exploration Ltd. (the Company), and its wholly owned subsidiaries. The Company's consolidated financial statements include the operations of the Company from its inception on March 7, 1997 and Old MSR's operations since October 31, 1997, the effective date of the Merger. All significant inter- company transactions and balances have been eliminated in consolidation. Principal Business Activity and Merger MSR Exploration Ltd. ( "the Company"), formerly Mercury Montana, Inc., was organized on March 7, 1997, under the laws of the State of Delaware for the purpose of acquiring from Mercury Exploration Company (Mercury) and thereafter exploring, developing and operating all of the Company's oil and natural gas properties located in Montana (the "Mercury Properties"). Upon formation of the Company, Mercury conveyed to the Company the Mercury Properties and associated debt in exchange for a majority of the then outstanding Company common stock and warrants to purchase additional shares of Company common stock. Certain directors, officers and agents of Mercury also conveyed to the Company certain contractual rights in the Mercury Properties in exchange for shares of Company common stock and warrants. The Mercury Properties included approximately 75 crude oil producing wells which were subject to a prior production payment, forward-sale agreement between Mercury and a third party covering a period from October 1996 through December 1997. The agreement was the obligation of Mercury; consequently the oil revenue and associated expenses from these properties belonged to Mercury through December 31, 1997, and started accruing to the Company on January 1, 1998. On March 26, 1997, MSR Exploration Ltd., ("Old MSR") , an Alberta, Canada corporation, entered into an agreement with the Company, then known as Mercury Montana, Inc. and its majority shareholder at that time, Mercury, both of Fort Worth, Texas, to combine all of the Company's oil and gas assets in Montana with all the oil and gas assets of Old MSR by way of a merger of the Company and Old MSR. The Company was the surviving corporation in the merger and changed its name to MSR Exploration Ltd. after the merger was effective. The merger was accounted for under the purchase method of accounting. At a combined Annual, General and Special Meeting of Shareholders of the Old MSR held on October 30, 1997, the shareholders elected directors and approved the domestication or continuance of Old MSR from Alberta, Canada to Delaware, U.S.A. The domestication of Old MSR into Delaware was required for the merger to become effective. The merger was subsequently approved on October 31, 1997, by written consent of the stockholders of Old MSR. As part of the merger, the Company issued to Old MSR shareholders one share of common stock of the Company for each of the 13,777,014 outstanding shares of Old MSR common stock. Each of the 12,000,000 shares of common stock of the Company outstanding prior to the merger remained outstanding. The combined total number of outstanding shares is 25,777,014. All such shares are listed for trading on the American Stock Exchange. In addition, the Company paid $4 million of Mercury Exploration Company bank debt. Outstanding warrants to purchase 5.5 million shares of common stock of the Company at $1.25 per share and 5.5 million shares at $2.00 per share also remained outstanding after the merger, as did Company stock options to purchase an aggregate of 228,570 shares of Company common stock at $0.875 per share granted in lieu of salaries. An outstanding warrant to purchase 280,000 shares of common stock of the Old MSR at $3.375 per share was converted to an equivalent right to acquire shares of the Company. F-32 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Three members of Old MSR's Board of Directors, Otto J. Buis, Patrick M. Montalban and Steven M. Morris, together with two independent directors, D. Randall Kent and W. Yandell Rogers, III, were elected to the Board of Directors of Old MSR at its October 30, 1997 meeting. With the completion of the merger, Messrs. Buis, Montalban, Morris, Kent and Rogers became directors of the Company joined by Frank Darden, Thomas F. Darden and Glenn M. Darden, the directors of the Company prior to the merger and also directors of Mercury. On October 31, 1997, the Company restructured the Old MSR's revolving credit facility and entered into a new credit agreement with a bank. The closing of the loan was subject to the successful completion of the Company's merger with Old MSR. The new agreement is for a $25,000,000 senior secured revolving credit facility with an initial borrowing base of $12,000,000, which matures in five years. U.S. Dollar Reporting The majority of the Company's business is transacted in U.S. dollars and, accordingly, the consolidated financial statements are expressed in that currency. Accounts Receivable The Company's customers are large oil and natural gas purchasers. The Company does not require collateral, and receivables are generally due in 30-60 days. Management considers all accounts receivable current and collectible; accordingly, no allowance for doubtful accounts has been established. Major Customers For the period from inception March 7, 1997 to December 31, 1997, three purchasers, Rio Vista Energy, Ltd., Montana Power Company, and J.N. Petroleum Marketing, Inc., accounted for approximately 42%, 22% and 11%, respectively of the Company's total consolidated oil and gas sales. The Company has a contract with Montana Power Company which expires January 1, 2004 to sell all gas processed through one of the company's gas plants. Gas prices are re-determined each January during the contract term. The Company 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. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market and consist of crude oil in tanks and well equipment spares and supplies. 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 independent petroleum engineers. Investments in unproved F-33 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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: Gas processing plants and gathering systems--over eight years Other equipment--over three to seven 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 recognizes revenue as quantities of oil and gas sold or volumes of gas transported, and utilizes the entitlement method of accounting for oil and gas imbalances. Under this method, the Company recognizes revenue for its proportionate share of volumes sold. Any over-produced amount is recorded as deferred revenue and any under-produced amount is recorded as current revenue and revenue receivable. The Company had no significant over or under-produced positions as of December 31, 1997. Environmental Compliance and Remediation Environmental compliance costs, including on going maintenance and monitoring, are expensed as incurred. Environmental remediation costs, which improve the condition of a property, are capitalized. Deferred Charges Financing charges related to the acquisition of debt are deferred and amortized over the term of that debt using the effective interest method. Foreign Currency Translation The functional currency for the Company's foreign operations is the applicable local currency; therefore, translation is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date, and for revenue and expense accounts using a weighted average exchange rate for the year. F-34 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Joint Venture Operations Certain of the Company's exploration and development activities relating to oil and gas are conducted jointly with others. The accompanying financial statements reflect only the Company's proportionate interest in such activities. Income Taxes Income taxes provide for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of properties, plant and equipment for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Earnings per Share In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS") which established new standards for computing and presenting EPS. SFAS No. 128 replaced the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The diluted weighted average number of shares outstanding includes 16,000 shares for the period attributable to the assumed exercise of dilutive common stock options. Earnings per share amounts for 1997 have been presented to conform to the SFAS No. 128 requirements. Cash Equivalents and Time Deposits The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investments with an original maturity in excess of three months are considered to be time deposits. Stock-Based Compensation Compensation expense is recorded with respect to stock option grants to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. The Company has not elected the fair value method of accounting for stock-based compensation encouraged, but not required, by Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation." Disclosure of Fair Value of Financial Instruments The Company's financial instruments include cash, time deposits, accounts receivable, notes payable, accounts payable and long-term debt. The Company estimates that the carrying amount of these items is a reasonable estimate of their fair value. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-35 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose statements. It requires (a) classification of items of other comprehensive income by their nature in a financial statement and (b) display of the accumulated balance of other comprehensive income separate from retained earnings and additional paid-in surplus in the equity section of the statement of financial position. The Company plans to adopt SFAS No. 130 for the quarter ended March 31, 1998. 2. Production Payment/Forward Sale of Oil The Mercury Properties contributed to the Company by Mercury, upon its inception, were subject to a production payment. Mercury and Supply Development Group, Inc. (SDG) entered into a Production Payment Agreement in October 1996. Pursuant to the agreement SDG was entitled to an aggregate of 320,000 barrels of oil produced from certain properties of Mercury, including the Mercury Properties. Mercury could satisfy this obligation by delivering to SDG proceeds from the sale of oil produced rather than delivering the oil "in kind", unless SDG elected to take oil "in kind". Pursuant to the Merger Agreement among the Company, Old MSR, and Mercury dated as of March 26, 1997, as amended, Mercury was entitled to all of the oil revenue and income attributable to the Mercury Properties until the Production Payment Amount had been delivered to SDG; provided that Mercury must reimburse the Company for all costs and expenses of oil production. Mercury's obligation to SDG was satisfied on December 31, 1997. No amounts associated with the Production Payment Agreement are reflected in the Company's financial statements, as the Production Payment Agreement was an obligation of Mercury. 3. Pro Forma Condensed Consolidated Data The following pro forma condensed consolidated data for the years ended December 31, 1997 and 1996 are presented as if the merger of the Company with Old MSR had been consummated on January 1, 1996, which includes adjustments to Old MSR. The Company's revenue and expenses subject to a prior forward sale were excluded from the Company's statements of operations and from this pro forma data. Oil revenues and direct operating expenses subject to the forward sale for 1997 were approximately $2,180,000 and $1,536,000 respectively, and for 1996 were approximately $689,000 of revenues and $308,000 of associated expenses. For 1996 the oil revenues and associated expenses subject to the forward sale relate to the final three months of 1996. Revenues and expenses associated with the forward sale began to accrue to the Company on January 1, 1998. F-36 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In thousands except for per share amounts
January 1 To From Inception March 6 March 7 to Predecessor December 31 Pro Forma 1997 Historical Historical Unaudited - ---- ----------- -------------- --------- Revenue.................................. $ 57 $ 854 $4,454 Expenses................................. 31 824 4,604 ------ ------ ------ Net income (loss)........................ $ 26 $ 30 $ (150) ====== ====== ====== Basic and diluted earnings (loss) per share................................... $ - $ - $(0.01) ====== ====== ====== Weighted average number of shares outstanding............................. 12,000 12,000 25,777 ====== ====== ======
Predecessor Pro Forma 1996 Historical Unaudited - ---- ----------- --------- Revenue................................................... $ 2,070 $6,446 Expenses.................................................. 1,188 6,512 ------- ------ Net income (loss)....................................... $ 882 $ (66) ======= ====== Basic and diluted earnings (loss) per share............... $ - ======= Weighted average number of shares outstanding............. $12,000 =======
4. Bankruptcy On February 2, 1992, Old MSR filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Old MSR elected to voluntarily file for bankruptcy primarily due to its substantial net losses and its inability to negotiate an agreeable restructuring of indebtedness with its then primary lender. On September 12, 1992, Old MSR filed a plan of reorganization with the Bankruptcy Court which was subsequently amended on December 11, 1992 and March 2, 1993, to reflect agreements between Old MSR and its creditors. As of December 31, 1997, the remaining amounts due to these creditors totaled $150,500. 5. Properties Plant and Equipment Capitalized costs at December 31, 1997, are shown below in thousands. Proved oil and gas properties....................................... $39,930 Unproved oil and gas interests...................................... 847 Accumulated depletion and depreciation.............................. (17,917) ------- 22,860 ------- Gas processing plants and gathering systems......................... 3,851 Other equipment..................................................... 830 Accumulated depreciation............................................ (3,307) ------- 1,374 ------- $24,234 =======
F-37 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Other Assets Other assets included deferred charges related to the acquisition of long- term debt (amortized over the life of that debt using the effective interest method) and restricted cash (held in a letter of credit in lieu of a plugging and abandonment bond required by the U.S. Environmental Protection Agency). Amounts presented in thousands.
1997 ---- Deferred loan cost..................................................... $118 Less accumulated amortization.......................................... (4) ---- Net deferred loan cost................................................. 114 Restricted cash........................................................ 241 ---- Total other assets................................................... $355 ====
7. Note Payable and Long-Term Debt
1997 ------- Long-term debt, in thousands, consists of: Note payable to a bank (7.6% at December 31, 1997)................. $10,498 Various pre-petition claims at interest rates ranging from 6% to 10%, due in monthly, quarterly and annual installments, including interest.......................................................... 150 ------- 10,648 Less current maturities............................................ (88) ------- $10,560 =======
Long-term debt maturities are as follows, in thousands of dollars:
Years Ending December 31, Amount ------------------------- ------- 1998................................................................ $ 88 1999................................................................ 62 2000................................................................ - 2001................................................................ - 2002................................................................ 10,498 Thereafter.......................................................... - ------- $10,648 =======
As part of the formation of the Company on March 7, 1997, the Company agreed to guarantee the repayment of $4.0 million of debt owed by Mercury Exploration Company to a bank. On October 31, 1997, the Company restructured the Old MSR revolving credit facility and entered into a new credit agreement with a bank. Proceeds from the new facility were used to repay the $4.0 million of debt guarantee by the Company and repay $6.0 million of debt owed by Old MSR. The closing of the loan was subject to the successful completion of the Company's merger with Old MSR. The new agreement is for a $25,000,000 senior secured revolving credit facility with an initial borrowing base of $12,000,000, which matures in five years. The Company can designate the interest rate on amounts outstanding at either the London Interbank Offered Rate (LIBOR) + 1.75%, or bank prime plus 1%. The collateral for this loan agreement consists of substantially all of the existing assets of the Company and any future reserves acquired. The loan agreement contains certain restrictive covenants, which, among other things, require the maintenance of a minimum current ratio, net worth, debt service ratio and contains certain dividend restrictions. F-38 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. 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, 1997 are as follows in thousands:
1997 ------ Deferred tax assets: Operating loss carryforwards....................................... $2,301 Investment tax credits............................................. 171 ------ Total deferred tax assets........................................ 2,472 Deferred tax liabilities: Properties, plant and equipment.................................... 3,473 ------ Total deferred tax liabilities................................... 3,473 ------ Net deferred tax liabilities................................... $1,001 ======
The income tax expense for the period from inception March 7, 1997 to December 31, 1997 was $15,000. This amount represents a deferred provision as no current tax provision or benefit was realized. No valuation allowance is required because the deferred tax assets will be used up by the reversal of the deferred tax liabilities. As the deferred tax liabilities reverse and create taxable income, the tax assets will offset this tax liability. The Company has U.S. net operating loss carryforwards of approximately $6,500,000 available to reduce future U.S. taxable income subject to certain limitations. These U.S. net operating loss carryforwards begin to expire in 2001. The Company also has Canadian expense carryforwards totaling approximately $2,000,000 available to reduce future Canadian taxable income. These Canadian expense carryforwards have no expiration date. Use of these U.S. and Canadian carryforwards is dependent on future taxable income. 9. Stockholders' Equity The Company is authorized to issue 50,000,000 of common stock with a par value of one cent ($0.01) and 10,000,000 shares of preferred stock with a par value of one cent ($0.01). The Company currently has outstanding 25,777,014 shares of common stock, warrants to purchase additional shares of common stock, 5,500,000 shares at $1.25 per share, 5,500,000 shares at $2.00 per share, and options to purchase 248,570 shares of common stock at $0.875 per share, and common stock warrants for 280,000 shares at $3.375 per share, and 57,500 shares at $0.01 per share. As a result of the merger of Old MSR with and into the Company on October 31, 1997 pursuant to the terms of the Agreement and Plan of Merger, dated as of March 26, 1997, as amended, among Old MSR, the Company and Mercury Exploration Company, each outstanding share of common stock, no par value per share, of Old MSR outstanding immediately prior to the effective time of the Merger, was converted into the right to receive one share of common stock, par value $0.01 per share, of the Company. In accordance with Rule 12g-3(a) of the Securities Exchange Act of 1934, as amended, the Company has succeeded to the obligations of Old MSR under the Exchange Act and will continue to file reports with the Securities and Exchange Commission using the Commission File Number (No. 1- 8523) utilized by its predecessor. In connection with the Merger, the Company changed its name from Mercury Montana, Inc. to MSR Exploration Ltd. F-39 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock Option Plan The 1997 Stock Option Plan of the Company (the "Plan") was adopted by the Board of Directors of the Company and approved by its shareholders and became effective as of March 7, 1997. The Plan permits the granting of options to purchase shares of the Company's common stock. All employees and directors of the Company are eligible to participate in the Plan. An aggregate of 250,000 shares of the Company's common stock have been authorized and reserved for issuance under the Plan. The Company's Board of Directors has increased the authorized share to a total of 500,000 shares, subject to shareholder approval. As of December 31, 1997, options to purchase an aggregate of 248,570 shares of the Company's common stock have been granted under the Plan at an exercise price of $0.875 per share. Options are totally vested when granted and must be exercised within five years of the date of grant. The Company's Compensation Committee of the Board of Directors determines who shall be granted options under the Plan and the terms thereof, and administers the Plan. No options may be granted under the Plan after March 7, 2007. No compensation cost has been recognized at date of grant of the stock options because the exercise price at date of grant was equal to the fair value of the common stock at date of grant. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards under the plan, the Company's net income would have been reduced by $62,000 for the period ended December 31, 1997. The fair value of the options were calculated in accordance with the Black-Scholes option pricing model using an expected volatility of 26%, expected option term of five years and a risk- free rate of return of 6%. Pro forma basic and diluted earnings per share were $0.00. 10. Related Party Transactions On October 31, 1997, the Company and Mercury Exploration Company (Mercury) have entered into a Management Agreement. Pursuant to the Agreement, Mercury will be managing all of the operations of the Company's various oil and gas properties and gas gathering and compression facilities located in Montana and Texas. Mercury will also provide accounting, administrative, and advisory services. The Company agreed to reimburse Mercury for its costs and expenses incurred in connection with managing such operations and pay a management fee equal to 10% of such costs and expenses. The term of the Management Agreement is for two years and thereafter for successive one-year terms. At December 31, 1997 the Company owed Mercury approximately $52,000 for payment of costs incurred on behalf of the Company . No management fee has been paid or accrued for the period ended December 31, 1997. Mercury owns 6,480,000 shares of the Company's common stock and three of Mercury's directors and officers--Frank Darden, Thomas Darden, and Glenn Darden--are also directors and officers of the Company. F-40 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Supplemental Cash Flow Information For the period from inception, March 7, 1997, to December 31, 1997, in thousands:
1997 ------- Cash paid during the year: Interest............................................................. $ 134 ======= Income taxes......................................................... $ - ======= Non-cash financing activities Purchase of the net assets of Old MSR by issuance of 13,777,014 shares of common stock. Amount includes assets totaling $20,034,000, including cash of $350,000, and liabilities totaling $8,496,000, including long-term debt of $6,114,000.............................. $12,538 ======= Consideration for financing costs by issuance of common stock warrants............................................................ $ 75 =======
12. Statements of Revenue and Direct Operating Expenses
For the Period Twelve Months From January 1 Ended to March 6, December 31, 1997 1996 -------------- ------------- (in thousands) Revenues Oil sales...................................... $ - $1,855 Gas sales...................................... 57 215 --- ------ Total........................................ 57 2,070 --- ------ Direct operating expenses Operating expenses............................. - 989 Production taxes............................... 7 199 --- ------ Total........................................ 7 1,188 --- ------ Excess of revenues over direct operating expenses........................................ $50 $ 882 === ======
a. Basis of Presentation Historical financial statements reflecting financial position, results of operations and cash flows required by generally accepted accounting principles are not presented for the period for January 1 to March 6, 1997, and for the year ended December 31, 1996, as such information is neither readily available on an individual property basis nor meaningful for the properties included in the Merger. Accordingly, this statement of revenues and direct operating expenses is presented in lieu of the financial statements required under Rule 3-05 of Securities and Exchange Commission Regulation S-X. The accompanying statement of revenues and direct operating expenses represent the Company's pre-Merger net ownership interest in the properties included in the Merger and are presented on the full cost accrual basis of accounting. Depreciation, depletion, and amortization, allocated general and administrative expenses, interest expense, and income taxes have been excluded because the property interests included in the Merger were from a newly formed business, and the expenses incurred would not necessarily be indicative of the expenses to be incurred by the Company after the Merger. F-41 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) b. Forward Sale of Oil Revenues The Mercury Properties were subject to a Production Payment Agreement entered into in October 1996 between Mercury and a third party. The Agreement was the obligation of Mercury and was for the period from October 1, 1996 to December 31, 1997. The Company's oil revenues and associated operating expenses included in the statements of revenues and direct operating expenses do not include any amounts which were subject to the Agreement. The oil revenues and associated expenses relating to the production payment forward sale started accruing to the Company on January 1, 1998. The oil revenues and associated expenses dedicated to the production payment forward sale from October 1, 1996, through December 31, 1996 were excluded from the Statement of Revenues and Direct Operating Expenses. Such amounts were also excluded from the Company's statement of operations for the period from Inception, March 7, 1997, to December 31, 1997. To provide information about the Company for 1998 and beyond, revenues subject to the forward sales agreement amounted to $689,000 for 1996. Direct operating expenses subject to the sale were $308,000 for 1996. DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (Unaudited) The following information about the Company's oil and gas producing activities has been prepared in accordance with Statement of Financial Standards No. 69, Disclosures about Oil and Gas Producing Activities. The Company believes that the valuation method prescribed by Statement of Financial Standards No. 69 does not provide the best estimate of current economic value of its oil and gas reserves as unproved reserves are not attributed any economic value and the use of year end price assumptions and a 10% discount rate are arbitrary. The pro forma amounts for 1996 are presented as if the Company had been in existence, owned the Mercury Properties, and had been combined with Old MSR since January 1, 1996. F-42 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Proved Oil and Gas Quantities The following information summarizes the Company's estimated net quantities of proved and proved-developed oil and gas reserves. The December 31, 1997 and 1996 end of year reserves are based on estimates of Citadel Engineering Ltd., petroleum consultants. Year Ended December 31, 1997
Oil Gas ------ ------ (Mbbl) (Mmcf) Proved reserved Beginning of year--pro forma............................... 5,281 1,339 Revisions of previous estimates............................ 686 332 Purchase of reserves in place--Old MSR..................... 3,646 19,870 Production................................................. (143) (322) ----- ------ End of year................................................ 9,470 21,219 ===== ====== Proved developed reserves Beginning of year--pro forma............................... 1,628 1,339 ===== ====== End of year................................................ 4,412 16,484 ===== ====== Year ended December 31, 1996--pro forma Oil Gas ------ ------ (Mbbl) (Mmcf) Proved reserves Beginning of year.......................................... 5,291 1,401 Revisions of previous estimates............................ 120 25 Production................................................. (130) (87) ----- ------ End of year................................................ 5,281 1,339 ===== ====== Proved developed reserves Beginning of year.......................................... 1,638 1,401 ===== ====== End of year................................................ 1,628 1,339 ===== ======
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (Unaudited) The following standardized measure of discounted future net cash flows relating to proved oil and gas reserves has been computed using year end prices, except where contractual arrangements in place at year end provide for future price changes and costs, in thousands.
As of December 31, -------------------- 1997 1996 --------- --------- Pro Forma Future cash flows...................................... $ 178,672 $ 119,585 Future production and development costs................ (70,242) (71,893) Future income tax expense.............................. (25,474) (10,200) --------- --------- 82,956 37,492 10% annual discount for timing of cash flows........... (44,581) (20,445) --------- --------- Standardized measure of discounted cash flows.......... $ 38,375 $ 17,047 ========= =========
F-43 MSR EXPLORATION LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The standardized measure of discounted cash flows does not include any value relating to the Company's gathering, processing, and transmission of gas reserves owned by other companies. The following table sets out in aggregate the principle source of change in the standardized measure of discounted future net cash flows for the year ended December 31, 1997, in thousands.
1997 ------- Sales of oil and gas produced, net of production costs............. $ (531) Net changes in price and production costs.......................... (5,628) Purchase of reserves in place...................................... 20,817 Revisions of previous quantity estimates........................... 2,908 Development costs incurred during the year......................... 62 Accretion of discount.............................................. 1,705 Net change in income taxes......................................... 1,234 Other.............................................................. 761 ------- Net increase (decrease)............................................ 21,328 Balance at beginning of year--pro forma............................ 17,047 ------- Balance at end of year............................................. $38,375 =======
Costs incurred in oil and gas property acquisition, exploration and development activities, in thousands:
Inception- March 7, 1997 to Year Ended December 31, December 31, 1997 1996 ---------------- ------------ Property acquisition costs..................... $19,583 $ - ======= === Exploration costs.............................. $ 530 $ - ======= === Development costs.............................. $ 62 $84 ======= ===
Results of operations from producing activities, in thousands:
Inception- March 7, 1997 to Year Ended December 31, December 31, 1997 1996 ---------------- ------------ Oil and gas sales............................. $ 827 $ 2,070 Operating expenses............................ (228) (1,054) Production taxes.............................. (68) (199) Depletion and depreciation.................... (220) (273) ----- ------- 311 544 Income taxes.................................. (106) (185) ----- ------- Results of operations from producing activities (excluding corporate overhead and interest costs).............................. $ 205 $ 359 ===== =======
F-44 SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The following table summarizes selected quarterly financial data for the fourth quarter ended December 31, 1997.
December 31, 1997 -------------- (in thousands) Revenue....................................................... $729 ---- Net income (loss)............................................. $(19) ==== Basic and diluted earnings (loss) per share................... - ====
F-45 INDEPENDENT AUDITOR'S REPORT To the Stockholders Mercury Exploration Company Fort Worth, Texas We have audited the accompanying consolidated balance sheets of Mercury Exploration Company as of September 30, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury Exploration Company as of September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. As described in Note 13, the Company has changed its accounting policy for accounting for oil and gas properties from the successful efforts method to the full cost method. Weaver and Tidwell, L.L.P. Fort Worth, Texas October 26, 1998 F-46 MERCURY EXPLORATION COMPANY CONSOLIDATED BALANCE SHEETS September 30, 1997 and 1996 (in thousands)
1997 1996 -------- ------- ASSETS CURRENT ASSETS Cash........................................................ $ 4,530 $ 2,958 Securities available for sale............................... 30 40 Trade accounts receivable................................... 9,226 6,494 Other accounts receivable................................... 110 - Inventory, at lower of average cost or market............... 754 887 Notes receivable--current portion........................... 27 40 -------- ------- Total current assets.................................... 14,677 10,419 Investment in partnerships.................................... 6,937 6,200 PROPERTY AND EQUIPMENT Oil and gas properties ("full cost") Proven.................................................... 85,665 25,979 Unproven.................................................. 1,305 1,710 Land, buildings and leasehold improvements.................. 1,579 1,174 Furniture and equipment..................................... 594 478 Transportation equipment.................................... 582 502 -------- ------- 89,725 29,843 Less accumulated depreciation and depletion................. 8,621 2,720 -------- ------- 81,104 27,123 Other assets Drilling bonds.............................................. 162 274 Deposit on property acquisition............................. - 6,170 -------- ------- 162 6,444 -------- ------- Total assets............................................ $102,880 50,186 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt........................ $ 13,534 $ 3,415 Accounts payable............................................ 6,055 4,655 Accrued liabilities......................................... 1,698 3,635 Advances payable............................................ 2,360 2,839 Royalties payable........................................... 1,984 1,483 Accounts payable--related partnerships...................... 107 168 Income taxes payable........................................ - 37 Unearned income............................................. 2,072 - -------- ------- Total current liabilities............................... 27,810 16,232 Deferred income taxes......................................... 6,650 3,939 LONG-TERM LIABILITIES Long-term debt.............................................. 47,174 19,560 Minority interest in subsidiaries............................. 5,930 28 STOCKHOLDERS' EQUITY Common shares, no par value, 1,000,000 shares authorized; 250,950 shares issued and outstanding...................... 1,087 1,087 Retained earnings........................................... 14,229 9,340 -------- ------- 15,316 10,427 -------- ------- Total liabilities and stockholders' equity.............. $102,880 $50,186 ======== =======
The accompanying notes are an integral part of these financial statements. F-47 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 -------- -------- -------- OIL AND GAS REVENUE.............................. $ 41,328 $ 17,388 $ 6,703 COSTS AND EXPENSES Production..................................... 16,454 11,907 3,849 General and administrative expenses............ 1,784 1,372 1,234 Depreciation, depletion and amortization....... 5,918 986 349 -------- -------- -------- Income from operations....................... 17,172 3,123 1,271 OTHER INCOME (EXPENSE) Gain on sale of assets......................... - - 5 Interest expense............................... (5,414) (1,620) (324) Interest income................................ 196 200 239 Equity in partnership income................... 731 1,010 884 Management fee income.......................... 204 176 162 Rental income.................................. 221 189 99 Miscellaneous income (expense)................. 386 417 (189) -------- -------- -------- Income before minority interest and income taxes....................................... 13,496 3,495 2,147 MINORITY INTEREST IN INCOME OF SUBSIDIARIES...... 5,687 28 - -------- -------- -------- Income before income taxes................... 7,809 3,467 2,147 INCOME TAXES..................................... 2,694 1,219 684 -------- -------- -------- NET INCOME....................................... $ 5,115 $ 2,248 $ 1,463 ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING.............. 250,950 250,950 250,950 ======== ======== ======== EARNINGS PER SHARE............................... $ 20.38 $ 8.96 $ 5.83 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-48 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years ended September 30, 1997, 1996 and 1995 (in thousands)
Common Retained Shares Earnings Total ------ -------- ------- BALANCE, September 30, 1994.................................. 1,087 $ 5,629 $ 6,716 Net income.......................................... - 1,463 1,463 ----- ------- ------- BALANCE, September 30, 1995.................................. 1,087 7,092 8,179 Net income.......................................... - 2,248 2,248 ----- ------- ------- BALANCE, September 30, 1996.................................. 1,087 9,340 10,427 Distribution to shareholders........................ - (226) (226) Net income.......................................... - 5,115 5,115 ----- ------- ------- BALANCE, September 30, 1997.................................. 1,087 $14,229 $15,316 ===== ======= =======
The accompanying notes are an integral part of these financial statements. F-49 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS September 30, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 -------- -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers.................... $ 39,687 $ 15,568 $ 7,111 Rent received................................... 221 188 99 Interest received............................... 196 200 239 Cash paid to suppliers and employees............ (19,204) (10,290) (5,002) Interest paid................................... (5,414) (1,620) (295) Income tax paid................................. (130) (95) (49) -------- -------- ------- Net cash provided by operating activities..... 15,356 3,951 2,103 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable equity securities..................................... 14 3 9 Proceeds from sale of assets.................... 586 560 - Redemption of bonds............................. 112 - 58 Repayment of advance from affiliates............ - 313 854 Distribution received from partnerships......... 1,194 1,192 225 Purchases of bonds.............................. - (71) 90 Payments received on notes receivable........... 12 60 (156) Advance from affiliates......................... (61) - (16) Purchases of marketable equity securities....... (4) (14) (27) Deposits paid on property acquisitions.......... - (4,370) (1,800) Investments in partnerships..................... (1,200) - (2,838) Capital expenditures............................ (54,231) (19,779) (2,227) -------- -------- ------- Net cash used in investing activities......... (53,578) (22,106) (5,828) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable..................... 89,052 17,888 5,950 Payment on advance from stockholders............ - - (47) Proceeds from production loans.................. 5,271 - - Payments on production loans.................... (3,199) - - Distributions to minority interest.............. (11) - - Principal paid on long-term debt................ (51,319) (1,093) (52) -------- -------- ------- Net cash provided by financing activities..... 39,794 16,795 5,851 -------- -------- ------- Net increase (decrease) in cash............... 1,572 (1,360) 2,126 CASH, beginning of period......................... 2,958 4,318 2,192 -------- -------- ------- CASH, end of period............................... $ 4,530 $ 2,958 $ 4,318 ======== ======== =======
The accompanying notes are an integral part of these financial statements. F-50 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years ended September 30, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 ------- ------- ------- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income........................................ $ 5,115 $ 2,248 $ 1,463 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and depletion...................... 5,918 986 349 Minority interest in income..................... 5,687 28 - Gain on sale of assets.......................... - - (5) Partnership income.............................. (731) (1,010) (884) Deferred income taxes........................... 2,710 1,114 622 Changes in operating assets and liabilities Accounts receivable........................... (2,732) 2,322 (731) Inventory..................................... 134 (499) (388) Prepaid expenses.............................. - - 2,094 Accounts payable.............................. 1,400 261 931 Accrued liabilities........................... (1,937) 2,434 (87) Advances payable.............................. (479) 891 (3,440) Royalties payable............................. 501 (4,735) 1,866 Income taxes payable.......................... (147) 10 12 Other......................................... (83) (99) 301 ------- ------- ------- Net cash provided by operating activities........ $15,356 $ 3,951 $ 2,103 ======= ======= =======
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 1997, notes payables were issued in exchange for assets of approximately $152,000. In 1997, stockholders' equity was reduced by approximately $226,000 as a result of transfer of property to shareholders. The accompanying notes are an integral part of these financial statements. F-51 MERCURY EXPLORATION COMPANY Note 1. Summary of Significant Accounting Policies The nature of operations and significant accounting policies are as follows: Nature of Operations Mercury Exploration Company's (the Company) operations consist primarily of oil and gas development and production in Texas, New Mexico, Montana, Wyoming, Michigan, Indiana, Kansas, Oklahoma, Kentucky and North Dakota. Consolidation Policy The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Mercury Michigan, Inc., Quicksilver Pipeline, L.L.C. (organized in 1996) of which the Company owns 52%, Quicksilver Energy, L.C. (organized in 1996) of which the Company owns 52%, and Mercury Montana, Inc. (organized in 1997) of which the Company owns 54%. As a result of the consolidation, intercompany transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments Financial instruments of the Company consist of cash, marketable equity securities, accounts receivable, notes receivable, investments in partnerships, accounts payable and debt. Recorded values of cash, accounts receivable, notes receivable and accounts payable approximate fair values due to the short maturities of the instruments. Investments in partnerships consist of ownership interests in privately held entities with no quoted market prices. An estimate of fair value cannot be made without incurring excessive costs. Investments in marketable equity securities were determined by quoted prices. Recorded values of notes payable approximate fair values based upon current interest rates. Inventory Inventory consists of oil and gas equipment available for use in production. Oil and Gas Property 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 independent 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. F-52 MERCURY EXPLORATION COMPANY 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 Property and Equipment Property and equipment is stated at cost. Depreciation is provided for using the straight-line and accelerated methods. Depreciation methods are designed to amortize the cost of assets over their estimated useful lives. Estimated useful lives of major categories of property and equipment are as follows: Land, buildings and leasehold improvements........................ 40 years Furniture and equipment........................................... 5-10 years Transportation equipment.......................................... 5 years
Maintenance, repairs, renewals and betterments, which do not enhance the value or increase the basic productive capacity of assets are charged to expense as incurred. Investments in Securities The Company has adopted Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued by the Financial Accounting Standards Board. In accordance with Statement No. 115, the Company's investments in securities are classified as follows: TRADING SECURITIES--Investments in debt and equity securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in other income. The Company does not, nor does it intend to, trade investments that it owns. SECURITIES TO BE HELD TO MATURITY--Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. SECURITIES AVAILABLE FOR SALE--Securities available for sale consist of its debt and equity securities not classified as trading securities nor as securities to be held to maturity. Unrealized holding gains and losses on securities available for sale if material, are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific identification method. Accounts Receivable The Company has not provided an allowance for doubtful accounts. All receivables considered doubtful have been charged to current operations, and it is management's opinion that no additional material amounts are doubtful of collection. F-53 MERCURY EXPLORATION COMPANY Cash Flow Presentation For purposes of the statement of cash flows, time deposits that mature in three months or less, certificates of deposit and restricted cash are considered cash and cash equivalents. Earnings Per Common Share The Company has adopted Statement No. 128, Earnings Per Share, issued by the Financial Standards Accounting Board. Adoption of Statement No. 128 had no effect upon 1997, 1996 or 1995 earnings per share computations. Basic earnings per common share was computed based on the weighted average number of common shares outstanding for the period. Diluted earnings per share have not been presented since the Company has no outstanding options or warrants to purchase its common stock. Concentration of Credit Risk The Company regularly maintains cash in bank deposit accounts, which exceed FDIC insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Accounting Changes The Financial Accounting Standards Board has issued the following Statements of Financial Accounting Standards effective for fiscal years beginning after December 15, 1997: No. 130--Reporting Comprehensive Income Requires that all items are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. No. 131--Disclosures About Segments of an Enterprise and Related Information Requires disclosure of operating segments based upon information used internally for evaluating segment performance and allocating resources. No. 132--Employers' Disclosures About Pensions and other Post-retirement Benefits Revises employers' disclosures about pensions and other post-retirement plans. The Company will adopt the above standards effective January 1, 1998. Adoption is not expected to have a significant effect upon current financial statements. Note 2. Securities Available For Sale Securities available for sale consist of equity securities and are carried at cost, which approximates market at September 30, 1997 and 1996. Market value was determined by quoted prices. Included in net income for the years ended September 30, 1997 and 1996 is a $241 gain and $161 loss, respectively, from sales of marketable equity securities. The cost of the securities sold was determined by the specific identity method. F-54 MERCURY EXPLORATION COMPANY Note 3. Trade Accounts Receivable Trade accounts receivable at September 30 consist of the following:
1997 1996 ------- ------- (in thousands) Oil and gas revenue receivable.............................. $ 8,235 $ 6,188 Joint interest billings receivable.......................... 991 306 ------- ------- $ 9,226 $ 6,494 ======= =======
Note 4. Investment In Partnerships Investment in partnerships is stated at cost plus the proportionate share of invested accumulated income. The Company's investment in partnerships consists of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest in Frederic HOF Limited Partnership, and a 50% interest in Wilderness Energy, L.C. None of these entities individually is considered a significant subsidiary of the Company. The following is a summary of the combined financial position and combined results of operations of the Company's investments in partnerships as of and for the years ended September 30:
1997 1996 1995 ------- ------- ------- (in thousands) Current assets...................................... $ 5,127 $ 7,311 $ 8,085 Property, plant and equipment....................... 40,102 44,392 45,916 Other assets........................................ 25 274 299 ------- ------- ------- Total assets...................................... $45,254 $51,977 $54,300 ======= ======= ======= Current liabilities................................. $ 200 $ 3,502 $ 4,358 Partnership equity.................................. 45,054 48,475 49,942 ------- ------- ------- Total liabilities and partnership equity.......... $45,254 $51,977 $54,300 ======= ======= ======= Oil and gas revenue................................. $ 9,830 $ 9,973 $ 8,116 ======= ======= ======= Net income.......................................... $ 2,857 $ 3,840 $ 3,889 ======= ======= ======= Company's investment................................ $ 6,937 $ 6,200 $ 6,285 ======= ======= =======
F-55 MERCURY EXPLORATION COMPANY Note 5. Long-Term Debt Long-term debt at September 30 consists of the following:
1997 1996 ------- ------- (in thousands) Note payable to bank with interest at prime, due in monthly payments of $82,750, with final payment due on December 31, 2002, retired in 1997, secured by investment in Wilderness Energy, L.C. and Frederic HOF Limited Partnership............ $ - $ 3,000 Notes payable to various entities, due in monthly payments ranging from $186 to $3,895, including interest ranging from 7% to 10.63%, secured by land, buildings and equipment....... 673 615 Note payable to bank, interest at 8.75%, unsecured, due on October 17, 1998, retired in 1997............................ - 8,800 Note payable to bank, due in monthly installments of $210,000 in 1997, including interest at 8.18%, secured by the assets of Mercury Exploration, Inc. in Wyoming and Montana, retired in 1997...................................................... - 10,560 Note payable to bank, due in monthly payments ranging from $165,000 to $88,333, including interest at 7.655%, secured by producing oil and gas properties............................. 8,680 - Line of credit to bank, due on January 1, 2002, including interest at Libor + 1.125%, secured by producing oil and gas properties................................................... 4,900 - Note payable to bank, due in monthly payments of $82,750, with interest at prime + .25%, with final payment due January 1, 2003, secured by oil and gas producing properties............ 4,255 - Note payable to bank, due in monthly payments of $866,667, including interest at 7.59% (based on rate swap), with final payment due on December 27, 2000, secured by oil and gas producing properties and investment in Quicksilver Energy, L.C.......................................................... 15,200 - Note payable to bank, due in quarterly payments ranging from $1,400,000 to $600,000, beginning in August 1999, including interest at 9%, with final payment due on March 31, 2007, secured by oil and gas producing properties and investment in Quicksilver Energy, L.C...................................... 27,000 - ------- ------- 60,708 22,975 ------- ------- Less current maturities....................................... 13,534 3,415 ------- ------- $47,174 $19,560 ======= =======
Aggregate maturities of long-term debt are as follows: 1998................................................................. $13,534 1999................................................................. 10,335 2000................................................................. 7,170 2001................................................................. 6,220 2002................................................................. 10,353 Thereafter........................................................... 13,096 ------- $60,708 =======
F-56 MERCURY EXPLORATION COMPANY Note 6. Income Taxes The Company provides for deferred income taxes resulting from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Temporary differences result primarily from intangible development costs being capitalized and amortized for financial reporting purposes but expensed for tax reporting purposes and different income recognition criteria for debt extinguishments. Also included in income taxes is the portion of state taxes based on income. The Company's income tax provision is as follows:
1997 1996 1995 ------ ------ ---- (in thousands) Current.................................................. $ (16) $ 105 $ 62 Deferred................................................. 2,710 1,114 622 ------ ------ ---- $2,694 $1,219 $684 ====== ====== ====
The tax effects of net operating loss carryforwards and temporary differences at September 30, 1997 and 1996 that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
1997 1996 ------ ------ Deferred tax assets Net operating loss carryforwards............................ $ 539 $ 128 Tax credit carryforwards.................................... 253 322 ------ ------ $ 792 $ 450 ------ ------ 1997 1996 ------ ------ Deferred tax liabilities Property and equipment...................................... $5,458 $2,114 Long term debt.............................................. 1,198 1,559 Investments................................................. 786 716 ------ ------ 7,442 4,389 ------ ------ Total deferred taxes, net................................. $6,650 $3,939 ====== ======
There is no material difference between the statutory tax rate and the provision for taxes used in the accompanying financial statements. The Company has U.S. net operating loss carryforwards of approximately $1,600,000 available to reduce future U.S. taxable income subject to certain limitations. These U.S. net operating loss carryforwards will expire in 2012. Note 7. Profit Sharing and Savings Plan The Company sponsors a defined contribution pension plan. All full-time employees are eligible for participation upon completion of one year's service. Employee contributions to the plan for the year ended September 30, 1997, 1996 and 1995 were $199,000, $162,000 and $106,000, respectively. The Company made contributions of $200,000, $117,000 and $78,000 in 1997, 1996 and 1995, respectively. F-57 MERCURY EXPLORATION COMPANY Note 8. Operating Leases The Company's leasing operations consist principally of the leasing of automobiles under operating leases that expire over the next three years. The future minimum annual rentals on noncancellable leases in effect at September 30, 1997, which have initial or remaining terms of more than one year, are as follows: 1998................................................................. $87,000 1999................................................................. 70,000 2000................................................................. 17,000
Total rental expense under operating leases was $129,000, $115,000 and $162,000 in 1997, 1996 and 1995, respectively. Note 9. Futures Contract There were no significant realized or unrealized gains or losses on this agreement at September 30, 1997. The Company has entered into this agreement as a hedge against any downward movement in the commodity price of oil through December 31, 1997. The agreement terminates at December 31, 1997. The Company has received a cash payment in advance of the delivery of the oil at a fixed price of approximately $17.48 per barrel. The market price for oil at September 30, 1997, was less than this price. Note 10. Contingencies The Company is a defendant in a lawsuit filed by a former employee with potential exposure of $500,000. The Company believes the lawsuit is without merit and is vigorously defending its position, and does not expect the ultimate outcome to materially affect the Company's financial position. Note 11. Subsequent Events The Company settled a lawsuit in December of 1997, which resulted in a gain of approximately $2,781,000. In October 1997, Mercury Montana, Inc. merged with MSR Exploration, Ltd. As a result of the merger, Mercury Exploration Company obtained an approximate 25% ownership interest in MSR Exploration, Ltd. Effective January 1, 1998, Mercury transferred substantially all producing oil and gas properties to a newly formed related company, Quicksilver Resources Inc., in exchange for common stock in Quicksilver. Subsequently on September 1, 1998, Quicksilver Resources Inc. entered into a merger agreement with MSR Exploration Ltd. Note 12. Acquisitions On November 14, 1996, Quicksilver Energy L.C., a 52% owned subsidiary of Mercury, consummated the acquisition of certain property interests from Shell Western Exploration & Production, Inc. (the Shell Properties). Such interests are primarily located in Michigan and, as of January 1, 1998, had combined proved reserves of approximately 42.5 Bcfe. The aggregate purchase price for the interests was approximately $57.7 million, which was paid in cash principally with bank debt. F-58 MERCURY EXPLORATION COMPANY The following unaudited pro forma summary presents the consolidated results of operations of Mercury for the years ended September 30, 1997, 1996 and 1995 as if the acquisition had occurred at the beginning of each fiscal year.
Year Ended Year Ended Year Ended September 30, 1997 September 30, 1996 September 30, 1995 ------------------ ------------------ ------------------ (in thousands, except for per share data) Revenues........... $44,599 $47,802 $26,783 Net income......... 5,457 10,227 5,832 Earnings per share............. 21.74 40.75 23.39
On October 9, 1997, Mercury consummated the acquisition of certain property interests from ECT Enocene Enterprises II (the Destec Properties). Such interests are primarily located in Michigan and, as of January 1, 1998, had combined proved reserves of approximately 25.4 Bcfe. The aggregate purchase price for the interests was approximately $23.5 million, which was paid in cash principally with debt from Mercury's credit facility. The following unaudited pro forma summary presents the consolidated results of operations of Mercury for the years ended September 30, 1997 and 1996 as if the acquisition had occurred at the beginning of each fiscal year. The 1996 pro forma amounts also give effect to the Shell Properties acquisition discussed above.
Year Ended Year Ended September 30, 1997 September 30, 1996 -------------------- -------------------- (in thousands, except for per share data) Revenues................ $51,856 $54,026 Net income.............. 8,330 12,646 Earnings per share...... 33.19 50.38
Note 13. Change in Method of Accounting for Oil and Gas Properties Pursuant to the merger agreement with MSR Exploration Ltd. dated September 1, 1998, the Company has changed its accounting policy for oil and gas properties from the successful efforts method to the full cost method. Accordingly, the Company's financial statements have been restated to apply the change retroactively. The effect of the accounting change on income as previously reported for 1997, 1996 and 1995 is:
1997 1996 1995 ------ ------ ----- (in thousands) Effect on: Income before extraordinary item and net income....... $4,219 $1,169 $ 200 Earnings per common share............................. $16.81 $ 4.66 $0.80
Adoption of the full cost method of accounting for oil and gas properties was mandated in the September 1998 merger agreement with MSR and is consistent with the accounting policy of MSR previously disclosed to its shareholders and the general public. In addition, the Company believes the full cost method of accounting for oil and gas properties more accurately reflects management's exploration objectives and results by including all costs incurred in oil and gas producing activities as integral to the acquisition, discovery and development of whatever reserves ultimately result from its efforts as a whole. F-59 MERCURY EXPLORATION COMPANY Note 14. Supplemental Oil and Gas Reserve Data (Unaudited) The Company's proved oil and gas reserves at September 30, 1997 have been estimated by the Company's petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission ("SEC"). Accordingly, the following reserve estimates are based upon existing economic and operating conditions. There are numerous uncertainties inherent in establishing quantities of proved reserves. The following reserve data represent estimates only and should not be construed as being exact. In addition, the present values should not be construed as the current market value of the Company's oil and gas properties or the cost that would be incurred to obtain equivalent reserves. Estimated Reserves Changes in the estimated net quantities of crude oil and natural gas reserves, all of which are located in the continental United States, are as follows: Reserve Quantities
Year Ended September 30, ---------------------------- 1997 1996 1995 -------- -------- -------- Proved reserves: Crude Oil (Mbbls) Beginning of period....................... 20,473 980 997 Revisions of previous estimates........... - 450 - Purchase of reserves in place............. 1,436 19,608 - Production................................ (835) (565) (17) -------- -------- -------- End of period............................. 21,074 20,473 980 ======== ======== ======== Minority interest end of period........... 374 - - ======== ======== ======== Natural Gas (Mmcf): Beginning of period....................... 20,571 22,523 23,127 Revisions of previous estimates........... (881) (3,041) - Purchase of reserves in place............. 66,114 2,029 - Production................................ (7,852) (940) (604) -------- -------- -------- End of period............................. 77,952 20,571 22,523 ======== ======== ======== Minority interest end of period........... 21,401 - - ======== ======== ======== Proved developed reserves: Crude Oil (Mbbls) Beginning of period....................... 5,955 113 130 End of period............................. 6,873 5,955 113 Minority interest end of period........... 374 - - Natural Gas (Mmcf): Beginning of period....................... 18,542 19,295 19,899 End of period............................. 69,883 18,542 19,295 Minority interest end of period........... 21,401 - - Company's proportional interest in proved reserves of investee's accounted for by the equity method--end of year................... 1,352 1,701 2,641
F-60 MERCURY EXPLORATION COMPANY Standardized Measure The following tables present the Company's standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves and were computed using reserve valuations based on regulations prescribed by the SEC. These regulations provide that the oil, condensate and gas price structure utilized to project future net cash flows reflects current prices at each date presented and have been escalated only when known and determinable price changes are provided by contract. Future production, development and net abandonment costs are based on current costs without escalation. The resulting net future cash flows have been discounted to their present values based on a 10% annual discount factor.
Year Ended September 30, ------------------------------ Standardized Measure (in thousands): 1997 1996 1995 ------------------------------------ --------- --------- -------- Future cash flows........................... $ 457,196 $ 375,012 $ 56,067 Future production and development costs..... (255,999) (231,817) (30,418) Future income tax expense................... (48,301) (41,985) (6,675) --------- --------- -------- 152,896 101,210 18,974 10% annual discount for timing of cash flows...................................... (70,805) (51,810) (10,556) --------- --------- -------- Standardized measure of discounted cash flows...................................... $ 82,091 $ 49,400 $ 8,418 ========= ========= ======== Company's share of equity method investee's standardized measure of discounted future net cash flows............................. $ 1,101 $ 1,048 $ 1,189 ========= ========= ======== Primary changes in standardized measure of discounted future net cash flows (in thousands): 1997 1996 1995 --------- --------- -------- Net changes in prices and production costs.. $ (2,176) $ (2,201) $ 2,845 Development costs incurred.................. (1,755) (2,832) (405) Changes in estimated future development costs...................................... (1,654) (4,395) - Purchases of reserves-in-place.............. 62,355 71,115 - Net change in income taxes.................. (5,932) (17,531) (994) Sales of oil and gas, net of production costs...................................... (21,923) (5,482) (2,854) Accretion of discount....................... 4,940 842 614 Other....................................... (1,164) 1,466 458 --------- --------- -------- $ 32,691 $ 40,982 $ (336) ========= ========= ========
Estimated future cash inflows are computed by applying year end prices of oil and gas to year end quantities of proved developed reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves in future years, based on year end costs and assuming continuation of existing economic conditions. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standard Board and the SEC. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows do not necessarily represent management's assessment of future profitability or future cash flow to Mercury. F-61 MERCURY EXPLORATION COMPANY Costs incurred in oil and gas property acquisition, exploration and development activities (in thousands):
Year Ended September 30, -------------------------- 1997 1996 1995 -------- -------- -------- Property acquisition costs........................ $ 53,162 $ 14,631 $ - Exploration costs................................. $ 3,027 $ 778 $ 550 Development costs................................. $ - $ - $ 2,095 Company's share of equity method investee's costs of property acquisition, exploration and development...................................... $ - $ 120 $ 511
Results of operations from producing activities (in thousands):
Year Ended September 30, --------------------------- 1997 1996 1995 -------- -------- ------- Oil and gas sales.............................. $ 34,440 $ 12,169 $ 2,106 Operating expenses............................. (17,312) (11,945) (4,321) Production taxes............................... (2,169) (739) (78) Depletion and depreciation..................... (5,361) (796) (271) -------- -------- ------- 9,598 (1,311) (2,564) Income taxes................................... (3,263) - - -------- -------- ------- Results of operations from producing activities (excluding corporate overhead and internal costs)........................................ $ 6,335 $ (1,311) $(2,564) ======== ======== ======= Minority interest in results of operations..... $ (5,667) $ - $ - ======== ======== ======= Company's share of equity method investee's results of operations from producing activities.................................... $ (81) $ 85 $ 7 ======== ======== =======
Note 15. Capitalized Costs Relating to Oil and Gas Producing Activities For the Years Ended September 30, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 ------- ------- ------ Unproved oil and gas properties..................... $ 1,305 $ 1,710 $1,003 Proved oil and gas properties....................... 85,665 25,979 7,986 ------- ------- ------ 86,970 27,689 8,989 Less accumulated depreciation and depletion......... 6,729 1,067 271 ------- ------- ------ Net capitalized costs............................... $80,241 $26,622 $8,718 ======= ======= ====== Company's share of equity method investee's net capitalized costs.................................. $ 911 $ 1,005 $1,189 ======= ======= ======
F-62 INDEPENDENT AUDITOR'S REPORT To the Stockholders Mercury Exploration Company Fort Worth, Texas We have audited the accompanying consolidated balance sheet of Mercury Exploration Company as of December 31, 1997 and the related consolidated statements of income, stockholders' equity and cash flows for the three months then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury Exploration Company as of December 31, 1997, and the results of its operations and its cash flows for the three months then ended in conformity with generally accepted accounting principles. Weaver and Tidwell, L.L.P. Fort Worth, Texas November 30, 1998 F-63 MERCURY EXPLORATION COMPANY CONSOLIDATED BALANCE SHEET December 31, 1997 (in thousands) ASSETS CURRENT ASSETS Cash................................................................ $ 6,844 Securities available for sale....................................... 27 Trade accounts receivable........................................... 9,635 Inventory, at lower of average cost or market....................... 899 Notes receivable--current portion................................... 81 -------- Total current assets.............................................. 17,486 INVESTMENT IN MSR EXPLORATION, LTD.................................... 119 INVESTMENT IN PARTNERSHIPS............................................ 6,556 PROPERTY AND EQUIPMENT Oil and gas properties................................................ 109,591 Land, buildings and leasehold improvements............................ 1,407 Furniture and equipment............................................... 683 Transportation equipment.............................................. 45 -------- 112,426 -------- Less accumulated depreciation and depletion........................... 10,383 102,043 OTHER ASSETS.......................................................... 302 -------- TOTAL ASSETS...................................................... $126,506 ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt................................ $ 13,335 Accounts payable.................................................... 6,744 Accrued liabilities................................................. 826 Advances payable.................................................... 3,420 Royalties payable................................................... 1,631 Income taxes payable................................................ 854 -------- Total current liabilities......................................... 26,810 -------- UNEARNED REVENUES..................................................... 2,567 DEFERRED INCOME TAXES................................................. 7,070 LONG-TERM DEBT........................................................ 65,275 MINORITY INTEREST IN SUBSIDIARIES..................................... 7,114 STOCKHOLDERS' EQUITY Capital Stock, No Par Value 1,000,000 shares authorized; 250,950 shares issued and outstanding...................................... 1,087 Retained earnings................................................... 6,583 -------- 17,670 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $126,506 ========
The accompanying notes are an integral part of this financial statement. F-64 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENT OF INCOME For The Three Months Ended December 31, 1997 (in thousands) Oil and gas revenues.................................................. $ 11,049 Costs and expenses Operating expenses.................................................... 4,736 Depletion and Depreciation............................................ 2,466 General and administrative............................................ 532 -------- Income from operations................................................ 3,315 -------- Other income (expense)................................................ (1,879) Interest expense...................................................... 27 Interest income....................................................... 78 Equity in partnerships................................................ 78 Management fee income................................................. 54 Rental income......................................................... 32 Miscellaneous income.................................................. 461 Income from litigation settlement..................................... 2,781 -------- Income before income taxes and minority interest...................... 4,869 Minority interest in income of subsidiary............................. 1,277 -------- Income before income taxes............................................ 3,592 Income taxes.......................................................... 1,238 Net income............................................................ $ 2,354 ======== Weighted average shares outstanding................................... 250,950 ======== Earnings per share.................................................... $ 9.38 ========
F-65 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Three Months Ended December 31, 1997 (in thousands)
Common Shares Retained Earnings Total ------------- ----------------- ------- BALANCE September 30, 1997...................... $1,087 $14,229 $15,316 Net income.............................. - 2,354 2,354 ------ ------- ------- BALANCE December 31, 1997....................... $1,087 $16,583 $17,670 ====== ======= =======
The accompanying notes are an integral part of this financial statement. F-66 MERCURY EXPLORATION COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS For The Three Months Ended December 31, 1997 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................................... $ 2,354 Adjustments to reconcile net income to net cash provided by operating activities............................................... Depreciation and depletion.......................................... 2,466 Minority interest in undistributed subsidiary earnings.............. 1,277 Partnership income.................................................. (78) Reduction of unearned revenues...................................... (1,593) Deferred income taxes............................................... 273 Changes in operating assets and liabilities Accounts Receivable............................................... (7) Inventory......................................................... (223) Accounts payable.................................................. 575 Accrued liabilities............................................... (859) Advances payable.................................................. 1,060 Royalties payable................................................. (353) Income taxes payable.............................................. 964 Other............................................................. (205) ------- Net cash provided by operating activities........................... 5,651 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................................................ (27,750) Proceeds from sale of marketable equity securities.................. 4 Proceeds from bond maturities....................................... 65 Distribution received from partnerships............................. 458 Advances on notes receivable........................................ (15) Investments in common stock not held for resale..................... (119) ------- Net cash used in investing activities............................... (27,327) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable......................................... 25,435 Receipt of unearned revenues........................................ 2,088 Principal paid on long-term debt.................................... (3,533) ------- Net cash provided by financing activities......................... 23,990 ------- Net increase (decrease) in cash................................... 2,314 Cash, beginning of period........................................... 4,530 ------- Cash, end of period................................................. $ 6,844 =======
The accompanying notes are an integral part of this financial statement. F-67 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies The nature of operations and significant accounting policies are as follows: Nature of Operations Mercury Exploration Company's (the Company) operations consist primarily of oil and gas development and production in Texas, New Mexico, Wyoming, Michigan, Indiana, Kansas, Oklahoma, Kentucky and North Dakota. Consolidation Policy The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, Mercury Michigan, Inc., Quicksilver Pipeline, L.L.C. (organized in 1996) of which the Company owns 52%, and Quicksilver Energy, L.C. (organized in 1996) of which the Company owns 52%. As a result of the consolidation, intercompany transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments Financial instruments of the Company consist of cash, marketable equity securities, accounts receivable, notes receivable, investments in partnerships, accounts payable and debt. Recorded values of cash, accounts receivable, notes receivable and accounts payable approximate fair values due to the short maturities of the instruments. Investments in partnerships consist of ownership interests in privately held entities with no quoted market prices. An estimate of fair value cannot be made without incurring excessive costs. Investments in marketable equity securities were determined by quoted prices. Recorded values of notes payable approximate fair values based upon current interest rates. Inventory Inventory consists of oil and gas equipment available for use in production. Oil and Gas Property 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 independent 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. F-68 MERCURY EXPLORATION COMPANY 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 Property and Equipment Property and equipment is stated at cost. Depreciation is provided for using the straight-line and accelerated methods. Depreciation methods are designed to amortize the cost of assets over their estimated useful lives. Estimated useful lives of major categories of property and equipment are as follows: Land, buildings and leasehold improvements........................ 40 years Furniture and equipment........................................... 5-10 years Transportation equipment.......................................... 5 years
Maintenance, repairs, renewals and betterments, which do not enhance the value or increase the basic productive capacity of assets are charged to expense as incurred. Investments in Securities The Company has adopted Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, issued by the Financial Accounting Standards Board. In accordance with Statement No. 115, the Company's investments in securities are classified as follows: TRADING SECURITIES--Investments in debt and equity securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in other income. The Company does not, nor does it intend to, trade investments that it owns. SECURITIES TO BE HELD TO MATURITY--Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. SECURITIES AVAILABLE FOR SALE--Securities available for sale consist of its debt and equity securities not classified as trading securities nor as securities to be held to maturity. Unrealized holding gains and losses on securities available for sale if material, are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific identification method. Accounts Receivable The Company has not provided an allowance for doubtful accounts. All receivables considered doubtful have been charged to current operations, and it is management's opinion that no additional material amounts are doubtful of collection. F-69 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Cash Flow Presentation For purposes of the statement of cash flows, time deposits that mature in three months or less and certificates of deposit are considered cash and cash equivalents. Earnings per Common Share The Company has adopted Statement No. 128, Earnings per Share, issued by the Financial Standards Accounting Board. Adoption of Statement No. 128 had no effect upon 1997 earnings per share computations. Basic earnings per common share was computed based on the weighted average number of common shares outstanding for the period. Diluted earnings per share have not been presented since the Company has no outstanding options or warrants to purchase its common stock. Concentration of Credit Risk The Company regularly maintains cash in bank deposit accounts, which exceed FDIC insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Accounting Changes The Financial Accounting Standards Board has issued the following Statements of Financial Accounting Standards effective for fiscal years beginning after December 15, 1997: NO. 130--Reporting Comprehensive Income Requires that all items are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. No. 131--Disclosures about Segments of an Enterprise and Related Information Requires disclosure of operating segments based upon information used internally for evaluating segment performance and allocating resources. No. 132--Employers' Disclosures about Pensions and Other Post-Retirement Benefits Revises employers' disclosures about pensions and other post-retirement plans. The Company will adopt the above standards effective January 1, 1998. Adoption is not expected to have a significant effect upon current financial statements. Note 2. Securities Available for Sale Securities available for sale consist of equity securities and are carried at cost, which approximates market at December 31, 1997. Market value was determined by quoted prices. Included in net income for the three months ended December 31, 1997 is a $594 gain from sales of marketable equity securities. The cost of the securities sold was determined by the specific identity method. F-70 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3. Trade Accounts Receivable Trade accounts receivable at December 31, 1997, consist of the following:
(in thousands) Oil and gas revenue receivable................................ $8,023 Joint interest billings receivable............................ 1, 612 ------ $9,635 ======
Note 4. Investment in Partnerships Investment in partnerships is stated at cost plus the proportionate share of invested accumulated income. The Company's investment in partnerships consists of a 10% interest in Michigan Gas Partners, Ltd., a 6% interest in Frederic HOF Limited Partnership, and a 50% interest in Wilderness Energy, L.C. The following is a summary of the combined financial position and combined results of operations of the Company's investments in partnerships as of and for the three months ended December 31, 1997:
(in thousands) Current assets................................................ $ 4,141 Property, plant and equipment................................. 37,831 ------- Total assets................................................ $41,972 ======= Current liabilities........................................... $ 674 Partnership equity............................................ 41,298 ------- Total liabilities and partnership equity.................... $41,972 ======= Oil and gas revenue........................................... $ 3,209 ======= Net income.................................................... $ 767 ======= Company's investment.......................................... $ 6,556 =======
Note 5. Capitalized Costs Relating to Oil and Gas Producing Activities
(in thousands) For December 31, 1997 Unproved oil and gas properties........................... $ 3,079 Proved and oil and gas properties......................... 106,512 -------- 109,591 Less accumulated depreciation and depletion................. 9,127 -------- Net capitalized costs..................................... $100,464 ======== Company's share of equity method investee's net capitalized costs...................................................... $ 911 ========
F-71 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6. Long-Term Debt Long-term debt at December 31, 1997 consists of the following:
(in thousands) -------------- Notes payable to various entities, due in monthly payments ranging from 7% to 10.63%, secured by land, buildings and equipment.................................................. $ 645 Note payable to bank, due in monthly payments ranging from $165,000 to $88,333, including interest at 7.655%, secured by producing oil and gas properties........................ 8,020 Line of credit to bank, due on January 1, 2002, including interest at Libor + 1.125%, secured by producing oil and gas properties............................................. 26,335 Note payable to bank, due in monthly payments of $82,750, with interest at prime + .25%, with final payment due January 1, 2003, secured by oil and gas producing properties................................................. 4,010 Note payable to bank, due in monthly payments of $866,667, including interest at 7.59% (based on rate swap), with final payment due on December 27, 2000, secured by oil and gas producing properties and investment in Quicksilver Energy, L.C................................................ 12,600 Note payable to bank, due in quarterly payments ranging from $1,400,000 to $600,000, beginning in August 1999, including interest at 9%, with final payment due on March 31, 2007, secured by oil and gas producing properties and investment in Quicksilver Energy, L.C................................. 27,000 ------- 78,610 Less current maturities..................................... 13,335 ------- $65,275 ======= Aggregate maturities of long-term debt are as follows: 1999........................................................ $13,335 2000........................................................ 8,896 2001........................................................ 6,876 2002........................................................ 6,034 2003........................................................ 31,874 Thereafter.................................................. 11,595 ------- $78,610 =======
Note 7. Income Taxes The Company provides for deferred income taxes resulting from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Temporary differences result primarily from intangible development costs being capitalized and amortized for financial reporting purposes but expensed for tax reporting purposes and different income recognition criteria for debt extinguishments. Also included in income taxes is the portion of state taxes based on income. The Company's income tax provision at December 31, 1997, is as follows:
(in thousands) -------------- Current....................................................... $ 965 Deferred...................................................... 273 ------ $1,238 ======
F-72 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects temporary differences at December 31, 1997, that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
(in thousands) Deferred tax assets Tax credit carryforwards.................................... $ 738 ------ 738 ------ Deferred tax liabilities Property and equipment...................................... 5,992 Long term debt.............................................. 1,187 Investments................................................. 629 ------ $7,808 ====== Total deferred taxes, net................................. $7,070 ======
There is no material difference between the statutory tax rate and the provision for taxes used in the accompanying financial statements. The Company has tax credit carryforwards available to offset regular federal income taxes of approximately $738,000 due to expire in 2002. Note 8. Profit Sharing and Savings Plan The Company sponsors a defined contribution pension plan. All full-time employees are eligible for participation upon completion of one year's service. Employee contributions to the plan for the three months ended December 31, 1997 were $61,500. The Company made no contributions for the three months ended December 31, 1997. Note 9. Operating Leases The Company's leasing operations consist principally of the leasing of automobiles under operating leases that expire over the next three years. The future minimum annual rentals on noncancellable leases in effect at December 31, 1997, which have initial or remaining terms of more than one year, are as follows: 1998................................................................ $108,000 1999................................................................ 81,000 2000................................................................ 33,000
Total rental expense under operating leases was $26,000, for the three months ended December 31, 1997. Note 10. Futures Contract The Company has entered into an agreement for the future delivery of approximately 41,800 barrels of oil. The contract qualifies as a hedge for financial reporting purposes. Accordingly, changes in the value of the contract are recognized in income when the effects of changes in oil prices are recognized. There were no significant realized or unrealized gains or losses on this agreement at September 30, 1997. The Company has entered into this agreement as a hedge against any downward movement in the commodity price of oil through December 31, 1997. The agreement terminates at December 31, 1997. The Company has received a cash payment in advance of the delivery of the oil at a fixed price of approximately $17.48 per barrel. The market price for oil at September 30, 1997, was less than this price. F-73 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 11. Tax Credit Sale In December 1997, the Company transferred certain properties, which carry IRS Code Section 29 income tax benefits, to an unrelated party and received consideration as follows: a. Initial payment of $2,553,000 b. Fixed payment of $5,093,000 c. Credit payment note d. Production payment Code Section 29 allows a credit against regular federal income tax liability for certain eligible gas production. A portion of the initial cash payment represented an advance payment for the first eighteen months of tax benefits. As of December 31, 1997, a balance of $2,448,000 in unearned revenues existed as a result of cash consideration received in excess of the tax benefit earned. For accounting purposes, the transfer does not qualify for sale or gain recognition. Accordingly, the accompanying financial statements continue to include the Company's costs, revenues and expenses associated with the assets transferred. Note 12. Supplemental Cash Flow Information In October 1998, the Company exchanged its 54% interest in a subsidiary, Mercury Montana, Inc., for a 25% interest in MSR Exploration Ltd. The investment in MSR Exploration Ltd. is being accounted for under the equity method of accounting. Assets and liabilities of Mercury Montana, Inc. at the date of exchange were as follows: Non-Cash Investing and Financing Activities
(in thousands) Assets Inventory..................................................... $ 78 Oil and gas properties, net................................... 4,345 Other assets.................................................. 50 ------ Total Assets................................................ $4,473 ====== Liabilities Accounts payable.............................................. 395 Accrued liabilities........................................... 13 Deferred income taxes......................................... (147) Long-term debt................................................ 4,000 Minority interest in subsidiaries............................. 93 ------ Total Liabilities........................................... $4,354 ====== Investment in MSR Exploration, Ltd............................ $ 119 ======
Note 13. Contingencies The Company is a defendant in a lawsuit filed by a former employee with potential exposure of $500,000. The Company believes the lawsuit is without merit and is vigorously defending its position, and does not expect the ultimate outcome to materially affect the Company's financial position. F-74 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 14. Subsequent Events Effective January 1, 1998, Mercury transferred substantially all producing oil and gas properties to a newly formed related company, Quicksilver Resources Inc., in exchange for common stock in Quicksilver. Subsequently on September 1, 1998, Quicksilver Resources Inc. entered into a merger agreement with MSR Exploration Ltd. Note 15. Supplemental Oil and Gas Reserve Data (Unaudited) The Company's proved oil and gas reserves at December 31, 1997, have been estimated by the Company's petroleum engineers in accordance with guidelines established by the Securities and Exchange Commission ("SEC"). Accordingly, the following reserve estimates are based upon existing economic and operating conditions. There are numerous uncertainties inherent in establishing quantities of proved reserves. The following reserve data represent estimates only and should not be construed as being exact. In addition, the present values should not be construed as the current market value of the Company's oil and gas properties or the cost that would be incurred to obtain equivalent reserves. Estimated Reserves Changes in the estimated net quantities of crude oil and natural gas reserves, all of which are located in the continental United States, are as follows: Reserve Quantities December 31, 1997
Petroleum Natural Liquids Gas (Bbls) Mmcf) -------------- ------- (in thousands) Reserves at September 30, 1997..................... 21,074 77,952 Purchases of reserves-in-place..................... - 30,831 Sale of reserves-in-place.......................... (5,840) (1,339) Production......................................... (168) (3,339) ------ ------- Reserves at December 31, 1997...................... 15,066 104,105 ====== ======= Total proved developed reserves at December 31, 1997.............................................. 4,520 90,585 ====== ======= Company's proportional interest in reserves of investee's accounted for by the equity method-end of year........................................... - - ====== =======
Standardized Measure The following tables present the Company's standardized measure of discounted future net cash flows and changes relating to proved oil and gas reserves and were computed using reserve valuations based on regulations prescribed by the SEC. These regulations provide that the oil, condensate and gas price structure utilized to project future net cash flows reflects current prices at each date presented and have been escalated only when known and determinable price changes are provided by contract. Future production, development and net abandonment costs are based on current costs without escalation. The resulting net future cash flows have been discounted to their present values based on a 10% annual discount factor. F-75 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Standardized Measure (in thousands): December 31, 1997 Future cash inflows............................................. $ 417,051 Future development and production costs......................... (213,408) Future income tax expense....................................... (40,965) --------- Future net cash flows........................................... 162,678 10% annual discount............................................. (71,774) Standardized measure of discounted future cash flows............ $ 90,904 ========= Company's share of equity method Investee's standardized measure of discounted future net cash flows.......................................................... $ 1,101 =========
Primary changes in standardized measure of discounted future net cash flows (in thousands) for the three months ended December 31, 1997: Net changes in prices and production costs......................... $ 1,708 Sale of reserves-in-place.......................................... (20,443) Development costs incurred......................................... (1,486) Changes in estimated future development costs...................... - Purchase of reserves-in-place...................................... 32,247 Net change in income taxes......................................... 2,052 Sales of oil and gas, net of production costs...................... (6,313) Accretion of discount.............................................. 2,052 Other.............................................................. (1,004) -------- $ 8,813 ========
Estimated future cash inflows are computed by applying year end prices of oil and gas to year end quantities of proved developed reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves in future years, based on year end costs and assuming continuation of existing economic conditions. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows do not necessarily represent management's assessment of future profitability or future cash flow to the Company. F-76 MERCURY EXPLORATION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Costs incurred in oil and gas property acquisition, exploration and development activities (in thousands): For the three months ended December 31, 1997 Property acquisition costs........................................ $25,152 Exploration costs................................................. 32 Development costs................................................. 2,566 Company's share of equity Method investee's costs of Property acquisition, Exploration and development.................................................... $ - Results of operations from producing activities (in thousands): For the three months ended December 31, 1997 Oil and gas sales............................................... $ 9,456 Operating expenses.............................................. (2,661) Production taxes................................................ (563) Depletion and depreciation...................................... (2,442) ------- $ 3,790 Income taxes...................................................... (1,289) Results of operations from producing activities (excluding corporate overhead and interests costs).......................... $ 2,501 ======= Minority interests in results of operations....................... $ 1,269 ======= Company's share of equity method investee's results of operations for producing activities......................................... $ 12 =======
F-77 INDEPENDENT AUDITOR'S REPORT To the Partners Michigan Gas Partners Limited Partnership We have audited the accompanying balance sheets of Michigan Gas Partners Limited Partnership as of December 31, 1997 and 1996 and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Michigan Gas Partners Limited Partnership as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years ended December 31, 1997, in conformity with generally accepted accounting principles. As described in Note 8, the Company has changed its accounting policy for accounting for oil and gas properties from the successful efforts method to the full cost method. Weaver and Tidwell, L.L.P. Fort Worth, Texas October 26, 1998 F-78 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP BALANCE SHEET December 31, 1997 and 1996 (in thousands)
1997 1996 ------ ------- ASSETS CURRENT ASSETS Cash and cash equivalents...................................... $ 56 $ 55 Oil and gas revenue receivable................................. 669 444 ------ ------- Total current assets......................................... 725 499 PROPERTY AND EQUIPMENT Producing oil and gas leases................................... 13,668 13,655 Less accumulated depletion, depreciation and amortization...... 4,558 3,603 ------ ------- 9,110 10,052 ------ ------- TOTAL ASSETS................................................. $9,835 $10,551 ====== ======= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable............................................... $ 150 $ 238 Deferred liabilities........................................... 232 - ------ ------- Total current liabilities.................................... 382 238 PARTNERS' CAPITAL................................................ 9,453 10,313 ------ ------- TOTAL LIABILITIES AND PARTNERS' CAPITAL...................... $9,835 $10,551 ====== =======
The accompanying notes are an integral part of this financial statement. F-79 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS Years Ended December 31, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 ------ ------ ------ REVENUES Oil and gas sales..................................... $2,894 $3,212 $1,732 Gas compressor reimbursement.......................... 110 156 198 Other income.......................................... 17 - - ------ ------ ------ Total revenues...................................... 3,021 3,368 1,930 COSTS AND EXPENSES Lease Operating expenses.............................. 1,922 1,853 1,183 Production taxes...................................... 114 133 70 Depletion, depreciation and amortization.............. 955 1,067 839 Impairment of oil and gas properties.................. - 902 423 General and administrative............................ 11 30 28 ------ ------ ------ Total costs and expenses............................ 3,002 3,985 2,543 ------ ------ ------ NET INCOME (LOSS)....................................... $ 19 $ (617) $ (613) ====== ====== ======
The accompanying notes are an integral part of this financial statement. F-80 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL Years Ended December 31, 1997, 1996 and 1995 (in thousands) BALANCE, DECEMBER 31, 1994............................................. $ 8,482 Distributions........................................................ (494) Capital contributed.................................................. 4,838 Net Loss............................................................. (613) ------- BALANCE, DECEMBER 31, 1995............................................. 12,213 Distributions........................................................ (1,283) Net loss............................................................. (617) ------- BALANCE, DECEMBER 31, 1996............................................. 10,313 Distributions........................................................ (879) Net income........................................................... 19 ------- BALANCE, DECEMBER 31, 1997............................................. $ 9,453 =======
The accompanying notes are an integral part of this financial statement. F-81 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from oil and gas sales.............. $ 2,938 $ 3,211 $ 1,561 Cash received from gas compressor reimbursement... 90 74 173 Cash paid to suppliers and employees.............. (2,135) (1,913) (1,148) ------- ------- ------- Net cash provided by operating activities..... 893 1,372 586 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.............................. (13) (132) (4,837) ------- ------- ------- Net cash used in investing activities......... (13) (132) (4,837) CASH FLOWS FROM FINANCING ACTIVITIES: Partnership distributions......................... (879) (1,283) (494) Capital contributions............................. - - 4,838 ------- ------- ------- Net cash provided by (used in) financing activities................................... (879) (1,283) 4,344 ------- ------- ------- Net increase (decrease) in cash............... 1 (43) 93 Cash, beginning of period........................... 55 98 5 ------- ------- ------- Cash, end of period................................. $ 56 $ 55 $ 98 ======= ======= ======= RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income (loss)................................. $ 19 $ (617) $ (613) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization.......... 955 1,067 839 Impairment of oil and gas properties.............. - 902 423 Changes in operating assets and liabilities Oil and gas revenue receivable.................. (225) (83) (196) Accounts payable................................ (88) 103 133 Deferred liabilities............................ 232 - - ------- ------- ------- Net cash provided by operating activities..... $ 893 $ 1,372 $ 586 ======= ======= =======
The accompanying notes are an integral part of this financial statement. F-82 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS Note 1. Significant Accounting Policies The accounting policy relative to the carrying value of property and equipment is indicated in the caption on the balance sheets. The nature of operations and other significant accounting policies are as follows: Nature of Operations Michigan Gas Partners Limited Partnership was formed to own and operate various oil and gas properties in the state of Michigan. Substantially all of the Company's revenue is derived from the production and sale of natural gas. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Oil and Gas Property and Equipment The Partnership 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 independent 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. 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. Statement of Cash Flows For purposes of the statement of cash flows, the Partnership considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. F-83 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(Continued) Federal Income Taxes Federal income taxes are not recorded, as the results of operations are not taxable to the Partnership, but are includable in the respective income tax returns of the partners. Note 2. Related Party Transactions In accordance with the partnership agreement, the Partnership contracts with a partner for all property exploration costs and continuing costs of operations. In addition, approximately $220,000 and $209,000, respectively, of oil and gas receivables at December 31, 1997 and 1996 are due from the partner and substantially all accounts payable for 1997 and 1996 are due to the partner. Note 3. Sale of Properties In December 1997, the Partnership transferred certain properties with a cost of $6,195,000 to an unrelated party and received consideration as follows: a. Initial payment of $232,000 b. Fixed payment note of $2,017,000 c. Credit payment note with a maximum amount of $4,000,000 d. Production payment For accounting purposes, the transfer does not qualify for sale or gain recognition. Accordingly, the accompanying financial statements continue to include the partnership's costs, revenues and expenses associated with the assets transferred. Any gain on the properties transferred will be recognized based upon future production of the properties. Note 4. Allocation of Net Income or Losses and Distribution of Cash Flows Net income equal to adjusted federal taxable income, as defined, is allocated to the partners' capital accounts to the extent of cash flows, so distributable, as defined. Remaining net income and net loss, as defined, are allocated to the partners' capital accounts in proportion to their prospective capital accounts and partnership interests in a manner specified in the partnership agreement. Note 5. Impairment of Property and Equipment In 1996 and 1995, the Partnership recognized an impairment loss for certain oil and gas properties based upon revision of the properties' reserves by independent petroleum engineers. The impairment loss recognized in the accompanying 1996 and 1995 financial statements was measured as the amount by which the carrying amount of the oil and gas properties exceeded their fair value. Fair value was determined based upon estimated future cash flows for the properties, discounted at a 10% annual rate. Note 6. Subsequent Events Effective January 1, 1998, the Michigan Gas Partners transferred substantially all producing oil and gas properties to a newly formed related company, Quicksilver Resources Inc., in exchange for common stock of Quicksilver. F-84 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(Continued) Note 7. Supplementary Information Related to Oil and Gas Activities--Unaudited Quantities of Oil and Gas Reserves The following table presents estimates of the Partnership's proved reserves, all of which have been prepared by the engineers of the Partnership's General Partner. Substantially all of the Partnership's crude oil and natural gas activities are conducted in the United States. Reserve Quantities for the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995 ------ ------ ------ Proved reserves: Natural Gas (Mmcf): Beginning of period.............................. 17,014 26,405 30,487 Production....................................... (1,199) (1,306) (915) Revisions of previous estimates.................. (2,288) (8,085) (3,167) ------ ------ ------ End of period.................................... 13,527 17,014 26,405 ====== ====== ====== Proved developed reserves: Natural Gas (Mmcf): Beginning of year................................ 15,956 25,667 24,190 End of year...................................... 12,600 15,956 25,667
The reduction in the reserves of Michigan Gas Partners from 1996 to 1997 is due primarily to the decision not to spend $3.2 million for drilling and development of existing leases. Michigan Gas Partners put its properties up for sale in 1997 and elected not to spend the capital to develop its reserves. Because no additional development was planned, the 1997 reserve report removed those potential reserves from its report and increased the decline in production. No reasonable sales price was received for the properties, and the assets were eventually merged into Quicksilver in 1998. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves. The following standardized measure of discounted future net cash flows was computed in accordance with the rules and regulations of the Securities and Exchange Commission and Financial Accounting Standards Board Statement No. 69 using year end prices and costs. No values are given to unproved properties or to probable reserves that may be recovered from proved properties. The inexactness associated with estimating reserve quantities, future production and revenue streams and future development and production expenditures, together with the assumptions applied in valuing future production, substantially diminishes the reliability of this data. The values so derived are not considered to be an estimate of fair market value. The Partnership therefore cautions against its simplistic use. F-85 MICHIGAN GAS PARTNERS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(Continued) The following tabulation reflects the Partnership's estimated discounted future cash flows from natural gas production: For the years ended December 31, 1997, 1996 and 1995, in thousands.
1997 1996 1995 -------- -------- -------- Future cash flows............................ $ 39,203 $ 42,342 $ 55,715 Future production and development costs...... (23,680) (27,266) (34,926) Future income tax expense.................... - - - -------- -------- -------- 10% annual discount for timing of cash flows....................................... 15,523 15,076 20,789 (4,509) (4,600) (8,900) -------- -------- -------- Standardized measure of discounted cash flows....................................... $ 11,014 $ 10,476 $ 11,889 ======== ======== ========
Primary changes in the standardized measure of discounted future net cash flows, in thousands:
1997 1996 1995 ------- ------- ------- Sales of oil and gas produced, net of production costs.............................. $ (858) $ (326) $ (479) Net changes in price and production costs...... 3,164 1,848 (6,354) Change in estimated future development costs... 468 445 5,539 Revisions of previous quantity estimates....... (2,254) (5,535) (1,648) Development costs incurred during the year..... (13) (132) (4,837) Accretion of discount.......................... 1,047 1,189 1,768 Other.......................................... (1,016) 1,098 217 ------- ------- ------- Net increase (decrease)........................ 538 (1,413) (5,794) Balance at beginning of year................... 10,476 11,889 17,683 ------- ------- ------- Balance at end of year......................... $11,014 $10,476 $11,889 ======= ======= =======
Changes in the supply and demand for oil, natural gas liquids, hydrocarbon price volatility, inflation, timing of production, reserve revisions and other factors make these estimates inherently imprecise and subject to substantial revision. As a result, these measures are not the Partnership's estimates for future cash flows nor do these measures serve as an estimate of current market value. Note 8. Change in Method of Accounting for Oil and Gas Properties Pursuant to the merger agreement with MSR Exploration Ltd. dated September 1, 1998, the partnership has changed its accounting policy for oil and gas properties from the successful efforts method to the full cost method. Accordingly, the Partnership's financial statements have been restated to apply the change retroactively. The effect of the accounting change on income as previously reported for 1997, 1996, and 1995 is:
1997 1996 1995 ------ ----- ----- (in thousands) Effect on: Income before extraordinary item and net income...... $1,738 $(659) $(812)
Adoption of the full cost method of accounting for oil and gas properties was mandated in the September 1998 merger agreement with MSR and is consistent with the accounting policy of MSR previously disclosed to its shareholders and the general public. In addition, the Company believes the full cost method of accounting for oil and gas properties more accurately reflects management's exploration objectives and results by including all costs incurred in oil and gas producing activities as integral to the acquisition, discovery and development of whatever reserves ultimately result from its efforts as a whole. F-86 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Quicksilver Resources Inc. Fort Worth, Texas We have audited the accompanying statement of revenues and direct operating expenses of the Unocal Corporation's Spirit Energy 76 unit interests, as described in Note 1, for the year ended December 31, 1998. This financial statement is the responsibility of management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. The accompanying statement of revenues and direct operating expenses reflects the revenues and direct operating expenses attributable to the Unocal Corporation's Spirit Energy 76 unit interests, as described in Note 2, and is not intended to be a complete presentation of the revenues and expenses of the Unocal Corporation's Spirit Energy 76 unit interests. In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and direct operating expenses of the Unocal Corporation's Spirit Energy 76 unit interests, as described in Note 1, for the year ended December 31, 1998, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Fort Worth, Texas July 22, 1999 F-87 SPIRIT ENERGY 76 UNIT INTERESTS STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES YEAR ENDED DECEMBER 31, 1998 (in thousands)
1998 ------ REVENUES--Oil, gas and related product sales............................ $9,718 DIRECT OPERATING EXPENSES--Lease operating expenses..................... 2,670 ------ EXCESS OF REVENUES OVER DIRECT OPERATING EXPENSES....................... $7,048 ======
See notes to statement of revenues and direct operating expenses. F-88 SPIRIT ENERGY 76 UNIT INTERESTS NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1998 1. The Properties The accompanying statement represents the revenues and direct operating expenses attributable to the net interest in Unocal Corporation's Spirit Energy 76 unit interests in producing wells and certain non-producing leases primarily in the Garfield and Beaver Creek Fields sold to Quicksilver Resources Inc. ("Quicksilver"). The purchase price was $30 million, consisting of $27 million in cash and 404,381 unregistered shares of Quicksilver's common stock. The stock component of the purchase price was placed in escrow and will be distributed to Unocal over a three-year period, subject to downward adjustment for certain costs, expenses, and liabilities incurred during this period. Quicksilver financed the cash portion of the purchase price with $27 million of borrowings under a bank credit facility, which permits Quicksilver to obtain revolving credit loans and to issue letters of credit from time to time in an aggregate amount not to exceed the lesser of a borrowing base limitation or $200 million. The properties are located in the state of Michigan. The acquisition closed in May 1999. These acquired properties and their related operations are included in Quicksilver's consolidated financial statements from the date of closing. 2. Basis Of Presentation The historical financial statements reflecting financial position, results of operations and cash flows required by generally accepted accounting principles, are not presented as such information is neither readily available on an individual property basis nor meaningful for the properties acquired because the entire acquisition cost is being assigned to oil and gas properties. Accordingly, the statement of revenues and direct operating expenses is presented in lieu of the financial statements required under Rule 3-05 of Securities and Exchange Commission Regulation S-X. The accompanying statement of revenues and direct operating expenses represents Unocal Corporation's net ownership interest in the properties acquired by Quicksilver and is represented on the full cost accrual basis of accounting. Depreciation, depletion and amortization; allocated general and administrative expenses; interest expense and income; and income taxes have been excluded because the property interest acquired represents only a portion of a business and the expenses incurred are not necessarily indicative of the expense to be incurred by Quicksilver. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of certain revenues for the reported period. Estimates and assumptions are also required in the disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from such estimates. 3. Contingent Liabilities Given the nature of the properties acquired and as stipulated in the purchase agreement, Quicksilver is subject to loss contingencies, if any, pursuant to existing or expected environmental laws, regulations and leases covering the acquired properties. F-89 SPIRIT ENERGY 76 UNIT INTERESTS NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--(Continued) For the Year Ended December 31, 1998 4. Oil And Natural Gas Reserves Information (unaudited) Unaudited reserve information related to the properties being acquired is presented in the table below and is derived from the January 1, 1999 oil and natural gas reserve report prepared by Quicksilver's independent petroleum engineers and calculated as of January 1, 1998 by adding production for 1998 to the January 1, 1999 amount.
Oil ------ (Mbbl) Estimated Quantities of Proved Reserves: January 1, 1998.................................................... 2,938 Production....................................................... (239) ----- December 31, 1998.................................................. 2,699 ===== Proved Developed Reserves: As of December 31, 1998.......................................... 621 =====
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Related to Oil and Natural Gas Reserves--The standardized measure of discounted future net cash flows ("Standardized Measure") relating to oil and natural gas reserves being acquired is calculated in accordance with Statement of Financial Accounting Standards No. 69, "Disclosures About Oil And Gas Producing Activities". The Standardized Measure has been prepared assuming year-end selling prices adjusted for future fixed and determinable contractual price changes, year-end development and production costs, and a 10% annual discount rate. The reserves and the related Standardized Measure at December 31, 1998, derived from the oil and natural gas reserve report prepared by Quicksilver's independent petroleum engineers, were adjusted for production during 1998, and in addition, the Standardized Measure was adjusted for price changes to derive reserves and the Standardized Measure as of December 31, 1998. The Standardized Measure is not a fair market value of the mineral interests purchased, and the Standardized Measure presented for the proved oil and natural gas reserves does not purport to present the fair market value of the 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 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 are inherently imprecise and subject to substantial revision.
December 31, 1998 ----------------- (in thousands) Future cash inflows..... $149,842 Future production and development costs...... (65,499) Future income tax ex- pense.................. (19,497) -------- Future net cash flows undiscounted........... 64,846 10% annual discount for estimated timing of cash flows............. (26,550) -------- Standardized measure of discounted future net cash flows............. $ 38,296 ========
The following are principal sources of changes in the standardized measure of discounted future net cash flows:
Year Ended December 31, 1998 ----------------- (in thousands) Standardized measure of discounted future net cash flows at beginning of period................................. $39,028 Changes resulting from: Net change in prices................................ (1,986) Sales of oil and natural gas produced, net of production costs................................... (7,048) Accretion of discount............................... 3,903 Net change in income taxes.......................... 4,399 ------- Standardized measure of discounted future net cash flows at end of period....................................... $38,296 =======
F-90 INDEPENDENT AUDITOR'S REPORT To the Stockholders Mercury Exploration Company Fort Worth, Texas We have audited the accompanying statements of revenues and direct operating expenses/Shell Michigan properties acquired of Mercury Exploration Company for the years ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying statements of revenues and direct operating expenses/Shell Michigan properties acquired reflect the revenues and direct operating expenses attributable to Mercury Exploration Company described in Note 2 to the financial statements and is not intended to be a complete presentation of the revenues and expenses of Mercury Exploration Company. In our opinion, the accompany financial statements referred to above present fairly, in all material respects, the revenues and direct operating expenses/Shell Michigan properties acquired of Mercury Exploration Company for the years ended September 30, 1996 and 1995 in conformity with generally accepted accounting principles. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas October 23, 1998 F-91 MERCURY EXPLORATION COMPANY STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES SHELL MICHIGAN PROPERTIES ACQUIRED YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (in thousands)
1996 1995 ------- ------- Revenues Gas revenues................................................. $25,543 $16,539 Oil revenues................................................. 1,152 892 Condensate revenues.......................................... 3,719 2,649 ------- ------- Total revenues............................................. 30,414 20,080 ======= ======= Direct Operating Expenses Operating expenses........................................... 3,147 2,902 Production taxes............................................. 1,648 1,390 ------- ------- Total direct operating expenses............................ 4,795 4,292 ------- ------- Excess of Revenues Over Direct Operating Expenses/Shell Michigan Properties Acquired.................. $25,619 $15,788 ======= =======
F-92 MERCURY EXPLORATION COMPANY SHELL MICHIGAN PROPERTIES ACQUIRED NOTES TO FINANCIAL STATEMENTS Note 1. Business Combination On November 14, 1996 Mercury Exploration Company consummated the Shell acquisition from Shell Western E & P, Inc. The acquisition consisted of 64 wells located in Michigan with combined proved reserves of approximately 75 Bcfe at the effective date of July 1, 1996. The aggregate purchase price for the interests was approximately $57.7 million, which was paid in cash with bank debt. Note 2. Basis Of Presentation Historical financial statements reflecting financial position, results of operations and cash flows required by generally accepted accounting principles are not presented, as such information is neither readily available on an individual property basis nor meaningful for the properties included in the business combination. Accordingly, these statements of revenues and direct operating expenses/properties acquired are presented in lieu of the financial statements required under Rule 3-05 of Securities and Exchange Commission Regulation S-X. The accompanying financial statements include the direct revenues and expenses of properties acquired by Mercury Exploration Company in the business combination referred to in Note 1. All of the statements and disclosures are stated in U.S. dollars. The accompanying statements of revenues and direct operating expenses/properties acquired represent Mercury's net ownership interest in the properties included in the business combination and are presented on the full cost accrual basis of accounting. Depreciation, depletion and amortization, allocated general and administrative expenses, interest expense, and income taxes have been excluded because the property interests included in the business combination are from a newly formed business and the expenses incurred are not necessarily indicative of the expenses to be incurred by Mercury. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Note 3. Disclosures About Oil And Gas Activities (Unaudited) The changes in proved reserves for 1996 and 1995 were as follows:
Petroleum Natural Gas Liquids (Bbls) (Mmcf) -------------- ----------- (in thousands) Reserves at September 30, 1994.................... 1,944 83,542 Production...................................... (241) (6,760) ----- ------- Reserves at September 30, 1995.................... 1,703 76,782 Production...................................... (267) (10,668) ----- ------- Reserves at September 30, 1996.................... 1,436 $66,114 ===== ======= Total proved developed reserves September 30, 1997.............................. 644 18,291 ===== ======= September 30, 1996.............................. 911 28,959 ===== =======
F-93 MERCURY EXPLORATION COMPANY SHELL MICHIGAN PROPERTIES ACQUIRED NOTES TO FINANCIAL STATEMENTS--(Continued) The standardized measure of discounted estimated future net cash flows, and changes therein, related to proved oil and gas reserves (in thousands) for 1996 and 1995 are as follows:
1996 1995 -------- -------- Future cash inflows..................................... $138,460 $174,704 Future development and production costs................. (35,525) (43,198) Future income tax expense............................... - - -------- -------- Future net cash flows................................... 102,935 131,506 10% annual discount..................................... (40,580) (43,485) -------- -------- Standardized measure of discounted future cash flows.... $ 62,355 $ 88,021 ======== ========
Primary changes in standardized measure of discounted future net cash flows (in thousands):
1996 1995 -------- ------- Net changes in prices and production costs............... $ (5,130) $(1,807) Sales of oil and gas, net of production costs............ (25,619) (15,788) Accretion of discount.................................... 8,036 8,296 Other.................................................... (2,953) 1,858 -------- ------- $(25,666) $(7,441) ======== =======
Estimated future cash inflows are computed by applying year end prices of oil and gas to year end quantities of proved developed reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves in future years, based on year end costs and assuming continuation of existing economic conditions. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the Securities and Exchange Commission. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows do not necessarily represent management's assessment of future profitability or future cash flow to the Company. The accompanying notes are an integral part of these financial statements. F-94 INDEPENDENT AUDITOR'S REPORT To the Stockholders Mercury Exploration Company Fort Worth, Texas We have audited the accompanying statements of revenues and direct operating expenses/Destec Michigan Properties acquired of Mercury Exploration Company for the years ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying statements of revenues and direct operating expenses/Destec Michigan properties acquired reflect the revenues and direct operating expenses attributable to Mercury Exploration Company described in Note 2 to the financial statements and is not intended to be a complete presentation of the revenues and expenses of Mercury Exploration Company. In our opinion, the accompanying financial statements referred to above present fairly, in all material respects, the revenues and direct operating expenses/Destec Michigan properties acquired of Mercury Exploration Company for the years ended September 30, 1997 and 1996 in conformity with generally accepted accounting principles. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas October 23, 1998 F-95 MERCURY EXPLORATION COMPANY STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES DESTEC MICHIGAN PROPERTIES ACQUIRED YEARS ENDED SEPTEMBER 30, 1997 AND 1996 (in thousands)
1997 1996 ------ ------ Revenues Gas revenues.................................................. $7,257 $6,224 ------ ------ Total revenues.............................................. 7,257 6,224 ------ ------ Direct Operating Expenses Operating expenses............................................ 1,289 1,689 Production taxes.............................................. 303 262 ------ ------ Total direct operating expenses............................. 1,592 1,951 ------ ------ Excess of Revenues Over Direct Operating Expenses/Destec Michigan Properties Acquired................................... $5,665 $4,273 ====== ======
The accompanying notes are an integral part of these financial statements. F-96 MERCURY EXPLORATION COMPANY DESTEC MICHIGAN PROPERTIES ACQUIRED NOTES TO FINANCIAL STATEMENTS Note 1. Business Combination On October 9, 1997 Mercury Exploration Company consummated the Destec acquisition from ECT Enocene Enterprises II, Inc. Such properties consist of 143 wells located in Michigan with combined proved reserves of approximately 30.8 Bcfe as of the effective date of August 1, 1997. The aggregate purchase price for the interests was approximately $23.5 million, which was paid in cash with bank debt. Note 2. Basis Of Presentation Historical financial statements reflecting financial position, results of operations and cash flows required by generally accepted accounting principles are not presented, as such information is neither readily available on an individual property basis nor meaningful for the properties included in the business combination. Accordingly, these statements of revenues and direct operating expenses/properties acquired are presented in lieu of the financial statements required under Rule 3-05 of Securities and Exchange Commission Regulation S-X. The accompanying financial statements include the direct revenues and expenses of properties acquired by Mercury Exploration Company in the business combination referred to in Note 1. All of the statements and disclosures are stated in U.S. dollars. The accompanying statements of revenues and direct operating expenses/ properties acquired represent Mercury's net ownership interest in the properties included in the business combination and are presented on the full cost accrual basis of accounting. Depreciation, depletion and amortization, allocated general and administrative expenses, interest expense, and income taxes have been excluded because the property interests included in the business combination are from a newly formed business and the expenses incurred are not necessarily indicative of the expenses to be incurred by Mercury. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Note 3. Disclosures About Oil And Gas Activities (unaudited) The changes in proved reserves for 1997 and 1996 were as follows:
Petroleum Natural Gas Liquids (Bbls) (Mmcf) -------------- ----------- (in thousands) Reserves at September 30, 1995.................... - 36,781 Production...................................... - (3,042) --- ------ Reserves at September 30, 1996.................... - 33,739 Production...................................... - (2,908) --- ------ Reserves at September 30, 1997.................... - 30,831 --- ------ Total proved developed reserves September 30, 1997.............................. - 26,755 --- ------ September 30, 1996.............................. - 29,663 === ======
F-97 MERCURY EXPLORATION COMPANY DESTEC MICHIGAN PROPERTIES ACQUIRED NOTES TO FINANCIAL STATEMENTS--(Continued) The standardized measure of discounted estimated future net cash flows, and changes therein, related to proved oil and gas reserves (in thousands) for 1997 and 1996 are as follows:
1997 1996 ------- ------- Future cash inflows........................................ $75,746 $58,031 Future development and production costs.................... (15,776) (12,440) Future income tax expense.................................. - - ------- ------- Future net cash flows...................................... 59,970 45,591 10% annual discount........................................ (27,723) (23,305) ------- ------- Standardized measure of discounted future cash flows....... $32,247 $22,286 ======= =======
Primary changes in standardized measure of discounted future net cash flows (in thousands):
1997 1996 ------- ------- Net changes in prices and production costs................ $10,861 $(1,369) Sales of oil and gas, net of production costs............. (5,665) (4,273) Accretion of discount..................................... 2,229 2,082 Other..................................................... (2,536) (643) ------- ------- $(9,961) $(1,465) ======= =======
Estimated future cash inflows are computed by applying year end prices of oil and gas to year end quantities of proved developed reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves in future years, based on year end costs and assuming continuation of existing economic conditions. These estimates are furnished and calculated in accordance with requirements of the Financial Accounting Standards Board and the SEC. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows do not necessarily represent management's assessment of future profitability or future cash flow to the Company. F-98 Holditch--Reservoir Technologies Consulting Services Schlumberger 1310 Commerce Drive Park Ridge 1 Pittsburgh, PA 15275-1011 Tel: 412-787-5403 Fax: 412-787-2906 15 October, 1999 Quicksilver Resources, Inc. 1619 Pennsylvania Avenue Fort Worth, Texas 76104 Dear Gentlemen: At the request of Quicksilver Resources, Inc. (QUICKSILVER), Holditch- Reservoir Technologies Consulting Services (H-RT) has prepared a reserve and economic audit of certain proved oil and gas interests as of September 1, 1999. The 1998 year end reserve forecasts prepared by H-RT were reviewed with the updated production and adjusted as necessary. Major changes from the 1998 year end reserve report are the result of higher product prices, significant reserve additions in Michigan and Canada as a result of the acquisitions of Spirit Energy and the Monogram Unit respectively, and adjustments to the undeveloped reserves in the South Central Cut Bank Sand Unit in Montana. The results of this study are summarized in Table 1. TABLE 1 ESTIMATED NET RESERVES & INCOME CERTAIN OIL AND GAS INTERESTS AUDITED FOR QUICKSILVER RESOURCES AS OF SEPTEMBER 1, 1999
Proved Proved Non- Proved Total Producing producing Undeveloped Proved Reserves Reserves Rese rves Reserves ----------- ----------- ----------- ------------- Remaining Net Reserves Oil--Mbbls 7,904.640 7,275.210 9,303.210 24,483.060 Gas--MMscf 117,137.100 26,242.100 67,465.780 210,845.000 NGL--Mbbls 600.330 358.150 88.020 1046.500 Income Data (M$) Future Net Revenue 525,116.500 228,254.500 404,088.900 1,157,460.000 Deductions 288,857.471 62,807.730 184,914.090 536,579.270 Future Net Income (FNI) 236,259.100 165,446.700 219,174.700 620,880.600 Discounted PV @ 10% (M$) 144,834.700 101,095.200 102,636.800 348,566.700
A-1 Holditch-Reservoir Technologies Consulting Services Schlumberger 15 October, 1999 Page 2 RESERVES ESTIMATES A combination of conventional decline curve analysis, reservoir simulation, and type curves were used in the January 1, 1999 evaluation to estimate the remaining reserves in the MI Antrim formation. The reservoir simulation was conducted using SHALEGAS, H-RT's multi-phase reservoir simulator designed specifically for evaluating fractured shale formations. For the September 1, 1999 audit we reviewed the total MI Antrim Proved Producing production plot and determined that our original forecast as a whole was in excellent agreement. Based on this, no MI Antrim forecasts were changed. The MI Non-Antrim formations were evaluated using decline curve analysis, volumetrics, and production data analysis. The production data analysis was conducted using PROMAT, H-RT's production data analysis software. Volumetric calculations were based on data and maps provided to us by QUICKSILVER. All forecasts from the January 1, 1999 evaluation were reviewed and changed where applicable. The reserves in the remaining properties were evaluated using decline curve analysis for the producing properties, and volumetrics, analogies, and simulation results for the behind pipe and undeveloped properties. For producing properties under waterflood, watercut versus cumulative oil plots were used to aid in decline curve estimates. Reserve estimates are strictly technical judgments. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretations. The reserve estimates presented in this report are believed reasonable; however, they are estimates only and should be accepted with the understanding that reservoir performance subsequent to the date of the estimate may justify their revision. RESERVES ADDITIONS & MODIFICATIONS Acquisitions and development activity during the first half of 1999 have impacted Quicksilver's reserves. Acquisition of Spirit Energy and the Monogram Unit added significant reserves in Michigan and Canada. Development activity in the South Central Cut Bank Sand Unit in Montana resulted in a reduction of the undeveloped reserves in the Unit. QUICKSILVER acquired several MI Spirit Energy properties in May of 1999. New properties included the Beaver Creek UPdC, the Beaver Creek Richfield Unit, the Beaver Creek Richfield Non-unit, and the Detroit River Sour. QUICKSILVER also obtained additional working and net revenue interests in the Garfield 8 and Garfield Richfield properties. The Spirit acquisition added 1,438 MBbls of oil, 28,378 MMscf of gas, and 66 MBbls of NGL to the proved net reserves. Total proved reserves in Canada increased by 10,077 MMscf as the result of the acquisition of the Monogram Unit in southern Alberta. Quicksilver acquired controlling (89%) interest in MGV Energy (MGV), a Calgary-based natural gas company, in August, 1999. The Monogram Unit is MGV's first acquisition. Proved undeveloped reserves in the South Central Cut Bank Sand Unit (SCCBSU) were reduced by 872 MBO (16%) from the 1998 Year End reserve report based on the results of A-2 Holditch-Reservoir Technologies Consulting Services Schlumberger 15 October, 1999 Page 3 recent drilling. The reserves were part of the Lower Cretaceous infill drilling and waterflood optimization project outlined for the Unit. During 1999 QRI drilled five Lower Cretaceous zone wells in the SCCBSU with limited success. The reduction in reserves relates to the locations in the channels adjacent to the recent drilling where the high permeability sand is swept. RESERVE CATEGORIES Reserves were assigned to the proved producing (PDP), proved non-producing (PDNP), and proved undeveloped (PUD) reserve categories. Oil and gas reserves by definition fall into one of the following categories: proved, probable, and possible. The proved category is further divided into: developed and undeveloped. The developed reserve category is even further divided into the appropriate reserve status subcategories: producing and non-producing. Non- producing reserves include shut-in and behind-pipe reserves. Only proved reserves were evaluated in this report and all reserve categories used in this report conform to the Securities and Exchange Commission Regulation S-X, Rule 4-10 (a). The reserves and income attributable to the various reserve categories included in this report have not been adjusted to reflect the varying degrees of risk associated with them. ECONOMIC TERMS Net revenue (sales) is defined as the total proceeds from the sale of oil, condensate, natural gas liquids (NGL), and gas before any deductions. Future net income (cashflow) is future net revenue less net lease operating, transportation, processing, and marketing expenses, and state severance or production taxes. Future net income (cashflow) includes only those deductions for general and administrative expenses charged by the operator to each particular well on a monthly basis. No provisions for State or Federal income taxes are made in this evaluation. The present worth (discounted cashflow) at various discount rates is calculated on a monthly basis. PRICING AND ECONOMIC PARAMETERS All product prices, costs, and economic parameters used in this report were supplied by QUICKSILVER. Data from QUICKSILVER were accepted as presented. All pricing and costs were held constant for the life of the projects (no escalation). All economics were run to economic life or 40 years which ever occurs first. All prices used in this report were based on current contracts or 8/31/99 NYMEX pricing plus or minus local differentials. The base NYMEX prices used were $22.86/Bbl for oil and $2.825/MMBtu for gas. Quicksilver currently has two oil price contracts that apply to the entire company oil volumes. The first is for 1000 BOPD at $20.65/Bbl and expires 7/31/2000, the second is for 500 BOPD at $19.35/Bbl and expires 4/30/2004. The oil price used for this report is a yearly weighted average price of the contract volumes and prices and the remaining volumes at the 8/31/99 NYMEX price of $22.86/Bbl. Total proved working interest volumes were used for the weighted average with a 12.5% royalty burden applied to the net oil stream to calculate the working interest volumes. A-3 Holditch-Reservoir Technologies Consulting Services Schlumberger 15 October, 1999 Page 4 OWNERSHIP The leasehold interests were supplied by QUICKSILVER and were accepted as presented. No attempt was made by the undersigned to verify the title or ownership of the interests evaluated. GENERAL All data used in this study were obtained from QUICKSILVER, public industry information sources, or the non-confidential files of H-RT. A field inspection of the properties was not made in connection with the preparation of this report. The potential environmental liabilities attendant to ownership and/or operation of the properties have not been addressed in this report. Abandonment and clean-up costs and possible salvage value of the equipment were not considered in this report. In auditing the information at our disposal related to this report, we have excluded from our consideration all matters which require a legal or accounting interpretation, or any interpretation other than those of an engineering or geological nature. In assessing the conclusions expressed in this report pertaining to all aspects of oil and gas evaluations, especially pertaining to reserve audits, there are uncertainties inherent in the interpretation of engineering data, and such conclusions represent only informed professional judgments. Data and worksheets used in the preparation of this audit will be maintained in our files in Pittsburgh and will be available for inspection by anyone having proper authorization by QUICKSILVER. This report was prepared solely for the use of the party to whom it is addressed and any disclosure made of this report and/or the contents by said party thereof shall be solely the responsibility of said party, and shall in no way constitute any representation of any kind whatsoever of the undersigned with respect to the matters being addressed. We appreciate the opportunity to perform this audit and are available should you need further assistance in this matter. Sincerely yours, /s/ Nelson R. Fairchild Jr. /s/ Joseph H. Frantz, Jr., P.E. Nelson R. Fairchild Jr. Joseph H. Frantz, Jr., P.E. Senior Petroleum Engineer Operations Manager Eastern U.S.
A-4 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The expenses of this offering are estimated to be as follows: Securities and Exchange Commission registration fee........... $14,126.74 AMEX listing fee.............................................. 17,500.00 NASD filing fee............................................... 5,581.56 Legal fees and expenses....................................... * Accounting fees and expenses.................................. * Engineering fees and expenses................................. * Blue Sky fees and expenses (including legal fees)............. * Printing expenses............................................. * Transfer Agent fees........................................... * Miscellaneous................................................. * ---------- TOTAL....................................................... $ ==========
-------- *To be provided by amendment. Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law ("DGCL") provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Our bylaws provide that indemnification shall be to the fullest extent permitted by the DGCL for all of our current or former directors. As permitted by the DGCL, our certificate of incorporation provides that our directors shall have no personal liability to us or our stockholders for monetary damages for breach of fiduciary duty as a director, II-1 except (1) for any breach of the directors duty of loyalty to us or our stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided under Section 174 of the DGCL or (4) for any transaction from which a director derived an improper personal benefit. The Underwriting Agreement that we will enter into with respect to the offer and sale of the common stock covered by this registration statement will contain certain provisions for the indemnification of our directors and officers and the underwriters, as applicable, against civil liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities We have sold and issued (without registration and without payment of any selling commission to any person) the following securities since December 18, 1997, the date of our formation. The share amounts shown are adjusted for a stock dividend which was declared in February 1999: (1) Effective January 1, 1998, Michigan Gas Partners merged into us, and all of the partnership interests of JEDI in Michigan Gas Partners were converted into the right to receive 1,340,405 shares of our common stock. (2) Effective January 1, 1998, Mercury transferred to us all of its oil and gas properties in the states of Michigan, Montana and Wyoming, except for some of its excluded Michigan properties. As consideration for the transfer, we assumed the liabilities of Mercury relating to the transferred properties, including debt in the amount of $34,600,000 owed by Mercury to Bank of America under a credit agreement dated January 31, 1997. We also issued 3,251,820 shares of our common stock to Mercury. In addition, at Mercurys request, 74,135 shares of our common stock to which Mercury was entitled were issued to Mercurys employee, Jeff Cook, as part of his agreed compensation. (3) Effective January 1, 1998, QELC transferred all of its oil and gas properties in the states of Michigan and Montana to us as part of our formation. As consideration for this transfer, we assumed the liabilities of QELC relating to the transferred properties and debt in the amount of approximately $39,600,000 owed by QELC to Trust Company of the West and Bank of America under credit agreements dated November 14, 1996. We issued an additional 3,030,860 shares of our common stock to QELC. (4) Effective January 1, 1998, Messrs. Frank, Thomas and Glenn Darden, Anne Darden Self and Jack L. Thurber transferred to us the contractual after payout or net profits interests owned by those individuals in some of the assets of Mercury or QELC that were transferred to us in our formation. As consideration for those transfers of contractual rights, we issued 242,922 shares of our common stock to each of Frank Darden, Thomas F. Darden, Glenn Darden and Anne Darden Self and 301,488 shares of our common stock to Mr. Thurber. (5) Effective January 1, 1998, we satisfied our debt assumed from QELC and owed to TCW under a credit agreement dated November 14, 1996 by paying $17,075,000 in cash to TCW and issuing 1,340,405 shares of our common stock to TCW, in exchange for a $10,000,000 credit. Mercury later purchased all of the shares of our common stock issued to TCW and TCW is no longer a shareholder of ours. (6) On May 17, 1999, we completed a purchase from Unocal Corporations Spirit Energy 76 unit of substantially all of Unocal's natural gas and crude oil assets in Michigan. The assets purchased, consisting of ownership interests in the Garfield Unit and the Beaver Creek Unit, include approximately 20,000 net leasehold acres and about 13,000 Mcfe production per day. The purchase price for the Unocal acquisition was $30 million, consisting of $27 million in cash, adjusted to $25.8 million cash at closing, and 404,381 unregistered shares of our common stock. The stock component of the purchase price was placed in escrow and will be distributed to Unocal over a three year period, subject to downward adjustment in correlation to costs, expenses, and liabilities which may be incurred during this period. (7) On May 25, 1999, our board of directors approved the issuance of $10,000 worth of our common stock to each of Messrs. Frank Darden, Steven Morris, Randall Kent and Yandell Rogers, III II-2 as compensation for their services during 1998. Based upon the average of the high and low closing prices for our common stock on that date, we plan to issue 1,600 shares of our common stock to each of these non-employee directors prior to completion of this offering. The sale of the above securities described in this Item 15 were exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits: *1.1 --Form of Underwriting Agreement +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 --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). +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). *5.1 --Opinion of Cantey & Hanger, L.L.P. regarding legality of the shares being registered. +10.1 --Agreement and Plan of Reorganization and Merger, dated March 31, 1998, by and among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan Gas Partners Limited Partnership, Mercury Exploration Company and Joint Energy Development Investments Limited Partnership (filed as Exhibit 10.2 to the Company's Form S-4 file No. 333-66709, filed November 3, 1998 and included herein by reference). +10.2 --Agreement Regarding Merger Agreement, dated April 9, 1998, by and among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan Gas Partners Limited Partnership, Mercury Exploration Company, Trust Company of the West and Joint Energy Development Investments Limited Partnership (filed as Exhibit 10.3 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.3 --Registration Rights Agreement, dated April 9, 1998, by and among Quicksilver Resources Inc., Joint Energy Development Investments Limited partnership and Trust Company of the West (filed as Exhibit 10.4 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.4 --Stockholders Agreement, dated April 9, 1998, by and among Quicksilver Resources, Inc., Mercury Exploration Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust Company of the West, Joint Energy Development Investments Limited Partnership and Mercury Production Company (filed as Exhibit 10.5 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.5 --Amendment No. 1 to Stockholders Agreement, dated September 1, 1998, by and among Quicksilver Resources Inc., Mercury Exploration Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust Company of the West, Joint Energy Development Investments Limited Partnership and Mercury Production Company (filed as Exhibit 10.7 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference.) +10.6 --Stock Transfer Agreement, dated April 9, 1998, by and among Mercury Exploration Company and Joint Energy Development Investment Limited Partnership (filed as Exhibit 10.7 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference).
II-3 +10.7 --Amendment No. 1 to Stock Transfer Agreement, dated September 1, 1998, by and among Mercury Exploration Company and Joint Energy Development Investment Limited Partnership (filed as Exhibit 10.8 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). *10.8 --Second Amended and Restated Credit Agreement, dated March 1, 1999, by and among Quicksilver Resources Inc. and NationsBank, N.A., Paribas, Bank One Texas, N.A. and Frost National Bank. *10.9 --First Amendment to Second Amended and Restated Credit Agreement, dated May 17, 1999, by and among NationsBank, N.A., Paribas, Bank One Texas, N.A. and Frost National Bank. *10.10 --Master Gas Purchase and Sale Agreement, dated March 1, 1999, by and between Quicksilver Resources Inc. and Reliant Energy Services, Inc. +10.11 --Agreement regarding Warrants, dated September 1, 1998, by and among Quicksilver Resources Inc., Mercury Exploration Company, Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Joint Energy Development Investments Limited Partnership and Trust Company of the West (filed as Exhibit 10.13 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.12 --Management Agreement, dated September 1, 1998, by and among Mercury Exploration Company and Quicksilver Resources Inc. (filed as Exhibit 10.15 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.13 --Wells Agreement (filed as an exhibit to the Registration Statement on Form S-4 File No. 333-29769, and incorporated herein by reference). +10.14 --Agreement and Plan of Merger, dated September 1, 1998, among Quicksilver Resources Inc. and MSR Exploration Ltd. (filed as Appendix A to the Proxy Statement/Prospectus included in Part I of the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.15 --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). +10.26 --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). *10.27 --Quicksilver Resources Management Incentive Plan *10.28 --Quicksilver Resources Inc. 1999 Stock Option and Retention Stock Plan *10.29 --Second Amendment to Second Amended and Restated Credit Agreement, dated October 6, 1999, by and among Quicksilver Resources Inc., Bank of America, N.A., Paribas, Frost National Bank, CIBC, Inc., and Christiana Bank. *21.1 --List of subsidiaries of Quicksilver Resources Inc. *23.1 --Consent of Deloitte & Touche LLP *23.2 --Consent of Weaver and Tidwell, L.L.P. *23.3 --Consent of Holditch-Reservoir Technologies Consulting Services 23.4 --Consent of Cantey & Hanger, L.L.P. (contained in Exhibit 5.1 hereto) 24.1 --Power of Attorney (included on the signature page to this Registration Statement) *27 --Financial Data Schedule
- -------- *Filed herewith +Previously filed (b) Consolidated Financial Statement Schedules: All schedules are omitted because the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. II-4 Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the calculation of Registration Fee table in the effective registration statement; and (iii) to include any additional or changed material information on the plan of distribution. (2) that, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (3) that, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereto. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth, State of Texas, on the 18th day of October, 1999. Quicksilver Resources Inc. /s/ Thomas F. Darden By: _________________________________ Name: Thomas F. Darden Title: Chairman of the Board and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Glenn M. Darden and Bill Lamkin, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any additional registration statements pursuant to Rule 462(b), and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities indicated and on the 18th day of October, 1999.
Signature Title --------- ----- /s/ Thomas F. Darden Chairman of the Board and ______________________________________ Chief Executive Officer Thomas F. Darden and Director (Principal Executive Officer) /s/ Glenn M. Darden President, Chief Operating ______________________________________ Officer and Secretary Glenn M. Darden /s/ Bill Lamkin Executive Vice President ______________________________________ and Chief Financial Bill Lamkin Officer (Principal Financial and Accounting Officer) /s/ Frank Darden Director ______________________________________ Frank Darden /s/ Steven M. Morris Director ______________________________________ Steven M. Morris /s/ D. Randall Kent Director ______________________________________ D. Randall Kent /s/ W. Yandell Rogers III Director ______________________________________ W. Yandell Rogers III
II-6
Signature Title --------- ----- Director ______________________________________ Mark Warner /s/ Anne Darden Self Director ______________________________________ Anne Darden Self
II-7 INDEX TO EXHIBITS
Exhibit Number Description ------- ----------- *1.1 --Form of Underwriting Agreement +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).-- 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 --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). +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). *5.1 --Opinion of Cantey & Hanger, L.L.P. regarding legality of the shares being registered. +10.1 --Agreement and Plan of Reorganization and Merger, dated March 31, 1998, by and among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan Gas Partners Limited Partnership, Mercury Exploration Company and Joint Energy Development Investments Limited Partnership (filed as Exhibit 10.2 to the Company's Form S-4 file No. 333-66709, filed November 3, 1998 and included herein by reference). +10.2 --Agreement Regarding Merger Agreement, dated April 9, 1998, by and among Quicksilver Resources Inc., Quicksilver Energy, L.C., Michigan Gas Partners Limited Partnership, Mercury Exploration Company, Trust Company of the West and Joint Energy Development Investments Limited Partnership (filed as Exhibit 10.3 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.3 --Registration Rights Agreement, dated April 9, 1998, by and among Quicksilver Resources Inc., Joint Energy Development Investments Limited partnership and Trust Company of the West (filed as Exhibit 10.4 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.4 --Stockholders Agreement, dated April 9, 1998, by and among Quicksilver Resources, Inc., Mercury Exploration Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust Company of the West, Joint Energy Development Investments Limited Partnership and Mercury Production Company (filed as Exhibit 10.5 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.5 --Amendment No. 1 to Stockholders Agreement, dated September 1, 1998, by and among Quicksilver Resources Inc., Mercury Exploration Company, Quicksilver Energy, L.C., Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Jeff Cook, Jack L. Thurber, Trust Company of the West, Joint Energy Development Investments Limited Partnership and Mercury Production Company (filed as Exhibit 10.7 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference.) +10.6 --Stock Transfer Agreement, dated April 9, 1998, by and among Mercury Exploration Company and Joint Energy Development Investment Limited Partnership (filed as Exhibit 10.7 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.7 --Amendment No. 1 to Stock Transfer Agreement, dated September 1, 1998, by and among Mercury Exploration Company and Joint Energy Development Investment Limited Partnership (filed as Exhibit 10.8 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). *10.8 --Second Amended and Restated Credit Agreement, dated March 1, 1999, by and among Quicksilver Resources Inc. and NationsBank, N.A., Paribas, Bank One Texas, N.A. and Frost National Bank. *10.9 --First Amendment to Second Amended and Restated Credit Agreement, dated May 17, 1999, by and among NationsBank, N.A., Paribas, Bank One Texas, N.A. and Frost National Bank.
Exhibit Number Description ------- ----------- *10.10 --Master Gas Purchase and Sale Agreement, dated March 1, 1999, by and between Quicksilver Resources Inc. and Reliant Energy Services, Inc. +10.11 --Agreement regarding Warrants, dated September 1, 1998, by and among Quicksilver Resources Inc., Mercury Exploration Company, Frank Darden, Thomas F. Darden, Glenn M. Darden, Anne Darden Self, Joint Energy Development Investments Limited Partnership and Trust Company of the West (filed as Exhibit 10.13 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.12 --Management Agreement, dated September 1, 1998, by and among Mercury Exploration Company and Quicksilver Resources Inc. (filed as Exhibit 10.15 to the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.13 --Wells Agreement (filed as an exhibit to the Registration Statement on Form S-4 File No. 333-29769, and incorporated herein by reference). +10.14 --Agreement and Plan of Merger, dated September 1, 1998, among Quicksilver Resources Inc. and MSR Exploration Ltd. (filed as Appendix A to the Proxy Statement/Prospectus included in Part I of the Company's Form S-4 File No. 333-66709, filed November 3, 1998 and included herein by reference). +10.15 --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). +10.26 --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). *10.27 --Quicksilver Resources Management Incentive Plan *10.28 --Quicksilver Resources Inc. 1999 Stock Option and Retention Stock Plan *10.29 --Second Amendment to Second Amended and Restated Credit Agreement, dated October 6, 1999, by and among Quicksilver Resources Inc., Bank of America, N.A., Paribas, Frost National Bank, CIBC, Inc., and Christiana Bank. *21.1 --List of subsidiaries of Quicksilver Resources Inc. *23.1 --Consent of Deloitte & Touche LLP *23.2 --Consent of Weaver and Tidwell, L.L.P. *23.3 --Consent of Holditch-Reservoir Technologies Consulting Services 23.4 --Consent of Cantey & Hanger, L.L.P. (contained in Exhibit 5.1 hereto) 24.1 --Power of Attorney (included on the signature page to this Registration Statement) *27 --Financial Data Schedule
- -------- *Filed herewith +Previously filed EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 7,000,000 Shares of Common Stock QUICKSILVER RESOURCES INC. UNDERWRITING AGREEMENT ---------------------- _________ __, 1999 BEAR, STEARNS & CO. INC. Dain Rauscher Wessels Morgan Keegan & Company, Inc. as Representatives of the several Underwriters Named in Schedule I hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, N.Y. 10167 Dear Sirs: 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 issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters"), acting severally and not jointly, an aggregate of ------------ 7,000,000 shares (the "Firm Shares") of the Company's common stock, par value ----------- $.01 per share (the "Common Stock"). The Company also proposes to issue and ------------ sell to the several Underwriters, for the sole purpose of covering over- allotments in connection with the sale of the Firm Shares, and at the option of the Underwriters, up to an additional 1,050,000 shares (the "Additional Shares") ----------------- of Common Stock. The Firm Shares and the Additional Shares are referred to herein collectively as the "Shares." 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 Underwriters that: (a) The Company 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-1 (Registration No. 333-_______), and related preliminary prospectuses, as amended, for the registration under the Securities Act of 1933, as amended (the "Securities Act"), of 8,050,000 shares (including -------------- the Additional Shares) of Common Stock, which registration statement, as so amended, has been declared effective by the Commission on the date hereof and copies of which have heretofore been delivered to the Underwriters. 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 pursuant to Rule 424(b) of the Securities Act Regulations, each in the form heretofore delivered to the Underwriters). 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 ---------- 4(a) and 4(b) below, if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the offering and sale of the Shares (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 Underwriters 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 Underwriters by the Company for use in connection with the offering of the Shares 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 2 is first provided to the Underwriters 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 any Underwriter furnished to the Company in writing by any Underwriter 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 delivered to the Underwriters 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 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 & Tidwell, L.L.P., who has certified certain financial statements of predecessors of the Company, Mercury Exploration, 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 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 3 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. (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) other than MGV Energy, Inc. (the "Subsidiary") has no 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 issuance or marketability of the Shares pursuant hereto or (z) in any manner draw into question the validity of this Agreement or the transactions described in the Prospectus under the caption "Use of Proceeds" (any of the events set forth in clauses (x), (y) or (z), being referred to as a "Material Adverse Effect"). ----------------------- (g) The Subsidiary (i) has been duly organized and is validly existing as a corporation in good standing under the laws of the Province of Alberta, Canada, (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) the Subsidiary has no 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 4 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 Subsidiary, (y) interfere with or adversely affect the issuance or marketability of the Shares pursuant hereto or (z) in any manner draw into question the validity of this Agreement or the transactions described in the Prospectus under the caption "Use of Proceeds" (any of the events set forth in clauses (x), (y) or (z), being referred to as 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. (i) The execution, delivery, and performance of this Agreement, the issuance, offering and sale of the Shares, and the consummation of the transactions contemplated hereby and in the Prospectus do not and will not (i) 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 (A) the Restated Certificate of Incorporation or By-Laws of the Company, (B) 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, (C) any statute, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective properties or assets (D) 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 (i) 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 (ii) any other person is required for (A) the execution, delivery and performance by the Company of this Agreement, (B) the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company 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 Underwriters. (j) All of the outstanding shares of Common Stock under this Agreement, are duly authorized and validly issued, and are 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 Company under this Agreement are duly authorized, and, when issued, delivered and paid for in accordance with this Agreement, will be validly issued, and fully paid and nonassessable, and will not have been issued in violation of or be subject to any preemptive or similar rights. As of June 30, 5 1999, after giving effect to the issuance and sale of the Shares pursuant hereto and the application of the net proceeds from the sale thereof, the Company had the pro forma capitalization as set forth in the Prospectus under the caption "Capitalization." 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 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 (a) taken (other than through the actions, if any, of the Underwriters) 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 (b) since the filing of the Preliminary Prospectus (i) sold, bid for, purchased or paid any person any compensation for soliciting purchases of, shares of Common Stock or (ii) 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 and its predecessors 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. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Consolidated Financial Data," "Selected Consolidated Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Prospectus. 6 (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 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 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. (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, including, without limitation, the corporate power and authority to issue, sell and deliver the Shares as provided herein and the corporate power to effect the use of proceeds from the Offering as described in the Prospectus. (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 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 issuance 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 the issuance of the Shares, 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 7 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 nor, to the best knowledge of the Company, threatened against it, (ii) no strike, labor dispute, slowdown or stoppage pending against the Company nor, 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 (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 the Company has received all permits, licenses and other approvals required of them 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 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 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 8 property and marketable 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 (i) to its oil and gas properties, including its wells and its leasehold interest therein, and (ii) 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 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 9 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 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 (a) to renew its existing insurance coverage as and when such policies expire or (b) 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. 10 (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 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 and any other person that would give rise to a valid claim against the Company or any of the Underwriters for a brokerage commission, finder's fee or like payment in connection with the issuance, purchase and 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 11 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 13 hereof. (ll) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters pursuant to this Agreement shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. The Company acknowledges that each of the Underwriters and, for purposes of the opinions to be delivered to the Underwriters pursuant to Sections 6(b) and 6(c) hereof, counsel to the Company and counsel to the Underwriters, will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 2. Purchase, Sale and Delivery of the Shares. ----------------------------------------- (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, (i) the Company agrees to issue and sell [7,000,000] of the Firm Shares to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price per share of $_______, the number of Firm Shares set forth opposite the respective names of the Underwriters in Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 9 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Shares shall be made at the office of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas, 75202, or at such other place as shall be agreed upon by you and the Company, at 10:00 A.M. on the third or fourth business day (as permitted by Rule 15c6-1 under the Exchange Act) (unless postponed in accordance with the provisions of Section 10 hereof) following the date of the effectiveness of the Registration Statement (or, if the Company has elected to rely upon Rule 430A of the Securities Act Regulations, the third or fourth business day (as permitted by Rule 15c6-1 under the Exchange Act) after the determination of the public offering price of the Shares), or such other time not later than ten business days after such date as shall be agreed upon by you and the Company (such time and date of payment and delivery being herein called the "Closing Date"). Payment shall ------------ 12 be made to the Company by wire transfer in same day funds, against delivery to you for the respective accounts of the Underwriters of certificates for the Shares to be purchased by them. Certificates for the Shares shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Closing Date. The Company will permit you to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (c) In addition, the Company hereby grants to the Underwriters the option to purchase up to 1,050,000 Additional Shares at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares as set forth in Section 2(a) hereof, for the sole purpose of covering over-allotments, if any, in the sale of Firm Shares by the Underwriters. This option may be exercised at any time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice to the Company from Bear, Stearns & Co. Inc. ("Bear Stearns") on behalf of the Underwriters. Such ------------ notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time, as reasonably determined by Bear Stearns on behalf of the Underwriters, when the Additional Shares are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that the Additional Closing Date - ------------------------ -------- ------- shall not be earlier than the Closing Date or, if thereafter, earlier than the second full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 10 hereof). Certificates for the Additional Shares shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Additional Closing Date. The Company will permit you to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 11 hereof) bears to 7,000,000 subject, however, to such adjustments to eliminate any fractional shares as Bear Stearns on behalf of the Underwriters in its sole discretion shall make. Payment for the Additional Shares shall be made by wire transfer in same day funds at the offices of Jenkens & Gilchrist, a Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas, 75202, or such other location as may be agreed upon between you and the Company, upon delivery of the certificates for the Additional Shares to you for the respective accounts of the Underwriters. 3. Offering. Upon your authorization of the release of the Firm Shares, -------- the Underwriters propose to offer the Firm Shares for sale to the public upon the terms set forth in the Prospectus. 13 4. Covenants of the Company. The Company covenants and agrees with the ------------------------ Underwriters that: (a) 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. 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 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 Underwriters 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. 14 (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 Underwriters 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 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) During the period of 180 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 the 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 Bear Stearns. The Company will obtain the undertaking of each of its officers and directors and such of its stockholders as have been heretofore designated by you and listed on Schedule II attached hereto not to engage in any of the aforementioned transactions or to announce their intention to do any of the foregoing on their own behalf, other than the Company's sale of Shares hereunder and the Company's issuance of Common Stock pursuant to any existing employee benefit plans or upon the exercise, conversion or exchange of any currently outstanding stock options or warrants. (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. 15 (h) The Company will apply its net proceeds from the sale of the Shares as set forth under the caption "Use of Proceeds" in the Prospectus. (i) The Company will use its best efforts to cause the Shares to be listed on the American Stock Exchange. (j) The Company will report the use of its net proceeds from the Offering to the extent required pursuant to Rule 463 of the Securities Act Regulations. 5. 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 hereunder, including those in connection with (i) preparing, printing, duplicating, filing 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 Underwriters in quantities as herein above stated), (ii) the issuance, transfer and delivery of the shares to the underwriters, 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 Underwriters and such counsel's disbursements in relation thereto, (iv) listing the shares on the American Stock Exchange, (v) filing fees of the Commission and the National Association of Securities Dealers, Inc. (the "NASD"), (vi) the cost of printing certificates representing the Shares and (vii) the cost and charges of any transfer agent or registrar for the common stock. 6. Conditions of Underwriters' Obligations. The obligations of the --------------------------------------- Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any certificates, opinions, written statements or letters furnished to you or to Jenkens & Gilchrist ("Underwriters' Counsel") pursuant to this Section 6 of any misstatement or omission, to the performance by the Company of its 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 4(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 16 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 LLP, counsel for the Company, dated the Closing Date addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) The Company and each of its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the state of incorporation. The Company and each of is subsidiaries 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 and each of its subsidiaries has all requisite corporate authority to own, lease and license their respective properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. Except as disclosed in the Prospectus, all of the outstanding shares of capital stock of the Company's subsidiaries are owned beneficially and of record by the Company and have been validly authorized and issued and are fully paid and nonassessable and, except as described in the Prospectus, there are no other equity securities of any subsidiary or any securities convertible into capital stock of any subsidiary, or are there any options, warrants, or other rights to acquire capital stock or other equity securities of any subsidiary of the Company. (ii) The Company has an authorized capital stock as set forth in the Registration Statement and the Prospectus. All of the outstanding shares of Common Stock 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 Company on the Closing Date have been duly and validly authorized and, when delivered by the Company against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable and will not have been issued in violation of or subject to any preemptive or similar rights. The certificates for the Common Stock are in due and proper form. The Common Stock, the Firm Shares and the Additional Shares conform to the descriptions thereof contained in the Registration Statement and the Prospectus. (iii) The shares of Common Stock currently outstanding are listed, and the Shares (including the Additional Shares) have been approved for listing, on the American Stock Exchange, subject only to notice of issuance. (iv) This Agreement has been duly and validly authorized, executed and delivered by the Company. 17 (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, the issuance, offering and sale of the Shares 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 any of its subsidiaries 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 or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective properties or assets are or may be bound (B) any statute, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective 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 subsidiaries or any of their respective 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 any of its subsidiaries or any of their respective 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 Underwriters (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 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. 18 (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 Underwriters at which the contents and 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 understood that such counsel need express no belief or opinion with respect to the financial statements and other financial 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 Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) 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 Underwriters' Counsel. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, you and they are justified in relying thereon. 19 (c) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to you and to Underwriters' Counsel, and the Underwriters shall have received from said Underwriters' Counsel a favorable opinion, dated as of the Closing Date with respect to the issuance and 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 Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. (d) At the Closing Date you shall have received a certificate of the President and Chief Executive Officer and the 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 6 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. (e) 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 Underwriters 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 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, 1998, 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, 1998, 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, 1999 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 20 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 June 30, 1999, 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 July 1, 1999 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 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. (f) At the time this Agreement is executed and at the Closing Date, you shall have received a letter from Weaver & Tidwell, L.L.P., independent accountants for predecessor entities to the Company, including Mercury Exploration Company and Michigan Gas Partners Limited 21 Partnership and certain acquired properties (collectively, the "Predecessor Entities"), dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters 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. (g) Prior to the Closing Date the Company shall have furnished to you such further information, certificates and documents as you may reasonably request. (h) You shall have received from each person who is a director or officer of the Company or such stockholder as have been heretofore designated by you and listed on Schedule II hereto a 180 day lock-up agreement, in form and substance satisfactory to the Underwriters and Underwriters' Counsel. (i) At the Closing Date, all of the Shares (including the Additional Shares) shall have been approved for listing on the American Stock Exchange, subject only to notice of issuance. (j) You shall have received from Holditch a letter, dated as of the Closing Date, addressed to the Underwriters 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 6 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 Underwriters' Counsel pursuant to this Section 6 shall not be in all [material] respects reasonably satisfactory in form and substance to you and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be canceled by you at, or at any time prior to, the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be canceled by you at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company in writing, or by telephone, telex or telegraph, confirmed in writing. 22 7. Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter 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), 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; 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 referred to in Section 9(c) furnished to the Company by or on behalf of any Underwriter through you expressly for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have, including under this Agreement. (b) Each Underwriter severally, and not jointly, 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, 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 any Underwriter through you expressly for use therein; provided, however, that in no case shall any -------- ------- Underwriter be liable or responsible for any amount in excess of 23 the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. This indemnity will be in addition to any liability which any Underwriter may otherwise have, including under this Agreement. The Company acknowledges that the statements set forth in the ___________, ____________ and ___________ paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter 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) 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 7). 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. 8. Contribution. In order to provide for contribution in ------------ circumstances in which the indemnification provided for in Section 7 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses 24 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 Underwriters, 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 and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares 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 and the Underwriters 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 Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and (y) the underwriting discounts and commissions received by the Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and of the Underwriters 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 or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) 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 8, (i) in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter 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 8 and the preceding sentence, no Underwriter shall 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 such Underwriter 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 8, each person, if any, who controls an Underwriter 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 such Underwriter, 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 8. 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 25 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 8 or otherwise. 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. 9. Default by an Underwriter. ------------------------- (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters. (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, you may in your discretion arrange for yourself or for another party or parties (including any non- defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within five calendar days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 9, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Company to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Sections 5, 7 and 8 hereof) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder. (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Additional Closing Date, as the case may be for a period, not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 26 10. Survival of Representations and Agreements. All representations ------------------------------------------ and warranties, covenants and agreements of the Underwriters and the Company contained in this Agreement, including representations of the Company in Section 1, the agreements contained in Section 5, the indemnity agreements contained in Section 7, the contribution agreements contained in Section 8 and the agreements contained in Section 13, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof or by or on behalf of the Company, any of its officers and directors or any controlling person thereof and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Section 1 and the agreements contained in Sections 5, 7, 8, 11(d) and 13 hereof shall survive the termination of this Agreement, including termination pursuant to Sections 9 or 11 hereof. 11. Effective Date of Agreement; Termination. ---------------------------------------- (a) This Agreement shall become effective, upon the later of when (i) you and the Company shall have received notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If either the initial public offering price or the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by notifying you or by you notifying the Company. Notwithstanding the foregoing, the provisions of this Section 11 and of Sections 1, 5, 7, 8 and 13 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 or the obligations of the Underwriters to purchase the Additional Shares at any time prior to the Additional Closing Date, as the case may be, 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 Firm 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 Firm Shares or the Additional Shares, as the case may be, on the terms contemplated by the Prospectus. 27 (c) Any notice of termination pursuant to this Section 11 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 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by you, reimburse the Underwriters for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of their counsel), incurred by the Underwriters in connection herewith. 12. Notices. All communications hereunder, except as may be ------- otherwise specifically provided herein, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, NY 10167, Attention: Amos Levy, with a copy to: Jenkens & Gilchrist, a Professional Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas 75202, Attention: L. Steven Leshin; if sent to the Company, shall be mailed, delivered, or telegraphed and confirmed in writing to the Company, 1619 Pennsylvania Avenue, 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: Sloan Blair. 13. Consent to Jurisdiction; Waiver of Immunities; Appointment of ------------------------------------------------------------- Agent for Service. - ----------------- (a) The Company: (i) irrevocably submits 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 agrees 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; (iii) irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding; and 28 (iv) irrevocably designates, appoints and empowers CT Corporation System, 1633 Broadway, New York, New York 10019 as its designee, appointee and authorized agent to receive for and on its behalf service of any and all legal process, summons, notices and documents that may be served in any action, suit or proceeding brought against it, with respect to its obligations, liabilities or any other matter arising out of or relating to this Agreement or any other document delivered in connection herewith and that such service may be made on such designee, appointee and authorized agent in accordance with legal procedures prescribed for such courts, and it being understood that the designation and appointment of CT Corporation System as such authorized agent shall become effective immediately without any further action; and each further agrees that to the extent permitted by law, proper service of process upon CT Corporation System (or its successors as agent for service of process), shall be deemed in every respect effective service of process upon it in any such action, suit or proceeding. (b) Nothing in this Section 13 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 13 shall survive any termination of this Agreement, in whole or in part. 14. Parties. This Agreement shall insure solely to the benefit of, and ------- shall be binding upon, the Underwriters, the Company and the controlling persons, directors, officers and others referred to in Sections 7 and 8, 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 any of the Underwriters. 15. 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. 16. 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. 29 If the foregoing correctly sets forth the understanding between you and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, QUICKSILVER RESOURCES INC. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- Accepted as of the date first above written BEAR, STEARNS & CO. INC. Dain Rauscher Wessels Morgan Keegan & Company, Inc. as representatives of the several Underwriters Named in Schedule I hereto c/o Bear Stearns & Co. Inc. 245 Park Avenue New York, N.Y. 10167 By: Bear, Stearns & Co. Inc. By: ------------------------------- Name: ------------------------------- Title: ------------------------------- 30 SCHEDULE I Total Number of Firm Total Number of Firm Name of Underwriter Shares to be Purchased - ------------------- ---------------------- Bear, Stearns & Co. Inc...................... Dain Rauscher Wessels........................ Morgan Keegan & Company, Inc................. Total......................... [7,000,000] 31 SCHEDULE II Thomas F. Darden Glenn M. Darden Houston Kauffmann William Lamkin Fred Van Naerssen Frank Darden Steven M. Morris D. Randall Kent W. Yandell Rogers, III Mark Warner Anne Darden Self Mercury Exploration Company Quicksilver Energy L.C. Joint Energy Development Investments Limited Partnership 32 EX-5.1 3 OPINION OF CANTEY & HANGER Exhibit 5.1 October 18, 1999 Quicksilver Resources Inc. 1619 Pennsylvania Avenue Fort Worth, Texas 76104 Ladies and Gentlemen: We have assisted in the preparation and filing by Quicksilver Resources Inc. (the "Company") of a Registration Statement on Form S-1, dated October 18, 1999 (the "Registration Statement"), with the Securities and Exchange Commission, relating to the sale of up to 8,050,000 shares (the "Shares") of Common Stock, $0.01 par value (the "Common Stock"), of the Company. A form of underwriting agreement (the "Underwriting Agreement") is filed as an exhibit to the Registration Statement. Our opinion is limited in all respects to the substantive law of the State of Texas, the federal law of the United States, and the Delaware General Corporation Law, and we assume no responsibility as to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction. As counsel to the Company, we have examined the Registration Statement, the Company's Restated Certificate of Incorporation, its Bylaws, and other corporate records of the Company and have made such other investigations as we have deemed necessary as a basis for the opinion hereinafter set forth. For purposes of this opinion we have assumed the genuineness of all signatures on all documents, the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as copies, and the correctness and accuracy of all facts set forth in all certificates and documents that we have examined. Based upon and subject to the foregoing, we are of the opinion that the Shares have been duly authorized and, when sold and paid for in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and nonassessable. This opinion is limited to the matters stated herein and no opinion is implied or may be inferred beyond the matters expressly stated. We hereby consent to the use of our name in the Registration Statement under the caption "Legal Matters" in the related Prospectus and consent to the filing of this opinion as an exhibit thereto. Very truly yours, CANTEY & HANGER, L.L.P. By: /s/ Dean A. Tetirick ----------------------- Dean A. Tetirick, Partner EX-10.8 4 SECOND AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.8 SECOND AMENDED AND RESTATED CREDIT AGREEMENT among QUICKSILVER RESOURCES INC., as Borrower, NATIONSBANK, N.A., as Administrative Agent, and The Financial Institutions Listed on Schedule 1 Hereto, as Banks $200,000,000 dated as of March 1, 1999 NATIONSBANC MONTGOMERY SECURITIES LLC, as Sole Lead Arranger and Book Manager PARIBAS, as Documentation Agent 1 TABLE OF CONTENTS
Page No. ARTICLE I AMENDMENT AND RESTATEMENT ARTICLE II TERMS DEFINED SECTION 2.1. Definitions.................................................... 2 SECTION 2.2. Accounting Terms and Determinations............................ 25 SECTION 2.3. Petroleum Terms................................................ 25 SECTION 2.4. Money.......................................................... 25 ARTICLE III THE CREDIT SECTION 3.1. Commitments.................................................... 25 SECTION 3.2. Notes.......................................................... 30 SECTION 3.3. Interest Rates; Payments....................................... 30 SECTION 3.4. Mandatory Prepayments Resulting From Borrowing Base Deficiency. 32 SECTION 3.5. Voluntary Prepayments.......................................... 32 SECTION 3.6. Voluntary Reduction of Commitments............................. 32 SECTION 3.7. Termination of Commitments; Final Maturity..................... 32 SECTION 3.8. Unused Commitment Fee.......................................... 32 SECTION 3.9. Agency and other Fees.......................................... 33 ARTICLE IV GENERAL PROVISIONS SECTION 4.1. Delivery and Endorsement of Notes.............................. 33 SECTION 4.2. General Provisions as to Payments.............................. 33 ARTICLE V CHANGE IN CIRCUMSTANCES SECTION 5.1. Increased Cost and Reduced Return.............................. 34 SECTION 5.2. Limitation on Types of Loans................................... 36 SECTION 5.3. Illegality..................................................... 36
i SECTION 5.4. Treatment of Affected Loans.................................... 36 SECTION 5.5. Compensation................................................... 37 SECTION 5.6. Taxes.......................................................... 37 SECTION 5.7. Discretion of Banks as to Manner of Funding.................... 39 ARTICLE VI BORROWING BASE SECTION 6.1. Reserve Report; Proposed Borrowing Base........................ 39 SECTION 6.2. Scheduled Redeterminations of the Borrowing Base and the Conforming Borrowing Base; Procedures and Standards........ 39 SECTION 6.3. Special Redetermination........................................ 40 SECTION 6.4. Borrowing Base Deficiency...................................... 41 SECTION 6.5. Initial Borrowing Base and Conforming Borrowing Base........... 41 ARTICLE VII COLLATERAL AND GUARANTEES SECTION 7.1. Security....................................................... 41 SECTION 7.2. Guarantees..................................................... 42 ARTICLE VIII CONDITIONS PRECEDENT SECTION 8.1. Conditions to Amendment and Restatement and Initial Borrowing and Participation in Letter of Credit Exposure................. 42 SECTION 8.2. Conditions to Each Borrowing and each Letter of Credit......... 47 SECTION 8.3. Materiality of Conditions...................................... 47 SECTION 8.4. Termination of Agreement....................................... 47 ARTICLE IX REPRESENTATIONS AND WARRANTIES SECTION 9.1. Existence and Power............................................ 48 SECTION 9.2. Credit Party and Governmental Authorization; Contravention..... 48 SECTION 9.3. Binding Effect................................................. 48 SECTION 9.4. Financial Information.......................................... 49 SECTION 9.5. Litigation..................................................... 50 SECTION 9.6. ERISA.......................................................... 50 SECTION 9.7. Taxes and Filing of Tax Returns................................ 50 SECTION 9.8. Ownership of Properties Generally.............................. 51 SECTION 9.9. Mineral........................................................ 51
ii SECTION 9.10. Licenses, Permits, Etc.................................... 51 SECTION 9.11. Compliance with Law....................................... 52 SECTION 9.12. Full Disclosure........................................... 52 SECTION 9.13. Organizational Structure; Nature of Business.............. 52 SECTION 9.14. Environmental Matters..................................... 52 SECTION 9.15. Burdensome Obligations.................................... 53 SECTION 9.16. Fiscal Year............................................... 53 SECTION 9.17. No Default................................................ 53 SECTION 9.18. Government Regulation..................................... 53 SECTION 9.19. Insider................................................... 54 SECTION 9.20. Gas Balancing Agreements and Advance Payment Contracts.... 54 SECTION 9.21. Closing Documents; Management Agreement................... 54 SECTION 9.22. Year 2000 Matters......................................... 54 ARTICLE X AFFIRMATIVE COVENANTS SECTION 10.1. Information............................................... 55 SECTION 10.2. Business of Borrower...................................... 57 SECTION 10.3. Maintenance of Existence.................................. 57 SECTION 10.4. Title Data................................................ 57 SECTION 10.5. Right of Inspection....................................... 57 SECTION 10.6. Maintenance of Insurance.................................. 57 SECTION 10.7. Payment of Taxes and Claims............................... 58 SECTION 10.8. Compliance with Laws and Documents........................ 58 SECTION 10.9. Operation of Properties and Equipment..................... 58 SECTION 10.10. Environmental Law Compliance.............................. 59 SECTION 10.11. ERISA Reporting Requirements.............................. 59 SECTION 10.12. Additional Documents...................................... 60 SECTION 10.13. Environmental Review...................................... 60 SECTION 10.14. Required Purchase Contracts............................... 60 SECTION 10.15. Year 2000 Compatibility................................... 60 ARTICLE XI NEGATIVE COVENANTS SECTION 11.1. Incurrence of Debt........................................ 61 SECTION 11.2. Restricted Payments....................................... 61 SECTION 11.3. Negative Pledge........................................... 61 SECTION 11.4. Consolidations and Mergers................................ 61 SECTION 11.5. Asset Dispositions........................................ 61 SECTION 11.6. Amendments to Organizational Documents; Other Material Agreements....................................... 62 SECTION 11.7. Use of Proceeds........................................... 62
iii SECTION 11.8. Investments............................................... 62 SECTION 11.9. Transactions with Affiliates.............................. 62 SECTION 11.10. ERISA..................................................... 62 SECTION 11.11. Hedge Transactions........................................ 62 SECTION 11.12. Fiscal Year............................................... 63 SECTION 11.13. Change in Business........................................ 63 ARTICLE XII FINANCIAL COVENANTS ARTICLE XIII DEFAULTS SECTION 13.1. Events of Default......................................... 63 ARTICLE XIV AGENTS SECTION 14.1. Appointment, Powers, and Immunities....................... 65 SECTION 14.2. Reliance by Agents........................................ 66 SECTION 14.3. Defaults.................................................. 66 SECTION 14.4. Rights as Bank............................................ 66 SECTION 14.5. Indemnification........................................... 67 SECTION 14.6. Non-Reliance on Agents and Other Banks.................... 67 SECTION 14.7. Resignation of Agents..................................... 67 ARTICLE XV MISCELLANEOUS SECTION 15.1. Notices................................................... 68 SECTION 15.2. No Waivers................................................ 68 SECTION 15.3. Expenses; Indemnification................................. 68 SECTION 15.4. Right of Set-off; Adjustments............................. 69 SECTION 15.5. Amendments and Waivers.................................... 70 SECTION 15.6. Survival.................................................. 70 SECTION 15.7. Limitation on Interest.................................... 70 SECTION 15.8. Invalid Provisions........................................ 71 SECTION 15.9. Waiver of Consumer Credit Laws............................ 71 SECTION 15.10. Assignments and Participations............................ 71 SECTION 15.11. TEXAS LAW................................................. 73 SECTION 15.12. Consent to Jurisdiction; Waiver of Immunities............. 73 SECTION 15.13. Counterparts; Effectiveness............................... 73
iv SECTION 15.14. No Third Party Beneficiaries.............................. 74 SECTION 15.15. COMPLETE AGREEMENT........................................ 74 SECTION 15.16. WAIVER OF JURY TRIAL...................................... 74 SECTION 15.17. Confidentiality........................................... 74
v EXHIBITS -------- EXHIBIT A FORM OF PLEDGE AGREEMENT EXHIBIT B FORM OF NOTE EXHIBIT C FORM OF GUARANTY EXHIBIT D FORM OF REQUEST FOR BORROWING EXHIBIT E FORM OF REQUEST FOR LETTER OF CREDIT EXHIBIT F FORM OF NOTICE OF CONTINUATION OR CONVERSION EXHIBIT G FORM OF CERTIFICATE OF OWNERSHIP INTERESTS EXHIBIT H FORM OF CERTIFICATE OF FINANCIAL OFFICER EXHIBIT I FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT EXHIBIT J FORM OF CERTIFICATE OF EFFECTIVENESS SCHEDULES --------- SCHEDULE 1 FINANCIAL INSTITUTIONS SCHEDULE 2 INVESTMENTS SCHEDULE 3 LITIGATION SCHEDULE 4 CAPITALIZATION SCHEDULE 5 ENVIRONMENTAL DISCLOSURE vi SECOND AMENDED AND RESTATED CREDIT AGREEMENT -------------------------------------------- THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") is --------- entered into as of the 1/st/ day of March, 1999, among QUICKSILVER RESOURCES INC., a Delaware corporation ("Borrower"), NATIONSBANK, N.A., successor by -------- merger to NationsBank of Texas, N.A., as Administrative Agent ("Administrative -------------- Agent"), and the financial institutions listed on Schedule 1 hereto as Banks - ----- ---------- (individually a "Bank" and collectively "Banks"). ---- ----- W I T N E S S E T H: ------------------- WHEREAS, Borrower, NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as Agent, and NationsBank, N.A., successor by merger to NationsBank of Texas, N.A., as the sole Bank ("NationsBank"), are parties to that certain ----------- Amended and Restated Credit Agreement dated as of April 9, 1998, pursuant to which NationsBank provided certain loans and other extensions of credit to Borrower (the "Existing QRI/NationsBank Credit Agreement"); and ----------------------------------------- WHEREAS, MSR Exploration Ltd., a Delaware corporation ("MSR"), Paribas --- (formerly known as Banque Paribas), as Agent and Paribas ("Paribas") and the ------- other financial institutions named therein are parties to that certain Credit Agreement dated as of October 31, 1997, pursuant to which Paribas and such other financial institutions provided a revolving credit facility to MSR in the maximum aggregate amount of $25,000,000 (the "MSR/Paribas Credit Agreement"); ---------------------------- and WHEREAS, immediately prior to the execution of this Agreement, NationsBank has entered into Assignment and Acceptance Agreements (collectively, the "Assignments") with each of Paribas, Bank One, Texas, N.A. ("Bank One"), and ----------- -------- Frost National Bank ("FNB," and together with Paribas and Bank One collectively --- referred to herein as the "New Banks"), pursuant to which NationsBank assigned --------- to the New Banks, and each of the New Banks (i) acquired from NationsBank a portion of NationsBank's Commitment and a portion of the Revolving Loan and Letter of Credit Exposure held by NationsBank under and as defined in the Existing QRI/NationsBank Credit Agreement and each of the other Loan Papers (as defined in the Existing QRI/NationsBank Credit Agreement), (ii) assumed and agreed to perform a portion of NationsBank's obligations under the Existing QRI/NationsBank Credit Agreement and the other Loan Papers (as defined therein), and (iii) became a party to, and a "Bank" under, the Existing QRI/NationsBank Credit Agreement and the other Loan Papers (as defined therein); and WHEREAS, after giving effect to the Assignments and the amendment and restatement of the Existing QRI/NationsBank Credit Agreement pursuant to the terms hereof, the Commitment Percentage (as herein defined) of each Bank (including NationsBank and each New Bank) hereunder will be as set forth on Schedule 1 hereto; and - ---------- WHEREAS, pursuant to the Merger Documents (as herein defined), MSR will merge with and into Borrower with Borrower being the surviving entity (the "Merger"); and ------ 1 WHEREAS, pursuant to the terms of the Merger and the Merger Documents, Borrower will assume and agree to perform as primary obligor, all obligations of MSR under the MSR/Paribas Credit Agreement; and WHEREAS, immediately after giving effect to the Assignments and the Merger, the parties hereto desire to amend and restate the Existing QRI/NationsBank Credit Agreement in the form of this Agreement and Borrower desires to obtain Borrowings (as herein defined) (a) to refinance the indebtedness under the Existing QRI/NationsBank Credit Agreement, (b) to refinance the indebtedness assumed by Borrower under the MSR/Paribas Credit Agreement, (c) to increase from $100,000,000 to $200,000,000 the aggregate Commitments of Banks, and (d) for other purposes permitted herein; and WHEREAS, subject to and upon the terms and conditions herein contained, Banks are willing to provide the credit facility described herein; and WHEREAS, pursuant to Article XIV of this Agreement, NationsBank, N.A. has ----------- been appointed Administrative Agent for Banks hereunder; and WHEREAS, pursuant to certain separate agreements among NationsBank, N.A., NationsBanc Montgomery Securities LLC ("NMS") and Borrower, NMS has been --- appointed Sole Lead Arranger and Book Manager for the credit facility provided herein. NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower, Administrative Agent, and Banks agree as follows: ARTICLE I AMENDMENT AND RESTATEMENT Subject to (i) Section 8.4 hereof, and (ii the satisfaction of each ----------- condition precedent contained in Section 8.1 hereof, the satisfaction of which ----------- shall be evidenced by the execution by Borrower and Administrative Agent of the Certificate of Effectiveness (as hereinafter defined), the Existing QRI/NationsBank Credit Agreement shall be amended and restated as of the Closing Date in the form of this Agreement. ARTICLE II TERMS DEFINED SECTION 2.1. Definitions. The following terms, as used herein, have the ----------- following meanings: 2 "Adjusted Eurodollar Rate" means, for any Eurodollar Loan for any Interest ------------------------ Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Administrative Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Loan for such Interest Period by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest Period. "Administrative Agent" means NationsBank, N.A. in its capacity as -------------------- administrative agent for Banks hereunder or any successor thereto. "Advance Payment Contract" means any contract whereby any Credit Party ------------------------ either (a) receives or becomes entitled to receive (either directly or indirectly) any payment (an "Advance Payment") to be applied toward payment of --------------- the purchase price of Hydrocarbons produced or to be produced from Mineral Interests owned by any Credit Party and which Advance Payment is paid or to be paid in advance of actual delivery of such production to or for the account of the purchaser regardless of such production, or (b) grants an option or right of refusal to the purchaser to take delivery of such production in lieu of payment, and, in either of the foregoing instances, the Advance Payment is, or is to be, applied as payment in full for such production when sold and delivered or is, or is to be, applied as payment for a portion only of the purchase price thereof or of a percentage or share of such production; provided that inclusion of the -------- ---- standard "take or pay" provision in any gas sales or purchase contract or any other similar contract shall not, in and of itself, constitute such contract as an Advance Payment Contract for the purposes hereof. "Affiliate" means, as to any Person, any Subsidiary of such Person, or any --------- other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person and, with respect to any Credit Party, means, any director, executive officer, general partner or manager of such Credit Party and any Person who holds five percent (5%) or more of the voting stock, partnership interests, membership interests or other ownership interests of such Credit Party. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, membership interests or partnership interests, or by contract or otherwise. "Agent" means Administrative Agent, Sole Lead Arranger or Book Manager and ----- "Agents" means Administrative Agent, Sole Lead Arranger and Book Manager, ------ collectively. "Agreement" means this Second Amended and Restated Credit Agreement as the --------- same may hereafter be modified, amended or supplemented from time to time. "Applicable Environmental Law" means any federal, state or local law, ---------------------------- common law, ordinance, regulation or policy, as well as order, decree, permit, judgment or injunction issued, promulgated, approved, or entered thereunder, relating to the environment, health and safety, or Hazardous Substances (including, without limitation, the use, handling, transportation, production, disposal, discharge or storage thereof) or to industrial hygiene or the environmental conditions on, under, or about any real property owned, leased or operated at any time by any Credit Party or any 3 real property owned, leased or operated by any other party including, without limitation, soil, groundwater, and indoor and ambient air conditions. "Applicable Lending Office" means, for each Bank and for each Type of Loan, ------------------------- the "Lending Office" of such Bank (or of an affiliate of such Bank) designated for such Type of Loan on the signature pages hereof or such other office of such Bank (or an affiliate of such Bank) as such Bank may from time to time specify to Administrative Agent and Borrower by written notice in accordance with the terms hereof as the office by which Loans of such Type are to be made and maintained. "Applicable Margin" means, on any date, with respect to each Eurodollar ----------------- Loan, an amount determined by reference to the ratio of Outstanding Credit to the Borrowing Base on such date in accordance with the table below:
===================================================================== Ratio of Outstanding Applicable Margin for Credit to Conforming Borrowing Base Eurodollar Tranches --------------------------------------------------------------------- *.50 to 1 1.125% --------------------------------------------------------------------- ** .50 to 1 * .75 to 1 1.375% --------------------------------------------------------------------- ** .75 to 1 * 1.00 to 1 1.625% --------------------------------------------------------------------- ** 1.00 to 1 2.250% =====================================================================
* less than or equal to ** greater than "Approved Petroleum Engineer" means LaRoche Petroleum Consultants, Ltd., --------------------------- Albrecht & Associates, Inc. and S. A. Holditch and Associates, Inc., or any other reputable firm of independent petroleum engineers as shall be selected by Borrower and approved by Required Banks, such approval not to be unreasonably withheld. "Assignment and Acceptance Agreement" has the meaning given such term in ----------------------------------- Section 15.10(a). - ---------------- "Assignment of Notes and Liens" means those certain Assignments of Notes ----------------------------- and Liens and Amendments to Mortgages to be entered into among Borrower, Administrative Agent and Existing MSR Agent, in form and substance acceptable to Administrative Agent, pursuant to which the notes and instruments evidencing all indebtedness outstanding under the MSR/Paribas Credit Agreement and all Liens securing payment thereof (including, without limitation, the Existing MSR Mortgages) shall be assigned to Administrative Agent for the ratable benefit of each Bank to secure the Obligations. "Assignments" has the meaning assigned to such term in the recitals hereto. ----------- "Authorized Officer" means, as to any Person, its Chief Executive Officer, ------------------ its President, its Chief Financial Officer, any of its Vice Presidents, its Treasurer or its corporate Secretary. "Availability" means, as of any date, the remainder of (a) the Borrowing ------------ Base in effect on such date, minus (b) the Outstanding Credit on such date. 4 "Bank" means any financial institution reflected on Schedule 1 hereto as ---- ---------- having a Commitment and its successors and permitted Assignees, and "Banks" ----- shall mean all Banks. "Bank One" means Bank One, Texas, N.A. -------- "Base Rate" means, for any day, the rate per annum equal to the higher of --------- (a) the Federal Funds Rate for such day plus one-half of one percent (.5%) and (b) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective automatically and without notice to Borrower or any Bank on the effective date of such change in the Prime Rate or Federal Funds Rate. "Base Rate Loan" means the portion of the principal of the Loan bearing -------------- interest with reference to the Base Rate. "Book Manager" means NationsBanc Montgomery Securities LLC in its capacity ------------ as book manager for the credit facility hereunder or any successor thereto. "Borrower" means Quicksilver Resources Inc., a Delaware corporation. -------- "Borrower Pledge Agreement" means a Pledge Agreement substantially in the ------------------------- form of Exhibit A hereto (with applicable conforming changes) to be executed by --------- Borrower pursuant to which Borrower shall pledge to Administrative Agent, for the ratable benefit of Banks, one-hundred percent (100%) of the issued and outstanding Equity of each existing or hereafter acquired Subsidiary of Borrower to secure the Obligations. "Borrowing" means any disbursement to Borrower under, or to satisfy the --------- obligations of any Credit Party under, any of the Loan Papers. Any Borrowing which will constitute a part of the Base Rate Loan is referred to herein as a "Base Rate Borrowing," and any Borrowing which will constitute a Eurodollar Loan ------------------- is referred to herein as a "Eurodollar Borrowing." -------------------- "Borrowing Base" means the loan value attributable to certain of Borrower's -------------- Mineral Interests as determined in accordance with Article VI hereof. ---------- "Borrowing Base Deficiency" means, as of any date, the amount, if any, by ------------------------- which the Outstanding Credit on such date exceeds the Borrowing Base in effect on such date; provided, that, for purposes of determining the existence and -------- ---- amount of any Borrowing Base Deficiency, Letter of Credit Exposure will not be deemed to be outstanding to the extent it is secured by cash in the manner contemplated by Section 3.1(b). -------------- "Borrowing Base Properties" means all Mineral Interests evaluated by Banks ------------------------- for purposes of establishing the Borrowing Base. The Borrowing Base Properties on the Closing Date are described in the Property Description and constitute all of the Mineral Interests described in the Initial Reserve Reports. 5 "Borrowing Date" means the Eurodollar Business Day or the Domestic Business -------------- Day, as the case may be, upon which the proceeds of any Borrowing are made available to Borrower or to satisfy any obligation of any Credit Party. "Certificate of Effectiveness" means a Certificate of Effectiveness in the ---------------------------- form of Exhibit J attached hereto to be executed by Borrower and Administrative --------- Agent upon the satisfaction of each of the conditions precedent contained in Section 8.1 hereof. - ----------- "Certificate of Ownership Interests" means a Certificate of Ownership ---------------------------------- Interests in the form of Exhibit G attached hereto to be executed and delivered --------- by an Authorized Officer of Borrower pursuant to Section 8.1(a)(xvi) hereof. ------------------- "Change of Control" means that, for any reason, the Darden Group fails to ----------------- own and control, directly or indirectly, fifty-one percent (51%) or more of the outstanding voting power of the issued and outstanding capital stock of every class of Borrower. "Closing Date" means the date upon which all of the conditions precedent ------------ set forth in Section 8.1 have been satisfied, and Borrower and Administrative ----------- Agent have executed and delivered the Certificate of Effectiveness; provided, -------- that, in no event shall such date be later than March 31, 1999. - ---- "Closing Documents" means the Merger Documents and all other material ----------------- documents, instruments and agreements executed or delivered by Borrower, MSR, or any Credit Party in connection with or otherwise pertaining to the Merger or the Closing Transactions. "Closing Transactions" means the transactions to occur on the Closing Date -------------------- pursuant to the Closing Documents and this Agreement, including, without limitation, (a) the Merger, (b) the termination of the MSR/Paribas Credit Agreement, including, without limitation, (i) the refinancing of all Debt of MSR under the MSR/Paribas Credit Agreement with proceeds of the Loan, (ii) cancellation of all letters of credit outstanding thereunder, and (iii) the assignment of all Liens securing the obligations of MSR (including, without limitation, the Existing MSR Mortgages) under the MSR/Paribas Credit Agreement to Administrative Agent, for the ratable benefit of each Bank, to secure the Obligations, (c) the cancellation of the Mercury Pledge Agreement, the QELC Pledge Agreement, the Darden Family Pledge Agreements and the Facility Guarantees (as each such term is defined in the Existing QRI/NationsBank Credit Agreement), and (d) the payment of all fees and expenses of Administrative Agent and its Affiliates in connection with the credit facility provided herein. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Collateral Assignment" means, collectively, that certain (i) Second --------------------- Amended and Restated Collateral Assignment of Promissory Notes and Contract Rights dated as of the Closing Date executed by Borrower in favor of Administrative Agent, and (ii) Amended and Restated Collateral Assignment of Promissory Notes and Contract Rights dated as of the Closing Date executed by Borrower in favor of Administrative Agent, pursuant to which Borrower assigns to Administrative Agent and grants Administrative Agent a security interest in certain of the Section 29 Documents. 6 "Commitment" means, with respect to any Bank, the commitment of such Bank ---------- to lend its Commitment Percentage of the Total Commitment to Borrower pursuant to Section 3.1 hereof, as such Commitment may be terminated and reduced from ----------- time to time in accordance with the provisions hereof. On the Closing Date the amount of each Bank's Commitment is the amount set forth opposite such Bank's name on Schedule 1 hereto; provided, that, after giving effect to any Assignment ---------- -------- ---- and Acceptance Agreement, the Commitment of each Bank shall be the amount set forth in the Register maintained by Administrative Agent pursuant to Section ------- 15.10(b). - -------- "Commitment Percentage" means, with respect to each Bank, the Commitment --------------------- Percentage for such Bank set forth on Schedule 1 hereto; provided, that, after ---------- -------- ---- giving effect to any Assignment and Acceptance Agreement, the Commitment of each Bank shall be the amount set forth in the Register maintained by Administrative Agent pursuant to Section 15.10(b). ---------------- "Conforming Borrowing Base" has the meaning set forth in Section 6.1 ------------------------- ----------- hereof. "Consolidated Current Assets" means, for any Person at any time, the --------------------------- current assets of such Person and its Consolidated Subsidiaries at such time, plus, in the case of Borrower, the Availability at such time. "Consolidated Current Liabilities" means, for any Person at any time, the -------------------------------- current liabilities of such Person and its Consolidated Subsidiaries at such time, but, in the case of Borrower, excluding current maturities of Long Term Debt of Borrower and its Consolidated Subsidiaries outstanding at such time. "Consolidated Subsidiary" or "Consolidated Subsidiaries" means, for any ----------------------- ------------------------- Person, any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements. "Consumers Power" means Consumers Power Company, a Michigan corporation. --------------- "Consumers Power Contract" means that certain Gas Purchase Agreement dated ------------------------ October 1, 1994, by and between Mercury, as seller, and Consumers Power, as buyer, pursuant to which Consumers Power has agreed to purchase certain gas owned or controlled by Mercury. "Continue," "Continuation," and "Continued" shall refer to the continuation -------- ------------ --------- pursuant to Section 3.3(c) and/or Article V hereof of a Eurodollar Loan from one -------------- --------- Interest Period to the next Interest Period. "Convert," "Conversion," and "Converted" shall refer to a conversion ------- ---------- --------- pursuant to Section 3.3(c) and/or Article V hereof of one Type of Loan into -------------- --------- another Type of Loan. "Credit Parties" means, collectively, Borrower and each Subsidiary of -------------- Borrower, and "Credit Party" means any one of the foregoing. ------------ "Darden Group" means, collectively, Mercury, QELC, Frank Darden, Anne ------------ Darden Self, Glenn Darden and Thomas Darden and their respective designees, heirs and estates. 7 "Debt" means, for any Person at any time, without duplication, (a) all ---- obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all other indebtedness (including capitalized lease obligations, other than usual and customary oil and gas leases) of such Person on which interest charges are customarily paid or accrued, (d) all Guarantees by such Person, (e) the unfunded or unreimbursed portion of all letters of credit issued for the account of such Person, (f) any amount owed by such Person representing the deferred purchase price of property or services other than accounts payable incurred in the ordinary course of business and in accordance with customary trade terms and which have not been outstanding for more than ninety (90) days past the invoice date, (g) all obligations of such Person secured by a Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person, and (h) all liability of such Person as a general partner of a partnership for obligations of such partnership of the nature described in (a) through (g) preceding. "Default" means any condition or event which constitutes an Event of ------- Default or which with the giving of notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means, in respect of any principal of the Loan or any other ------------ amount payable by Borrower under any Loan Paper which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum during the period commencing on the due date until such amount is paid in full equal to the sum of (i) three percent (3%), plus (ii) the Base Rate as in effect from time to time (provided, that if such amount in default is principal of a -------- ---- Eurodollar Borrowing and the due date is a day other than the last day of an Interest Period therefor, the "Default Rate" for such principal shall be, for ------------ the period from and including the due date and to but excluding the last day of the Interest Period therefor, (a) three percent (3%), plus (b) the Applicable Margin, plus (c) the Eurodollar Rate for such Borrowing for such Interest Period as provided in Section 3.3 hereof, and thereafter, the rate provided for above ----------- in this definition). "Distribution" by any Person, means (a) with respect to any stock issued by ------------ such Person or any partnership, joint venture, limited liability company, membership or other interest of such Person, the retirement, redemption, purchase, or other acquisition for value of any such stock or partnership, joint venture, limited liability company, membership or other interest, (b) the declaration or payment of any dividend or other distribution on or with respect to any stock, partnership, joint venture, limited liability company, membership or other interest of any Person, and (c) any other payment by such Person with respect to such stock, partnership, joint venture, limited liability company, membership or other interest of such Person. "Domestic Business Day" means any day except a Saturday, Sunday or other --------------------- day on which national banks in Dallas, Texas, are authorized by Law to close. "Domestic Lending Office" means, as to each Bank, (a) its office located at ----------------------- its address identified on Schedule 1 hereto as its Domestic Lending Office, (b) ---------- its office located at its address identified on the Register (as defined in Section 15.10(b)) as its Domestic Lending Office, or (c) such other office as - ---------------- such Bank may hereafter designate as its Domestic Lending Office by notice to Borrower and Administrative Agent. 8 "Eligible Assignee" means (i) a Bank, (ii) an Affiliate of a Bank, and ----------------- (iii) any other Person approved by Administrative Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 15.10, Borrower, such approval not to be unreasonably ------------- withheld or delayed by Borrower and such approval to be deemed given by Borrower if no objection is received by the assigning Bank and Administrative Agent from Borrower within two (2) Domestic Business Days after notice of such proposed assignment has been provided by the assigning Bank to Borrower; provided, -------- however, that neither Borrower nor an Affiliate of Borrower shall qualify as an - ------- Eligible Assignee. "Environmental Complaint" means any complaint, summons, citation, notice, ----------------------- directive, order, claim, litigation, investigation, proceeding, judgment, letter or other communication from any federal, state or municipal authority or any other party against any Credit Party involving (a) a Hazardous Discharge from, onto or about any real property owned, leased or operated at any time by any Credit Party, (b) a Hazardous Discharge caused, in whole or in part, by any Credit Party or by any Person acting on behalf of or at the instruction of any Credit Party, or (c) any violation of any Applicable Environmental Law by any Credit Party. "Equity" means shares of capital stock or a partnership, profits, capital, ------ member or other equity interest, or options, warrants or any other rights to substitute for or otherwise acquire the capital stock or a partnership, profits, capital, member or other equity interest of any Credit Party. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. "ERISA Affiliate" means any corporation or trade or business under common --------------- control with any Credit Party as determined under section 4001(a)(14) of ERISA. "Eurodollar Business Day" means any Domestic Business Day on which ----------------------- commercial banks are open for international business (including dealings in dollar deposits) in the applicable eurodollar interbank market. "Eurodollar Lending Office" means, as to each Bank, (a) its office, branch ------------------------- or affiliate located at its address identified on Schedule 1 hereto as its ---------- Eurodollar Lending Office, (b) its office, branch or affiliate located at its address identified on the Register (as defined in Section 15.10(b)) as its ---------------- Eurodollar Lending Office, or (c) such other office, branch or affiliate of such Bank as it may hereafter designate as its Eurodollar Lending Office by notice to Borrower and Administrative Agent. "Eurodollar Loans" means Loans that bear interest at rates based upon the ---------------- Adjusted Eurodollar Rate. "Eurodollar Rate" means, for any Loan which is the subject of a Eurodollar --------------- Tranche for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" --------------- shall mean, for the principal amount of the Loan which is the subject of a Eurodollar Tranche for any Interest Period therefor, the rate per 9 annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Eurodollar Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on -------- ------- Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). "Events of Default" has the meaning set forth in Section 13.1. ----------------- ------------ "Exhibit" refers to an exhibit attached to this Agreement and incorporated ------- herein by reference, unless specifically provided otherwise. "Existing Credit Agreements" means the Existing QRI/NationsBank Credit -------------------------- Agreement and the MSR/Paribas Credit Agreement. "Existing MSR Agent" means Paribas, as Agent under the MSR/Paribas Credit ------------------ Agreement. "Existing MSR Mineral Interests" means the Mineral Interests owned by MSR ------------------------------ or its Subsidiaries on the Closing Date prior to giving effect to the Closing Transactions. "Existing MSR Mortgages" means the mortgages, deeds of trust, security ---------------------- agreements, assignments, pledges and other documents, instruments and agreements described in each of the Assignments of Notes and Liens, which establish Liens on certain of the Existing MSR Mineral Interests to secure MSR's obligations under the MSR/Paribas Credit Agreement. "Existing QRI/NationsBank Credit Agreement" has the meaning assigned to ----------------------------------------- such term in the recitals hereto. "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (a) if the day for which such rate is to be -------- ---- determined is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (b) if such rate is not so published on such next succeeding Domestic Business Day, the Federal Funds Rate for any day shall be the average rate charged to Administrative Agent on such day on such transactions as determined by Administrative Agent. "Financial Officer" of any Person means its Chief Financial Officer; ----------------- provided, that if no Person serves in such capacity, "Financial Officer" shall - -------- ---- ----------------- mean the highest ranking executive officer of such Person with responsibility for accounting, financial reporting, cash management and similar functions. "Fiscal Quarter" means the three (3) month periods ending on March 31, June -------------- 30, September 30 and December 31 of each Fiscal Year. 10 "Fiscal Year" means a twelve (12) month period ending December 31. ----------- "FNB" means Frost National Bank. --- "GAAP" means those generally accepted accounting principles and practices ---- which are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the Closing Date so as to properly reflect the financial condition, and the results of operations and changes in financial position, of a Person and its Consolidated Subsidiaries, except that any accounting principle or practice required to be changed by the said Accounting Principles Board or Financial Accounting Standards Board (or other appropriate board or committee of the said Boards) in order to continue as a generally accepted accounting principle or practice may be so changed. "Gas Balancing Agreement" means any agreement or arrangement whereby any ----------------------- Credit Party, or any other party having an interest in any Hydrocarbons to be produced from Mineral Interests in which any Credit Party owns an interest, has a right to take more than its proportionate share of production therefrom. "Governmental Authority" means any court or governmental department, ---------------------- commission, board, bureau, agency, or instrumentality of any nation or of any province, state, commonwealth, nation, territory, possession, county, parish, or municipality, whether now or hereafter constituted or existing. "Guarantee" by any Person means any obligation, contingent or otherwise, of --------- such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions, by "comfort letter" or other similar undertaking of support or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall -------- ---- not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Discharge" means any releasing, spilling, leaking, pumping, ------------------- pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping of any Hazardous Substance from or onto any real property owned, leased or operated at any time by any Credit Party or any real property owned, leased or operated by any other party. "Hazardous Substance" means any pollutant, toxic substance, hazardous ------------------- waste, compound, element or chemical that is defined as hazardous, toxic, noxious, dangerous or infectious pursuant to any Applicable Environmental Law or which is otherwise regulated by any Applicable Environmental Law or is required to be investigated and/or remediated by or pursuant to any Applicable Environmental Law. 11 "Hedge Transaction" means any commodity, interest rate, currency or other ----------------- swap, option, collar, futures contract or other contract pursuant to which a Person hedges risks related to commodity prices, interest rates, currency exchange rates, securities prices or financial market conditions. Hedge Transactions expressly includes Oil and Gas Hedge Transactions. "Hydrocarbons" means oil, gas, casinghead gas, drip gasolines, natural ------------ gasoline, condensate, distillate, and all other liquid and gaseous hydrocarbons produced or to be produced in conjunction therewith, and all products, by- products and all other substances derived therefrom or the processing thereof, and all other minerals and substances, including, but not limited to, sulphur, lignite, coal, uranium, thorium, iron, geothermal steam, water, carbon dioxide, helium, and any and all other minerals, ores, or substances of value, and the products and proceeds therefrom, including, without limitation, all gas resulting from the in-situ combustion of coal or lignite. "Initial Borrowing Base" means a Borrowing Base in the amount of ---------------------- $85,000,000, which shall be in effect during the period commencing on the Closing Date and continuing until the first Redetermination after the Closing Date. "Initial Conforming Borrowing Base" means a Conforming Borrowing Base in --------------------------------- the amount of $75,000,000, which shall be in effect during the period commencing on the Closing Date and continuing until the first Redetermination after the Closing Date. "Initial Reserve Reports" means the following reserve reports which contain ----------------------- an evaluation of the Borrowing Base Properties: (a) reserve report dated as of July 1, 1998 prepared by LaRoche Petroleum Consultants, Ltd., (b) reserve report dated August 1, 1997 prepared by Albrecht & Associates, Inc., (c) reserve report dated as of January 1, 1998 prepared by S. A. Holditch and Associates, Inc. (with respect to certain Mineral Interests owned by QELC prior to the Closing Date under and as defined in the Existing QRI/NationsBank Credit Agreement), and (d) reserve report dated as of January 1, 1998 prepared by S. A. Holditch and Associates, Inc. (with respect to certain Mineral Interests owned by MGP prior to the Closing Date under and as defined in the Existing QRI/NationsBank Credit Agreement). "Interest Period" means, with respect to each Eurodollar Borrowing and each --------------- Continuation of Eurodollar Loans and each Conversion of all or part of the Base Rate Loan to Eurodollar Loans, the period commencing on the date of such Borrowing, Continuation or Conversion and ending one (1), two (2), three (3) and, if available to all Banks, six (6) months thereafter, as Borrower may elect in the applicable Request for Borrowing or Notice of Continuation or Conversion; provided that: - -------- ---- (a) any Interest Period which would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; (b) any Interest Period which begins on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in 12 the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Eurodollar Business Day of a calendar month; (c) if any Interest Period includes a date on which any payment of principal of the Eurodollar Loans which are the subject of such Borrowing, Continuation or Conversion is required to be made hereunder, but does not end on such date, then (i) the principal amount of such Eurodollar Loans required to be repaid on such date shall have an Interest Period ending on such date, and (ii) the remainder of each such Eurodollar Loans shall have an Interest Period determined as set forth above; and (d) no Interest Period shall extend past the Termination Date. "Investment" means, with respect to any Person, any loan, advance, ---------- extension of credit, capital contribution to, investment in or purchase of the stock or other securities of, or interests in, any other Person; provided, that -------- ---- "Investment" shall not include customer and trade accounts which are payable in ---------- accordance with customary trade terms. "Laws" means all applicable statutes, laws, ordinances, regulations, ---- orders, writs, injunctions, or decrees of any state, commonwealth, nation, territory, possession, county, township, parish, municipality or Governmental Authority. "Lending Office" means, as to any Bank, its Domestic Lending Office or its -------------- Eurodollar Lending Office, as the context may require. "Letter of Credit Exposure" of any Bank means such Bank's aggregate ------------------------- participation in the unfunded portion and the funded but unreimbursed portion of Letters of Credit outstanding at any time. "Letter of Credit Fee" means, with respect to any Letter of Credit issued -------------------- hereunder, a fee in an amount equal to a percentage of the stated amount of such Letter of Credit (calculated on a per annum basis based on the stated term of such Letter of Credit) determined by reference to the ratio of the Outstanding Credit to the Conforming Borrowing Base in effect on the date such Letter of Credit is issued in accordance with the table below:
====================================================================== Ratio of Outstanding Per Annum Letter of Credit to Conforming Borrowing Base Credit Fee ---------------------------------------------------------------------- * .50 to 1 1.125% ---------------------------------------------------------------------- ** .50 to 1 * .75 to 1 1.375% ---------------------------------------------------------------------- ** .75 to 1 * 1.00 to 1 1.625% ---------------------------------------------------------------------- ** 1.00 to 1 2.250% ======================================================================
* less than or equal to ** greater than "Letter of Credit Fronting Fee" means, with respect to any Letter of Credit ----------------------------- issued hereunder, a fee equal to one hundred twenty five one thousandths of one percent (.125%) per annum of the stated amount of such Letter of Credit. 13 "Letters of Credit" means letters of credit issued for the account of ----------------- Borrower pursuant to Section 3.1(b). -------------- "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, Borrower and its Subsidiaries shall be deemed to own subject to a Lien any asset which is acquired or held subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means the revolving credit loan in an amount outstanding at any time ---- not to exceed the amount of the Total Commitment then in effect less the amount of the Letter of Credit Exposure then outstanding to be made by Banks to Borrower in accordance with Section 3.1 hereof. The Loan may be comprised of ----------- the Base Rate Loan and one or more Eurodollar Loans as Borrower may select in a Request for Borrowing or a Notice of Continuation and Conversion. "Loan Papers" means this Agreement, 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 Assignments of Notes and Liens, and all other certificates, documents or instruments delivered in connection with this Agreement, as the foregoing may be amended from time to time. "Long Term Debt" means Debt which matures more than one year from the date -------------- it is incurred, or which can be extended at the option of the obligor(s) to a date more than one year from the date it is incurred. "Management Agreement" means that certain Management Agreement dated -------------------- September 1, 1998, to be effective on the Closing Date, by and between Mercury and Borrower, pursuant to which Mercury shall operate all of Borrower's Mineral Interests and provide certain general and administrative services necessary for the operation of Borrower's business and properties. "Margin Regulations" means Regulations T, U and X of the Board of Governors ------------------ of the Federal Reserve System, as in effect from time to time. "Margin Stock" means "margin stock" as defined in Regulation U. ------------ "Material Adverse Change" means any circumstance or event that has had or ----------------------- would reasonably be expected to have (a) a material and adverse effect on the financial condition, business operations, prospects, properties or assets of any Credit Party, (b) an adverse effect on (i) the validity and enforceability of any Loan Paper, or (ii) the perfection or priority of any Lien purported to be created thereby, or (c) a material adverse effect on the right or ability of any Credit Party to fully, completely and timely pay and perform its obligations under the Loan Papers. "Material Agreement" means any material written or oral agreement, ------------------ contract, commitment, or understanding to which a Person is a party, by which such Person is directly or indirectly bound, 14 or to which any assets of such Person may be subject, which is not cancelable by such Person upon notice of thirty (30) days or less without liability for further payment other than nominal penalty. "Material Gas Imbalance" means, with respect to all Gas Balancing ---------------------- Agreements to which any Credit Party is a party or by which any Mineral Interest owned by any Credit Party is bound, a net negative gas imbalance to any Credit Party in excess of $250,000. "Maximum Lawful Rate" means, for each Bank, the maximum rate (or, if the ------------------- context so permits or requires, an amount calculated at such rate) of interest which, at the time in question would not cause the interest charged on the portion of the Loan owed to such Bank at such time to exceed the maximum amount which such Bank would be allowed to contract for, charge, take, reserve, or receive under applicable Laws after taking into account, to the extent required by applicable Laws, any and all relevant payments or charges under the Loan Papers. To the extent the Laws of the State of Texas are applicable for purposes of determining the "Maximum Lawful Rate," such term shall mean the ------------------- "indicated rate ceiling" from time to time in effect under Chapter 1D of the Texas Credit Title, Revised Civil Statutes of Texas, 1925, as amended, substituted for or restated, or, if permitted by applicable Law and effective upon the giving of the notices required by such Chapter 1D (or effective upon any other date otherwise specified by applicable Law), the "quarterly ceiling" or "annualized ceiling" from time to time in effect under such Chapter 1D, whichever Administrative Agent (with the approval of Required Banks) shall elect to substitute for the "indicated rate ceiling," and vice versa, each such ---- ----- substitution to have the effect provided in such Chapter 1D, and Administrative Agent (with the approval of Required Banks) shall be entitled to make such election from time to time and one or more times and, without notice to Borrower, to leave any such substitute rate in effect for subsequent periods in accordance with subsection (h)(1) of such Chapter 1D. "Mercury" means Mercury Exploration Company, a Texas corporation. ------- "Merger" means the merger of MSR with and into Borrower pursuant to, and in ------ accordance with, the Merger Agreement and the Merger Certificate, with Borrower being the surviving entity. "Merger Agreement" means that certain Agreement and Plan of Merger and ---------------- Reorganization dated as of September 1, 1998, by and between Borrower and MSR, as amended by that certain First Amendment to Agreement and Plan of Merger and Reorganization dated as of January 27, 1999, by and between Borrower and MSR. "Merger Certificate" means that certain Certificate of Merger to be filed ------------------ on the Closing Date with the Secretary of State of Delaware, and certified copies of which shall subsequently be filed in such jurisdictions as Administrative Agent shall require. "Merger Documents" means, collectively, (a) the Merger Agreement, (b) the ---------------- Merger Certificate, and (c) all other material documents, instruments and agreements executed or delivered by any Credit Party pursuant to the Merger Agreement, the Merger Certificate or the Merger. "MGP" means Michigan Gas Partners, Limited Partnership, formerly a Texas --- limited partnership prior to its merger with and into Borrower. 15 "Mineral Interests" means rights, estates, titles, and interests in and to ----------------- oil and gas leases and any oil and gas interests, royalty and overriding royalty interest, production payment, net profits interests, oil and gas fee interests, and other rights therein, including, without limitation, any reversionary or carried interests relating to the foregoing, together with rights, titles, and interests created by or arising under the terms of any unitization, communization, and pooling agreements or arrangements, and all properties, rights and interests covered thereby, whether arising by contract, by order, or by operation of Laws, which now or hereafter include all or any part of the foregoing without limiting the foregoing, in the case of Borrower, "Mineral ------- Interests" also includes all rights of Borrower under the Section 29 Documents. - --------- "Monthly Date" means the fifteenth day of each calendar month. ------------ "Mortgages" means all mortgages, deeds of trusts, amendments to mortgages, --------- security agreements, amendments to security agreements, assignments of production, amendments to assignments of production, pledge agreements, collateral mortgages, collateral chattel mortgages, collateral assignments, financing statements and other documents, instruments and agreements evidencing, creating, perfecting or otherwise establishing the Liens required by Section 7.1 ----------- hereof. All Mortgages shall be in form and substance satisfactory to Administrative Agent in its sole discretion. "MSR" means MSR Exploration Ltd., a Delaware corporation, and which --- pursuant to, and upon the effective date of, the Merger, will be merged with and into Borrower with Borrower being the surviving entity. "MSR/Paribas Credit Agreement" has the meaning assigned to such term in the ---------------------------- recitals hereto. "NationsBank" means NationsBank, N.A., a national banking association, in ----------- its capacity as a Bank. "New Bank" means Paribas, Bank One or FNB, and "New Banks" means Paribas, -------- --------- Bank One and FNB, collectively. "NMS" means NationsBank Montgomery Securities LLC. --- "Non-Recourse Debt" means indebtedness (a) secured solely by the assets ----------------- acquired with the proceeds of such indebtedness, (b) with respect to which no Credit Party shall have any liability for repayment beyond the assets pledged, and (c) with respect to which Borrower has delivered to Banks an opinion in a form satisfactory to Required Banks of counsel acceptable to Administrative Agent stating that such indebtedness meets the criteria set forth in (a) and (b) preceding. "Note" means a promissory note of Borrower payable to the order of a Bank, ---- in substantially the form of Exhibit B hereto, in the amount of such Bank's --------- Commitment, evidencing the obligation of Borrower to repay to such Bank its Commitment Percentage of the Loan, together with all modifications, extensions, renewals, and rearrangements thereof, and "Notes" means all of such Notes ----- collectively. 16 "Notice of Continuation or Conversion" has the meaning set forth in Section ------------------------------------ ------- 3.3(c). - ------ "Obligations" means all present and future indebtedness, obligations and ----------- liabilities, and all renewals and extensions thereof, or any part thereof, of each Credit Party to Administrative Agent or to any Bank or any Affiliate of any Bank arising pursuant to the Loan Papers or pursuant to any Hedge Transaction entered into with any Bank or any Affiliate of any Bank, and all interest accrued thereon and costs, expenses, and attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint and several. "Oil & Gas Hedge Transaction" means a Hedge Transaction pursuant to which --------------------------- any Person hedges the price to be received by it for future production of Hydrocarbons. "Outstanding Credit" means, on any date, the sum of (a) the aggregate ------------------ outstanding Letter of Credit Exposure on such date, including the Letter of Credit Exposure attributable to Letters of Credit to be issued on such date, plus (b) the aggregate outstanding principal balance of the Loan on such date, including the amount of any Borrowing to be made on such date. "Paribas" means Paribas in its capacity as a Bank. ------- "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Permitted Encumbrances" means with respect to any asset: ---------------------- (a) Liens (if any) securing the Notes in favor of Banks; (b) minor defects in title which do not secure the payment of money and otherwise have no material adverse effect on the value or the operation of the subject property, and for the purposes of this Agreement, a minor defect in title shall include, but not be limited to, easements, rights-of-way, servitudes, permits, surface leases and other similar rights in respect of surface operations, and easements for pipelines, streets, alleys, highways, telephone lines, power lines, railways and other easements and rights-of-way, on, over or in respect of any of the properties of any Credit Party that are customarily granted in the oil and gas industry; (c) inchoate statutory or operators' Liens securing obligations for labor, services, materials and supplies furnished to Mineral Interests which are not delinquent (except to the extent permitted by Section 10.7); ------------ (d) mechanic's, materialmen's, warehouseman's, journeyman's and carrier's Liens and other similar Liens arising by operation of Law in the ordinary course of business which are not delinquent (except to the extent permitted by Section 10.7); ------------ (e) Liens for Taxes or assessments not yet due or not yet delinquent, or, if delinquent, that are being contested in good faith in the normal course of business by appropriate action, as permitted by Section 10.7; ------------ 17 (f) lease burdens payable to third parties which are deducted in the calculation of discounted present value in the Reserve Report including, without limitation, any royalty, overriding royalty, net profits interest, production payment, carried interest or reversionary working interest; (g) the Section 29 Mortgages; and (h) the TCW Royalty Documents. "Permitted Investments" means (a) readily marketable direct obligations of --------------------- the United States of America (or investments in mutual funds or similar funds which invest solely in such obligations), (b) fully insured time deposits and certificates of deposit with maturities of one year or less of any commercial bank operating in the United States having capital and surplus in excess of $500,000,000, (c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest ratings categories of Standard and Poor's Corporation or Moody's Investors Service, (d) Investments described on Schedule 2 hereto, and (e) other Investments; provided that, the ---------- -------- ---- aggregate amount of all other Investments made pursuant to this clause (e) outstanding at any time shall not exceed $500,000 (measured on a cost basis). "Person" means an individual, a corporation, a partnership, an association, ------ a trust or any other entity or organization, including a Government Authority. "Plan" means an employee benefit plan within the meaning of section 3(3) of ---- ERISA, and any other similar plan, policy or arrangement, including an employment contract, whether formal or informal and whether legally binding or not, under which any Credit Party or an ERISA Affiliate of a Credit Party has any current or future obligation or liability or under which any present or former employee of any Credit Party or an ERISA Affiliate of a Credit Party, or such present or former employee's dependents or beneficiaries, has any current or future right to benefits resulting from the present or former employee's employment relationship with any Credit Party or an ERISA Affiliate of a Credit Party. "Prime Rate" means the per annum rate of interest established from time to ---------- time by NationsBank as its prime rate, which rate may not be the lowest rate of interest charged by NationsBank to its customers. "Property Description" means the legal description of Mineral Interests -------------------- attached to the Certificate of Ownership Interests. "Proved Mineral Interests" means, collectively, Proved Producing Mineral ------------------------ Interests, Proved Nonproducing Mineral Interests, and Proved Undeveloped Mineral Interests. "Proved Nonproducing Mineral Interests" means all Mineral Interests which ------------------------------------- constitute proved developed nonproducing reserves. "Proved Producing Mineral Interests" means all Mineral Interests which ---------------------------------- constitute proved developed producing reserves. 18 "Proved Undeveloped Mineral Interests" means all Mineral Interests which ------------------------------------ constitute proved undeveloped reserves. "QELC" means Quicksilver Energy, L.C., a Michigan limited liability ---- company. "Quarterly Date" means the last day of each March, June, September and -------------- December. "Recognized Value" means, with respect to Mineral Interests, the discounted ---------------- present value of the estimated net cash flow to be realized from the production of Hydrocarbons from such Mineral Interests as determined by NationsBank for purposes of determining the portion of the Borrowing Base which it attributes to such Mineral Interests in accordance with Article VI hereof. ---------- "Redetermination" means (i) any Scheduled Redetermination, or (ii) any --------------- Special Redetermination. "Redetermination Date" means (a) each June 1 and December 1, commencing -------------------- June 1, 1999, and (b) with respect to any Special Redetermination, the first day of the first month which is not less than twenty (20) Domestic Business Days following the date of a request for a Special Redetermination. "Regulation A" means Regulation A of the Board of Governors of the Federal ------------ Reserve System, 12 C.F.R. Part 221, as in effect from time to time. "Request for Borrowing" has the meaning set forth in Section 3.1(d). --------------------- -------------- "Request for Letter of Credit" has the meaning set forth in Section 3.1(e). ---------------------------- -------------- "Required Banks" means Banks holding at least sixty-six and two-thirds -------------- percent (66 2/3%) of the Total Commitment. "Required Reserve Value" means Proved Mineral Interests that have a ---------------------- Recognized Value of not less than eighty percent (80%) of the Recognized Value of all Proved Mineral Interests held by Borrower and its Subsidiaries. "Reserve Report" means an unsuperseded engineering analysis of the Mineral -------------- Interests owned by Borrower, in form and substance reasonably acceptable to Required Banks, prepared in accordance with customary and prudent practices in the petroleum engineering industry and Financial Accounting Standards Board Statement 69. Each Reserve Report required to be delivered by March 31 of each year pursuant to Section 6.1 shall be prepared by the Approved Petroleum ----------- Engineer. Each other Reserve Report shall be prepared by Borrower's in-house staff. Notwithstanding the foregoing, in connection with any Special Redetermination requested by Borrower, the Reserve Report shall be in form and scope mutually acceptable to Borrower and Required Banks. Until superseded, each of the Initial Reserve Reports shall be considered a Reserve Report. 19 "Reserve Requirement" means, at any time, the maximum rate at which ------------------- reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against in the case of Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (i) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category of extensions of credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement. "Restricted Payment" means, with respect to any Person, (a) any ------------------ Distribution by such Person, or (b) the retirement, redemption or prepayment prior to scheduled maturity by such Person or any Affiliate of such Person of any Debt of such Person. "Schedule" means a "schedule" attached to this Agreement and incorporated -------- herein by reference, unless specifically indicated otherwise. "Scheduled Redetermination" means any Redetermination of the Borrowing Base ------------------------- pursuant to Section 6.2. ----------- "Section" refers to a "section" or "subsection" of this Agreement unless ------- specifically indicated otherwise. "Section 29 Documents" means each of the following documents, instruments -------------------- and agreements: (a) Assignment, dated as of December 1, 1997, by and between Mercury, as assignor, and MA Gas LLC ("MAG"), as assignee, and recorded in the --- county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 477, Page 1232, (ii) Crawford County, Michigan, December 23, 1997, under Liber 444, Page 01, (iii) Montmorency County, Michigan, December 22, 1997, under Liber 405, Page 01, and (iv) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 579; (b) Assignment by and between Mercury, as assignor, and Borrower, as assignee, and recorded in the county records of (i) Antrim County, Michigan, April 15, 1998, under Liber 485, Page 1046, and Liber 485, Page 1087, (ii) Crawford County, Michigan, April 15, 1998, under Liber 451, Page 251, (iii) Montmorency County, Michigan, April 15, 1998, under Liber 408, Page 0008, and (iv) Otsego County, Michigan, April 15, 1998, under Liber 675, Page 217; (c) Partial Assignment of Reversionary Interest, dated effective as of December 1, 1997, by and between Borrower, as assignor, and MAG, as assignee, and recorded in the county records of Antrim, Crawford, Montmorency and Otsego Counties, Michigan; 20 (d) Conveyance of Production Payment, dated as of December 1, 1997, by and between MAG, as assignor, and Mercury, as assignee, and recorded in the county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 477, Page 1273, (ii) Crawford County, Michigan, December 23, 1997, under Liber 444, Page 42, (iii) Montmorency County, Michigan, December 22, 1997, under Liber 405, Page 42, and (iv) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 620; (e) Amendment to Conveyance of Production, dated effective as of December 1, 1997, by and between MAG, as assignor, and Borrower, as assignee, and recorded in the county records of Antrim, Crawford, Montmorency and Otsego Counties, Michigan; (f) Mortgage, dated as of December 1, 1997, by and between MAG, as mortgagor, and Mercury, as mortgagee, and recorded in the county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 477, Page 1413, (ii) Crawford County, Michigan, December 23, 1997, under Liber 444, Page 182, (iii) Montmorency County, Michigan, December 22, 1997, under Liber 134, Page 528, and (iv) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 760; (g) Assignment, dated as of December 1, 1997 by and between MGP, as assignor, and MGP Gas L.L.C. ("MGPG"), as assignee, and recorded in the ---- county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 478, Page 1, and (ii) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 802; (h) Partial Assignment of Reversionary Interest, dated effective as of December 1, 1997, by and between Borrower, as assignor, and MGPG, as assignee, and recorded in the county records of Antrim and Otsego Counties, Michigan; (i) Conveyance of Production Payment, dated as of December 1, 1997, by and between MGPG, as assignor, and MGP, as assignee, and recorded in the county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 478, Page 9, and (ii) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 810; (j) Amendment to Conveyance of Production Payment, dated effective as of December 1, 1997, by and between MGPG, as assignor, and Borrower, as assignee, and recorded in the county records of Antrim and Otsego Counties, Michigan; (k) Mortgage, dated as of December 1, 1997, by and between MGPG, as mortgagor, and MGP, as mortgagee, and recorded in the county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 478, Page 37, and (ii) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 838; (l) Purchase and Sale Agreement, dated as of December 1, 1997, by and between Mercury, as Seller, and MAG, as buyer; (m) Credit Payment Note, dated December 1, 1997, executed by MAG, as maker, payable to the order of Mercury, as payee; 21 (n) Fixed Payment Note, dated December 1, 1997, executed by MAG, as maker, payable to the order of Mercury, as payee, in the original principal amount of $5,092,721; (o) Assignment of Enforcement Rights, dated effective December 1, 1997, by and between MAG and Mercury, and acknowledged and consented to by State Street and Antrim; (p) Management Agreement, dated as of December 1, 1997, by and between MAG and Mercury, as manager; (q) Purchase and Sale Agreement, dated as of December 1, 1997, by and between MGP, as seller, and MGPG, as buyer; (r) Credit Payment Note, dated December 1, 1997, executed by MGPG, as maker, payable to the order of MGP, as payee; (s) Fixed Payment Note, dated December 1, 1997, executed by MGPG, as maker, payable to the order of MGP, as payee, in the original principal amount of $2,017,373; (t) Assignment of Enforcement Rights, dated effective December 1, 1997, by and between MGPG and MGP, and acknowledged and consented to by State Street and Antrim; and (u) Management Agreement, dated as of December 1, 1997, by and between MGPG and MGP, as manager. "Section 29 Mortgages" means each of the following documents, instruments -------------------- and agreements: (a) Mortgage, dated as of December 1, 1997, by and between Mercury, as mortgagor, and MAG, as mortgagee, and recorded in the county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 477, Page 1370, (ii) Crawford County, Michigan, December 23, 1997, under Liber 444, Page 139; (iii) of Montmorency County, Michigan, December 22, 1997, under Liber 134, Page 485; and (iv) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 717; and (b) Mortgage, dated as of December 1, 1997, by and between MGPG, as mortgagor, and MGP, as mortgagee, and recorded in the county records of (i) Antrim County, Michigan, December 23, 1997, under Liber 478, Page 37; and (ii) Otsego County, Michigan, December 22, 1997, under Liber 662, Page 838. "Special Redetermination" means any Redetermination of the Borrowing Base ----------------------- pursuant to Section 6.3. ----------- "Sole Lead Arranger" means NationsBank Montgomery Securities LLC in its ------------------ capacity as sole lead arranger for the credit facility hereunder or any successor thereto. 22 "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). "Subsidiary Guaranty" means a Guaranty substantially in the form of Exhibit ------------------- ------- C hereto to be executed by each existing and future Subsidiary of Borrower in - - favor of Banks pursuant to which each Subsidiary of Borrower guaranties payment and performance in full of the Obligations. "Subsidiary Pledge Agreement" means a Pledge Agreement substantially in the --------------------------- form of Exhibit A attached hereto (with applicable conforming changes) to be --------- executed by each existing and future Subsidiary of Borrower (for purposes of this definition and Section 7.1(d) hereof, such Subsidiary is referred to herein -------------- and therein as a "First Tier Subsidiary"), pursuant to which such First Tier --------------------- Subsidiary shall pledge to Administrative Agent, for the ratable benefit of Banks, one hundred percent (100%) of the issued and outstanding Equity of each existing or hereafter created Subsidiary of such First Tier Subsidiary to secure the Obligations. "Taxes" means all taxes, assessments, filing or other fees, levies, ----- imposts, duties, deductions, withholdings, stamp taxes, capital transaction taxes, foreign exchange taxes or other charges, or other charges of any nature whatsoever, from time to time or at any time imposed by Law or any Governmental Authority. "Tax" means any one of the foregoing. --- "TCW Royalty Documents" means, collectively, (a) the Royalty Agreement --------------------- dated November 14, 1996 by and between Borrower and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P., as amended by a First Amendment to Royalty Agreement dated as of April 9, 1998, and (b) the Conveyance of Adjustable Overriding Royalty Interest dated November 14, 1996 granted by Borrower to TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P., as amended by an Amendment to Conveyance of Overriding Royalty Interest dated as of April 9, 1998. "Termination Date" means March 4, 2004. ---------------- "Total Commitment" means the Commitments of all Banks in an initial ---------------- aggregate amount of $200,000,000 as such amount may be reduced from time to time pursuant to Section 3.6. ----------- "Tranche" means the Base Rate Loan or a Eurodollar Loan and "Tranches" ------- -------- means the Base Rate Loan or Eurodollar Loans or any combination thereof. "Type" means with reference to a Loan, the characterization of such Loan as ---- the Base Rate Loan or a Eurodollar Loan based on the method by which the accrual of interest on such Tranche is calculated. "Unused Commitment Fee Percentage" means three hundred seventy-five one -------------------------------- thousandths of one percent (.375%) per annum. 23 SECTION 2.2 Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent with the most recent audited consolidated financial statements of Borrower and its Consolidated Subsidiaries delivered to Banks prior to the date hereof except for changes concurred in by Borrower's independent certified public accountants and which are disclosed to Administrative Agent on the next date on which financial statements are required to be delivered to Banks pursuant to Section 10.1. ------------ SECTION 2.3 Petroleum Terms. As used herein, the terms "proved --------------- ------ reserves," "proved developed reserves," "proved developed producing reserves," - -------- ------------------------- ----------------------------------- "proved developed nonproducing reserves," and "proved undeveloped reserves" have -------------------------------------- --------------------------- the meaning given such terms from time to time and at the time in question by the Society of Petroleum Engineers of the American Institute of Mining Engineers. SECTION 2.4 Money. Unless expressly stipulated otherwise, all references ----- herein to "dollars," "money," "funds," "payments," "prepayments" or other ------- ----- ----- -------- ----------- similar financial or monetary terms, are references to currency of the United States of America. ARTICLE III THE CREDIT SECTION 3.1 Commitments. (a) Each Bank severally agrees, subject to ----------- Sections 3.1(c), 8.1, 8.2 and 8.4 and the other terms and conditions set forth - -------------------- --- --- in this Agreement, to lend to Borrower from time to time prior to the Termination Date amounts requested by Borrower not to exceed in the aggregate at any one time outstanding, the amount of such Bank's Commitment reduced by an amount equal to such Bank's Letter of Credit Exposure. Each Borrowing shall be in an aggregate principal amount of $1,000,000 or any larger integral multiple of $100,000 (except that any Base Rate Borrowing may be in an amount equal to the Availability at such time), and (ii) shall be made from Banks ratably in accordance with their respective Commitment Percentages. Subject to the foregoing limitations and the other provisions of this Agreement, prior to the Termination Date Borrower may borrow under this Section 3.1(a), repay amounts -------------- borrowed and request new Borrowings to be made under this Section 3.1(a). -------------- (b) Administrative Agent will, from time to time prior to the Termination Date, upon request by Borrower, issue Letters of Credit for the account of Borrower, so long as (i) the sum of (A) the total Letter of Credit Exposure then existing, and (B) the amount of the requested Letter of Credit does not exceed ten percent (10%) of the Conforming Borrowing Base, and (ii) Borrower would be entitled to a Borrowing under Sections 3.1(a) and 3.1(c) in --------------- ------ the amount of the requested Letter of Credit. Not less than three (3) Domestic Business Days prior to the requested date of issuance of any such Letter of Credit, Borrower shall execute and deliver to Administrative Agent, Administrative Agent's customary letter of credit application. Each Letter of Credit shall be in the minimum amount of $10,000 and shall be in form and substance acceptable to Administrative Agent. No Letter of Credit shall have an expiration date later than the Termination Date. Upon the date of 24 issuance of a Letter of Credit, Administrative Agent shall be deemed to have sold to each other Bank, and each other Bank shall be deemed to have unconditionally and irrevocably purchased from Administrative Agent, a non- recourse participation in the related Letter of Credit and Letter of Credit Exposure equal to such Bank's Commitment Percentage of such Letter of Credit and Letter of Credit Exposure. Upon request of any Bank, but not less often than quarterly, Administrative Agent shall provide notice to each Bank by telephone, teletransmission or telex setting forth each Letter of Credit issued and outstanding pursuant to the terms hereof and specifying the beneficiary and expiration date of each such Letter of Credit, each Bank's percentage of each such Letter of Credit and the actual dollar amount of each Bank's participation held by Administrative Agent thereof for such Bank's account and risk. At the time of issuance of each Letter of Credit, Borrower shall pay to Administrative Agent in respect of such Letter of Credit (a) the applicable Letter of Credit Fee, and (b) the applicable Letter of Credit Fronting Fee. Administrative Agent shall distribute the Letter of Credit Fee payable upon the issuance of each Letter of Credit to Banks in accordance with their respective Commitment Percentages, and Administrative Agent shall retain the Letter of Credit Fronting Fee for its own account. Any (y) material amendment or modification, or (z) renewal or extension of any Letter of Credit shall be deemed to be the issuance of a new Letter of Credit for purposes of this Section 3.1(b). Notwithstanding -------------- anything to the contrary contained herein, Borrower shall pay to Administrative Agent in connection with any amendment or modification of any nature, Administrative Agent's usual and customary fees for amendments or modifications to, and processing of, Letters of Credit. Immediately upon the occurrence of an Event of Default, Borrower shall deposit with Administrative Agent cash in such amounts as Administrative Agent may request, up to a maximum amount equal to the aggregate existing Letter of Credit Exposure of all Banks. Any amounts so deposited shall be held by Administrative Agent for the ratable benefit of all Banks as security for the outstanding Letter of Credit Exposure and the other Obligations, and Borrower will, in connection therewith, execute and deliver such security agreements in form and substance satisfactory to Administrative Agent which Administrative Agent may, in its discretion, require. As drafts or demands for payment are presented under any Letter of Credit, Administrative Agent shall apply such cash to satisfy such drafts or demands. When all Letters of Credit have expired and the Obligations have been repaid in full (and no Bank has any obligation to lend or issue Letters of Credit hereunder) or such Event of Default has been cured to the satisfaction of Required Banks, Administrative Agent shall release to Borrower any remaining cash deposited under this Section 3.1(b). Whenever -------------- Borrower is required to make deposits under this Section 3.1(b) and fails to do -------------- so on the day such deposit is due, Administrative Agent or any Bank may, without notice to Borrower, make such deposit (whether by application of proceeds of any collateral for the Obligations, by transfers from other accounts maintained with any Bank or otherwise) using any funds then available to any Bank of any Credit Party, any guarantor, or any other party liable for repayment of the Obligations. Notwithstanding anything to the contrary contained herein, Borrower hereby agrees to reimburse Administrative Agent immediately upon demand by Administrative Agent, and in immediately available funds, for any payment or disbursement made by Administrative Agent under any Letter of Credit issued by it. Payment shall be made by Borrower with interest on the amount so paid or disbursed by Administrative Agent from and including the date payment is made under any Letter of Credit to and including the date of payment, at the lesser of (i) the Maximum Lawful Rate, or (ii) the Default Rate. The obligations of Borrower under this paragraph will continue until all 25 Letters of Credit have expired and all reimbursement obligations with respect thereto have been paid in full by Borrower and until all other Obligations shall have been paid in full. Borrower shall be obligated to reimburse Administrative Agent upon demand for all amounts paid under Letters of Credit as set forth in the immediately preceding paragraph hereof; provided, however, if Borrower for any reason fails -------- ------- to reimburse Administrative Agent in full upon demand, Banks shall reimburse Administrative Agent in accordance with each Banks' Commitment Percentage for amounts due and unpaid from Borrower as set forth hereinbelow; provided, -------- however, that no such reimbursement made by Banks shall discharge Borrower's - ------- ---- obligations to reimburse Administrative Agent. All reimbursement amounts payable by any Bank under this Section 3.1(b) shall include interest thereon at -------------- the Federal Funds Rate, from the date of the payment of such amounts by Administrative Agent to the date of reimbursement by such Bank. No Bank shall be liable for the performance or nonperformance of the obligations of any other Bank under this paragraph. The reimbursement obligations of Banks under this paragraph shall continue after the Termination Date and shall survive termination of this Agreement and the other Loan Papers. Borrower shall indemnify and hold Administrative Agent and each Bank, and their respective officers, directors, representatives and employees harmless from loss for any claim, demand or liability which may be asserted against any or such indemnified party in connection with actions taken under Letters of Credit or in connection therewith (including losses resulting from the negligence of any or such indemnified party), and shall pay each indemnified party for reasonable fees of attorneys and legal costs paid or incurred by each indemnified party in connection with any matter related to Letters of Credit, except for losses and liabilities incurred as a direct result of the gross negligence or willful misconduct of such indemnified party, IT BEING THE EXPRESS INTENTION OF THE PARTIES THAT EACH INDEMNIFIED PARTY SHALL BE INDEMNIFIED FOR THE CONSEQUENCES OF ITS OWN ORDINARY NEGLIGENCE. If Borrower for any reason fails to indemnify or pay such indemnified party as set forth herein in full, Banks shall indemnify and pay such indemnified party upon demand, in accordance with each Bank's Commitment Percentage of such amounts due and unpaid from Borrower. The provisions of this paragraph shall survive the termination of this Agreement. Administrative Agent does not make any representation or warranty, and does not assume any responsibility with respect to the validity, legality, sufficiency or enforceability of any letter of credit application executed and delivered in connection with any Letter of Credit issued hereunder or any document relative thereto or to the collectibility thereunder. Administrative Agent does not assume any responsibility for the financial condition of Borrower or for the performance of any obligation of Borrower. Administrative Agent may use its discretion with respect to exercising or refraining from exercising any rights, or taking or refraining from taking any action which may be vested in it or which it may be entitled to take or assert with respect to any Letter of Credit or any letter of credit application. FURTHERMORE, EXCEPT AS SET FORTH HEREIN, ADMINISTRATIVE AGENT SHALL BE UNDER NO LIABILITY TO ANY BANK, WITH RESPECT TO ANYTHING ADMINISTRATIVE AGENT MAY DO OR REFRAIN FROM DOING IN THE EXERCISE OF ITS JUDGMENT, THE SOLE LIABILITY AND RESPONSIBILITY OF ADMINISTRATIVE AGENT BEING TO HANDLE EACH BANK'S SHARE ON AS FAVORABLE A BASIS AS ADMINISTRATIVE AGENT HANDLES ITS OWN SHARE. ADMINISTRATIVE AGENT SHALL NOT HAVE ANY DUTIES OR RESPONSIBILITIES 26 EXCEPT THOSE EXPRESSLY SET FORTH HEREIN AND THOSE DUTIES AND LIABILITIES SHALL BE SUBJECT TO THE LIMITATIONS AND QUALIFICATIONS SET FORTH HEREIN. FURTHERMORE, NEITHER ADMINISTRATIVE AGENT, NOR ANY OF ITS DIRECTORS, OFFICERS, OR EMPLOYEES SHALL BE LIABLE FOR ANY ACTION TAKEN OR OMITTED (WHETHER OR NOT SUCH ACTION TAKEN OR OMITTED IS EXPRESSLY SET FORTH HEREIN) UNDER OR IN CONNECTION HEREWITH OR UNDER ANY OTHER INSTRUMENT OR DOCUMENT IN CONNECTION HEREWITH, EXCEPT FOR GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Administrative Agent shall not incur any liability to any Bank, Borrower, or any Affiliate of any Bank or Borrower, in acting upon any notice, document, order, consent, certificate, warrant or other instrument reasonably believed by Administrative Agent to be genuine or authentic and to be signed by the proper party. (c) No Bank will be obligated to lend to Borrower hereunder or incur Letter of Credit Exposure, and Borrower shall not be entitled to borrow hereunder or obtain Letters of Credit hereunder, in an amount which would cause the Outstanding Credit to exceed the Borrowing Base then in effect. No Bank shall be obligated to fund Borrowings hereunder and Borrower shall not be entitled to Borrowings hereunder during the existence of a Borrowing Base Deficiency. Nothing in this Section 3.1(c) shall be deemed to limit any Bank's -------------- obligation to reimburse Administrative Agent with respect to its participation in Letters of Credit as a result of the drawing under any Letter of Credit pursuant to Section 3.1(b). -------------- (d) In order to request any Borrowing under this Section 3.1, Borrower ----------- shall hand deliver, telex or telecopy to Administrative Agent a duly completed Request for Borrowing (herein so called) prior to 12:00 noon (Dallas, Texas time), (i) at least one (1) Domestic Business Day before the Borrowing Date specified for a proposed Base Rate Borrowing, and (ii) at least three (3) Eurodollar Business Days before the Borrowing Date of a proposed Eurodollar Borrowing. Each such Request for Borrowing shall be substantially in the form of Exhibit D hereto, and shall specify: --------- (i) the Borrowing Date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Eurodollar Business Day in the case of a Eurodollar Borrowing; (ii) the aggregate amount of such Borrowing; (iii) whether such Borrowing is to be a Base Rate Borrowing or a Eurodollar Borrowing; and (iv) in the case of a Eurodollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Upon receipt of a Request for Borrowing, Administrative Agent shall promptly notify each Bank of the contents thereof and the amount of the Borrowing to be loaned by such Bank pursuant thereto, and such Request for Borrowing shall not thereafter be revocable by Borrower. Not later than 12:00 noon (Dallas, Texas time) on the date of each Borrowing, each Bank shall make available its 27 Commitment Percentage of such Borrowing, in Federal or other funds immediately available in Dallas, Texas to Administrative Agent at its address set forth on Schedule 1 hereto. Notwithstanding the foregoing, if Borrower delivers to - ---------- Administrative Agent a Request for Borrowing prior to 10:00 a.m. (Dallas, Texas time) on a Domestic Business Day requesting a Base Rate Borrowing on such day, each Bank shall use its best efforts to make available to Administrative Agent its Commitment Percentage of such Borrowing by 1:00 p.m. (Dallas, Texas time) on the same day. Unless Administrative Agent determines that any applicable condition specified in Section 8.2 has not been satisfied, Administrative Agent ----------- will make the funds so received from Banks available to Borrower at Administrative Agent's aforesaid address. (e) In order to request any Letter of Credit hereunder, Borrower shall hand deliver, telex or telecopy to Administrative Agent a duly completed Request for Letter of Credit (herein so called) prior to 12:00 noon (Dallas, Texas time) at least three (3) Domestic Business Days before the date specified for issuance of such Letter of Credit. Each Request for Letter of Credit shall be substantially in the form of Exhibit E hereto, shall be accompanied by --------- Administrative Agent's duly completed and executed letter of credit application and agreement and shall specify: (i) the requested date for issuance of such Letter of Credit; (ii) the terms of such requested Letter of Credit, including the name and address of the beneficiary, the stated amount, the expiration date and the conditions under which drafts under such Letter of Credit are to be available; and (iii) the purpose of such Letter of Credit. Upon receipt of a Request for Letter of Credit, Administrative Agent shall promptly notify each Bank of the contents thereof, including the amount of the requested Letter of Credit, and such Request for Letter of Credit shall not thereafter be revocable by Borrower. No later than 12:00 noon (Dallas, Texas time) on the date each Letter of Credit is requested, unless Administrative Agent determines that any applicable condition precedent set forth in Section ------- 8.2 hereof has not been satisfied, Administrative Agent will issue and deliver - --- such Letter of Credit pursuant to the instructions of Borrower. SECTION 3.2. Notes. Each Bank's Commitment Percentage of the Loan shall ----- be evidenced by a single Note payable to the order of such Bank in an amount equal to such Bank's Commitment. SECTION 3.3. Interest Rates; Payments. (a) The principal amount of the ------------------------ Base Rate Loan outstanding from day to day shall bear interest at a rate per annum equal to the Base Rate in effect from day to day; provided that in no -------- ---- event shall the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate. Interest on the Base Rate Loan shall be payable as it accrues on each Quarterly Date, and on the Termination Date. (b) The principal amount of each Eurodollar Loan outstanding from day to day shall bear interest for the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Applicable Margin plus (ii) the applicable Adjusted Eurodollar Rate; provided that in no event shall -------- ---- 28 the rate charged hereunder or under the Notes exceed the Maximum Lawful Rate. Interest on any portion of the principal of each Eurodollar Loan subject to an Interest Period of one (1), two (2) or three (3) months shall be payable on the last day of the Interest Period applicable thereto. Interest on any portion of the principal of each Eurodollar Loan having an Interest Period of six (6) months shall be payable on the last day of the Interest Period applicable thereto and on each Quarterly Date. (c) So long as no Default or Event of Default shall be continuing, subject to the provisions of this Section 3.3, Borrower shall have the option of having ----------- all or any portion of the principal outstanding under the Loan be a Base Rate Loan or one (1) or more Eurodollar Loans, which shall bear interest at rates determined by reference to the Base Rate and the Adjusted Eurodollar Rate, respectively; provided, that each Eurodollar Loan shall be in a minimum amount -------- ---- of $1,000,000 and shall be in an amount which is an integral multiple of $100,000. Prior to the termination of each Interest Period with respect to each Eurodollar Loan, Borrower shall give written notice (a "Notice of Continuation ---------------------- or Conversion") in the form of Exhibit F attached hereto to Administrative Agent - ------------- --------- of the Type of Loan which shall be applicable to the principal of such Eurodollar Loan upon the expiration of such Interest Period. Such Notice of Continuation or Conversion shall be given to Administrative Agent at least one (1) Domestic Business Day, in the case of a Base Rate Loan selection, and three (3) Eurodollar Business Days, in the case of a Eurodollar Loan selection, prior to the termination of the Interest Period then expiring. If Borrower shall specify a Eurodollar Loan, such Notice of Continuation or Conversion shall also specify the length of the succeeding Interest Period (subject to the provisions of the definition of such term) selected by Borrower. Each Notice of Continuation or Conversion shall be irrevocable and effective upon notification thereof to Administrative Agent. If the required Notice of Continuation or Conversion shall not have been timely received by Administrative Agent, Borrower shall be deemed to have elected that the principal of the Eurodollar Loan subject to the Interest Period then expiring be Converted to the Base Rate Loan upon the expiration of such Interest Period and Borrower will be deemed to have given Administrative Agent notice of such election. Subject to the limitations set forth in this Section 3.3(c) on the amount and number of Eurodollar Loans, -------------- Borrower shall have the right to Convert all or any part of the Base Rate Loan to a Eurodollar Loan by giving Administrative Agent a Notice of Continuation or Conversion of such election at least three (3) Eurodollar Business Days prior to the date on which Borrower elects to make such Conversion (a "Conversion Date"). --------------- The Conversion Date selected by Borrower shall be a Eurodollar Business Day. Notwithstanding anything in this Section 3.3 to the contrary, no portion of the ----------- principal of the Base Rate Loan may be Converted to a Eurodollar Loan and no Eurodollar Loan may be Continued as such when any Default or Event of Default has occurred and is continuing, but each such Eurodollar Loan shall be automatically Converted to the Base Rate Loan on the last day of each applicable Interest Period. Borrower shall not be permitted to have more than five (5) Eurodollar Loans in effect at any time. (d) Notwithstanding anything to the contrary set forth in Section 3.3(a) or -------------- (b) above, after the occurrence of an Event of Default, interest shall accrue on - --- the outstanding principal balance of the Loan, and to the extent permitted by Law, on the accrued but unpaid interest on the Loan and all other Obligations from the period from and including the occurrence of such Event of Default to but excluding the date the same is remedied at a rate per annum equal to the lesser of (a) the Default Rate, and (b) the Maximum Lawful Rate. 29 (e) Administrative Agent shall determine each interest rate applicable to the Loan in accordance with the terms hereof. Administrative Agent shall promptly notify Borrower and Banks by telex, telecopy or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Notwithstanding the foregoing, if at any time the rate of interest calculated with reference to the Base Rate or the Eurodollar Rate hereunder (the "contract rate") is limited to the Maximum Lawful Rate, any subsequent ------------- reductions in the contract rate shall not reduce the rate of interest on the Loan below the Maximum Lawful Rate until the total amount of interest accrued equals the amount of interest which would have accrued if the contract rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of any Note, the total amount of interest paid or accrued on such Note is less than the amount of interest which would have accrued if the contract rate had at all times been in effect with respect thereto, then at such time, to the extent permitted by law, Borrower shall pay to the holder of such Note an amount equal to the difference between (i) the lesser of the amount of interest which would have accrued if the contract rate had at all times been in effect and the amount of interest which would have accrued if the Maximum Lawful Rate had at all times been in effect, and (ii) the amount of interest actually paid on such Note. (g) Interest payable hereunder on each Eurodollar Loan shall be computed based on the number of actual days elapsed assuming that each calendar year consisted of 360 days. Interest payable hereunder on the Base Rate Loan shall be computed based on the actual number of days elapsed assuming that each calendar year consisted of 365 days. SECTION 3.4. Mandatory Prepayments Resulting From Borrowing Base --------------------------------------------------- Deficiency. In the event a Borrowing Base Deficiency exists after giving effect - ---------- to any Redetermination, Borrower shall, at its option, either (a) eliminate such Borrowing Base Deficiency by making a single mandatory prepayment of principal on the Loan in an amount equal to the entire amount of such Borrowing Base Deficiency on the first Monthly Date following the date on which such Borrowing Base Deficiency is determined to exist, or (b) eliminate such deficiency by making six (6) consecutive mandatory prepayments of principal on the Loan each of which shall be in the amount of one sixth (1/6th) of the amount of such Borrowing Base Deficiency commencing on the first Monthly Date following the date on which such Borrowing Base Deficiency is determined to exist and continuing on each Monthly Date thereafter. If a Borrowing Base Deficiency cannot be eliminated pursuant to this Section 3.4 by prepayment of the Loan in ----------- full (as a result of outstanding Letter of Credit Exposure) on each Monthly Date, Borrower shall also deposit cash with Administrative Agent, to be held by Administrative Agent to secure outstanding Letter of Credit Exposure in the manner contemplated by Section 3.1(b), in an amount at least equal to one sixth -------------- (1/6th) of the balance of such Borrowing Base Deficiency (i.e., one-sixth (1/6th) of the difference between the Borrowing Base Deficiency and the remaining outstanding principal under the Loan on the date such Borrowing Base Deficiency is first determined to occur). SECTION 3.5. Voluntary Prepayments. Borrower may, subject to Section 5.5 --------------------- ----------- and the other provisions of this Agreement, upon three (3) Domestic Business Days advance notice to Administrative Agent, prepay the principal of the Loan in whole or in part. Any partial prepayment shall be in a minimum amount of $1,000,000 and shall be in an integral multiple of $100,000. 30 SECTION 3.6. Voluntary Reduction of Commitments. Borrower may, by notice ---------------------------------- to Administrative Agent five (5) Domestic Business Days prior to the effective date of any such reduction, reduce the Total Commitment (and thereby reduce the Commitment of each Bank ratably) in amounts not less than $5,000,000 and in an amount which is an integral multiple of $1,000,000. On the effective date of any such reduction, Borrower shall, to the extent required as a result of such reduction, make a principal payment on the Loan in an amount sufficient to cause the principal balance of the Loan then outstanding to be equal to or less than the Total Commitment as thereby reduced. Notwithstanding the foregoing, Borrower shall not be permitted to voluntarily reduce the Total Commitment to an amount less than the aggregate Letter of Credit Exposure of all Banks. SECTION 3.7. Termination of Commitments; Final Maturity of Loan. The -------------------------------------------------- Total Commitment (and the Commitment of each Bank) shall terminate, and the entire outstanding principal balance of the Loan, all interest accrued thereon, all accrued but unpaid fees hereunder and all other outstanding Obligations shall be due and payable in full on the Termination Date. SECTION 3.8. Unused Commitment Fee. On the Termination Date, on each --------------------- Quarterly Date prior to the Termination Date, and, in the event the Commitments are terminated in their entirety prior to the Termination Date, on the date of such termination, Borrower shall pay to Administrative Agent, for the ratable benefit of each Bank based on each Bank's Commitment Percentage, a commitment fee equal to the Unused Commitment Fee Percentage in effect from day to day (applied on a per annum basis and computed on the basis of actual days elapsed and as if each calendar year consisted of 365 days) of the average daily Availability for the Fiscal Quarter (or portion thereof) ending on the date such payment is due. SECTION 3.9. Agency and other Fees. Borrower shall pay to Administrative --------------------- Agent and its Affiliates such other fees and amounts as Borrower shall be required to pay to Administrative Agent and its Affiliates from time to time pursuant to any separate agreement between Borrower and Administrative Agent or such Affiliates. Such fees and other amounts shall be retained by Administrative Agent and its Affiliates, and no Bank (other than Administrative Agent) shall have any interest therein. Administrative Agent may disburse any fees paid to Administrative Agent and its Affiliates pursuant to this Section ------- 3.9 in any manner Administrative Agent desires in its sole discretion - --- ARTICLE IV GENERAL PROVISIONS SECTION 4.1. Delivery and Endorsement of Notes. On the Closing Date, --------------------------------- Administrative Agent shall deliver to each Bank the Note payable to such Bank. Each Bank may endorse (and prior to any transfer of its Note shall endorse) on the schedules attached and forming a part thereof appropriate notations to evidence the date and amount of its Commitment Percentage of each Borrowing, the Interest Period applicable thereto, and the date and amount of each payment of principal made by Borrower with respect thereto; provided that the failure by -------- ---- any Bank to so endorse its Note shall not affect the liability of Borrower for the repayment of all amounts outstanding under such Note together with interest thereon. Each Bank is hereby irrevocably authorized by 31 Borrower to endorse its Note and to attach to and make a part of any such Note a continuation of any such schedule as required. SECTION 4.2. General Provisions as to Payments. (a) Borrower shall make --------------------------------- each payment of principal of, and interest on, the Loan, and all fees payable hereunder shall be paid, not later than 12:00 noon (Dallas, Texas time) on the date when due, in Federal or other funds immediately available in Dallas, Texas, to Administrative Agent at its address set forth on Schedule 1 hereto. ---------- Administrative Agent will promptly (and if such payment is received by Administrative Agent by 10:00 a.m., and otherwise if reasonably possible, on the same Domestic Business Day) distribute to each Bank its Commitment Percentage of each such payment received by Administrative Agent for the account of Banks. Whenever any payment of principal of, or interest on, any portion of the Loan subject to a Base Rate Tranche or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, any portion of the Loan subject to a Eurodollar Tranche shall be due on a day which is not a Eurodollar Business Day, the date for payment thereof shall be extended to the next succeeding Eurodollar Business Day (subject to the provisions of the definition of Interest Period). If the date for any payment of principal is extended by operation of Law or otherwise, interest thereon shall be payable for such extended time. Borrower hereby authorizes Administrative Agent to charge from time to time against Borrower's accounts with Administrative Agent any amount then due. (b) Prior to the occurrence of an Event of Default, all principal payments received by Banks with respect to the Loan shall be applied first to Eurodollar Tranches outstanding with Interest Periods ending on the date of such payment, then to Base Rate Tranches, and then to Eurodollar Tranches next maturing until such principal payment is fully applied. (c) After the occurrence of an Event of Default, all amounts collected or received by Administrative Agent or any Bank shall be applied first to the payment of all proper costs incurred by Administrative Agent in connection with the collection thereof (including reasonable expenses and disbursements of Administrative Agent), second to the payment of all proper costs incurred by Banks in connection with the collection thereof (including reasonable expenses and disbursements of Banks), third to the reimbursement of any advances made by Banks to effect performance of any unperformed covenants of any Credit Party under any of the Loan Papers, fourth to the payment of any unpaid fees required pursuant to Section 3.9, fifth to the payment of any unpaid fees required ----------- pursuant to Sections 3.1(b) and 3.8, sixth, to payment to each Bank of its --------------- --- Commitment Percentage of the outstanding principal of the Loan and accrued but unpaid interest thereon, and seventh to establish the deposits required in Section 3.1(b). All payments received by a Bank after the occurrence of an - -------------- Event of Default for application to the principal of the Loan shall be applied by such Bank in the manner provided in Section 4.2(b). -------------- 32 ARTICLE V CHANGE IN CIRCUMSTANCES SECTION 5.1. Increased Cost and Reduced Return. --------------------------------- (a) If, after the date hereof, the adoption of any applicable law, rule, or regulation, or any change in any applicable law, rule, or regulation, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency: (i) shall subject such Bank (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Loans, its Note, or its obligation to make Eurodollar Loans, or change the basis of taxation of any amounts payable to such Bank (or its Applicable Lending Office) under this Agreement or its Note in respect of any Eurodollar Loans (other than taxes imposed on the overall net income of such Bank or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, compulsory loan, or similar requirement (other than the Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Bank (or its Applicable Lending Office), including the Commitment of such Bank hereunder; or (iii) shall impose on such Bank (or its Applicable Lending Office) or on the London interbank market any other condition affecting this Agreement or its Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Loans or to reduce any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or its Note with respect to any Eurodollar Loans, then Borrower shall pay to such Bank on demand such amount or amounts as will compensate such Bank for such increased cost or reduction. If any Bank requests compensation by Borrower under this Section 5.1(a), Borrower may, by notice to such Bank (with a copy to - -------------- Administrative Agent), suspend the obligation of such Bank to make or Continue Eurodollar Loans or to Convert all or part of the Base Rate Loan owing to such Bank into Eurodollar Loans, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 5.4 ----------- shall be applicable); provided that such suspension shall not affect the right -------- ---- of such Bank to receive the compensation so requested. (b) If, after the date hereof, any Bank shall have determined that the adoption of any applicable law, rule, or regulation regarding capital adequacy or any change therein or in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable 33 agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Bank or any corporation controlling such Bank as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then, from time to time upon demand, Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. (c) Each Bank shall promptly notify Borrower and Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 5.1 and will ----------- designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to it. Any Bank claiming compensation under this Section 5.1 shall furnish to Borrower and Administrative ----------- Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 5.2. Limitation on Types of Loans. If on or prior to the first ---------------------------- day of any Interest Period for any Eurodollar Loan: (a) Administrative Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) Required Banks determine (which determination shall be conclusive) and notify Administrative Agent that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to Banks of funding Eurodollar Loans for such Interest Period; then Administrative Agent shall give Borrower prompt notice thereof specifying the relevant Type of Loans and the relevant amounts or periods, and so long as such condition remains in effect, Banks shall be under no obligation to make additional Loans of such Type, Continue Loans of such Type, or to Convert Loans of any other Type into Loans of such Type and Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Loans of the affected Type, either prepay such Loans or Convert such Loans into another Type of Loan in accordance with the terms of this Agreement. SECTION 5.3. Illegality. Notwithstanding any other provision of this ---------- Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder, then such Bank shall promptly notify Borrower thereof and such Bank's obligation to make or Continue Eurodollar Loans and to Convert other Types of Loans into Eurodollar Loans shall be suspended until such time as such Bank may again make, maintain, and fund Eurodollar Loans (in which case the provisions of Section 5.4 shall be ----------- applicable). 34 SECTION 5.4. Treatment of Affected Loans. If the obligation of any Bank --------------------------- to make particular Eurodollar Loans or to Continue Loans, or to Convert Loans of another Type into Loans of a particular Type shall be suspended pursuant to Section 5.1 or 5.3 hereof (Loans of such Type being herein called "Affected - ----------- --- -------- Loans" and such Type being herein called the "Affected Type"), such Bank's - ----- ------------- Affected Loans shall be automatically Converted into the Base Rate Loan on the last day(s) of the then current Interest Period(s) for Affected Loans (or, in the case of a Conversion required by Section 5.3 hereof, on such earlier date as ----------- such Bank may specify to Borrower with a copy to Administrative Agent) and, unless and until such Bank gives notice as provided below that the circumstances specified in Section 5.1 or 5.3 hereof that gave rise to such Conversion no ----------- --- longer exist: (a) to the extent that such Bank's Affected Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Bank's Affected Loans shall be applied instead to the Base Rate Loan; and (b) all Loans that would otherwise be made or Continued by such Bank as Loans of the Affected Type shall be made or Continued instead as part of the Base Rate Loan, and all Loans of such Bank that would otherwise be Converted into Loans of the Affected Type shall be Converted instead into (or shall remain) as part of the Base Rate Loan. If such Bank gives notice to Borrower (with a copy to Administrative Agent) that the circumstances specified in Section 5.1 or 5.3 hereof that gave rise to the ----------- --- Conversion of such Bank's Affected Loans pursuant to this Section 5.4 no longer ----------- exist (which such Bank agrees to do promptly upon such circumstances ceasing to exist) at a time when Loans of the Affected Type made by other Banks are outstanding, such Bank's portion of the Base Rate Loan shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Loans of the Affected Type to the extent necessary so that, after giving effect thereto, all Loans held by Banks holding Loans of the Affected Type and by such Bank are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. SECTION 5.5. Compensation. Upon the request of any Bank, Borrower shall ------------ pay to such Bank such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Loan for any reason (including, without limitation, the acceleration of the Loan) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Article VIII to be ------------ satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Loan on the date for such Borrowing, Conversion, Continuation, or prepayment specified in the relevant Request for Borrowing, Notice of Continuation or Conversion, or other notice of Borrowing, prepayment, Continuation, or Conversion under this Agreement. SECTION 5.6. Taxes. (a) Any and all payments by Borrower to or for the ----- account of any Bank or Administrative Agent hereunder or under any other Loan Paper shall be made free and 35 clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and Administrative Agent, --------- taxes imposed on its income, and franchise taxes imposed on it, by any relevant taxation authority (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to in this Section 5.6 as "Non-Excluded Taxes"). If Borrower shall be required by ----------- ------------------ law to deduct any Non-Excluded Taxes from or in respect of any sum payable under this Agreement or any other Loan Paper to any Bank or Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 5.6) such Bank or Administrative Agent receives an amount ----------- equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) Borrower shall furnish to Administrative Agent, at its address set forth in Schedule 1 hereto, the original or a certified copy of ---------- a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Agreement or any other Loan Paper or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Paper (hereinafter referred to as "Other ----- Taxes"). - ----- (c) Borrower agrees to indemnify each Bank and Administrative Agent for the full amount of Non-Excluded Taxes and Other Taxes (including, without limitation, any Non-Excluded Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 5.6) paid by such Bank or ----------- Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on Schedule 1 hereto and on or prior to the date ---------- on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by Borrower or Administrative Agent (but only so long as such Bank remains lawfully able to do so), shall provide Borrower and Administrative Agent with (i) Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Bank is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Agreement or any of the other Loan Papers. (e) For any period with respect to which a Bank has failed to provide Borrower and Administrative Agent with the appropriate form pursuant to Section ------- 5.6(d) (unless such failure is due to a change in treaty, law, or regulation - ------ occurring subsequent to the date on which a form originally 36 was required to be provided), such Bank shall not be entitled to indemnification under Section 5.6(a) or 5.6(b) with respect to Non-Excluded Taxes imposed by the -------------- ------ United States; provided, however, that should a Bank, which is otherwise exempt -------- ------- ---- from or subject to a reduced rate of withholding tax, become subject to Non- Excluded Taxes because of its failure to deliver a form required hereunder, Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Non-Excluded Taxes. (f) If Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 5.6, then such Bank will agree to use ----------- reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. (g) Within thirty (30) days after the date of any payment of Non-Excluded Taxes, Borrower shall furnish to Administrative Agent the original or a certified copy of a receipt evidencing such payment. (h) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section ------- 5.6 shall survive the termination of the Commitments and the payment in full of - --- the Notes. SECTION 5.7. Discretion of Banks as to Manner of Funding. Notwithstanding ------------------------------------------- any provisions of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Commitment in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during the Interest Period for such Eurodollar Loan through the purchase of deposits having a maturity corresponding to the last day of such Interest Period and bearing an interest rate equal to the Adjusted Eurodollar Rate for such Interest Period. ARTICLE VI BORROWING BASE SECTION 6.1. Reserve Report; Proposed Borrowing Base and Conforming ------------------------------------------------------ Borrowing Base. As soon as available and in any event by March 31 and September - -------------- 30 of each year commencing March 31, 1999, Borrower shall deliver to Administrative Agent and each Bank a Reserve Report prepared as of the immediately preceding December 31 and June 30 respectively. Simultaneously with the delivery to Administrative Agent and each Bank of each Reserve Report, Borrower shall notify Administrative Agent and each Bank of the amount of the Borrowing Base which Borrower requests become effective on the next Redetermination Date (or such date promptly following such Redetermination Date as Required Banks shall elect). Banks may, in their sole discretion, establish a Borrowing Base which is higher than the Borrowing Base would otherwise be if Banks determined the Borrowing Base based on each Bank's application of the credit standards and other criteria customarily applied by such Bank in the determination of credit limitations for companies similar to Borrower ("Conforming Credit Criteria"). At the time of each Redetermination, -------------------------- 37 Banks shall also determine what the Borrowing Base would be if they applied Conforming Credit Criteria (the "Conforming Borrowing Base"). If Banks do not ------------------------- determine a Conforming Borrowing Base, the Borrowing Base as redetermined shall also be the Conforming Borrowing Base for purposes of this Agreement. SECTION 6.2. Scheduled Redeterminations of the Borrowing Base and the -------------------------------------------------------- Conforming Borrowing Base; Procedures and Standards. Based in part on the - --------------------------------------------------- Reserve Reports made available to Banks pursuant to Section 6.1, Banks shall ----------- redetermine the Borrowing Base and the Conforming Borrowing Base on or prior to the next Redetermination Date (or such date promptly thereafter as reasonably possible based on the engineering and other information available to Banks). Any Borrowing Base or Conforming Borrowing Base which becomes effective as a result of any Redetermination of the Borrowing Base or Conforming Borrowing Base shall be subject to the following restrictions: (a) such Borrowing Base or Conforming Borrowing Base shall not exceed the Borrowing Base requested by Borrower pursuant to Sections 6.1 or 6.3 (as applicable), (b) such Borrowing Base or ------------ --- Conforming Borrowing Base shall not exceed the Total Commitment then in effect, (c) to the extent such Borrowing Base or Conforming Borrowing Base represents an increase from the Borrowing Base or the Conforming Borrowing Base (as applicable) in effect prior to such Redetermination, such Borrowing Base or Conforming Borrowing Base shall be approved by all Banks, and (d) to the extent such Borrowing Base or Conforming Borrowing Base represents a decrease in the Borrowing Base or the Conforming Borrowing Base (as applicable) in effect prior to such Redetermination, or a reaffirmation of such prior Borrowing Base or Conforming Borrowing Base, such Borrowing Base or Conforming Borrowing Base shall be approved by Required Banks. Each Redetermination shall be made by Banks in their sole discretion. Without limiting such discretion, Borrower acknowledges and agrees that Banks (i) may make such assumptions regarding appropriate existing and projected pricing for Hydrocarbons as they deem appropriate in their sole discretion, (ii) may make such assumptions regarding projected rates and quantities of future production of Hydrocarbons from the Mineral Interests owned by Borrower as they deem appropriate in their sole discretion, (iii) may consider the projected cash requirements of the Credit Parties, (iv) except with respect to the Initial Borrowing Base and the Initial Conforming Borrowing Base, are not required to consider any asset other than Proved Mineral Interests owned by Borrower which are subject to first and prior Liens in favor of Administrative Agent for the ratable benefit of Banks to the extent required by Section 7.1 hereof, and (v) may make such other assumptions, ----------- considerations and exclusions as Banks deem appropriate in the exercise of their sole discretion. It is further acknowledged and agreed that each Bank may consider such other credit factors as it deems appropriate in the exercise of its sole discretion and shall have no obligation in connection with any Redetermination to approve any increase from the Borrowing Base or the Conforming Borrowing Base in effect prior to such Redetermination. The Conforming Borrowing Base shall also be determined by Banks in their sole discretion, and in determining the amount of the Conforming Borrowing Base, each Bank may make the assumptions and consider the factors and criteria set forth in subclauses (a) through (d) and (i) through (v) above; provided, that each Bank -------- ---- shall apply Conforming Credit Criteria. Promptly following any Redetermination of the Borrowing Base and the Conforming Borrowing Base, Administrative Agent shall notify Borrower of the amount of the Borrowing Base and the Conforming Borrowing Base as redetermined, which Borrowing Base and Conforming Borrowing Base shall be effective as of the date specified in such notice, and shall remain in effect for all purposes of this Agreement until the next Redetermination. 38 SECTION 6.3. Special Redetermination. (a) In addition to Scheduled ----------------------- Redeterminations, Required Banks shall be permitted to make a Special Redetermination of the Borrowing Base and the Conforming Borrowing Base once in each period between Scheduled Redeterminations. Any request by Required Banks pursuant to this Section 6.3(a) shall be submitted to Administrative Agent and -------------- Borrower. (b) In addition to Scheduled Redeterminations, Borrower shall be permitted to request a Special Redetermination of the Borrowing Base and the Conforming Borrowing Base once in each Fiscal Year. Such request shall be submitted to Administrative Agent and Required Banks and at the time of such request Borrower shall deliver to Administrative Agent and each Bank a Reserve Report. Together with such request, Borrower shall also notify Administrative Agent and each Bank of the Borrowing Base requested by Borrower in connection with such Special Redetermination. (c) Any Special Redetermination shall be made by Banks in accordance with the procedures and standards set forth in Section 6.2; provided, that, no ----------- -------- ---- Reserve Report will be required to be delivered to Administrative Agent and Banks in connection with any Special Redetermination requested by Required Banks pursuant to clause (a) above. SECTION 6.4. Borrowing Base Deficiency. If a Borrowing Base Deficiency ------------------------- exists after giving effect to any Redetermination, Borrower shall be obligated to eliminate such Borrowing Base Deficiency by making the mandatory prepayments of the Loan required by Section 3.4. ----------- SECTION 6.5. Initial Borrowing Base and Conforming Borrowing Base. ---------------------------------------------------- Notwithstanding anything to the contrary contained herein, the Borrowing Base and the Conforming Borrowing Base in effect during the period commencing on the Closing Date and ending on the effective date of the first Redetermination after the Closing Date shall be the Initial Borrowing Base and the Initial Conforming Borrowing Base, respectively. ARTICLE VII COLLATERAL AND GUARANTEES SECTION 7.1. Security. (a) The Obligations shall be secured by first and -------- prior Liens (subject only to Permitted Encumbrances) covering and encumbering (i) one hundred percent (100%) of all Borrowing Base Properties, (ii) one hundred percent (100%) of the issued and outstanding Equity of each existing and future Subsidiary of Borrower, and (iii) all right, title and interest of Borrower under the Management Agreement. On the Closing Date, Borrower shall deliver to Administrative Agent for the ratable benefit of each Bank, the Assignments of Notes and Liens, and Mortgages in form and substance acceptable to Administrative Agent and duly executed by Borrower together with such other assignments, conveyances, amendments, agreements and other writings, including, without limitation, UCC-1 financing statements and UCC-3 assignments (each duly authorized and executed) as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect first and prior Liens in all Borrowing Base Properties and other interests of Borrower required by this Section 7.1(a). - -------------- 39 (b) On or before each Redetermination Date after the Closing Date and at such other times as Administrative Agent or Required Banks shall request, Borrower shall execute and deliver to Administrative Agent, for the ratable benefit of each Bank, Mortgages in form and substance acceptable to Administrative Agent and duly executed by Borrower together with such other assignments, conveyances, amendments, agreements and other writings, including, without limitation, UCC-1 financing statements (each duly authorized and executed) as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect the Liens required by Section 7.1(a) preceding with respect -------------- to Borrowing Base Properties acquired by Borrower subsequent to the last date on which Borrower was required to execute and deliver Mortgages pursuant to this Section 7.1(b), or which, for any other reason are not the subject of valid, - -------------- enforceable, perfected first priority Liens (subject only to Permitted Encumbrances) in favor of Administrative Agent for the ratable benefit of Banks. (c) At any time Borrower or any of its Subsidiaries is required to execute and deliver Mortgages to Administrative Agent pursuant to this Section ------- 7.1, Borrower shall also deliver to Administrative Agent such opinions of - --- counsel (including, if so requested, title opinions, and in each case addressed to Administrative Agent) and other evidence of title as Administrative Agent shall deem necessary or appropriate to verify (i) Borrower's title to the Required Reserve Value of the Proved Mineral Interests which are subject to such Mortgages, and (ii) the validity, perfection and priority of the Liens created by such Mortgages and such other matters regarding such Mortgages as Administrative Agent shall reasonably request. (d) On the date of the creation or acquisition by Borrower of any Subsidiary, or on the date of creation or acquisition by any First Tier Subsidiary of any Subsidiary, Borrower or such First Tier Subsidiary (as applicable) shall execute and deliver to Administrative Agent a Borrower Pledge Agreement or a Subsidiary Pledge Agreement (as applicable) together with (i) all certificates (or other evidence acceptable to Administrative Agent) evidencing the issued and outstanding Equity of any such Subsidiary of every class which shall be duly endorsed or accompanied by stock powers executed in blank (as applicable), and (ii) such UCC-1 financing statements as Administrative Agent shall deem necessary or appropriate to grant, evidence and perfect the Liens required by Section 7.1(a)(ii) in the issued and outstanding Equity of each such ------------------ Subsidiary. SECTION 7.2. Guarantees. Payment and performance of the Obligations ---------- shall be fully guaranteed by each existing or hereafter created or acquired Subsidiary of Borrower pursuant to a Subsidiary Guaranty. On the date of creation or acquisition by Borrower of any Subsidiary, Borrower shall cause such Subsidiary to execute and deliver to Administrative Agent a Subsidiary Guaranty. ARTICLE VII CONDITIONS PRECEDENT SECTION 8.1. Conditions to Amendment and Restatement and Initial --------------------------------------------------- Borrowing and Participation in Letter of Credit Exposure. The obligation of - -------------------------------------------------------- each Bank to amend and restate the Existing QRI/NationsBank Credit Agreement in the form of this Agreement and the obligation of each Bank to loan its Commitment Percentage of the initial Borrowing made hereunder, and the 40 obligation of Administrative Agent to issue (or cause another Bank to issue) the initial Letter of Credit issued hereunder is subject to the satisfaction of each of the following conditions: (a) 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 and each of which shall, unless otherwise indicated, be dated the Closing Date: (i) a Note payable to the order of each Bank, each in the amount of such Bank's Commitment duly executed by Borrower; (ii) Mortgages duly executed and delivered by Borrower creating first and prior Liens in all Borrowing Base Properties; (iii) Assignments of Notes and Liens duly executed and delivered by Existing MSR Agent and Borrower; (iv) the Collateral Assignments duly executed by Borrower; (v) such financing statements in form and substance acceptable to Administrative Agent and executed by each Credit Party as Administrative Agent shall specify to fully evidence and perfect all Liens contemplated by the Loan Papers, all of which shall be filed of record in such jurisdictions as Administrative Agent shall require in its sole direction; (vi) 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 Closing 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 Closing Date; (vii) 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 Closing Date; (viii) 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; 41 (ix) 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 Closing Date, executed by the Secretary or comparable Authorized Officer of each Credit Party; (x) copies of resolutions or comparable authorizations approving the Loan Papers and authorizing the transactions contemplated by this Agreement 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 Closing Date; (xi) an opinion of Cantey & Hanger, L.L.P., special counsel for Borrower dated the Closing Date, favorably opining as to the enforceability of each of the Loan Papers and otherwise in form and substance satisfactory to Administrative Agent; (xii) an opinion of Loomis, Ewert, Parsley, Davis & Gotting, special Michigan counsel for Administrative Agent, dated the Closing Date, favorably opinion as to the enforceability of the Mortgages in Michigan and otherwise in form and substance satisfactory to Administrative Agent; (xiii) an opinion of Herschler, Freudenthal, Salzburg, Bonds & Zerga, P.C., special Wyoming counsel for Administrative Agent, dated the Closing Date, favorably opining as to the enforceability of the Mortgages in Wyoming and otherwise in form and substance satisfactory to Administrative Agent; (xiv) an opinion of Crowley, Haughey, Hanson, Toole & Dietrich, special Montana counsel for Administrative Agent, dated the Closing Date, favorably opining as to the enforceability of the Mortgages and the Assignments of Notes and Liens (as applicable) in Montana and otherwise in form and substance satisfactory to Administrative Agent; (xv) a certificate signed by an Authorized Officer of Borrower stating that (a) the representations and warranties contained in this Agreement and the other Loan Papers are true and correct in all respects, and (b) no Default or Event of Default has occurred and is continuing, and (c) all conditions set forth in this Section 8.1 and ----------- Section 8.2 have been satisfied; ----------- (xvi) a Certificate of Ownership Interests signed by an Authorized Officer of Borrower in the form of Exhibit G attached hereto; --------- 42 (xvii) certificates from Borrower's insurance broker setting forth the insurance maintained by Borrower, stating that such insurance is in full force and effect, that all premiums due have been paid and stating that such insurance is adequate and complies with the requirements of Section 10.6; ------------ (xviii) a copy of each of the Closing Documents accompanied by a certificate executed by an Authorized Officer of Borrower certifying that (A) such copies are accurate and complete and represent the complete understanding and agreement of the parties thereto, (B) no material right or obligation of any party thereto has been modified, amended or waived, and (C) subject only to funding the initial Borrowing to be made hereunder, the Closing Transactions have been consummated on the terms set forth in such Closing Documents; (xix) a report or reports in form, scope and detail acceptable to Administrative Agent and Banks setting forth the results of a review of Borrower's Mineral Interests (after giving effect to the Closing Transactions) and other operations, which report(s) shall not reflect the existence of facts or circumstances which would constitute a material violation of any Applicable Environmental Law or which are likely to result in a material liability to any Credit Party, and/or otherwise reveal any condition or circumstance which would reflect that the representations and warranties contained in Section 9.14 ------------ hereof are inaccurate in any respect; and (xx) copies of the Merger Certificate filed with the Secretary of State of Delaware, together with such certificates, affidavits or other instruments suitable for recording same in such jurisdictions as Administrative Agent shall require, certifying or otherwise evidencing that such copies are accurate and complete copies of the Merger Certificate as so filed. (b) Closing Transactions. Subject only to disbursement and -------------------- application of the initial Borrowing, the Closing Transactions shall have occurred (or Administrative Agent shall be satisfied that such transactions will occur simultaneously therewith). Without limiting the foregoing, each of the following shall have occurred (or Administrative Agent shall be satisfied that each of the following shall occur simultaneously therewith): (i) the Merger shall have been completed pursuant to the terms of the Merger Documents, and pursuant thereto the Certificate of Merger shall have been duly filed with the Secretary of State of Delaware; (ii) the MSR/Paribas Credit Agreement shall have been terminated and all obligations and Debt thereunder shall have been refinanced in full with proceeds of the Loan and all Liens securing payment and performance of such Debt and obligations shall have been assigned to Administrative Agent pursuant to the Assignments of Notes and Liens; and (iii) all fees and expenses of Administrative Agent and its Affiliates in connection with the credit facility provided herein shall have been paid. 43 (c) Title Review. Administrative Agent or its counsel shall have ------------ completed a review of title (including opinions of title) with respect to the Required Reserve Value of all Borrowing Base Properties, and such review shall not have revealed any condition or circumstance which would reflect that the representations and warranties contained in Section 9.9 hereof are inaccurate in ----------- any respect. (d) No Material Adverse Change. In the sole discretion of each Bank, -------------------------- no Material Adverse Change shall have occurred (i) since September 30, 1998 with respect to Borrower or its Subsidiaries (including, without limitation, no Material Adverse Change with respect to any facts or information regarding such Persons as represented to any Agent or any Bank on or prior to the Closing Date) or (ii since September 30, 1998 with respect to MSR or its Subsidiaries (including, without limitation, no Material Adverse Change with respect to any facts or information regarding such Persons as represented to any Agent or any Bank on or prior to the Closing Date). (e) No Legal Prohibition. The transactions contemplated by this -------------------- Agreement shall be permitted by applicable Law and regulation and shall not subject any Agent, any Bank, or any Credit Party to any Material Adverse Change. (f) No Litigation. No litigation, arbitration or similar proceeding ------------- shall be pending or threatened which calls into question the validity or enforceability of this Agreement, the other Loan Papers or the transactions contemplated hereby or thereby. (g) Closing Fees. Borrower shall have paid to Administrative Agent ------------ for the ratable benefit of each Bank, and shall have paid to Administrative Agent and its Affiliates (for its own account), the fees to be paid on the Closing Date pursuant to Section 3.9. ----------- (h) Other Matters. All matters related to this Agreement, the other ------------- Loan Papers, the Closing Documents, the Closing Transactions and the Credit Parties shall be acceptable to each Bank in its sole discretion, and each Credit Party shall have delivered to Administrative Agent and each Bank such evidence as they shall request to substantiate any matters related to this Agreement and the other Loan Papers, as Administrative Agent or any Bank shall request. Upon satisfaction of each of the conditions set forth in this Section 8.1, ----------- Borrower and Administrative Agent shall execute the Certificate of Effectiveness. Upon the execution and delivery of the Certificate of Effectiveness, the Existing QRI/NationsBank Credit Agreement shall automatically and completely be amended and restated on the terms set forth herein without necessity of any other action on the part of any Bank, any Agent or Borrower. Until execution and delivery of the Certificate of Effectiveness, the Existing QRI/NationsBank Credit Agreement shall remain in full force and effect in accordance with its terms. Each Bank hereby authorizes Administrative Agent to execute the Certificate of Effectiveness on its behalf and acknowledges and agrees that the execution of the Certificate of Effectiveness by Administrative Agent shall be binding on each such Bank. SECTION 8.2. Conditions to Each Borrowing and each Letter of Credit. The ------------------------------------------------------ obligation of each Bank to loan its Commitment Percentage of each Borrowing and the obligation 44 of Administrative Agent to issue a Letter of Credit on the date such Letter of Credit is to be issued is subject to the further satisfaction of the following conditions: (a) timely receipt by Administrative Agent of a Request for Borrowing or a Request for Letter of Credit (as applicable); (b) immediately before and after giving effect to such Borrowing or issuance of such Letter of Credit, no Default or Event of Default shall have occurred and be continuing and the funding of such Borrowing or the issuance of the requested Letter of Credit (as applicable) shall not cause a Default or Event of Default; (c) the representations and warranties of each Credit Party contained in this Agreement and the other Loan Papers shall be true and correct on and as of the date of such Borrowing or issuance of such Letter of Credit (as applicable); (d) the amount of the requested Borrowing or the amount of the requested Letter of Credit (as applicable) shall not exceed the Availability; (e) no Material Adverse Change shall have occurred; and (f) the funding of such Borrowing or the issuance of such Letter of Credit (as applicable) shall be permitted by applicable Law. The funding of each Borrowing and the issuance of each Letter of Credit hereunder shall be deemed to be a representation and warranty by Borrower on the date of such Borrowing and the date of issuance of each Letter of Credit as to the facts specified in Sections 8.2(b) through (f). --------------- --- SECTION 8.3. Materiality of Conditions. Each condition precedent herein is ------------------------- material to the transactions contemplated herein, and time is of the essence in respect of each thereof. SECTION 8.4. Termination of Agreement. Notwithstanding anything to the ------------------------ contrary contained in this Agreement (including, without limitation, Section 3.1 ----------- hereof) or in any other Loan Paper, if all the conditions precedent set forth in Section 8.1 hereof, including, without limitation, the execution and delivery of - ----------- the Certificate of Effectiveness, have not been consummated on or prior to March 31, 1999, Required Banks may, by notice to Administrative Agent and Borrower, terminate this Agreement and the Total Commitment (and the Commitment of each Bank) as of any date specified in such notice (the "Early Termination Date"), ---------------------- whereupon this Agreement and the Total Commitment (and the Commitment of each Bank) shall terminate, and all accrued but unpaid fees hereunder and all other outstanding Obligations shall be due and payable in full on the Early Termination Date. 45 ARTICLE IX REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Administrative Agent and each Bank that each of the following statements is true and correct on the date hereof, will be true and correct on the Closing Date after giving effect to the Closing Transactions, and will be true and correct on the occasion of each Borrowing and the issuance of each Letter of Credit: SECTION 9.1. Existence and Power. Each Credit Party (a) is a corporation, ------------------- partnership or limited liability company duly incorporated or organized (as applicable), validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, (b) has all corporate, partnership or limited liability company power (as applicable) and all material governmental licenses, authorizations, consents and approvals required to carry on its businesses as now conducted and as proposed to be conducted, and (c) is duly qualified to transact business as a foreign corporation, partnership or limited liability company in each jurisdiction where a failure to be so qualified could result in a Material Adverse Change. SECTION 9.2. Credit Party and Governmental Authorization; Contravention. ---------------------------------------------------------- The execution, delivery and performance of this Agreement and the other Loan Papers by each Credit Party (to the extent each Credit Party is a party to this Agreement and such Loan Papers) are within such Credit Party's corporate, partnership or limited liability company powers, when executed will be duly authorized by all necessary corporate, partnership or limited liability company action, require no action by or in respect of, or filing with, any Governmental Authority and do not contravene, or constitute a default under, any provision of applicable Law (including, without limitation, the Margin Regulations) or of the articles or certificate of incorporation, bylaws, regulations, partnership agreement or comparable charter documents of any Credit Party or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Credit Party or result in the creation or imposition of any Lien on any asset of any Credit Party other than the Liens securing the Obligations. SECTION 9.3. Binding Effect. This Agreement constitutes a valid and -------------- binding agreement of Borrower; the other Loan Papers when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of each Credit Party executing the same; and each Loan Paper is, or when executed and delivered will be, enforceable against each Credit Party which executes the same in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar Laws affecting creditors rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 9.4. Financial Information. (a) The most recent annual audited --------------------- consolidated balance sheet of Borrower and the related consolidated statements of operations and cash flows for the Fiscal Year then ended, copies of which have been delivered to each Bank, fairly present, in conformity with GAAP, the consolidated financial position of Borrower as of the end of such Fiscal Year and its consolidated results of operations and cash flows for such Fiscal Year. 46 (b) The most recent quarterly unaudited consolidated balance sheet of Borrower delivered to Banks, and the related unaudited consolidated statements of operations and cash flows for the portion of Borrower's Fiscal Year then ended, fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in Section 9.4(a), the consolidated -------------- financial position of Borrower as of such date and its consolidated results of operations and cash flows for such portion of Borrower's Fiscal Year. (c) The most recent annual audited consolidated balance sheet of MSR and the related consolidated statements of operations and cash flows for the Fiscal Year then ended, copies of which have been delivered to each Bank, fairly present, in conformity with GAAP, the consolidated financial position of MSR as of the end of such Fiscal Year and its consolidated results of operations and cash flows for such Fiscal Year. (d) The most recent quarterly unaudited consolidated balance sheet of MSR delivered to Banks, and the related unaudited consolidated statements of operations and cash flows for the portion of MSR's Fiscal Year then ended, fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in Section 9.4(c), the consolidated financial -------------- position of MSR as of such date and its consolidated results of operations and cash flows for such portion of MSR's Fiscal Year. (e) Except as disclosed in writing to Banks prior to the execution and delivery of this Agreement, since (i) September 30, 1998, no Material Adverse Change has occurred with respect to Borrower or its Subsidiaries (including, without limitation, no Material Adverse Change with respect to any facts or information regarding such Persons as represented to any Agent or any Bank on or prior to the Closing Date), and (ii September 30, 1998, no Material Adverse Change has occurred with respect to MSR or its Subsidiaries (including, without limitation, no Material Adverse Change with respect to any facts or information regarding such Persons as represented to any Agent or any Bank on or prior to the Closing Date). (f) After giving effect to the transactions contemplated by this Agreement (including the Closing Transactions), (i) the fair value of the property of each Credit Party is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Credit Party, (ii) the present fair saleable value of the assets of each Credit Party is not less than the amount that will be required to pay the liability of each Credit Party on its debts as they become absolute and matured, (iii) each Credit Party is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) no Credit Party intends to, and no Credit Party believes that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, and (v) no Credit Party is engaged in a business or transaction, and no Credit Party is about to engage in a business or transaction for which such Credit Party's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such Credit Party is engaged. SECTION 9.5. Litigation. Except for matters disclosed on Schedule 3 ---------- ---------- attached hereto, there is no action, suit or proceeding pending against, or to the knowledge of any Credit Party, threatened against or affecting any Credit Party before any Governmental Authority in which there 47 is a reasonable possibility of an adverse decision which could result in a Material Adverse Change or which could in any manner draw into question the validity of the Loan Papers. SECTION 9.6. ERISA. No Credit Party nor any ERISA Affiliate of any ----- Credit Party maintains or has ever maintained or been obligated to contribute to any Plan covered by Title IV of ERISA or subject to the funding requirements of Section 412 of the Code or Section 302 of ERISA. Each Plan maintained by any Credit Party or any ERISA Affiliate of any Credit Party is in compliance in all material respects with all applicable Laws. Except in such instances where an omission or failure would not result in a Material Adverse Change, (a) all returns, reports and notices required to be filed with any regulatory agency with respect to any Plan have been filed timely, and (b) no Credit Party nor any ERISA Affiliate of any Credit Party has failed to make any contribution or pay any amount due or owing as required by the terms of any Plan. There are not pending or, to the best of Borrower's knowledge, threatened claims, lawsuits, investigations or actions (other than routine claims for benefits in the ordinary course) asserted or instituted against, and no Credit Party nor any ERISA Affiliate of any Credit Party has knowledge of any threatened litigation or claims against, the assets of any Plan or its related trust or against any fiduciary of a Plan with respect to the operation of such Plan that are likely to result in liability of any Credit Party resulting in a Material Adverse Change. Except in such instances where an omission or failure would not result in a Material Adverse Change, each Plan that is intended to be "qualified" within the meaning of section 401(a) of the Code is, and has been during the period from its adoption to date, so qualified, both as to form and operation and all necessary governmental approvals, including a favorable determination as to the qualification under the Code of such Plan and each amendment thereto, have been or will be timely obtained. No Credit Party nor any ERISA Affiliate of any Credit Party has engaged in any prohibited transactions, within the meaning of section 406 of ERISA or section 4975 of the Code, in connection with any Plan which would result in liability of any Credit Party resulting in a Material Adverse Change. No Credit Party nor any ERISA Affiliate of any Credit Party maintains or contributes to any Plan that provides a post-employment health benefit, other than a benefit required under Section 601 of ERISA, or maintains or contributes to a Plan that provides health benefits that is not fully funded except where the failure to fully fund such Plan would not result in a Material Adverse Change. No Credit Party nor any ERISA Affiliate of any Credit Party maintains, has established or has ever participated in a multiple employer welfare benefit arrangement within the meaning of section 3(40)(A) of ERISA. SECTION 9.7. Taxes and Filing of Tax Returns. Each Credit Party has ------------------------------- filed all tax returns required to have been filed and has paid all Taxes shown to be due and payable on such returns, including interest and penalties, and all other Taxes which are payable by such party, to the extent the same have become due and payable. No Credit Party knows of any proposed material Tax assessment against it and all Tax liabilities of each Credit Party are adequately provided for. Except as disclosed in writing to Banks prior to the date hereof, no income tax liability of any Credit Party has been asserted by the Internal Revenue Service or other Governmental Authority for Taxes in excess of those already paid. SECTION 9.8. Ownership of Properties Generally. Each Credit Party has --------------------------------- good and valid fee simple or leasehold title to all material properties and assets purported to be owned by it, including, without limitation, all assets reflected in the balance sheets referred to in Section 9.4 (a) --------------- 48 and all assets which are used by the Credit Parties in the operation of their respective businesses, and none of such properties or assets is subject to any Lien other than Permitted Encumbrances. SECTION 9.9. Mineral Interests. The Property Description is an accurate ----------------- and complete description of all Borrowing Base Properties on the Closing Date. Subject only to Immaterial Title Deficiencies (as herein defined), after giving effect to the Closing Transactions, Borrower will have good and defensible title to all Mineral Interests described in the Reserve Report, including, without limitation, all Borrowing Base Properties, free and clear of all Liens except for Permitted Encumbrances. Subject only to Immaterial Title Deficiencies, all Mineral Interests described in the Reserve Report are valid, subsisting, and in full force and effect, and all rentals, royalties, and other amounts due and payable in respect thereof have been duly paid. Without regard to any consent or non-consent provisions of any joint operating agreement covering any of Borrower's Proved Mineral Interests, after giving effect to the Closing Transactions, but subject to Immaterial Title Deficiencies, Borrower's share of (a) the costs for each Proved Mineral Interest described in the Reserve Report is not greater than the decimal fraction set forth in the Reserve Report, before and after payout, as the case may be, and described therein by the respective designations "working interests," "WI," "gross working interest," "GWI," or similar terms, and (b) production from, allocated to, or attributed to each such Proved Mineral Interest is not less than the decimal fraction set forth in the Reserve Report, before and after payout, as the case may be, and described therein by the designations "net revenue interest," "NRI," or similar terms. As used herein, the term "Immaterial Title Deficiencies" means minor defects or ----------------------------- deficiencies in title which do not effect, in the aggregate, more than two percent (2%) (by value) of all Borrowing Base Properties. Each well drilled in respect of each Proved Producing Mineral Interest described in the Reserve Report (y) is capable of, and is presently, producing Hydrocarbons in commercially profitable quantities, and after giving effect to the Closing Transactions, Borrower will receive payments on a current basis for its share of production, with no funds in respect of any thereof held in suspense, other than any such funds held in suspense pending delivery of appropriate division orders, and (z) has been drilled, bottomed, completed, and operated in compliance with all applicable Laws and no such well which is currently producing Hydrocarbons is subject to any penalty in production by reason of such well having produced in excess of its allowable production. SECTION 9.10. Licenses, Permits, Etc. Each Credit Party possesses such ---------------------- valid franchises, certificates of convenience and necessity, operating rights, licenses, permits, consents, authorizations, exemptions and orders of Governmental Authorities, as are necessary to carry on its business as now conducted and as proposed to be conducted, except to the extent a failure to obtain any such item would not result in a Material Adverse Change. SECTION 9.11. Compliance with Law. The business and operations of the ------------------- Credit Parties have been and are being conducted in accordance with all applicable Laws other than violations of Laws which do not (either individually or collectively) result in a Material Adverse Change. SECTION 9.12. Full Disclosure. All information heretofore furnished by --------------- each Credit Party to Administrative Agent or any Bank for purposes of or in connection with this Agreement, any Loan Paper or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by or on behalf of any Credit Party to Administrative Agent or any Bank will be, true, 49 complete and accurate in every material respect. The Credit Parties have disclosed or have caused to be disclosed to Banks in writing any and all facts (other than facts of general public knowledge) which might reasonably be expected to result in a Material Adverse Change. SECTION 9.13. Organizational Structure; Nature of Business. The Credit -------------------------------------------- Parties are engaged only in the business of acquiring, exploring, developing and operating Mineral Interests and the production, marketing, processing and transporting of Hydrocarbons therefrom. Schedule 4 hereto accurately reflects ---------- (i) the jurisdiction of incorporation or organization of each Credit Party, (ii) each jurisdiction in which each Credit Party is qualified to transact business as a foreign corporation, foreign partnership or foreign limited liability company, (iii) the authorized, issued and outstanding Equity of each Credit Party (and the legal and beneficial owners of such Equity) immediately prior to giving effect to the Closing Transactions, (iv) the authorized, issued and outstanding Equity of each Credit Party (and the number of shares owned by each member of the Darden Group) immediately after giving effect to the Closing Transactions, (v) all outstanding warrants, options, subscription rights, convertible securities or other rights to purchase Equity of each Credit Party immediately prior to giving effect to the Closing Transactions, and (vi) all outstanding warrants, options, subscription rights, convertible securities or other rights to purchase Equity of each Credit Party owned by, or otherwise in favor of, each member of the Darden Group immediately after giving effect to the Closing Transactions. SECTION 9.14. Environmental Matters. Except for matters disclosed on --------------------- Schedule 5 hereto, and after giving effect to the Closing Transactions, no - ---------- operation conducted by any Credit Party and no real or personal property now or previously owned or leased by any Credit Party (including, without limitation, Mineral Interests) and no operations conducted thereon, and to any Credit Parties' knowledge, no operations of any prior owner, lessee or operator of any such properties, is or has been in violation of any Applicable Environmental Law other than violations which neither individually nor in the aggregate could result in a Material Adverse Change. Except for matters disclosed on Schedule 5 ---------- hereto, and after giving effect to the Closing Transactions, no Credit Party, nor any such property nor operation is the subject of any existing, pending or, to any Credit Parties' knowledge, threatened Environmental Complaint which could, individually or in the aggregate, result in a Material Adverse Change. All notices, permits, licenses, and similar authorizations, required to be obtained or filed (after giving effect to the Closing Transactions) in connection with the ownership of each tract of real property or operations of any Credit Party thereon and each item of personal property owned, leased or operated by any Credit Party, including, without limitation, notices, licenses, permits and authorizations required in connection with any past or present treatment, storage, disposal, or release of Hazardous Substances into the environment, have been duly obtained or filed except to the extent the failure to obtain or file such notices, licenses, permits and authorizations would not result in a Material Adverse Change. All Hazardous Substances, generated at each tract of real property and by each item of personal property owned, leased or operated by any Credit Party (after giving effect to the Closing Transactions) have been transported, treated, and disposed of only by carriers or facilities maintaining valid permits under RCRA (as hereinafter defined) and all other Applicable Environmental Laws for the conduct of such activities except in such cases where the failure to obtain such permits could not, individually or in the aggregate, result in a Material Adverse Change. Except for matters disclosed on Schedule 5 hereto, and after giving effect to the ---------- Closing Transactions, there have been no Hazardous Discharges which were not in compliance with Applicable Environmental Laws other than Hazardous Discharges 50 which would not, individually or in the aggregate, result in a Material Adverse Change. Except for matters disclosed on Schedule 5 hereto, and after giving ---------- effect to the Closing Transactions, no Credit Party nor any Subsidiary of any Credit Party has any contingent liability in connection with any Hazardous Discharge which could reasonably be expected to result in a Material Adverse Change. As used in this Section 9.14, the term "RCRA" shall mean the Resource ------------ ---- Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Recovery Act of 1976, as amended by the Solid Waste Disposal Act of 1980, and the Hazardous and Solid Waste Amendments of 1984, as the same may be further amended and in effect from time to time. SECTION 9.15. Burdensome Obligations. No Credit Party, nor any of the ---------------------- properties of any Credit Party is subject to any Law or any pending or threatened change of Law or subject to any restriction under its articles (or certificate) of incorporation, bylaws, regulations, partnership agreement or comparable charter documents or under any agreement or instrument to which any Credit Party or by which any Credit Party or any of their properties may be subject or bound, which is so unusual or burdensome as to be likely in the foreseeable future to result in a Material Adverse Change. Without limiting the foregoing, no Credit Party is a party to or bound by any agreement or subject to any order of any Governmental Authority which prohibits or restricts in any way the right of such Credit Party to make Distributions. SECTION 9.16. Fiscal Year. Borrower's Fiscal Year is January 1 through ----------- December 31. SECTION 9.17. No Default. Neither a Default nor an Event of Default has ---------- occurred or will exist after giving effect to the transactions contemplated by this Agreement or the other Loan Papers. SECTION 9.18. Government Regulation. No Credit Party is subject to --------------------- regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act (as any of the preceding acts have been amended), the Investment Company Act of 1940 or any other Law which regulates the incurring by such Credit Party of Debt, including, but not limited to Laws relating to common contract carriers or the sale of electricity, gas, stream, water or other public utility services. SECTION 9.19. Insider. No Credit Party is, and no Person having "control" ------- (as that term is defined in 12 U.S.C. Section 375(b) or regulations promulgated thereunder) of any Credit Party is an "executive officer," "director" or "shareholder" of any Bank or any bank holding company of which any Bank is a Subsidiary or of any Subsidiary of such bank holding company. SECTION 9.20. Gas Balancing Agreements and Advance Payment Contracts. On ------------------------------------------------------ the date of this Agreement and on the Closing Date, (a) there is no Material Gas Imbalance, and (b) the aggregate amount of all Advance Payments received by any Credit Party under Advance Payment Contracts which have not been satisfied by delivery of production does not exceed $250,000. SECTION 9.21. Closing Documents; Management Agreement. Borrower has --------------------------------------- provided (or on the Closing Date Borrower will provide) Administrative Agent with a true and correct copy of each of the Closing Documents and the Management Agreement including all amendments and 51 modifications thereto. No material rights or obligations of any party to any of such Closing Documents or the Management Agreement have been (or will be on the Closing Date) waived, and no Credit Party, nor to the best knowledge of Borrower, any other party to any of such Closing Documents or the Management Agreement, is (or will be on the Closing Date) in default of its obligations thereunder. Each of the Closing Documents and the Management Agreement is (or will be on the Closing Date) a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is (or will be on the Closing Date) in full force and effect. Each representation and warranty made by each Credit Party, and to the best knowledge of Borrower, by each other party to the Closing Documents and the Management Agreement, in the Closing Documents and the Management Agreement (a) was true and correct when made, and (b) will be true and correct on the Closing Date. SECTION 9.22. Year 2000 Matters. Any reprogramming required to permit the ----------------- proper functioning (but only to the extent that such proper functioning would otherwise be impaired by the occurrence of the year 2000) in and following the year 2000 of computer systems and other equipment containing imbedded microchips, in either case owned or operated by any Credit Party or used or relied upon in the conduct of their business (including, to Borrower's knowledge, any such systems and other equipment supplied by others or with which the computer systems of any Credit Party interface) and the testing of all such systems and other equipment as so reprogrammed, has been completed. The costs to Borrower and any other Credit Party that have not been incurred as of the date hereof for such reprogramming and testing and for other reasonably foreseeable consequences to them of any improper functioning of other computer systems and equipment containing imbedded microchips due to the occurrence of the year 2000 could not reasonably be expected to result in a Default, Event of Default or a Material Adverse Change. Except for any reprogramming referred to above, the computer systems of each Credit Party are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient for the conduct of their business as currently conducted. ARTICLE X AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: SECTION 10.1. Information. Borrower will deliver, or cause to be ----------- delivered, to each Bank: (a) as soon as available and in any event within ninety (90) days after the end of each Fiscal Year, a consolidated and consolidating balance sheet of Borrower and each other Credit Party as of the end of such Fiscal Year and the related consolidated and consolidating statements of income and statements of cash flow for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported by such Credit Party in accordance with GAAP and audited by a firm of independent public accountants of nationally recognized standing and acceptable to Administrative Agent; 52 (b) (i) as soon as available and in any event within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year, consolidated and consolidating balance sheets of Borrower and each other Credit Party as of the end of such Fiscal Quarter and the related consolidated and consolidating statements of income and statements of cash flow for such quarter and for the portion of such Credit Party's Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of such Credit Party's previous Fiscal Year; (c) simultaneously with the delivery of each set of financial statements referred to in Sections 10.1(a) and (b), a certificate of a Financial ---------------- --- Officer of Borrower in the form of Exhibit H attached hereto, (i) setting forth --------- in reasonable detail the calculations required to establish whether Borrower was in compliance with the requirements of Article XII on the date of such financial ----------- statements, (ii) stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which Borrower is taking or proposes to take with respect thereto, (iii) stating whether or not such financial statements fairly reflect in all material respects the results of operations and financial condition of Borrower and each other Credit Party as of the date of the delivery of such financial statements and for the period covered thereby, (iv) setting forth (A) whether as of such date there is a Material Gas Imbalance and, if so, setting forth the amount of net gas imbalances under Gas Balancing Agreements to which any Credit Party is a party or by which any Mineral Interests owned by Borrower is bound, and (B) the aggregate amount of all Advance Payments received under Advance Payment Contracts to which any Credit Party is a party or by which any Mineral Interests owned by Borrower is bound which have not been satisfied by delivery of production, if any, and (v) a summary of the Hedge Transactions to which each Credit Party is a party on such date; (d) promptly upon the mailing thereof to the stockholders of any Credit Party generally, copies of all financial statements, reports and proxy statements so mailed; (e) promptly upon the filing thereof, copies of all final registration statements post effective amendments thereto and annual, quarterly or special reports which any Credit Party shall have filed with the Securities and Exchange Commission; provided, that Borrower must deliver, or cause to be -------- ---- delivered, any annual reports which any Credit Party shall have filed with the Securities and Exchange Commission, within ninety (90) days after the end of each Fiscal Year of such Credit Party, and any quarterly reports which any Credit Party shall have filed with the Securities and Exchange Commission, within forty-five (45) days after the end of each of the first three (3) Fiscal Quarters of each Fiscal Year of such Credit Party; (f) promptly upon receipt of same, any notice or other information received by any Credit Party indicating (i) any potential, actual or alleged non-compliance with or violation of the requirements of any Applicable Environmental Law which could result in liability to any Credit Party for fines, clean up or any other remediation obligations or any other liability in excess of $100,000 in the aggregate; (ii) any threatened Hazardous Discharge which Hazardous Discharge would impose on any Credit Party a duty to report to a Governmental Authority or to pay cleanup costs or to take remedial action under any Applicable Environmental Law which could result in liability to any Credit Party for fines, clean up and other remediation obligations or any other liability in excess of $100,000 in the aggregate; or (iii) the existence of any Lien arising under any Applicable Environmental Law 53 securing any obligation to pay fines, clean up or other remediation costs or any other liability in excess of $100,000 in the aggregate. Without limiting the foregoing, each Credit Party shall provide to Banks promptly upon receipt of same by any Credit Party copies of all environmental consultants or engineers reports received by any Credit Party which would render the representations and warranties (or any of them) contained in Section 9.14 untrue or inaccurate in ------------ any respect; (g) in the event any notification is provided to any Bank or Administrative Agent pursuant to Section 10.1(f) hereof or Administrative Agent --------------- or any Bank otherwise learns of any event or condition under which any such notice would be required, then, upon request of Required Banks, Borrower shall within thirty (30) days of such request, cause to be furnished to Administrative Agent and each Bank a report by an environmental consulting firm acceptable to Administrative Agent and Required Banks, stating that a review of such event, condition or circumstance has been undertaken (the scope of which shall be acceptable to Administrative Agent and Required Banks) and detailing the findings, conclusions and recommendations of such consultant; Borrower shall bear all expenses and costs associated with such review and updates thereof; (h) immediately upon any Authorized Officer becoming aware of the occurrence of any Default, a certificate of an Authorized Officer setting forth the details thereof and the action which Borrower is taking or proposes to take with respect thereto; (i) no later than March 31 and September 30 of each year, reports of production volumes, revenue, expenses and product prices for all Mineral Interests owned by Borrower for the periods of six (6) months ending the preceding December 31 and June 30, respectively. Such reports shall be prepared on an accrual basis and shall be reported on a field by field basis; (j) promptly notify Banks of any Material Adverse Change; and (k) from time to time such additional information regarding the financial position or business of any Credit Party as Administrative Agent, at the request of any Bank, may reasonably request. SECTION 10.2. Business of Borrower. The sole business of Borrower shall -------------------- be the acquisition, exploration, development and operation of Mineral Interests and the production, marketing, processing and transportation of Hydrocarbons therefrom. SECTION 10.3. Maintenance of Existence. Borrower shall, and shall cause ------------------------ each other Credit Party to, at all times (a) maintain its corporate, partnership or limited liability company existence in its state of incorporation or organization, and (b) maintain its good standing and qualification to transact business in all jurisdictions where the failure to maintain good standing or qualification to transact business could result in a Material Adverse Change. SECTION 10.4. Title Data. Borrower shall, upon the request of Required ---------- Banks, cause to be delivered to Administrative Agent such title opinions and other information regarding title to Mineral Interests owned by Borrower and the perfection and priority of Administrative Agent's Liens therein as are appropriate to determine the status thereof. 54 SECTION 10.5. Right of Inspection. Borrower will permit, and will cause ------------------- each other Credit Party to permit, any officer, employee or agent of Administrative Agent or of any Bank to visit and inspect any of the assets of any Credit Party, examine each Credit Party's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of each Credit Party with such Credit Party's officers, accountants and auditors, all at such reasonable times and as often as Administrative Agent or any Bank may desire, and upon and during the continuance of an Event of Default all at the expense of Borrower. SECTION 10.6. Maintenance of Insurance. Borrower will, and will cause ------------------------ each other Credit Party to, at all times maintain or cause to be maintained insurance covering such risks as are customarily carried by businesses similarly situated, including, without limitation, the following: (a) workmen's compensation insurance; (b) employer's liability insurance; (c) comprehensive general public liability and property damage insurance; (d) insurance against losses customarily insured against as a result of damage by fire, lightning, hail, tornado, explosion and other similar risk; and (e) comprehensive automobile liability insurance. All loss payable clauses or provisions in all policies of insurance maintained by Borrower pursuant to this Section 10.6 shall ------------ be endorsed in favor of and made payable to Administrative Agent for the ratable benefit of Banks, as their interests may appear. Administrative Agent shall have the right, for the ratable benefit of Banks, to collect, and Borrower hereby assigns to Administrative Agent for the ratable benefit of Banks, any and all monies that may become payable under any such policies of insurance by reason of damage, loss or destruction of any property which stands as security for the Obligations or any part thereof, and Administrative Agent may, at its election, either apply for the ratable benefit of Banks all or any part of the sums so collected toward payment of the Obligations, whether or not such Obligations are then due and payable, in such manner as Administrative Agent may elect, or release same to the applicable Credit Party. SECTION 10.7. Payment of Taxes and Claims. Borrower will, and will cause --------------------------- each other Credit Party to, pay (a) all Taxes imposed upon it or any of its assets or with respect to any of its franchises, business, income or profits before any material penalty or interest accrues thereon and (b) all material claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or might become a Lien (other than a Permitted Encumbrance) on any of its assets; provided, however, no payment of Taxes or claims shall be required if (i) the - -------- ------- amount, applicability or validity thereof is currently being contested in good faith by appropriate action promptly initiated and diligently conducted in accordance with good business practices and no material part of the property or assets of any Credit Party is subject to any pending levy or execution, (ii) the Credit Parties, as and to the extent required in accordance with GAAP, shall have set aside on their books reserves (segregated to the extent required by GAAP) deemed by them to be adequate with respect thereto, and (iii) the Credit Parties have notified Administrative Agent of such circumstances, in detail satisfactory to Administrative Agent. SECTION 10.8. Compliance with Laws and Documents. Borrower will, and will ---------------------------------- cause each other Credit Party to, comply with all Laws, their respective certificates (or articles) of incorporation, bylaws, regulations and similar organizational documents and all Material Agreements to which any Credit Party is a party, if a violation, alone or when combined with all other such violations, could result in a Material Adverse Change. 55 SECTION 10.9. Operation of Properties and Equipment. (a) Borrower will, ------------------------------------- and will cause each of its Subsidiaries to, maintain, develop and operate (or use its best efforts to cause the operator to maintain and operate to the extent Borrower is not the operator) its Mineral Interests in a good and workmanlike manner, and observe and comply with all of the terms and provisions, express or implied, of all oil and gas leases relating to such Mineral Interests so long as such Mineral Interests are capable of producing Hydrocarbons and accompanying elements in paying quantities. (b) Borrower will, and will cause each of its Subsidiaries to, comply in all respects with all contracts and agreements applicable to or relating to its Mineral Interest or the production and sale of Hydrocarbons and accompanying elements therefrom. (c) Borrower will, and will cause each of its Subsidiaries to, at all times maintain, preserve and keep all operating equipment used with respect to its Mineral Interests in proper repair, working order and condition, and make all necessary or appropriate repairs, renewals, replacements, additions and improvements thereto so that the efficiency of such operating equipment shall at all times be properly preserved and maintained; provided further that no item of -------- ------- ---- operating equipment need be so repaired, renewed, replaced, added to or improved, if Borrower shall in good faith determine that such action is not necessary or desirable for the continued efficient and profitable operation of the business of such Credit Party. SECTION 10.10. Environmental Law Compliance. Borrower will, and will cause ---------------------------- each other Credit Party to, comply with all Applicable Environmental Laws, including, without limitation, (a) all licensing, permitting, notification and similar requirements of Applicable Environmental Laws, and (b) all provisions of all Applicable Environmental Laws regarding storage, discharge, release, transportation, treatment and disposal of Hazardous Substances. Borrower will, and will cause each other Credit Party to, promptly pay and discharge when due all legal debts, claims, liabilities and obligations with respect to any clean- up or remediation measures necessary to comply with Applicable Environmental Laws. SECTION 10.11. ERISA Reporting Requirements. Borrower shall furnish, or ---------------------------- cause to be furnished, to Administrative Agent: (a) promptly and in any event (i) within thirty (30) days after Borrower or any ERISA Affiliate receives notice from any regulatory agency of the commencement of an audit, investigation or similar proceeding with respect to a Plan, and (ii) within ten (10) days after Borrower or any ERISA Affiliate contacts the Internal Revenue Service for the purpose of participation in a closing agreement or any voluntary resolution program with respect to a Plan or knows or has reason to know that any event with respect to any Plan of Borrower or any ERISA Affiliate has occurred, a written notice describing such event and describing what action is being taken or is proposed to be taken with respect thereto, together with a copy of any notice of event that is given to the PBGC; (b) promptly and in any event within thirty (30) days after the receipt by Borrower of a request therefor by a Bank, copies of any annual and other report (including Schedule B thereto) with respect to a Plan filed by Borrower or any ERISA Affiliate with the United States Department of Labor, the Internal Revenue Service or the PBGC; 56 (c) notification within thirty (30) days of the effective date thereof of any material increases in the benefits, or material change in the funding method, of any existing Plan which is not a multiemployer plan (as defined in section 4001(a)(3) of ERISA), or the establishment of any material new Plans, or the commencement of contributions to any Plan to which Borrower or any ERISA Affiliate was not previously contributing; and (d) promptly after receipt of written notice of commencement thereof, notice of all (i) claims made by participants or beneficiaries with respect to any Plan and (ii) actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting Borrower or any ERISA Affiliate with respect to any Plan, except those which, in the aggregate, if adversely determined could not result in a Material Adverse Change. SECTION 10.12. Additional Documents. Borrower will, and will cause each -------------------- other Credit Party (to the extent each is party thereto) to, cure promptly any defects in the creation and issuance of each Note, and the execution and delivery of this Agreement and the other Loan Papers and, at Borrower's expense, Borrower shall promptly and duly execute and deliver to each Bank, and cause each other Credit Party to promptly and duly execute and deliver to each Bank, upon reasonable request, all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of the Credit Parties in this Agreement and the other Loan Papers as may be reasonably necessary or appropriate in connection therewith. SECTION 10.13. Environmental Review. Not later than thirty (30) days prior -------------------- to the date of any acquisition by any Credit Party of Mineral Interests or related assets, other than an acquisition of additional interests in Mineral Interests in which a Credit Party previously held an interest, Borrower shall deliver to Administrative Agent a report in form, scope and detail acceptable to Administrative Agent from environmental engineering firms acceptable to Administrative Agent, which report or reports shall set forth the results of a Phase I environmental review of such Mineral Interests and related assets. SECTION 10.14. Required Purchase Contracts. Borrower will at all times --------------------------- during the period commencing on and including the Closing Date and continuing through and including the Termination Date, maintain contracts for the sale of at least seventy-five percent (75%) of its gas production to Consumers Power (or other parties of equal or greater creditworthiness approved by Administrative Agent and Required Banks) which provide for fixed prices on all gas production sold that, when averaged in each calendar year, equal or exceed $2.40 per thousand cubic feet. Such average shall be calculated for each calendar year by dividing (i) all revenues under such fixed price contracts for such gas production, by (ii) the total amount of such gas production, measured in thousand cubic feet. For the purpose of determining compliance with the foregoing, if Borrower enters into floating rate contracts for the sale of its gas production to Consumers Power (or other parties of equal or greater creditworthiness approved by Administrative Agent and Required Banks) and at the same time puts into place Oil and Gas Hedge Transactions in equivalent volumes with counterparties approved by Administrative Agent and Required Banks which, when netted against such floating rate contracts, provide Borrower with a net price equal to or in excess of $2.40 per thousand cubic feet, such net price shall be deemed to be the fixed price to be used in making the foregoing calculation. 57 SECTION 10.15. Year 2000 Compatibility. Borrower will, and will cause each ----------------------- other Credit Party to, take all actions reasonably necessary to assure that Borrower's and each such other Credit Party's computer based systems are able to operate and effectively process data which includes dates on and after January 1, 2000. At the request of Administrative Agent or any Bank, Borrower and each other Credit Party shall provide reasonable assurances satisfactory to Administrative Agent and any such Bank of Borrower's and each such other Credit Party's year 2000 compatibility. ARTICLE XI NEGATIVE COVENANTS Borrower agrees that, so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding: 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 the Obligations; provided, that, at any time when the Outstanding -------- ---- Credit is less than the Conforming Borrowing Base and no Default or Event of Default 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 $1,000,000. 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, any Restricted Payment. SECTION 11.3. Negative Pledge. Borrower will not, nor will Borrower --------------- permit any other Credit Party to, create, assume or suffer to exist any Lien on any of their respective assets other than Permitted Encumbrances. Borrower will not, nor will Borrower permit any other Credit Party to, enter into or become bound by any agreement (other than this Agreement) that prohibits or otherwise restricts the right of Borrower or any other Credit Party to create, assume or suffer to exist any Lien on any of their respective assets in favor of Administrative Agent for the ratable benefit of Banks. SECTION 11.4. Consolidations and Mergers. Borrower will not, nor will -------------------------- Borrower permit any other Credit Party to, consolidate or merge with or into any other Person. SECTION 11.5. Asset Dispositions. Borrower will not, nor will Borrower ------------------ permit any other Credit Party to, sell, lease, transfer, abandon or otherwise dispose of any asset other than the sale in the ordinary course of business of Hydrocarbons produced from Borrower's and any other Credit Party's Mineral Interests (and not pursuant to Advance Payment Contracts); provided, that, so -------- ---- long as no Default or Event of Default has occurred which is continuing, Borrower shall be permitted to sell or dispose of (a) machinery and equipment which is obsolete or otherwise not necessary or useful in the operation of Borrower's business, and (b) Mineral Interests during any period between Scheduled Redeterminations with an aggregate Recognized Value (measured at the 58 time of such sale or disposition) not in excess of three percent (3%) of the Conforming Borrowing Base in effect during such period. Borrower will not sell, transfer or dispose of, or permit any other Credit Party to sell, transfer or dispose of, any capital stock or other equity interest in any Subsidiary of Borrower. 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 obligation 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 Section 29 Documents, (d) the Management Agreement, or (e) the Consumers Power Contract. SECTION 11.7. Use of Proceeds. 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, and (c) to refinance the obligations outstanding under the Existing Credit Agreements. None of such proceeds (including, without limitation, proceeds of Letters of Credit issued hereunder) will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, and none of such proceeds will be used in violation of applicable Law (including, without limitation, the Margin Regulations). Letters of Credit will be issued hereunder only for the purpose of securing bids, tenders, bonds, contracts and other obligations entered into in the ordinary course of Borrower's business. Without limiting the foregoing, no Letters of Credit will be issued hereunder for the purpose of providing credit enhancement with respect to any Debt or equity security of any Credit Party or to secure any Credit Party's obligations with respect to Hedge Transactions other than Hedge Transactions with a Bank. SECTION 11.8. Investments. Borrower will not, nor will Borrower permit ----------- any other Credit Party to, directly or indirectly, make or have outstanding any Investment other than Permitted Investments. SECTION 11.9. Transactions with Affiliates. Borrower will not, nor will ---------------------------- Borrower permit any other Credit Party to, engage in any transaction with an Affiliate unless such transaction is as favorable to such party as could be obtained in an arm's length transaction with an unaffiliated Person in accordance with prevailing industry customs and practices. SECTION 11.10. ERISA. Except in such instances where an omission or ----- failure would not result in a Material Adverse Change, Borrower will not, nor will Borrower permit any other Credit Party to (a) take any action or fail to take any action which would result in a violation of ERISA, the Code or other Laws applicable to the Plans maintained or contributed to by it or any ERISA Affiliate, or (b) modify the term of, or the funding obligations or contribution requirements under any existing Plan, establish a new Plan, or become obligated or incur any liability under a Plan that is not maintained or contributed to by Borrower or any ERISA Affiliate as of the Closing Date. SECTION 11.11. Hedge Transactions. With the exception of Oil and Gas Hedge ------------------ Transactions entered into pursuant to Section 9.14, Borrower will not, nor will ------------ Borrower permit any 59 other Credit Party to, enter into Oil and Gas Hedge Transactions which would cause the volume of Hydrocarbons with respect to which a settlement payment is calculated under such Oil and Gas Hedge Transactions to exceed seventy-five percent (75%) of Borrower's anticipated production from Proved Producing Mineral Interests during the period from the immediately preceding settlement date (or the commencement of such Hedge Transaction if there is no prior settlement date) to such settlement date. Borrower shall not enter into or consent to, or permit Mercury to enter into or consent to, any amendment, modification, cancellation or termination of the Consumers Power Contract and will at all times perform all of its obligations thereunder and take all other actions necessary to cause such contract to be maintained. SECTION 11.12. Fiscal Year. Borrower will not, and Borrower will not ----------- permit any other Credit Party to, change its Fiscal Year. SECTION 11.13. Change in Business. Borrower will not, nor will Borrower ------------------ permit any other Credit Party to, engage in any business other than the businesses engaged in by such parties on the date hereof as described in Section ------- 9.13 hereof. - ---- ARTICLE XII FINANCIAL COVENANTS Borrower agrees that so long as any Bank has any commitment to lend or participate in Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding, Borrower will not permit its ratio of Consolidated Current Assets to its Consolidated Current Liabilities to be less than 1.0 to 1.0 at any time. ARTICLE XIII DEFAULTS SECTION 13.1. Events of Default. If one or more of the following events ----------------- (collectively "Events of Default" and individually an "Event of Default") shall ----------------- ---------------- have occurred and be continuing: (a) Borrower shall fail to pay when due any principal on any Note; (b) Borrower shall fail to pay when due accrued interest on any Note or any fees or any other amount payable hereunder and such failure shall continue for a period of three (3) days following the due date; (c) Borrower shall fail to observe or perform any covenant or agreement contained in Article XI or Article XII of this Agreement; ---------- ----------- (d) any Credit Party shall fail to observe or perform any covenant or agreement contained in this Agreement or any other Loan Paper (other than those referenced in Sections 13.1(a), ----------------- 60 (b) and (c)) and such failure continues for a period of twenty (20) days after - --- --- the earlier of (i) the date any Authorized Officer of any Credit Party acquires knowledge of such failure, or (ii) written notice of such failure has been given to any Credit Party by Administrative Agent or any Bank; (e) any representation, warranty, certification or statement made or deemed to have been made by any Credit Party in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made; (f) any Credit Party shall fail to make any payment when due on any Debt of such Person in a principal amount equal to or greater than $250,000 or any other event or condition shall occur which (i) results in the acceleration of the maturity of any such Debt, or (ii) entitles the holder of such Debt to accelerate the maturity thereof; (g) any Credit Party shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate, partnership or limited liability company action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against any Credit Party seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar Law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of sixty (60) days; or an order for relief shall be entered against any Credit Party under the federal bankruptcy Laws as now or hereafter in effect; (i) one (1) or more final judgments or orders for the payment of money aggregating in excess of $250,000 shall be rendered against any Credit Party and such judgment or order shall continue unsatisfied or unstayed for thirty (30) days; (j) any event occurs with respect to any Plan or Plans pursuant to which any Credit Party and/or any ERISA Affiliate incur a liability due and owing at the time of such event, without existing funding therefor, for benefit payments under such Plan or Plans in excess of $250,000; or (ii) any Credit Party, any ERISA Affiliate, or any other "party-in-interest" or "disqualified person," as such terms are defined in section 3(14) of ERISA and section 4975(e)(2) of the Code, shall engage in transactions which in the aggregate would reasonably result in a direct or indirect liability to any Credit Party or any ERISA Affiliate in excess of $250,000 under section 409 or 502 of ERISA or section 4975 of the Code; (k) this Agreement or any other Loan Paper shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by any Credit Party, or any Credit Party shall deny that it has any further liability or 61 obligation under any of the Loan Papers to which it is a party, or any Lien created by the Loan Papers shall for any reason (other than the release thereof in accordance with the Loan Papers) cease to be a valid, first priority, perfected Lien upon any of the Proved Mineral Interests purported to be covered thereby; (l) a Material Adverse Change shall occur with respect to any Credit Party; or (m) a Change of Control shall occur; then, and in every such event, Administrative Agent shall without presentment, notice or demand (unless expressly provided for herein) of any kind (including, without limitation, notice of intention to accelerate and acceleration), all of which are hereby waived, (i) if requested by Required Banks, terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Required Banks, take such other actions as may be permitted by the Loan Papers including, declaring the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable; provided -------- that, in the case of any of the Events of Default specified in Sections 13.1(g) - ---- ---------------- or (h), without any notice to any Credit Party or any other act by --- Administrative Agent or Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable. ARTICLE XIV AGENTS SECTION 14.1. Appointment, Powers, and Immunities. Each Bank hereby ----------------------------------- irrevocably appoints and authorizes each Agent to act as its agent under this Agreement and the other Loan Papers with such powers and discretion as are specifically delegated to each such Agent by the terms of this Agreement and the other Loan Papers, together with such other powers as are reasonably incidental thereto. No Agent (which term as used in this sentence and in Section 14.5 and ------------ the first sentence of Section 14.6 hereof shall include their Affiliates and ------------ their own and their Affiliates' officers, directors, employees, and agents): (a) shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Loan Papers and no Agent shall be a trustee or fiduciary for any Bank; (b) shall be responsible to Banks for any recital, statement, representation, or warranty (whether written or oral) made in or in connection with any Loan Paper or any certificate or other document referred to or provided for in, or received by any of them under, any Loan Paper, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of any Loan Paper, or any other document referred to or provided for therein or for any failure by any Credit Party or any other Person to perform any of its obligations thereunder; (c) shall be responsible for or have any duty to ascertain, inquire into, or verify the performance or observance of any covenants or agreements by any Credit Party or the satisfaction of any condition or to inspect the property (including the books and records) of any Credit Party or any of their Subsidiaries or Affiliates; (d) shall be required to initiate or conduct any litigation or collection proceedings under any Loan Paper; and (e) shall be responsible for any action taken or omitted to be taken by it under or in connection with any Loan Paper, except for its own gross negligence or willful misconduct. Each Agent may 62 employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by any such Agent with reasonable care. SECTION 14.2. Reliance by Agents. Each Agent shall be entitled to rely ------------------ upon any certification, notice, instrument, writing, or other communication (including, without limitation, any thereof by telephone or telecopy) believed by it to be genuine and correct and to have been signed, sent or made by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (including counsel for any Credit Party), independent accountants, and other experts selected by any such Agent. Each Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until Administrative Agent receives and accepts an Assignment and Acceptance Agreement executed in accordance with Section 15.10 hereof. As to any matters not ------------- expressly provided for by this Agreement, no Agent shall be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of Required Banks, and such instructions shall be binding on Banks; provided, however, that no Agent shall be required to take any -------- ------- ---- action that exposes such Agent to personal liability or that is contrary to any Loan Paper or applicable Law unless it shall first be indemnified to its satisfaction by Banks against any and all liability and expense which may be incurred by it by reason of taking any such action. SECTION 14.3. Defaults. No Agent shall be deemed to have knowledge or -------- notice of the occurrence of a Default or Event of Default unless such Agent has received written notice from a Bank or Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that Administrative Agent receives such a notice of the occurrence of a Default or Event of Default, Administrative Agent shall give prompt notice thereof to Banks. Administrative Agent shall (subject to Section 14.2 hereof) take such ------------ action with respect to such Default or Event of Default as shall reasonably be directed by Required Banks; provided that, unless and until Administrative Agent -------- ---- shall have received such directions, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of Banks. SECTION 14.4. Rights as Bank. With respect to its Commitment and the -------------- Loans made by it, NationsBank (and any successor acting as Administrative Agent) in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as Administrative Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include Administrative Agent in its individual capacity. NationsBank (and any successor acting as Administrative Agent), each other Agent and their Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, make investments in, provide services to, and generally engage in any kind of lending, trust, or other business with Borrower or any of its Subsidiaries or Affiliates as if it were not acting as Agent, and NationsBank (and any successor acting as Administrative Agent), each other Agent and their Affiliates may accept fees and other consideration from Borrower or any of its Subsidiaries or Affiliates for services in connection with this Agreement or otherwise without having to account for the same to Banks. SECTION 14.5. Indemnification. Banks agree to indemnify each Agent (to --------------- the extent not reimbursed by Borrower or any Subsidiary of Borrower hereof, but without limiting the 63 obligations of any Credit Party to so reimburse) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including attorneys' fees), or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against any such Agent (including by any Bank) in any way relating to or arising out of any Loan Paper or the transactions contemplated thereby or any action taken or omitted by any Agent under any Loan Paper (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF ANY AGENT); provided that no Bank shall be liable for any of the foregoing to -------- ---- the extent they arise from the gross negligence or willful misconduct of the Person to be indemnified. Without limitation of the foregoing, each Bank agrees to reimburse each Agent promptly upon demand for its ratable share of any costs or expenses payable by Borrower hereunder, to the extent that any such Agent is not promptly reimbursed for such costs and expenses by Borrower. The agreements contained in this Section 14.5 shall survive payment and performance in full of ------------ the Obligations and all other amounts payable under this Agreement. SECTION 14.6. Non-Reliance on Agents and Other Banks. Each Bank agrees -------------------------------------- that it has, independently and without reliance on any Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of each Credit Party and decision to enter into this Agreement and that it will, independently and without reliance upon any Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Loan Papers. Except for notices, reports, and other documents and information expressly required to be furnished to Banks by Administrative Agent hereunder, no Agent shall have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition, or business of any Credit Party or their Affiliates that may come into the possession of any such Agent or any of their Affiliates. SECTION 14.7. Resignation of Agents. Any Agent may resign at any time by --------------------- giving notice thereof to Banks and Borrower. Upon any such resignation, Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by Required Banks and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of Banks, appoint a successor Agent which shall be a commercial bank organized under the Laws of the United States of America having combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor, such successor shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges, and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article XIV shall continue in effect for its ----------- benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. 64 ARTICLE XV MISCELLANEOUS SECTION 15.1. Notices. All notices, requests and other communications to ------- any party hereunder shall be in writing (including bank wire, telecopy or similar writing) and shall be given, if to Administrative Agent or any Bank, at its address or telecopier number set forth on Schedule 1 hereto, and if given to ---------- Borrower, at its address or telecopy number set forth on the signature pages hereof (or in either case, at such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto). Each such notice, request or other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 15.1 and the appropriate answerback is received ------------ or receipt is otherwise confirmed, (b) if given by mail, three (3) Domestic Business Days after deposit in the mails with first class postage prepaid, addressed as aforesaid or (c) if given by any other means, when delivered at the address specified in this Section 15.1; provided that notices to Administrative ------------ -------- ---- Agent under Article III or IV shall not be effective until received. ----------- -- SECTION 15.2. No Waivers. No failure or delay by Administrative Agent or ---------- any Bank in exercising any right, power or privilege hereunder or under any Note or other Loan Paper shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law or in any of the other Loan Papers. SECTION 15.3. Expenses; Indemnification. (a) Borrower agrees to pay on ------------------------- demand all reasonable costs and expenses of each Agent in connection with the syndication, preparation, execution, delivery, modification, and amendment of this Agreement, the other Loan Papers, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for Administrative Agent (including the cost of internal counsel) with respect thereto and with respect to advising Administrative Agent as to its rights and responsibilities under the Loan Papers. Borrower further agrees to pay on demand all reasonable costs and expenses of Administrative Agent and Banks, if any (including, without limitation, reasonable attorneys' fees and expenses and the cost of internal counsel), in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Loan Papers and the other documents to be delivered hereunder. (b) Borrower agrees to indemnify and hold harmless each Agent and each Bank and each of their Affiliates and their respective officers, directors, employees, agents, and advisors (each, an "Indemnified Party") from and against ----------------- any and all claims, damages, losses, liabilities, costs, and expenses (including, without limitation, reasonable attorneys' fees) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation, or proceeding or preparation of defense in connection therewith) the Loan Papers, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loan (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF THE INDEMNIFIED PARTY), except to the extent such claim, damage, loss, liability, cost, or expense 65 is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 15.3 applies, such indemnity ------------ shall be effective whether or not such investigation, litigation or proceeding is brought by Borrower, its directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. Borrower agrees not to assert any claim against any Agent, any Bank, any of their Affiliates, or any of their respective directors, officers, employees, attorneys, agents, and advisers, on any theory of liability, for special, indirect, consequential, or punitive damages arising out of or otherwise relating to the Loan Papers, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Loan. (c) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section ------- 15.3 shall survive the payment in full of the Loans and all other amounts - ---- payable under this Agreement. SECTION 15.4. Right of Set-off; Adjustments. (a) Upon the occurrence and ----------------------------- during the continuance of any Event of Default, each Bank (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank (or any of its Affiliates) to or for the credit or the account of Borrower against any and all of the Obligations, irrespective of whether such Bank shall have made any demand under this Agreement or Note held by such and although such obligations may be unmatured. Each Bank agrees promptly to notify Borrower after any such set-off and application made by such Bank; provided, however, that the failure to give -------- ------- ---- such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 15.4 are in addition to other rights and ------------ remedies (including, without limitation, other rights of set-off) that such Bank may have. (b) If any Bank (a "benefitted Bank") shall at any time receive any payment --------------- of all or part of the Loans owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, or otherwise), in a greater proportion than any such payment to or collateral received by any other Bank, if any, in respect of such other Bank's Loans owing to it, or interest thereon, such benefitted Bank shall purchase for cash from the other Banks a participating interest in such portion of each such other Bank's Loans owing to it, or shall provide such other Banks with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Bank to share the excess payment or benefits of such collateral or proceeds ratably with each other Bank; provided, however, that if all or any -------- ------- ---- portion of such excess payment or benefits is thereafter recovered from such benefitted Bank, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Borrower agrees that any Bank so purchasing a participation from a Bank pursuant to this Section 15.4 may, to the fullest extent permitted by Law, exercise all ------------ of its rights of payment (including the right of set-off) with respect to such participation as fully as if such Person were the direct creditor of Borrower in the amount of such participation. 66 SECTION 15.5. Amendments and Waivers. Any provision of this Agreement or ---------------------- any other Loan Paper may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by Borrower and Required Banks (and, if Article XIV or the rights or duties of any Agent are affected thereby, by such - ----------- Agent); provided that no such amendment or waiver shall, unless signed by each -------- ---- Bank directly affected thereby, (i) increase the Commitments of Banks, (ii) reduce the principal of or rate of interest on any Loan or any fees or other amounts payable hereunder, (iii) postpone any date fixed for the payment of any scheduled installment of principal of or interest on any Loan or any fees or other amounts payable hereunder or for termination of any Commitment, (iv) change the percentage of the Commitments or of the unpaid principal amount of the Notes, or the number of Banks, which shall be required for Banks or any of them to take any action under this Section 15.5 or any other provision of this ------------ Agreement, or (v) release any guarantor of the Obligations or all or substantially all of the collateral securing the Obligations. SECTION 15.6. Survival. All representations, warranties and covenants -------- made by any Credit Party herein or in any certificate or other instrument delivered by it or in its behalf under the Loan Papers shall be considered to have been relied upon by Banks and shall survive the delivery to Banks of such Loan Papers or the extension of the Loan (or any part thereof), regardless of any investigation made by or on behalf of Banks. The indemnity provided in Section 15.3(b) herein shall survive the repayment of all credit advances - --------------- hereunder and/or the discharge or release of any Lien granted hereunder or in any other Loan Paper, contract or agreement between Borrower or any other Credit Party and any Agent or any Bank. SECTION 15.7. Limitation on Interest. Regardless of any provision ---------------------- contained in the Loan Papers, Banks shall never be entitled to receive, collect, or apply, as interest on the Loan, any amount in excess of the Maximum Lawful Rate, and in the event any Bank ever receives, collects or applies as interest any such excess, such amount which would be deemed excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such; and if the Loan is paid in full, any remaining excess shall promptly be paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Lawful Rate, Borrower and Banks shall, to the extent permitted under applicable Law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof and (c) amortize, prorate, allocate and spread, in equal parts, the total amount of the interest throughout the entire contemplated term of the Notes, so that the interest rate is the Maximum Lawful Rate throughout the entire term of the Notes; provided, however, -------- ------- that if the unpaid principal balance thereof is paid and performed in full prior - ---- to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Lawful Rate, Banks shall refund to Borrower the amount of such excess and, in such event, Banks shall not be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Lawful Rate. SECTION 15.8. Invalid Provisions. If any provision of the Loan Papers is ------------------ held to be illegal, invalid, or unenforceable under present or future Laws effective during the term thereof, such provision shall be fully severable, the Loan Papers shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, 67 or unenforceable provision there shall be added automatically as a part of the Loan Papers a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION 15.9. Waiver of Consumer Credit Laws. Pursuant to Chapter 346 of ------------------------------ the Texas Finance Code, as amended, Borrower agrees that such Chapter 346 shall not govern or in any manner apply to the Loan. SECTION 15.10. Assignments and Participations. (a) Each Bank may assign ------------------------------ to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its interest in the Loan, its Note, and its Commitment); provided, however, that, -------- ------- ----- (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to another Bank or an assignment of all of a Bank's rights and obligations under this Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 or an integral multiple of $100,000 in excess thereof; (iii) each such assignment by a Bank shall be of a constant, and not varying, percentage of all of its rights and obligations under this Agreement and its Note; and (iv) the parties to such assignment shall execute and deliver to Administrative Agent for its acceptance an Assignment and Acceptance Agreement (herein so called) in the form of Exhibit I hereto, together with any Notes --------- subject to such assignment and a processing fee to be paid by the assigning Bank of $3,500. Upon execution, delivery, and acceptance of such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, rights, and benefits of a Bank hereunder and the assigning Bank shall, to the extent of such assignment, relinquish its rights and be released from its obligations under this Agreement. Upon the consummation of any assignment pursuant to this Section 15.10(a), the assignor, ---------------- Administrative Agent and Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the assignee. If the assignee is not incorporated under the Laws of the United States of America or a state thereof, it shall deliver to Borrower and Administrative Agent certification as to exemption from deduction or withholding of Taxes in accordance with Section 5.6. ----------- (b) Administrative Agent shall maintain at its address set forth on Schedule 1 hereto, a copy of each Assignment and Acceptance Agreement delivered - ---------- to and accepted by it and a register for the recordation of the names and addresses of Banks and the Commitment of, and principal amount of the Loan owing to, each Bank and the Commitment Percentage of each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for -------- all purposes, absent manifest error, and Borrower, Administrative Agent and Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. 68 (c) Upon its receipt of an Assignment and Acceptance Agreement executed by the parties thereto, together with any Notes subject to such assignment and payment of the processing fee, Administrative Agent shall, if such Assignment and Acceptance Agreement has been completed and is in substantially the form of Exhibit I hereto, (i) accept such Assignment and Acceptance Agreement, (ii) - --------- record the information contained therein in the Register, and (iii) give prompt notice thereof to the parties thereto. (d) Each Bank may sell participations to one or more Persons in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and its interest in the Loan); provided, however, that -------- ------- ---- (i) such Bank's obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Article V and the right --------- of set-off contained in Section 15.4, and (iv) Borrower shall continue to deal ------------ solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and such Bank shall retain the sole right to enforce the obligations of Borrower relating to its interest in the Loan and its Note and to approve any amendment, modification, or waiver of any provision of this Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on the Loan or the Notes, extending any scheduled principal payment date or date fixed for the payment of interest on the Loan or the Notes, or extending its Commitment). (e) Notwithstanding any other provision set forth in this Agreement, any Bank may at any time assign and pledge all or any portion of its interest in the Loan and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Bank from its obligations hereunder. (f) Any Bank may furnish any information concerning Borrower or any of its Subsidiaries in the possession of such Bank from time to time to assignees and participants (including prospective assignees and participants). (g) Borrower shall not assign or transfer any rights or obligations under any Loan Paper or permit any Credit Party to assign or transfer any rights or obligations under any Loan Paper without first obtaining all Banks' consent, and any purported assignment or transfer without all Banks' consent is void. SECTION 15.11. TEXAS LAW. THIS AGREEMENT, EACH NOTE AND THE OTHER LOAN --------- PAPERS HAVE BEEN EXECUTED AND DELIVERED IN THE STATE OF TEXAS AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT THE LAWS OF ANY STATE IN WHICH ANY PROPERTY INTENDED AS SECURITY FOR THE OBLIGATIONS IS LOCATED NECESSARILY GOVERN (A) THE PERFECTION AND PRIORITY OF THE LIENS IN FAVOR OF ADMINISTRATIVE AGENT AND BANKS WITH RESPECT TO SUCH PROPERTY, AND (B) THE EXERCISE OF ANY REMEDIES (INCLUDING FORECLOSURE) WITH RESPECT TO SUCH PROPERTY. 69 SECTION 15.12. Consent to Jurisdiction; Waiver of Immunities. (a) ---------------------------------------------- Borrower hereby irrevocably submits to the jurisdiction of any Texas State or Federal court sitting in the Northern District of Texas over any action or proceeding arising out of or relating to this Agreement or any other Loan Papers, and Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Texas State or Federal court. As an alternative, Borrower irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to such Person at its address specified in Section 15.1. ------------ Borrower agrees that a final judgment on any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. (b) Nothing in this Section 15.12 shall affect any right of Banks to ------------- serve legal process in any other manner permitted by Law or affect the right of any Bank to bring any action or proceeding against any Credit Party or their properties in the courts of any other jurisdictions. (c) To the extent that Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, such Person hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other Loan Papers. SECTION 15.13. Counterparts; Effectiveness. This Agreement may be signed --------------------------- in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Subject to the terms and conditions herein set forth, this Agreement shall become effective when Administrative Agent shall have received counterparts hereof signed by all of the parties hereto or, in the case of any Bank as to which an executed counterpart shall not have been received, Administrative Agent shall have received telegraphic or other written confirmation from such Bank of execution of a counterpart hereof by such Bank. SECTION 15.14. No Third Party Beneficiaries. Except for the provisions ---------------------------- hereof inuring to the benefit of Agents not a party to this Agreement, it is expressly intended that there shall be no third party beneficiaries of the covenants, agreements, representations or warranties herein contained other than third party beneficiaries permitted pursuant to Section 15.10. ------------- SECTION 15.15. COMPLETE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN ------------------ PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BY AND AMONG BANKS, ADMINISTRATIVE AGENT, AND THE CREDIT PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF BANKS, ADMINISTRATIVE AGENT, AND THE CREDIT PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG BANKS, ADMINISTRATIVE AGENT, AND THE CREDIT PARTIES. SECTION 15.16. WAIVER OF JURY TRIAL. BORROWER, ADMINISTRATIVE AGENT, AND -------------------- BANKS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN PAPERS AND FOR ANY COUNTERCLAIM THEREIN. 70 SECTION 15.17. Confidentiality. Administrative Agent and each Bank (each, --------------- a "Lending Party") agrees to keep confidential any information furnished or made ------------- available to it by Borrower pursuant to this Agreement that is marked confidential; provided that nothing herein shall prevent any Lending Party from -------- ---- disclosing such information (a) to any other Lending Party or any Affiliate of any Lending Party, or any officer, director, employee, agent, or advisor of any Lending Party or Affiliate of any Lending Party, (b) to any other Person if reasonably incidental to the administration of the credit facility provided herein, (c) as required by any Law, rule, or regulation, (d) upon the order of any court or administrative agency, (e) upon the request or demand of any regulatory agency or authority, (f) that is or becomes available to the public or that is or becomes available to any Lending Party other than as a result of a disclosure by any Lending Party prohibited by this Agreement, (g) in connection with any litigation to which such Lending Party or any of its Affiliates may be a party, (h) to the extent necessary in connection with the exercise of any remedy under this Agreement or any other Loan Paper, and (i) subject to provisions substantially similar to those contained in this Section 15.17, to ------------- any actual or proposed participant or assignee. [Signature pages follow] 71 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective Authorized Officers on the day and year first above written. BORROWER: - -------- QUICKSILVER RESOURCES INC., a Delaware corporation /s/ GLENN DARDEN By: ____________________________________ Glenn Darden, Vice President Address for Notice: 1619 Pennsylvania Avenue Fort Worth, Texas 76104 Attn: Glenn Darden Fax No. (817) 877-3829 BANKS: - ----- NATIONSBANK, N.A. /s/ J. SCOTT FOWLER By: ____________________________________ J. Scott Fowler, Vice President BANK ONE, TEXAS, N.A. /s/ WM. MARK CRANMER By: ____________________________________ Wm. Mark Cranmer, Vice President 72 PARIBAS /s/ MICHAEL FIUZAT /s/ BRIAN M. MALONE By: ____________________________________ Michael Fiuzat Brian M. Malone Name: ____________________________________ Vice President Director Title: ____________________________________ FROST NATIONAL BANK /s/ W.H. ADAMS, III By: ____________________________________ W.H. Adams, III Name: ____________________________________ Senior Vice President Title: ____________________________________ ADMINISTRATIVE AGENT: - -------------------- NATIONSBANK, N.A. /s/ J. SCOTT FOWLER By: ______________________________________ J. Scott Fowler, Vice President 73 EXHIBIT A --------- PLEDGE AGREEMENT ---------------- THIS PLEDGE AGREEMENT (this "Agreement") is made as of __________, _____ by --------- [Quicksilver Resources Inc., a Delaware corporation] [First Tier Subsidiary] (herein called "Pledgor"), in favor of NationsBank, N.A., as Administrative ------- Agent for the ratable benefit of Banks (as defined below) (herein called "Pledgee"). ------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, [Pledgor] [Quicksilver Resources Inc., a Delaware corporation ("Borrower")], Pledgee and Banks are parties to a Second Amended and Restated -------- Credit Agreement dated as of March 1, 1999, pursuant to which Banks have made a revolving credit loan to [Pledgor] [Borrower] and agreed to issue and participate in letters of credit issued on behalf of [Pledgor] [Borrower] (as amended or modified from time to time, the "Credit Agreement"); and ---------------- WHEREAS, it is a condition to the agreement of Banks to continue to extend credit under the Credit Agreement that Pledgor execute and deliver this Agreement in favor of Pledgee for the benefit of Banks. NOW, THEREFORE, in consideration of the premises and in order to induce Banks to continue to extend credit under the Credit Agreement, Pledgor hereby agrees with Pledgee as follows: ARTICLE I Definitions and References -------------------------- Section 1.1. General Definitions. As used herein, the terms "Agreement," ------------------- --------- "Credit Agreement," ["Borrower,"] "Pledgee," and "Pledgor," shall have the ---------------- -------- ------- ------- meanings indicated above, and the following terms shall have the following meanings: "Bank" means any financial institution reflected on Schedule 1 to the ---- Credit Agreement and its successors and assigns, and "Banks" shall mean all ----- Banks. "Code" means the Uniform Commercial Code in effect in the State of Texas on ---- the date hereof. "Collateral" means all property of whatever type, in which Pledgee at any ---------- time has a security interest pursuant to Section 2.1. ----------- "Commitment" means the agreement or commitment by Banks to make loans or ---------- otherwise extend credit to [Pledgor] [Borrower] under the Credit Agreement, and any other agreement, commitment, statement of terms or other document contemplating the making of loans or advances A-1 or other extension of credit by Banks to or for the account of [Pledgor] [Borrower] which is now or at any time hereafter intended to be secured by the Collateral under this Agreement. "Obligation Documents" means the Credit Agreement, the Notes, the other -------------------- Loan Papers, and all other documents and instruments under, by reason of which, or pursuant to which, any or all of the Obligations are evidenced, governed, secured, or otherwise dealt with, and all other agreements, certificates, and other documents, instruments and writings heretofore or hereafter delivered in connection herewith or therewith. "Obligations" means all present and future indebtedness, obligations and ----------- liabilities of whatever type which are or shall be secured pursuant to Section ------- 2.2. - --- "Other Liable Party" means any Person, other than [Pledgor] [Borrower], who ------------------ may now or may at any time hereafter be primarily or secondarily liable for any of the Obligations or who may now or may at any time hereafter have granted to Pledgee or Banks a Lien upon any property as security for the Obligations. "Pledged Equity" has the meaning given it in Section 2.1. -------------- ----------- Section 1.2. Other Definitions. Reference is hereby made to the Credit ----------------- Agreement for a statement of the terms thereof. All capitalized terms used in this Agreement which are defined in the Credit Agreement and not otherwise defined herein shall have the same meanings herein as set forth therein. All terms used in this Agreement which are defined in the Code and not otherwise defined herein or in the Credit Agreement shall have the same meanings herein as set forth therein, except where the context otherwise requires. Section 1.3. Exhibits. All exhibits attached to this Agreement are a -------- part hereof for all purposes. Section 1.4. Amendment of Defined Instruments. Unless the context -------------------------------- otherwise requires or unless otherwise provided herein, references in this Agreement to a particular agreement, instrument or document also refer to and include all renewals, extensions, amendments, modifications, supplements or restatements of any such agreement, instrument or document; provided that -------- ---- nothing contained in this Section 1.4 shall be construed to authorize any Person ----------- to execute or enter into any such renewal, extension, amendment, modification, supplement or restatement. Section 1.5. References and Titles. All references in this Agreement to --------------------- Exhibits, Articles, Sections, subsections, and other subdivisions refer to the Exhibits, Articles, Sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any subdivision are for convenience only and do not constitute any part of any such subdivision and shall be disregarded in construing the language contained in this Agreement. The words "this Agreement," "herein," "hereof," "hereby," "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The phrases "this Section" and "this subsection" and similar phrases refer only to the Sections or subsections hereof in which the phrase occurs. The word "or" is not exclusive, and the word "including" (in all of its forms) means "including without limitation". Pronouns in masculine, feminine A-2 and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. ARTICLE II Security Interest ----------------- Section 2.1. Grant of Security Interest. As collateral security for all -------------------------- of the Obligations, Pledgor hereby pledges and assigns to Pledgee and grants to Pledgee a continuing first priority security interest for the benefit of Banks in and to all of the following rights, interests and property: (a) all of the issued and outstanding shares of capital stock, membership interests or partnership interests of each Subsidiary of Pledgor now owned or hereafter acquired by Pledgor including, without limitation, the shares, membership interests or partnership interests of each Subsidiary of Pledgor owned by Pledgor on the date hereof (all of the foregoing being herein sometimes called the "Pledged Equity"); -------------- (b) any and all proceeds or other sums arising from or by virtue of, and all dividends and distributions (cash or otherwise) payable and/or distributable with respect to, all or any of the Pledged Equity described in clause (a) preceding; and (c) all cash, securities, dividends and other property at any time and from time to time receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Equity described in clause (a) hereof and any other property substituted or exchanged therefor. Section 2.2. Obligations Secured. The security interest created hereby ------------------- in the Collateral constitutes continuing collateral security for all of the following obligations, indebtedness and liabilities, whether now existing or hereafter incurred: (a) Credit Agreement Indebtedness. The payment by [Pledgor] [Borrower], as ----------------------------- and when due and payable, of all amounts from time to time owing by [Pledgor] [Borrower] under or in respect of the Credit Agreement, the Notes or any of the other Obligation Documents. (b) Renewals. All renewals, extensions, amendments, modifications, -------- supplements, or restatements of, or substitutions for, any of the foregoing. (c) Performance. The due performance and observance by [Pledgor] ----------- [Borrower] of all of its other obligations from time to time existing under or in respect of any of the Obligation Documents. (d) Hedge Transactions. The payment and performance of any and all present ------------------ or future obligations of [Pledgor] [Borrower] according to the terms of any present or future Hedge Transaction, including, without limitation, any present or future swap agreements, cap, floor, collar, exchange, transaction, forward agreement or other exchange or protection agreements relating to crude oil, natural gas or other Hydrocarbons, or any option with respect to any such transaction now A-3 existing or hereafter entered into between and/or among [Pledgor,] [Borrower,] Pledgee, any Bank or any affiliate of any of the foregoing. ARTICLE III Representations Warranties and Covenants ---------------------------------------- Section 3.1. Representations and Warranties. Pledgor represents and ------------------------------ warrants as follows: (a) Ownership and Liens. Pledgor has good and marketable title to the ------------------- Collateral free and clear of all Liens, encumbrances or adverse claims, except for the security interest created by this Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except such as have been filed in favor of Pledgee relating to this Agreement. (b) No Conflicts or Consents. Neither the ownership or the intended use of ------------------------ the Collateral by Pledgor, nor the grant of the security interest by Pledgor to Pledgee herein, nor the exercise by Pledgee of its rights or remedies hereunder, will (i) conflict with any provision of (a) any domestic or foreign law, statute, rule or regulation, (b) the articles or certificate of incorporation, certificate of limited partnership, partnership agreement, regulations, charter or bylaws of Pledgor, or (c) any agreement, judgment, license, order or permit applicable to or binding upon Pledgor, or (ii) result in or require the creation of any Lien, charge or encumbrance upon any assets or properties of Pledgor except as expressly contemplated in the Obligation Documents. Except as expressly contemplated in the Obligation Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, Governmental Authority or third party is required in connection with the grant by Pledgor of the security interest herein, or the exercise by Pledgee of its rights and remedies hereunder. (c) Security Interest. Pledgor has and will have at all times full right, ----------------- power and authority to grant a security interest in the Collateral to Pledgee in the manner provided herein, free and clear of any Lien, adverse claim, or encumbrance. This Agreement creates a valid and binding security interest in favor of Pledgee in the Collateral securing the Obligations. The taking possession by Pledgee (for the ratable benefit of Banks) of all certificates, instruments and cash constituting Collateral from time to time and the filing of the financing statements delivered concurrently herewith by Pledgor to Pledgee will perfect, and establish the first priority of, Pledgee's security interest hereunder in the Collateral securing the Obligations. No further or subsequent filing, recording, registration, other public notice or other action is necessary or desirable to perfect or otherwise continue, preserve or protect such security interest except for continuation statements or filings as contemplated in Section 3.3(b). -------------- (d) Pledged Equity. (i) Pledgor is the legal and beneficial owner of the -------------- Pledged Equity issued by each Subsidiary of Pledgor, (ii) the Pledged Equity is duly authorized and issued, fully paid and non-assessable, and all documentary, stamp or other Taxes or fees owing in connection with the issuance, transfer and/or pledge thereof hereunder have been paid, (iii) no dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Pledged Equity, (iv) the Pledged A-4 Equity is free and clear of all Liens, options, warrants, puts, calls or other rights of third Persons, and restrictions, other than (a) those Liens arising under this Agreement or any other of the Loan Papers and Liens for Taxes not yet due and payable, and (b) restrictions on transferability imposed by applicable state and federal securities Laws, (v) Pledgor has full right and authority to pledge the Pledged Equity for the purposes and upon the terms set out herein, (vi) certificates (or other evidence acceptable to Pledgee) representing the Pledged Equity have been delivered to Pledgee, together with a duly executed blank stock power (as applicable) with signatures guaranteed, for each certificate, (vii) the Pledged Equity constitutes all of the issued and outstanding capital stock, membership interests or partnership interests of each Subsidiary of Pledgor of every class, and (viii) no Subsidiary of Pledgor has issued, and there are not outstanding, any options, warrants or other rights to acquire capital stock, membership interests or partnership interests of any Subsidiary of Pledgor. Section 3.2. Affirmative Covenants. Unless Pledgee shall otherwise --------------------- consent in writing, Pledgor will at all times comply with the covenants contained in this Section 3.2 from the date hereof and so long as any part of ----------- the Obligations or Commitments is outstanding. (a) Ownership and Liens. Pledgor will maintain good and marketable title ------------------- to all Collateral free and clear of all Liens encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted by the Credit Agreement. Pledgor will cause to be terminated any financing statement or other registration with respect to the Collateral, except such as may exist or as may have been filed in favor of Pledgee. Pledgor will defend Pledgee's right, title and special property and security interest in and to the Collateral against the claims of any Person. (b) Further Assurances. Pledgor will, at its expense and at any time and ------------------ from time to time, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable or that Pledgee may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest; (ii) to enable Pledgee to exercise and enforce its rights and remedies hereunder in respect of the Collateral; or (iii) to otherwise effect the purposes of this Agreement, including, without limitation: (A) executing and filing such financing or continuation statements, or amendments thereto, as may be necessary or desirable or that Pledgee may request in order to perfect and preserve the security interest created or purported to be created hereby; and (B) furnishing to Pledgee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Pledgee may reasonably request, all in reasonable detail. (c) Delivery of Pledged Equity. All certificates, instruments and writings -------------------------- evidencing the Pledged Equity shall be delivered to Pledgee on or prior to the execution and delivery of this Agreement. All other certificates, instruments and writings hereafter evidencing or constituting Pledged Equity shall be delivered to Pledgee promptly upon the receipt thereof by or on behalf of Pledgor. All such Pledged Equity shall be held by or on behalf of Pledgee pursuant hereto and shall be delivered in the same manner and with the same effect as described in Section 2.1 and Section 3.1 hereof. Upon delivery, such ----------- ----------- equity interests shall thereupon constitute "Pledged Equity" and shall be subject to the Liens herein created, for the purposes and upon the terms and conditions set forth in this Agreement and the other Loan Papers. A-5 (d) Proceeds of Pledged Equity. If Pledgor shall receive, by virtue of its -------------------------- being or having been an owner of any Pledged Equity, any (i) shares of capital stock, membership interests and/or partnership interests (including any certificate representing any shares of capital stock, membership interests and/or partnership interests or distribution in connection with any increase or reduction of capital, reorganization, reclassification, merger, consolidation, sale of assets, or spinoff or split-off), promissory note or other instrument or writing; (ii) option or right, whether as an addition to, substitution for, or in exchange for, any Pledged Equity or otherwise; (iii) dividends payable in cash (except such dividends permitted to be retained by Pledgor pursuant to Section 4.7 hereof) or in securities or other property; or (iv) dividends or - ----------- other distributions in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, Pledgor shall receive the same in trust for the benefit of Pledgee, shall segregate it from Pledgor's other property, and shall promptly deliver it to Pledgee in the exact form received, with any necessary endorsement or appropriate stock powers duly executed in blank, to be held by Pledgee as Collateral. (e) Status of Pledged Equity. The certificates (or other instruments and ------------------------ writings) evidencing the Pledged Equity shall at all times be valid and genuine and shall not be altered. The Pledged Equity at all times shall be duly authorized, validly issued, fully paid, and non-assessable, shall not be issued in violation of the pre-emptive rights of any Person or of any agreement by which Pledgor or any of its Subsidiaries is bound, and, except for the bylaws, partnership agreement or regulations of Pledgor, shall not be subject to any restrictions or conditions with respect to the transfer, voting or capital of any Pledged Equity. Section 3.3. Negative Covenants. Unless Pledgee shall otherwise consent ------------------ in writing, Pledgor will at all times comply with the covenants contained in this Section 3.3 from the date hereof and so long as any part of the Obligations ----------- or the Commitments is outstanding. (a) Transfer or Encumbrance. Pledgor will not sell, assign (by operation ----------------------- of law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Collateral, nor will Pledgor grant a Lien upon or execute, file or record any financing statement or other registration with respect to the Collateral, nor will Pledgor allow any such Lien, financing statement, or other registration to exist or deliver actual or constructive possession of the Collateral to any other Person other than Liens in favor of Pledgee. (b) Financing Statement Filings. Pledgor recognizes that financing --------------------------- statements pertaining to the Collateral have been or may be filed where Pledgor maintains any Collateral, has its records concerning any Collateral or has its chief executive office or chief place of business. Without limitation of any other covenant herein, Pledgor will not cause or permit any change to be made in its name, identity or corporate, partnership or limited liability company structure, or any change to be made to a jurisdiction other than as represented in Section 3.1 hereof in (i) the location of any records concerning any ----------- Collateral, or (ii) in the location of its chief executive office or chief place of business, unless Pledgor shall have notified Pledgee of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Pledgee for the purpose of further perfecting or protecting the security interest in favor of Pledgee in the Collateral. In any notice furnished pursuant to this subsection, Pledgor will expressly state that the notice is required by this Agreement and contains facts that may require additional filings of financing A-6 statements or other notices for the purposes of continuing perfection of Pledgee's security interest in the Collateral. (c) Impairment of Security Interest. Pledgor will not take or fail to take ------------------------------- any action which would in any manner impair the enforceability of Pledgee's security interest in any Collateral. (d) Dilution of Pledged Equity. Pledgor will not permit the issuance of -------------------------- (i) any additional shares of capital stock, membership interests or partnership interests of any class of any of its Subsidiaries (unless immediately upon issuance the same are pledged and delivered to Pledgee pursuant to the terms hereof), (ii) any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any such capital stock, membership interests or partnership interests, or (iii) any warrants, options, contracts or other commitments entitling any Person to purchase or otherwise acquire any such capital stock, membership interests or partnership interests of any Subsidiary of Pledgor. (e) Restrictions on Pledged Equity. Except for the bylaws, partnership ------------------------------ agreement or regulations of each Subsidiary of Pledgor, Pledgor will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any Pledged Equity. ARTICLE IV Remedies, Powers and Authorizations ----------------------------------- Section 4.1. Provisions Concerning the Collateral. ------------------------------------ (a) Additional Financing Statement Filings. Pledgor hereby authorizes -------------------------------------- Pledgee to file, without the signature of Pledgor where permitted by law, one (1) or more financing or continuation statements, and amendments thereto, relating to the Collateral. Pledgor further agrees that a carbon, photographic or other reproduction of this Agreement or any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Pledgee may deem appropriate. (b) Power of Attorney. Pledgor hereby irrevocably appoints Pledgee as ----------------- Pledgor's attorney-in-fact and proxy, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Pledgee's discretion, to take any action (except for the exercise of any voting rights pertaining to the Pledged Equity or any part thereof) and to execute any instrument, certificate or notice which Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement including, without limitation: (i) to request or instruct Pledgor (and each registrar, transfer agent, or similar Person acting on behalf of Pledgor) to register the pledge or transfer of the Collateral to Pledgee; (ii) to otherwise give notification to Pledgor, registrar, transfer agent, financial intermediary, or other Person of Pledgee's security interests hereunder; (iii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iv) to receive, indorse and collect any drafts or other instruments, documents and chattel paper; and (v) to file any claims or take any action or institute any proceedings which Pledgee may deem necessary or desirable for the collection A-7 of any of the Collateral or otherwise to enforce the rights of Pledgee with respect to any of the Collateral. (c) Performance by Pledgee. If Pledgor fails to perform any agreement or ---------------------- obligation contained herein, Pledgee may itself perform, or cause performance of, such agreement or obligation, and the expenses of Pledgee incurred in connection therewith shall be payable by Pledgor [(but not Borrower)] under Section 4.4. - ----------- (d) Collection Rights. Pledgee shall have the right at any time, upon the ----------------- occurrence and during the continuance of a Default or an Event of Default, to notify any or all obligors (including without limitation Pledgor) under any accounts or general intangibles included among the Collateral of the assignment thereof to Pledgee and to direct such obligors to make payment of all amounts due or to become due to Pledgor thereunder directly to Pledgee and, upon such notification and at the expense of Pledgor [(but not Borrower)] and to the extent permitted by law, to enforce collection thereof and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Pledgor could have done. After Pledgor receives notice that Pledgee has given any notice referred to above in this subsection, (i) all amounts and proceeds (including instruments and writings) received by Pledgor in respect of such accounts or general intangibles shall be received in trust for the benefit of Pledgee hereunder, shall be segregated from other funds of Pledgor and shall be forthwith paid over to Pledgee in the same form as so received (with any necessary indorsement) to be held as cash collateral and (A) released to Pledgor upon the remedy of all Defaults or Events of Default, or (B) if any Event of Default shall have occurred and be continuing, applied as specified in Section ------- 4.3, and (ii) Pledgor will not adjust, settle or compromise the amount or - --- payment of any such account or general intangible or release wholly or partly any account debtor or obligor thereof (including without limitation Pledgor) or allow any credit or discount thereon. Section 4.2. Event of Default Remedies. If an Event of Default shall ------------------------- have occurred and be continuing, Pledgee may from time to time in its discretion, without limitation and without notice except as expressly provided below: (a) exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, under the other Obligation Documents or otherwise available to it, all the rights and remedies of a secured party on default under the Code (whether or not the Code applies to the affected Collateral); (b) require Pledgor to, and Pledgor hereby agrees that it will at its expense and upon request of Pledgee forthwith, assemble all or part of the Collateral as directed by Pledgee and make it available to Pledgee at a place to be designated by Pledgee which is reasonably convenient to both parties; (c) reduce its claim to judgment against Pledgor or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; (d) dispose of, at its office, on the premises of Pledgor or elsewhere, all or any part of the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale of any part of the Collateral shall not exhaust Pledgee's power A-8 of sale, but sales may be made from time to time, and at any time, until all of the Collateral has been sold or until the Obligations have been paid and performed in full), and at any such sale it shall not be necessary to exhibit any of the Collateral; (e) buy (or allow any Bank to buy) the Collateral, or any part thereof, at any public sale; (f) buy (or allow any Bank to buy) the Collateral, or any part thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations; (g) apply by appropriate judicial proceedings for appointment of a receiver for the Collateral, or any part thereof, and Pledgor hereby consents to any such appointment; and (h) at its discretion, retain the Collateral in satisfaction of the Obligations whenever the circumstances are such that Pledgee is entitled to do so under the Code or otherwise (provided that Pledgee shall in no circumstances -------- ---- be deemed to have retained the Collateral in satisfaction of the Obligations in the absence of an express notice by Pledgee to Pledgor that Pledgee has either done so or intends to do so). Pledgor agrees that, to the extent notice of sale shall be required by law, at least five (5) days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Pledgee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Section 4.3. Application of Proceeds. If any Event of Default shall have ----------------------- occurred and be continuing, Pledgee may in its discretion apply any cash held by Pledgee as Collateral, and any cash proceeds received by Pledgee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral, to any or all of the following in such order as Pledgee may elect: (a) to the repayment of the reasonable costs and expenses, including reasonable attorneys' fees and legal expenses, incurred by Pledgee in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral, (iii) the exercise or enforcement of any of the rights of Pledgee hereunder, or (iv) the failure of Pledgor to perform or observe any of the provisions hereof; (b) to the payment or other satisfaction of any Liens, encumbrances, or adverse claims upon or against any of the Collateral; (c) to the reimbursement of Pledgee for the amount of any obligations of Pledgor or any Other Liable Party paid or discharged by Pledgee pursuant to the provisions of this Agreement or the other Obligation Documents, and of any expenses of Pledgee payable by Pledgor hereunder or under the other Obligation Documents; A-9 (d) to the satisfaction of any other Obligations or any other indebtedness of [Pledgor] [and/or Borrower] to Banks or Pledgee; (e) by holding the same as Collateral; (f) to the payment of any other amounts required by applicable law (including, without limitation, Section 9.504(a)(3) of the Code or any successor or similar, applicable statutory provision); and (g) by delivery to Pledgor or to whomsoever shall be lawfully entitled to receive the same or as a court of competent jurisdiction shall direct. Section 4.4. Release and Expenses. In addition to, and not in -------------------- qualification of, any similar obligations under other Obligation Documents: (a) Pledgor agrees to release and forever discharge Pledgee and each Bank from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement). The foregoing release and discharge shall apply whether or not such claims, losses and liabilities are in any way or to any extent owed, in whole or in part, under any claim or theory of strict liability or are, to any extent caused, in whole or in part, by any negligent act or omission of any kind by Pledgee or any Bank. (b) Pledgor will upon demand pay to Pledgee the amount of any and all costs and expenses, including the fees and disbursements of Pledgee's counsel and of any experts and agents, which Pledgee may incur in connection with (i) the transactions which give rise to this Agreement; (ii) the preparation of this Agreement and the perfection and preservation of the security interest created under this Agreement; (iii) the administration of this Agreement; (iv) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any Collateral; (v) the exercise or enforcement of any of the rights of Pledgee hereunder; or (vi) the failure by Pledgor to perform or observe any of the provisions hereof, except expenses resulting from Pledgee's gross negligence or willful misconduct. Section 4.5. Non-Judicial Remedies. In granting to Pledgee the power to --------------------- enforce its rights hereunder without prior judicial process or judicial hearing, Pledgor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Pledgee to enforce its rights by judicial process. In so providing for non-judicial remedies, Pledgor recognizes and concedes that such remedies are consistent with the usage of trade, are responsive to commercial necessity, and are the result of a bargain at arm's length. Nothing herein is intended to prevent Pledgee or Pledgor from resorting to judicial process at either party's option. Section 4.6. Other Recourse. Pledgor waives any right to require Pledgee -------------- or Banks to proceed against any other Person, exhaust any Collateral or other security for the Obligations, or to have any Other Liable Party joined with Pledgor in any suit arising out of the Obligations or this Agreement, or pursue any other remedy in Pledgee's power. Pledgor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension for any period of any of the Obligations of any Other Liable Party from time to time. A-10 Pledgor further waives any defense arising by reason of any disability or other defense of any Other Liable Party or by reason of the cessation from any cause whatsoever of the liability of any Other Liable Party. Until all of the Obligations shall have been paid in full, Pledgor shall have no right to subrogation and Pledgor waives the right to enforce any remedy which Pledgee or any Bank has or may hereafter have against any Other Liable Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Pledgee. Pledgor authorizes Pledgee and each Bank, without notice or demand and without any reservation of rights against Pledgor and without affecting [Pledgor's] [or Borrower's] liability hereunder or on the Obligations, from time to time to (a) take or hold any other property of any type from any other Person as security for the Obligations, and exchange, enforce, waive and release any or all of such other property, (b) apply the Collateral or such other property and direct the order or manner of sale thereof as Pledgee may in its discretion determine, (c) renew, extend for any period, accelerate, modify, compromise, settle or release any of the obligations of any Other Liable Party in respect to any or all of the Obligations or other security for the Obligations, (d) waive, enforce, modify, amend or supplement any of the provisions of any Obligation Document with any Person other than Pledgor, and (e) release or substitute any Other Liable Party. Section 4.7. Voting Rights, Dividends Etc. in Respect of Pledged Equity. ---------------------------------------------------------- (a) So long as no Default or Event of Default shall have occurred and be continuing Pledgor may receive and retain any and all dividends or interest paid in respect of the Pledged Equity; provided, however, that any and all --------- ------- ---- (i) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of or in exchange for, any Pledged Equity, (ii) dividends and other distributions paid or payable in cash in respect of any Pledged Equity in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iii) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Pledged Equity, shall be, and shall forthwith be delivered to Pledgee to hold as, Pledged Equity and shall, if received by Pledgor, be received in trust for the benefit of Pledgee, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Pledgee in the exact form received with any necessary indorsement or appropriate stock powers duly executed in blank, to be held by Pledgee as Collateral. (b) Upon the occurrence and during the continuance of a Default or an Event of Default: (i) all rights of Pledgor to receive and retain the dividends and interest payments which Pledgor would otherwise be authorized to receive and retain pursuant to subsection (a) of this section shall automatically cease, and all such rights shall thereupon become vested in Pledgee which shall thereupon have the right to receive and hold as Pledged Equity such dividends and interest payments; A-11 (ii) without limiting the generality of the foregoing, Pledgee may at its option exercise any and all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to any of the Pledged Equity (except voting rights) as if it were the absolute owner thereof, including, without limitation, the right to exchange, in its discretion, any and all of the Pledged Equity upon the merger, consolidation, reorganization, recapitalization or other adjustment of Pledgor or any of its Subsidiaries, or upon the exercise by Pledgor or any of its Subsidiaries of any right, privilege or option pertaining to any Pledged Equity, and, in connection therewith, to deposit and deliver any and all of the Pledged Equity with any committee, depository, transfer agent, registrar or other designated agent upon such terms and conditions as it may determine; and (iii) all dividends and interest payments which are received by Pledgor contrary to the provisions of subsection (b) (i) of this section shall be received in trust for the benefit of Pledgee, shall be segregated from other funds of Pledgor, and shall be forthwith paid over to Pledgee as Pledged Equity in the exact form received, to be held by Pledgee as Collateral. Anything herein to the contrary notwithstanding, Pledgee may not exercise any voting rights pertaining to the Pledged Equity and Pledgor may at all times exercise any and all voting rights pertaining to the Pledged Equity or any part thereof for any purpose not inconsistent with the terms of this Agreement or any other Obligation Document; provided, however, upon the occurrence and during the -------- ------- continuance of a Default or an Event of Default, Pledgor will not exercise or refrain from exercising any such right, as the case may be, if Pledgee gives notice that, in Pledgee's judgment, such action would result in a Material Adverse Change with respect to the value of the Pledged Equity or the benefits to Pledgee of its security interest hereunder. Section 4.8. Private Sale of Pledged Equity. Pledgor recognizes that ------------------------------ Pledgee may deem it impracticable to effect a public sale of all or any part of the Pledged Equity and that Pledgee may, therefore, determine to make one or more private sales of any such securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such private sales shall be deemed to have been made in a commercially reasonable manner and that Pledgee shall have no obligation to delay the sale of any such securities for the period of time necessary to permit Pledgor to register such securities (with no obligation of Pledgor to accomplish such registration) for public sale under the Securities Act of 1933, as amended. Pledgor further acknowledges and agrees that any offer to sell such securities which has been (a) publicly advertised on a bona fide basis in a newspaper or ---- ---- other publication of general circulation in the financial community of Dallas, Texas (to the extent that such an offer may be so advertised without prior registration under the Securities Act), or (b) made privately in the manner described above to not less than fifteen (15) bona fide offerees shall be deemed ---- ---- to involve a "public sale" for the purposes of Section 9.504(c) of the Code (or any successor or similar, applicable statutory provision) as then in effect in the State of Texas, notwithstanding that such sale may not constitute a "public offering" under the Securities Act of 1933, as amended, and that Pledgee may, in such event, bid for the purchase of such securities. A-12 ARTICLE V Miscellaneous ------------- Section 5.1. Notices. Any notice or communication required or permitted ------- hereunder shall be given in writing, sent by personal delivery, by telecopy, by delivery service with proof of delivery, or by registered or certified United States mail, postage prepaid, addressed to the appropriate party as follows: To Pledgor: ---------- ______________________________ ______________________________ ______________________________ Fax No.: (___) _______________ To Pledgee: NationsBank, N.A., ---------- as Administrative Agent for Banks 901 Main Street, 64/th/ Floor Dallas, Texas 75202 Fax No. (214) 508-1285 or to such other address or to the attention of such other individual as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given (a) in the case of personal delivery or delivery service, as of the date of first attempted delivery at the address or in the manner provided herein, (b) in the case of telecopy, upon receipt, or (c) in the case of registered or certified United States mail, three (3) days after deposit in the mail. Section 5.2. Amendments. No amendment of any provision of this Agreement ---------- shall be effective unless it is in writing and signed by Pledgor, Pledgee and Banks, and no waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall be effective unless it is in writing and signed by Pledgee and Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given and to the extent specified in such writing. Section 5.3. Preservation of Rights. No failure on the part of Pledgee ---------------------- or any Bank to exercise, and no delay in exercising, any right hereunder or under any other Obligation Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. Neither the execution nor the delivery of this Agreement shall in any manner impair or affect any other security for the Obligations. The rights and remedies of Pledgee and Banks provided herein and in the other Obligation Documents are cumulative of and are in addition to, and not exclusive of, any rights or remedies provided by law. The rights of Pledgee and Banks under any Obligation Document against any party thereto are not conditional or contingent on any attempt by Pledgee or Banks to exercise any of its rights under any other Obligation Document against such party or against any other Person. A-13 Section 5.4. Unenforceability. Any provision of this Agreement which is ---------------- prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 5.5. Survival of Agreements. All representations and warranties ---------------------- of Pledgor herein, and all covenants and agreements herein shall survive the execution and delivery of this Agreement, the execution and delivery of any other Obligation Documents and the creation of the Obligations. Section 5.6. Other Liable Party. Neither this Agreement nor the exercise ------------------ by Pledgee or any Bank or the failure of Pledgee or any Bank to exercise any right, power or remedy conferred herein or by law shall be construed as relieving any Other Liable Party from liability on the Obligations or any deficiency thereon. This Agreement shall continue irrespective of the fact that the liability of any Other Liable Party may have ceased or irrespective of the validity or enforceability of any other Obligation Document to which Pledgor or any Other Liable Party may be a party, and notwithstanding the reorganization, death, incapacity or bankruptcy of any Other Liable Party, and notwithstanding the reorganization or bankruptcy or other event or proceeding affecting any Other Liable Party. Section 5.7. Binding Effect and Assignment. This Agreement creates a ----------------------------- continuing security interest in the Collateral and (a) shall be binding on Pledgor and its successors and permitted assigns, and (b) shall inure, together with all rights and remedies of Pledgee hereunder, to the benefit of Pledgee and Banks and their respective successors, transferees and assigns. Without limiting the generality of the foregoing, Pledgee and Banks may pledge, assign or otherwise transfer any or all of their respective rights under any or all of the Obligation Documents to any other Person, and such other Person shall thereupon become vested with all of the benefits in respect thereof granted herein or otherwise. None of the rights or duties of Pledgor hereunder may be assigned or otherwise transferred without the prior written consent of Pledgee and Banks. Section 5.8. Termination. It is contemplated by the parties hereto that ----------- there may be times when no Obligations are outstanding, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding Obligations. Upon the satisfaction in full of the Obligations, upon the termination or expiration of the Credit Agreement and any other Commitment of Banks to extend credit to Borrower, and upon written request for the termination hereof delivered by Pledgor to Pledgee and Banks, this Agreement and the security interest created hereby shall terminate and all rights to the Collateral shall revert to Pledgor. Pledgee will, upon Pledgor's request and at Pledgor's expense, (a) return to Pledgor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof, and (b) execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. SECTION 5.9. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF AMERICA. A-14 Section 5.10. Counterparts. This Agreement may be separately executed in ------------ any number of counterparts, all of which when so executed shall be deemed to constitute one and the same Agreement. Section 5.11. Loan Paper. This Agreement is a "Loan Paper", as defined in ---------- the Credit Agreement, and, except as expressly provided herein to the contrary, this Agreement is subject to all provisions of the Credit Agreement governing such Loan Paper. A-15 IN WITNESS WHEREOF, Pledgor has caused this Agreement to be executed and delivered by its officer thereunto duly authorized, as of the date first above written. [QUICKSILVER RESOURCES INC., a Delaware corporation] [FIRST TIER SUBSIDIARY] By: _____________________________________ Name: _____________________________________ Title: _____________________________________ A-16 EXHIBIT B --------- Note ---- $_____________________ Dallas, Texas ________, 1999 FOR VALUE RECEIVED, the undersigned, Quicksilver Resources Inc., a Delaware corporation ("Maker"), promises to pay to the order of [Name of Bank] ("Payee"), ----- ----- at the offices of NationsBank, N.A., as Administrative Agent (herein so called), at 901 Main Street, 64th Floor, Dallas, Texas 75202, for Payee, the principal sum of _________________ and No/100 Dollars ($_______________), or so much thereof as may be advanced and outstanding, together with interest, as hereinafter described. This Note has been executed and delivered pursuant to, and is subject to and governed by, the terms of that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (as hereafter renewed, extended, amended, or supplemented, the "Agreement") among Maker, Payee, Administrative Agent and the --------- other Banks named therein, and is one of the "Notes" referred to therein. ----- Unless otherwise defined herein or unless the context hereof otherwise requires, each term used herein with its initial letter capitalized has the meaning given to such term in the Agreement. Maker also promises to pay interest on the unpaid principal amount hereof in like money at the offices of Administrative Agent above referenced from the date hereof at the rates applicable to amounts outstanding under the Loan provided in the Agreement and on the dates specified in the Agreement. The principal balance of this Note shall be paid at the times and in the amounts required by the Agreement. The entire outstanding principal balance hereof and all accrued but unpaid interest thereon shall be due and payable in full on the Termination Date. Upon and subject to the terms and conditions of the Agreement, Maker shall be entitled to prepay the principal of or interest on this Note from time to time and at any time, in whole or in part. Upon the occurrence and continuance of an Event of Default, and upon the conditions stated in the Agreement, Administrative Agent may, at its option, and shall, to the extent required in accordance with the terms of the Agreement, declare the entire unpaid principal of and accrued interest on this Note immediately due and payable (provided that, upon the occurrence of certain -------- ---- Events of Default, and upon the conditions stated in the Agreement, such acceleration shall be automatic), without notice (except as otherwise required by the Agreement), demand, or presentment, all of which are hereby waived, and the holder hereof shall have the right to offset against this Note any sum or sums owed by the holder hereof to Maker. All past-due principal of and, to the extent permitted by law, accrued interest on this Note shall, at the option of the holder hereof, bear interest at the lesser of (a) the Maximum Lawful Rate or (b) the Default Rate until paid from the due date. B-1 Notwithstanding the foregoing, if at any time, any rate of interest calculated under Section 3.3 of the Agreement (the "Contract Rate") exceeds the ----------- ------------- Maximum Lawful Rate, the rate of interest hereunder shall be limited to the Maximum Lawful Rate, but any subsequent reductions in the Contract Rate shall not reduce the rate of interest on this Note below the Maximum Lawful Rate until the total amount of interest accrued equals the amount of interest which would have accrued (including the amount of interest which would have accrued prior to the payment or prepayment of any portion of this Note) if the Contract Rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of this Note, the total amount of interest paid or accrued on this Note is less than the amount of interest which would have accrued if the Contract Rate had at all times been in effect with respect thereto, then at such time the Maker shall pay to the holder of this Note an amount equal to the difference between (a) the lesser of the amount of interest which would have accrued if the Contract Rate had at all times been in effect and the amount of interest which would have accrued if the Maximum Lawful Rate had at all times been in effect, and (b) the amount of interest actually paid or accrued on this Note. QUICKSILVER RESOURCES INC., a Delaware corporation By:______________________________________ Name:____________________________________ Title:___________________________________ B-2 ADVANCES, MATURITIES, AND PAYMENTS OF PRINCIPAL AND INTEREST
========================================================================================================================== Payee's Commitment Expiration Rate of Interest Amount of Unpaid Borrowing Percentage of Interest Applicable to Principal Amount of Principal Notation Date of Borrowing Period Tranche Paid Interest Paid Balance Made By ========================================================================================================================== __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ __________________________________________________________________________________________________________________________ ==========================================================================================================================
B-3 EXHIBIT C --------- GUARANTY -------- THIS GUARANTY (this "Guaranty") is dated as of the ____ day of __________, -------- _____, by [Subsidiary of Borrower], a ___________________ ("Guarantor"), in --------- favor of NATIONSBANK, N.A., PARIBAS, FROST NATIONAL BANK, BANK ONE, TEXAS, N.A. and each of the other financial institutions listed on Schedule 1 to the Credit Agreement (as hereinafter defined) as Banks, and each of their successors and assigns as permitted pursuant to the Credit Agreement (NationsBank, N.A. acting as a Bank but not as Administrative Agent, Paribas, Frost National Bank, Bank One, Texas, N.A., each of the other Banks listed on Schedule 1 of the Credit Agreement, and each of their successors and assigns are collectively referred to herein as "Noteholders"). ----------- W I T N E S S E T H: ------------------- WHEREAS, Quicksilver Resources Inc., a Delaware corporation ("Borrower"), -------- Noteholders and NationsBank, N.A., as Administrative Agent ("Administrative -------------- Agent") are parties to that certain Second Amended and Restated Credit Agreement - ----- (as amended, the "Credit Agreement") dated as of March 1, 1999, pursuant to ---------------- which Noteholders have made a revolving credit loan to Borrower and agreed to issue and participate in letters of credit issued on behalf of Borrower (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, Noteholders have required, as a condition to the continued extension of credit under the Credit Agreement, that Guarantor execute and deliver this Guaranty; and WHEREAS, Guarantor has determined that valuable benefits will be derived by it as a result of the Credit Agreement and the extension of credit made (and to be made) by Noteholders thereunder; and WHEREAS, Guarantor has further determined that the benefits accruing to it from the Credit Agreement exceed Guarantor's anticipated liability under this Guaranty. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Guarantor hereby covenants and agrees as follows: 1. Guarantor hereby absolutely and unconditionally guarantees the prompt, complete and full payment when due, no matter how such shall become due, of the Obligations, and further guarantees that Borrower will properly and timely perform the Obligations. Notwithstanding any contrary provision in this Guaranty, however, Guarantor's maximum liability under this Guaranty is limited, to the extent, if any, required so that its liability is not subject to avoidance under applicable Debtor Relief Laws (as such term is defined in Paragraph 8 hereof). - ----------- 2. If Guarantor is or becomes liable for any indebtedness owing by Borrower to any Noteholder by endorsement or otherwise than under this Guaranty, such liability shall not be in any manner impaired or affected hereby, and the rights of Noteholders hereunder shall be cumulative of C-1 any and all other rights that Noteholders may ever have against Guarantor. The exercise by any Noteholder of any right or remedy hereunder or under any other instrument, at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. 3. In the event of default by Borrower in payment of the Obligations, or any part thereof, when such Obligations become due, either by their terms or as the result of the exercise of any power to accelerate, Guarantor shall, on demand, and without further notice of dishonor and without any notice having been given to Guarantor previous to such demand of the acceptance by Noteholders of this Guaranty, and without any notice having been given to such Guarantor previous to such demand of the creating or incurring of such Obligations, pay the amount due thereon to Noteholders at Administrative Agent's office as set forth in the Credit Agreement, and it shall not be necessary for any Noteholder, in order to enforce such payment by Guarantor, first, to institute suit or exhaust its remedies against Borrower or others liable on such Obligations, to have Borrower joined with Guarantor in any suit brought under this Guaranty or to enforce their rights against any security which shall ever have been given to secure such indebtedness; provided, however, that in the event any Noteholder -------- ------- ---- elects to enforce and/or exercise any remedies they may possess with respect to any security for the Obligations prior to demanding payment from Guarantor, Guarantor shall nevertheless be obligated hereunder for any and all sums still owing to Noteholders on the Obligations and not repaid or recovered incident to the exercise of such remedies. 4. Notice to Guarantor of the acceptance of this Guaranty and of the making, renewing or assignment of the Obligations and each item thereof, are hereby expressly waived by Guarantor. 5. Each payment on the Obligations shall be deemed to have been made by Borrower unless express written notice is given to Noteholders at the time of such payment that such payment is made by Guarantor as specified in such notice. 6. If all or any part of the Obligations at any time are secured, Guarantor agrees that Administrative Agent and/or Noteholders may at any time and from time to time, at their discretion and with or without valuable consideration, allow substitution or withdrawal of collateral or other security and release collateral or other security or compromise or settle any amount due or owing under the Credit Agreement or amend or modify in whole or in part the Credit Agreement or any Loan Paper executed in connection with same without impairing or diminishing the obligations of Guarantor hereunder. Guarantor further agrees that if Borrower executes in favor of any Noteholder any collateral agreement, mortgage or other security instrument, the exercise by any Noteholder of any right or remedy thereby conferred on such Noteholder shall be wholly discretionary with such Noteholder, and that the exercise or failure to exercise any such right or remedy shall in no way impair or diminish the obligation of Guarantor hereunder. Guarantor further agrees that Noteholders and Administrative Agent shall not be liable for their failure to use diligence in the collection of the Obligations or in preserving the liability of any person liable for the Obligations, and Guarantor hereby waives presentment for payment, notice of nonpayment, protest and notice thereof (including, notice of acceleration), and diligence in bringing suits against any Person liable on the Obligations, or any part thereof. 7. Guarantor agrees that Noteholders, in their discretion, may (i) bring suit against all guarantors (including, without limitation, Guarantor hereunder) of the Obligations jointly and C-2 severally or against any one or more of them, (ii) compound or settle with any one or more of such guarantors for such consideration as Noteholders may deem proper, and (iii) release one or more of such guarantors from liability hereunder, and that no such action shall impair the rights of Noteholders to collect the Obligations (or the unpaid balance thereof) from other such guarantors of the Obligations, or any of them, not so sued, settled with or released. Guarantor agrees, however, that nothing contained in this paragraph, and no action by Noteholders permitted under this paragraph, shall in any way affect or impair the rights or obligations of such guarantors among themselves. 8. Guarantor represents and warrants to each Noteholder that (i) Guarantor is a corporation, limited liability company or partnership duly organized and validly existing under the laws of the jurisdiction of its incorporation or formation; and (ii) Guarantor possesses all requisite authority and power to authorize, execute, deliver and comply with the terms of this Guaranty; this Guaranty has been duly authorized and approved by all necessary action on the part of Guarantor and constitutes a valid and binding obligation of Guarantor enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable Debtor Relief Laws; and no approval or consent of any court or governmental entity is required for the authorization, execution, delivery or compliance with this Guaranty which has not been obtained (and copies thereof delivered to Noteholders). As used in this Guaranty, the term, "Debtor Relief Laws" means the Bankruptcy Code of the United States of ------------------ America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. 9. Guarantor covenants and agrees that until the Obligations are paid and performed in full, except as otherwise provided in the Credit Agreement or unless Noteholders give their prior written consent to any deviation therefrom, it will (i) at all times maintain its existence and authority to transact business in any State or jurisdiction where Guarantor has assets and operations, (ii) promptly deliver to Noteholders and to Administrative Agent such information respecting its business affairs, assets and liabilities as Noteholders may reasonably request, and (iii) duly and punctually observe and perform all covenants applicable to Guarantor under the Credit Agreement and the other Loan Papers. The failure of Guarantor to comply with the terms of this paragraph shall be an Event of Default under the Credit Agreement. 10. This Guaranty is for the benefit of Noteholders, their successors and assigns, and in the event of an assignment by Noteholders (or their successors or assigns) of the Obligations, or any part thereof, the rights and benefits hereunder, to the extent applicable to the Obligations so assigned, may be transferred with such Obligations. This Guaranty is binding upon Guarantor and its successors and assigns. 11. No modification, consent, amendment or waiver of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing and signed by each Noteholder, and then shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on Guarantor in any case shall, of itself, entitle Guarantor to any other or further notice or demand in similar or other circumstances. No delay or omission by Noteholders in exercising any power or right hereunder shall impair any such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single C-3 or partial exercise of any such power preclude other or further exercise thereof, or the exercise of any other right or power hereunder. All rights and remedies of Noteholders hereunder are cumulative of each other and of every other right or remedy which Noteholders may otherwise have at law or in equity or under any other contract or document, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. 12. No provision herein or in any promissory note, instrument or any other Loan Paper executed by Borrower or Guarantor evidencing the Obligations shall require the payment or permit the collection of interest in excess of the Maximum Lawful Rate. If any excess of interest in such respect is provided for herein or in any such promissory note, instrument, or any other Loan Paper, the provisions of this paragraph shall govern, and neither Borrower nor Guarantor shall be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law. The intention of the parties being to conform strictly to any applicable federal or state usury laws now in force, all promissory notes, instruments and other Loan Papers executed by Borrower or Guarantor evidencing the Obligations shall be held subject to reduction to the amount allowed under said usury laws as now or hereafter construed by the courts having jurisdiction. 13. If Guarantor should breach or fail to perform any provision of this Guaranty, Guarantor agrees to pay Noteholders all costs and expenses (including court costs and reasonable attorneys fees) incurred by Noteholders in the enforcement hereof. 14. (a) The liability of Guarantor under this Guaranty shall in no manner be impaired, affected or released by the insolvency, bankruptcy, making of an assignment for the benefit of creditors, arrangement, compensation, composition or readjustment of Borrower, or any proceedings affecting the status, existence or assets of Borrower or other similar proceedings instituted by or against Borrower and affecting the assets of Borrower. (b) Guarantor acknowledges and agrees that any interest on any portion of the Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Obligations if said proceedings had not been commenced) shall be included in the Obligations because it is the intention of Guarantor, Administrative Agent and Noteholders that the Obligations which are guaranteed by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Borrower of any portion of such Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Noteholders or Administrative Agent, or allow the claim of Noteholders or Administrative Agent in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Obligations are paid by Borrower, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from Administrative Agent or any Noteholder as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Obligations for all purposes under this Guaranty. C-4 15. Guarantor understands and agrees that any amounts of Guarantor on account with any Noteholder may be offset to satisfy the obligations of Guarantor hereunder. 16. Guarantor hereby subordinates and makes inferior any and all indebtedness now or at any time hereafter owed by Borrower to Guarantor to the Obligations evidenced by the Credit Agreement and agrees after the occurrence of a Default under the Credit Agreement, or any event which with notice, lapse of time, or both, would constitute a Default under the Credit Agreement, not to permit Borrower to repay, or to accept payment from Borrower of, such indebtedness or any part thereof without the prior written consent of Noteholders. 17. During the period that Banks have any commitment to lend or participate in Letter of Credit Exposure under the Loan Papers, or any amount payable under any Note remains unpaid or any Letter of Credit remains outstanding, and throughout any additional preferential period subsequent thereto, Guarantor hereby waives any and all rights of subrogation to which Guarantor may otherwise be entitled against Borrower, or any other guarantor of the Obligations, as a result of any payment made by Guarantor pursuant to this Guaranty. 18. As of the date hereof, the fair saleable value of the property of Guarantor is greater than the total amount of liabilities (including contingent and unliquidated liabilities) of Guarantor, and Guarantor is able to pay all of its liabilities as such liabilities mature and Guarantor does not have unreasonably small capital within the meaning of Section 548, Title 11, United States Code, as amended. In computing the amount of contingent or liquidated liabilities, such liabilities have been computed at the amount which, in light of all the facts and circumstances existing as of the date hereof, represents the amount that can reasonably be expected to become an actual or matured liability. 19. If any provision of this Guaranty is held to be illegal, invalid, or unenforceable, such provision shall be fully severable; this Guaranty shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Guaranty a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable. 20. (a) Except to the extent required for the exercise of the remedies provided in the other security instruments, Guarantor hereby irrevocably submits to the nonexclusive jurisdiction of any Texas state or federal court over any action or proceeding arising out of or relating to this Guaranty or any other Loan Paper, and Guarantor hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Texas state or federal court. Guarantor hereby irrevocably waives, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of venue of any Litigation arising out of or in connection with this Guaranty or any of the Loan Papers brought in district courts of Dallas County, Texas, or in the United States District Court for the Northern District of Texas, Dallas Division. Guarantor hereby irrevocably waives any claim that any Litigation brought in any such court has been brought in an inconvenient forum. Guarantor hereby irrevocably consents to the service of process out of any C-5 of the aforementioned courts in any such Litigation by the mailing of copies thereof by certified mail, return receipt requested, postage prepaid, to Guarantor's office at ____________________________________________. Guarantor irrevocably agrees that any legal proceeding against Noteholders shall be brought in the district courts of Dallas County, Texas, or in the United States District Court for the Northern District of Texas, Dallas Division. Nothing herein shall affect the right of Noteholder to commence legal proceedings or otherwise proceed against Guarantor in any jurisdiction or to serve process in any manner permitted by applicable law. As used herein, the term "Litigation" ---------- means any proceeding, claim, lawsuit or investigation (i) conducted or threatened by or before any court or governmental department, commission, board, bureau, agency or instrumentality of the United States or of any state, commonwealth, nation, territory, possession, county, parish, or municipality, whether now or hereafter constituted or existing, or (ii) pending before any public or private arbitration board or panel. (b) Nothing in this Paragraph 20 shall affect any right of any ------------ Noteholder to serve legal process in any other manner permitted by law or affect the right of any Noteholder to bring any action or proceeding against Guarantor in the courts of any other jurisdictions. (c) To the extent that Guarantor has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Guarantor hereby irrevocably waives such immunity in respect of its obligations under this Guaranty and the other Loan Papers. 21. THIS GUARANTY AND THE OTHER LOAN PAPERS COLLECTIVELY REPRESENT THE FINAL AGREEMENT BY AND AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT AND GUARANTOR AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF NOTEHOLDERS, AGENT AND GUARANTOR. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT AND GUARANTOR. 22. GUARANTOR, FOR ITSELF, ITS SUCCESSORS AND ASSIGNS, HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RIGHT TO A JURY TRIAL, IN ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THIS GUARANTY OR ANY OF THE OTHER LOAN PAPERS. 23. THIS GUARANTY AND THE OTHER LOAN PAPERS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. [Signature page to follow] C-6 EXECUTED and effective as of the date first above written. GUARANTOR: [SUBSIDIARY OF BORROWER] By:_______________________________ Name:_____________________________ Title:____________________________ C-7 EXHIBIT D --------- REQUEST FOR BORROWING --------------------- Reference is made to that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (as from time to time amended, the "Agreement") by and among Quicksilver Resources Inc. ("Borrower"), NationsBank, --------- -------- N.A., as Administrative Agent, and certain Banks as named and defined therein. Terms which are defined in the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. Pursuant to the terms of the Agreement, Borrower hereby requests a Borrowing in the amount of $_____________ to be advanced on ________________________, _______. Borrower requests that the Borrowing to be made hereunder shall be [a Base Rate Borrowing] [a Eurodollar Borrowing], shall be in the aggregate amount set forth below, and shall have the Interest Period(s) set forth below: Type of Borrowing Aggregate Amount Interest Period ----------------- ---------------- --------------- ________________________ ______________________ _______________ ________________________ ______________________ _______________ ________________________ ______________________ _______________ Borrower and the Authorized Officer of Borrower signing this instrument hereby certify that: (a) Such officer is the duly elected, qualified and acting officer of Borrower as indicated below such officers signature hereto. (b) The representations and warranties of Borrower and each other Credit Party set forth in the Agreement and the Loan Papers delivered to Administrative Agent and Banks are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof or, if such representations and warranties are expressly limited to particular dates, as of such particular dates. No Material Adverse Change has occurred with respect to any Credit Party since the date of the last financial reports delivered to Banks pursuant to Section 10.1 of the Agreement. ------------ (c) There does not exist on the date hereof, any condition or event which constitutes a Default or Event of Default, nor will any such Default or Event of Default exist upon Borrower's receipt and application of the proceeds requested hereby. Borrower will use the proceeds hereby requested in compliance with the applicable provisions of the Agreement. D-1 (d) After giving effect to the Borrowing requested hereby, the Outstanding Credit will not be in excess of the Borrowing Base. IN WITNESS WHEREOF, this instrument is executed as of _________________, __________. QUICKSILVER RESOURCES INC., a Delaware corporation By:___________________________________ Name:_________________________________ Title:________________________________ D-2 EXHIBIT E --------- REQUEST FOR LETTER OF CREDIT ---------------------------- Reference is made to that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (as from time to time amended, the "Agreement"), by and among Quicksilver Resources Inc. ("Borrower"), NationsBank, --------- -------- N.A., as Administrative Agent, and certain Banks as named and defined therein. Terms which are defined in the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. Pursuant to the terms of the Agreement, Borrower hereby requests NationsBank, N.A., as Administrative Agent ("Issuer") to issue a Letter of ------ Credit for the account of Borrower, as follows: Type of Commitment: ------------------ Requested Amount $__________________________ Requested Date of Issuance ___________________________ Requested Expiration Date ___________________________ Summary of Terms ___________________________ (provide a brief description of conditions under which the drafts under such Letter of Credit are to be available) ___________________________ Beneficiary (Name/Address) ___________________________ ___________________________ ___________________________ ___________________________ Such Letter of Credit is more particularly described in the Letter of Credit Application and Agreement of Issuer which is attached hereto. Borrower and the Authorized Officer of Borrower signing this instrument hereby certify that: (a) Such officer is the duly elected, qualified and acting officer of Borrower as indicated below such officer's signature hereto. (b) The representations and warranties of Borrower and each Credit Party set forth in the Agreement and the other Loan Papers delivered to Administrative Agent and Banks are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof, or if such representations and warranties are expressly limited to particular dates, as of such particular dates. No Material Adverse Change has occurred with respect to a Credit Party since the date of the last financial reports delivered to Banks pursuant to Section 10.1 of the Agreement. ------------ E-1 (c) There does not exist on the date hereof any condition or event which constitutes a Default or Event of Default, nor will any such Default or Event of Default exist upon the issuance of the Letter of Credit requested hereby. Borrower will use the Letter of Credit solely for purposes permitted by the Agreement. (d) After the issuance of the Letter of Credit requested hereby, the Outstanding Credit will not be in excess of the Borrowing Base. IN WITNESS WHEREOF, this instrument is executed as of ________________, ___. QUICKSILVER RESOURCES INC., a Delaware corporation By:__________________________________ Name:________________________________ Title:_______________________________ E-2 EXHIBIT F --------- NOTICE OF CONTINUATION OR CONVERSION ------------------------------------ Reference is made to that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (as from time to time amended, the "Agreement"), by and among Quicksilver Resources Inc. ("Borrower"), NationsBank, --------- -------- N.A., as Administrative Agent, and certain Banks as named and defined therein. Terms which are defined in the Agreement and which are used but not defined herein are used herein with the meanings given them in the Agreement. [_] Reference is hereby made to the existing Eurodollar Loan outstanding under the Agreement in the amount of $________ which is subject to an Interest Period expiring on _________________, ____. Borrower hereby requests that on the expiration of such Interest Period the portion of the principal of such Eurodollar Loan which is subject to such Interest Period be made the subject of [_] a Base Rate Loan or [_] a Eurodollar Loan having an Interest Period of ____________ (___) months. [_] Borrower hereby requests that on _______________, ____, a portion of the principal of the Base Rate Loan in the amount of $_________ be made the subject of a Eurodollar Loan having an Interest Period of ____________ (___) months. Borrower and the Authorized Officer of Borrower signing this instrument hereby certify that: (a) Such officer is the duly elected, qualified and acting officer of Borrower as indicated below such officer's signature hereto; (b) There does not exist on the date hereof any condition or event which constitutes a Default or Event of Default; and (c) The representations and warranties of Borrower and each Credit Party set forth in the Agreement and the Loan Papers delivered to Administrative Agent and each Bank are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made on and as of the date hereof or, if such representations and warranties are expressly limited to particular dates, as of such particular dates. IN WITNESS WHEREOF, this instrument is executed as of ________, ____. QUICKSILVER RESOURCES INC., a Delaware corporation By:_______________________________ Name:_____________________________ Title:____________________________ F-1 EXHIBIT G --------- CERTIFICATE OF OWNERSHIP INTERESTS ---------------------------------- This Certificate of Ownership Interests (this "Certificate") is executed ----------- and delivered pursuant to that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (as amended from time to time, the "Agreement"), by and among Quicksilver Resources Inc. ("Borrower"), NationsBank, --------- -------- N.A., as Administrative Agent, and certain Banks as named and defined therein. Unless otherwise defined herein, all capitalized terms shall have the meanings given such terms in the Agreement. In order to induce Banks to extend credit to Borrower under the Agreement, Borrower hereby represents and warrants to Administrative Agent and each Bank that (a) Exhibit A attached hereto (the "Property Description") is a complete --------- -------------------- and accurate description of all Mineral Interests described in the Initial Reserve Reports (the "Initial Borrowing Base Properties"), (b) after giving --------------------------------- effect to the Closing Transactions, Borrower holds good and defensible title, subject only to Permitted Encumbrances and Immaterial Title Deficiencies, to the Initial Borrowing Base Properties described in the Property Description, (c) after giving effect to the Closing Transactions, Borrower's share of (i) the costs for each of the Initial Borrowing Base Properties is not greater than the decimal fraction set forth in the Initial Reserve Reports, before and after payout, as the case may be, and described therein by the respective designations "working interests," "WI," "gross working interest," "GWI," or similar terms (except in such cases where there is a corresponding increase in the net revenue interest), and (ii) production from, allocated to, or attributed to each of such Initial Borrowing Base Properties is not less than the decimal fraction set forth in the Initial Reserve Reports, before and after payout, as the case may be, and described therein by the designations "net revenue interest," "NRI," or similar terms, and (d) after giving effect to the Closing Transactions, each well drilled in respect of each of the Initial Borrowing Base Properties described in the Initial Reserve Reports (A) is capable of, and is presently, producing Hydrocarbons in commercially profitable quantities, Borrower is receiving payments for its share of production, with no funds in respect of any thereof being presently held in suspense, other than any such funds being held in suspense pending delivery of appropriate division orders, and (B) has been drilled, bottomed, completed and operated in compliance with all applicable Laws and no such well which is currently producing Hydrocarbons is subject to any penalty in production by reason of such well having produced in excess of its allowable production. Borrower acknowledges and agrees that each Bank is relying on this Certificate and the representations and warranties herein contained in extending credit under the Agreement, and but for Borrower's execution and delivery of this Certificate, Banks would not extend credit under the Agreement. G-1 Executed as of the 4/th/ day of March, 1999. QUICKSILVER RESOURCES INC., a Delaware corporation By:____________________________________ Glenn Darden, President G-2 EXHIBIT A --------- Initial Borrowing Base Properties (to be attached) G-3 EXHIBIT H --------- CERTIFICATE OF FINANCIAL OFFICER -------------------------------- The undersigned, the ____________ of Quicksilver Resources Inc., a Delaware corporation ("Borrower") hereby (a) delivers this Certificate pursuant to -------- Section 10.1(c) of that certain Second Amended and Restated Credit Agreement - --------------- ("Credit Agreement") dated as of March 1, 1999, by and among Borrower, ---------------- NationsBank, N.A., as Administrative Agent, and the financial institutions listed on Schedule 1 thereto, as Banks ("Banks"), and (b) certifies to Banks, ----- with the knowledge and intent that Banks may, without any independent investigation, rely fully on the matters herein in connection with the Credit Agreement, as follows: 1. Attached hereto as Schedule I are the financial statements of Borrower ---------- as of and for the Fiscal [_] Year [_] Quarter (check one) ended ____________, ____. 2. Such financial statements are true and correct, have been prepared on a consistent basis in accordance with GAAP (except as otherwise noted therein) and fairly present the financial condition of Borrower as of the date indicated therein and the results of operations for the respective periods indicated therein. 3. Attached hereto as Schedule II are detailed calculations used by ----------- Borrower to establish that Borrower was in compliance with the requirements of Article XII of the Credit Agreement on the date of the financial statements attached as Schedule I hereto. ---------- 4. Unless otherwise disclosed on Schedule III attached hereto and ------------ incorporated herein by reference for all purposes, neither a Default nor an Event of Default has occurred which is in existence on the date hereof; provided, that, for any Default or Event of Default disclosed on Schedule III - -------- ---- ------------ attached hereto, Borrower is taking or proposes to take the action to cure such Default or Event of Default set forth on Schedule III. ------------ 5. On the date hereof (a) (check one) [_] there is no Material Gas Imbalance or [_] the amount of the net gas imbalances under Gas Balancing Agreements to which Borrower is a party or by which any Mineral Interests owned by Borrower or any of its Subsidiaries is bound is ____________________, and (b) the aggregate amount of all Advance Payments received under Advance Payment Contracts to which any Credit Party is a party or by which any Mineral Interests owned by Borrower or any other Credit Party is bound which have not been satisfied by delivery of production, if any, is _______________________________. 6. Attached hereto as Schedule IV is a summary of the Hedge Transactions ----------- to which Borrower or any other Credit Party is a party on the date hereof. 7. Unless otherwise described on Schedule V attached hereto and ---------- incorporated herein by reference for all purposes, the representations and warranties of Borrower and each other Credit Party set forth in the Credit Agreement and the other Loan Papers are true and correct on and as of the date hereof, with the same effect as though such representations and warranties had been made H-1 on and as of the date hereof, or if such representations and warranties are expressly limited to particular dates, as of such particular dates. Unless otherwise defined herein, all capitalized terms used herein shall have the meaning given such terms in the Credit Agreement. IN WITNESS WHEREOF, the undersigned has duly executed this Certificate of Financial Officer as of ___________, ____. QUICKSILVER RESOURCES INC., a Delaware corporation By: ______________________________ Name: ______________________________ Title: ______________________________ H-2 Schedule I ---------- Financial Statements (to be attached) H-3 Schedule II ----------- Compliance Calculations (to be attached) H-4 Schedule III ------------ Defaults/Remedial Action (to be attached) H-5 Schedule IV ----------- Summary of Hedge Transactions (to be attached) H-6 Schedule V ---------- Qualifications to Representations and Warranties (to be attached) H-7 EXHIBIT I --------- ASSIGNMENT AND ACCEPTANCE ------------------------- Reference is made to that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (the "Credit Agreement") among Quicksilver ---------------- Resources Inc., ("Borrower"), NationsBank, N.A., as Administrative Agent -------- ("Administrative Agent"), and the financial institutions listed on Schedule 1 -------------------- thereto, as Banks ("Banks"). Terms defined in the Credit Agreement are used ----- herein with the same meaning. The "Assignor" and the "Assignee" referred to on Schedule 1 agree as follows: 1. Assignor hereby sells and assigns to Assignee, without recourse and without representation or warranty except as expressly set forth herein, and Assignee hereby purchases and assumes from Assignor, an interest in and to Assignor's rights and obligations under the Credit Agreement and the other Loan Papers as of the date hereof equal to the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement - ---------- and the other Loan Papers. After giving effect to such sale and assignment, Assignee's Commitment, Assignee's Commitment Percentage and the principal amount of the Loan owing to Assignee will be as set forth on Schedule 1. ---------- 2. Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Papers or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Papers or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under the Loan Papers or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note held by Assignor and requests that Administrative Agent exchange such Note for new Notes payable to the order of Assignee in an amount equal to the Commitment assumed by Assignee pursuant hereto and to Assignor in an amount equal to the Commitment retained by Assignor, if any, as specified on Schedule 1. - ---------- 3. Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 10.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon any Agent, Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to each such Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are I-1 required to be performed by it as a Bank; and (vi) attaches any U.S. Internal Revenue Service or other forms required under Section 5.6. 4. Following the execution of this Assignment and Acceptance, it will be delivered to Administrative Agent for acceptance and recording by Administrative Agent. The effective date for this Assignment and Acceptance (the "Effective --------- Date") shall be the date of acceptance hereof by Administrative Agent, unless - ---- otherwise specified on Schedule 1. ---------- 5. Upon such acceptance and recording by Administrative Agent, as of the Effective Date, (i) Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder, and (ii) Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by Administrative Agent, from and after the Effective Date, Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to Assignee. Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Texas. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall ---------- be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, Assignor and Assignee have caused Schedule 1 to this ---------- Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. I-2 SCHEDULE 1 to ASSIGNMENT AND ACCEPTANCE Percentage interest assigned: ________% Assignee's Commitment: $_______ Assignee's Commitment Percentage: ________% Aggregate outstanding principal amount of Loan assigned: $_______ Principal amount of Note payable to Assignee: $_______ Principal amount of Note payable to Assignor: $_______ Effective Date (if other than date of acceptance by Administrative Agent): *_______, _____ [NAME OF ASSIGNOR], as Assignor By:_________________________ Title:___________________ Dated: ______________, _____ [NAME OF ASSIGNEE], as Assignee By:_________________________ Title:___________________ Domestic Lending Office: Eurodollar Lending Office: * This date should be no earlier than five Domestic Business Days after the delivery of this Assignment and Acceptance to Administrative Agent unless an earlier date is agreed to by Assignor, Assignee, Administrative Agent and Borrower. I-3 Accepted and Approved this ___ day of ___________, _____ NATIONSBANK, N.A., as Administrative Agent By:_________________________ Name:_______________________ Title:______________________ Approved this ____ day of ____________, ______ QUICKSILVER RESOURCES INC. By:_______________________ Name:_____________________ Title:____________________ I-4 EXHIBIT J --------- CERTIFICATE OF EFFECTIVENESS ---------------------------- This Certificate of Effectiveness (this "Certificate") is executed the ----------- 4/th/ day of March, 1999 by and between Quicksilver Resources Inc. ("Borrower") -------- and NationsBank, N.A., as Administrative Agent ("Administrative Agent") for the -------------------- Banks under and as defined in that certain Second Amended and Restated Credit Agreement (the "Agreement") dated as of March 1, 1999 by and among Borrower, --------- Administrative Agent, and the Banks named therein. This Certificate is executed pursuant to Section 8.1 of the Agreement and is the "Certificate of ----------- Effectiveness" therein referenced. Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Agreement. Borrower and Administrative Agent on behalf of itself and the Banks hereby acknowledge and agree as follows: 1. Borrower has satisfied each condition precedent to the effectiveness of the Agreement contained in Section 8.1 of the Agreement. ----------- 2. The Agreement is effective as of the date hereof. NATIONSBANK, N.A., as Administrative Agent for the Banks By:________________________________________ J. Scott Fowler, Vice President QUICKSILVER RESOURCES INC. By:________________________________________ Glenn Darden, President J-1 SCHEDULE 1 FINANCIAL INSTITUTIONS
=============================================================== Commitment Commitment Banks Amount Percentage ----- ---------- ---------- --------------------------------------------------------------- NationsBank, N.A. $40,588,235.29 20.2941176% =============================================================== Paribas $58,823,529.41 29.4117647% =============================================================== Bank One, Texas, N.A. $47,058,823.53 23.5294118% =============================================================== Frost National Bank $23,529,411.76 11.7647059% =============================================================== CIBC, Inc. $ 15,000,000 7.5000000% =============================================================== Christiania Bank $ 15,000,000 7.5000000% =============================================================== Totals $ 200,000,000 100% ===============================================================
======================================================================================================================== Domestic Lending Eurodollar Lending Banks Office Office Address for Notice ----- ------ ------ ------------------ - ------------------------------------------------------------------------------------------------------------------------ NationsBank, N.A. 901 Main Street 901 Main Street 901 Main Street 64th Floor 64th Floor 64th Floor Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202 Fax No. (214) 508-1285 Fax No. (214) 508-1285 Fax No. (214) 508-1285 ======================================================================================================================== Bank One, Texas, N.A. 1717 Main Street 1717 Main Street 1717 Main Street 4/th/ Floor 4/th/ Floor 4/th/ Floor Dallas, Texas 75201 Dallas, Texas 75201 Dallas, Texas 75201 Fax No. (214) 290-2332 Fax No. (214) 290-2332 Fax No. (214) 290-2332 ======================================================================================================================== Paribas 1200 Smith Street 1200 Smith Street 1200 Smith Street Suite 3100 Suite 3100 Suite 3100 Houston, Texas 77002 Houston, Texas 77002 Houston, Texas 77002 Fax No. (713) 659-6915 Fax No. (713) 659-6915 Fax No. (713) 659-6915 ======================================================================================================================== Frost National Bank Continental Plaza Continental Plaza Continental Plaza 777 Main Street 777 Main Street 777 Main Street Fort Worth, Texas 76102-5304 Fort Worth, Texas 76102-5304 Fort Worth, Texas 76102-5304 Fax No. (817) 336-5615 Fax No. (817) 336-5615 Fax No. (817) 336-5615 ======================================================================================================================== CIBC, Inc. 2 Paces West 2 Paces West 2 Paces West Suite 1200 Suite 1200 Suite 1200 2727 Paces Ferry Road 2727 Paces Ferry Road 2727 Paces Ferry Road Atlanta, Georgia 30339 Atlanta, Georgia 30339 Atlanta, Georgia 30339 Fax No. (770) 319-4950 Fax No. (770) 319-4950 Fax No. (770) 319-4950 ========================================================================================================================
======================================================================================================================== Christiania Bank OG 11 West 42nd Street 11 West 42nd Street 11 West 42nd Street Kreditkasse ASA 7th Floor 7th Floor 7th Floor New York, New York 10036 New York, New York 10036 New York, New York 10036 Fax No. (212) 827-4888 Fax No. (212) 827-4888 Fax No. (212) 827-4888 ========================================================================================================================
Administrative Agent - Address NationsBank, N.A. 901 Main Street, 64/th/ Floor Dallas, Texas 75202 Attn: Scott Fowler Fax No. (214) 508-1285 SCHEDULE 2 INVESTMENTS NONE SCHEDULE 3 LITIGATION NONE SCHEDULE 4 CAPITALIZATION (to be attached) SCHEDULE 5 ENVIRONMENTAL DISCLOSURE NONE EX-10.9 5 FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CRE EXHIBIT 10.9 FIRST AMENDMENT TO ------------------ SECOND AMENDED AND RESTATED CREDIT AGREEMENT -------------------------------------------- This First Amendment to Second Amended and Restated Credit Agreement (this "First Amendment") is entered into as of May 17, 1999 by and among QUICKSILVER --------------- RESOURCES INC., a Delaware corporation ("Borrower"), NATIONSBANK, N.A., a -------- national banking association, as Administrative Agent ("Administrative Agent") -------------------- and each of the financial institutions set forth on the signature pages hereto as Banks. W I T N E S S E T H: ------------------- WHEREAS, Borrower, Administrative Agent, NationsBank, N.A. in its individual capacity ("NationsBank"), Bank One, Texas, N.A. ("Bank One"), Paribas ----------- -------- and Frost National Bank ("Frost," and together with NationsBank and Paribas ----- collectively referred to herein as "Banks") are parties to that certain Second ----- Amended and Restated Credit Agreement dated as of March 1, 1999 (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, NationsBank, Bank One, Paribas and Frost have made a Loan to Borrower and provided certain other credit accommodations to Borrower; and WHEREAS, (a) prior to the execution of this First Amendment, Bank One has entered into an Assignment and Acceptance Agreement with NationsBank, pursuant to which Bank One has assigned to NationsBank, and NationsBank (i) acquired from Bank One one hundred percent (100%) of Bank One's Commitment and one hundred percent (100%) of the Loan and Letter of Credit Exposure held by Bank One under the Credit Agreement and each of the other Loan Papers, and (ii) assumed and agreed to perform all of Bank One's obligations under the Credit Agreement and each of the other Loan Papers, and (b) immediately prior to the execution of this First Amendment, Frost has entered into Assignment and Acceptance Agreement with NationsBank, pursuant to which Frost has assigned to NationsBank, and NationsBank (i) acquired from Frost a portion of Frost's Commitment and a portion of the Loan and Letter of Credit Exposure held by Frost under the Credit Agreement and each of the other Loan Papers, and (ii) assumed and agreed to perform a portion of Frost's obligations under the Credit Agreement and the other Loan Papers; and WHEREAS, Schedule 1 hereto reflects the Commitments of each Bank after ---------- giving effect to the Assignment and Acceptance Agreements referenced above, and Schedule 1 to the Credit Agreement is deemed amended and restated in the form of Schedule 1 hereto; and - ---------- WHEREAS, Borrower has entered into that certain Purchase and Sale Agreement dated as of March 31, 1999 (the "Unocal Acquisition Agreement"), executed by and ---------------------------- between Borrower, as buyer thereunder, and Union Oil Company of California, a California corporation ("Unocal"), as seller thereunder, pursuant to which ------ Borrower has agreed to purchase, and Unocal has agreed to sell, certain properties and assets (the "Unocal Properties") more particularly described ----------------- therein (the "Unocal Acquisition"); and ------------------ WHEREAS, in connection with the consummation of the Unocal Acquisition, Borrower has requested that, among other things, Banks (a) amend certain terms of the Credit Agreement in certain respects, and (b) establish (i) a Borrowing Base in the amount of $115,000,000, and (ii) a Conforming Borrowing Base in the amount of $95,000,000, to be effective May 17, 1999 and continuing until the next Redetermination Date; and WHEREAS, subject to the terms and conditions herein contained, Banks have agreed to Borrower's requests. 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 Banks hereby agree as follows: SECTION 1. Amendments. Subject to the satisfaction of each condition --------- ---------- precedent set forth in Section 4 hereof, and in reliance on the representations, --------- warranties, covenants and agreements contained in this First Amendment, the Credit Agreement shall be amended effective May 17, 1999 (the "Effective Date") -------------- in the manner provided in this Section 1. --------- 1.1 Additional Definitions. Section 2.1 of the Credit Agreement shall be ---------------------- amended to add thereto in alphabetical order the definitions of "Asset ----- Disposition," "Equity Contribution," "Existing Mineral Interests," "First - ----------- ------------------- -------------------------- ----- Amendment," "Mandatory Redetermination," "Net Cash Proceeds," "Permitted - --------- ------------------------- ----------------- --------- Unsecured Loan," "Unocal," "Unocal Acquisition," "Unocal Acquisition Agreement," - -------------- ------ ------------------ ---------------------------- "Unocal Acquisition Documents," "Unocal Properties," "Unocal Redetermination," ---------------------------- ----------------- ---------------------- "Unocal Redetermination Date" and "Unocal Reserve Report" which shall read in - ---------------------------- --------------------- full as follows: "Asset Disposition" means any sale, assignment, lease, license, ----------------- exchange or other disposition by Borrower of any of its assets, but excluding any of the foregoing expressly permitted pursuant to Section 11.5 ------------ hereof. "Equity Contribution" means any cash contribution to the equity ------------------- capital of Borrower occurring in connection with the issuance or sale of equity securities by Borrower. "Existing Mineral Interests" means the Mineral Interests owned by -------------------------- Borrower on the effective date of the First Amendment prior to giving effect to the Unocal Acquisition, which Mineral Interests are described in the Initial Reserve Reports. "First Amendment" means that certain First Amendment to Second Amended --------------- and Restated Credit Agreement dated as of May 17, 1999 among Borrower, Administrative Agent and the financial institutions a party thereto as Banks. "Mandatory Redetermination" means any reduction of the Borrowing Base ------------------------- pursuant to Section 6.7. Notwithstanding anything to the contrary ----------- contained herein, no Mandatory Redetermination shall be deemed or construed to be a Special Redetermination hereunder. 2 "Net Cash Proceeds" means the remainder of (a) the gross proceeds ----------------- received by Borrower from an Equity Contribution or Asset Disposition, less (b) underwriter discounts and commissions, investment banking fees, legal, accounting and other professional fees and expenses and other usual and customary transaction costs, in each case only to the extent paid or payable by Borrower in cash and related to such Equity Contribution or Asset Disposition. "Permitted Unsecured Loan" means that certain unsecured revolving loan ------------------------ from Mercury to Borrower in an amount up to $2,000,000. "Unocal" means Union Oil Company of California, a California ------ corporation. "Unocal Acquisition" means the purchase by Borrower of the Unocal ------------------ Properties pursuant to the Unocal Acquisition Agreement. "Unocal Acquisition Agreement" means that certain Purchase and Sale ---------------------------- Agreement dated as of March 31, 1999, by and between Borrower and Unocal. "Unocal Acquisition Documents" means the Unocal Acquisition Agreement ---------------------------- and all agreements, assignments, deeds, conveyances, certificates and other documents and instruments now or hereafter executed and delivered by or between Borrower and Unocal pursuant to the Unocal Acquisition Agreement or in connection with the Unocal Acquisition. "Unocal Properties" means the "Assets" as defined in the Unocal ----------------- Acquisition Agreement. "Unocal Redetermination" means any Redetermination of the Borrowing ---------------------- Base pursuant to Section 6.6. Notwithstanding anything to the contrary ----------- contained herein, no Unocal Redetermination shall be deemed or construed to be a Special Redetermination hereunder. "Unocal Redetermination Date" means any date on which either (a) any --------------------------- Borrowing Base Property (or any interest therein) is excluded from the Unocal Acquisition pursuant to the terms of Sections 10.3.1 and 19.6.1(c) of the Unocal Acquisition Agreement, or (b) the Purchase Price (as defined in the Unocal Acquisition Agreement) is adjusted downward (i) pursuant to Sections 10.3.1, 10.3.2, 19.6.1(b), and 19.6.1(c) of the Unocal Acquisition Agreement, or (ii) after final determination thereof pursuant to Section 3.2 of the Unocal Acquisition Agreement and in accordance with the procedures set forth in Section 13 of the Unocal Acquisition Agreement. "Unocal Reserve Report" means an engineering and economic analysis of --------------------- the Unocal Properties prepared as of January 1, 1999 by S.A. Holditch & Associates, Inc. 1.2 Amendment to Definitions. The definitions of "Applicable Margin," ------------------------ ----------------- "Borrowing Base Properties," "Letter of Credit Fee," "Loan Papers," - -------------------------- -------------------- ----------- "Redetermination," "Redetermination Date," - ---------------- -------------------- 3 "Reserve Report" and "Restricted Payment" set forth in Section 2.1 of the -------------- ------------------ Credit Agreement are amended to read in full as follows: "Applicable Margin" means, on any date, with respect to each ----------------- Eurodollar Loan, an amount determined by reference to the ratio of Outstanding Credit to the Conforming Borrowing Base on such date in accordance with the table below:
------------------------------------------------------------- Ratio of Outstanding Applicable Margin for Credit to Conforming Eurodollar Loans Borrowing Base ------------------------------------------------------------- * .50 to 1 1.125% ------------------------------------------------------------- ** .50 to 1 * .75 to 1 1.375% ------------------------------------------------------------- ** .75 to 1 * .90 to 1 1.625% ------------------------------------------------------------- ** .90 to 1 * 1.00 to 1 1.875% ------------------------------------------------------------- ** 1.00 * to 1 2.375% -------------------------------------------------------------
* less than or equal to ** greater than "Borrowing Base Properties" means all Mineral Interests evaluated by ------------------------- Banks for purposes of establishing the Borrowing Base. The Borrowing Base Properties on the effective date of the First Amendment consist of the Existing Mineral Interests and the Unocal Properties described in the Unocal Reserve Report. "Letter of Credit Fee" means, with respect to any Letter of Credit -------------------- issued hereunder, a fee in an amount equal to a percentage of the stated amount of such Letter of Credit (calculated on a per annum basis based on the stated term of such Letter of Credit) determined by reference to the ratio of Outstanding Credit to the Conforming Borrowing Base in effect on the date such Letter of Credit is issued in accordance with the table below:
------------------------------------------------------------- Ratio of Outstanding Per Annum Letter of Credit to Conforming Credit Fee Borrowing Base ------------------------------------------------------------- * .50 to 1 1.125% ------------------------------------------------------------- ** .50 to 1 * .75 to 1 1.375% ------------------------------------------------------------- ** .75 to 1 * .90 to 1 1.625% ------------------------------------------------------------- ** .90 to 1 * 1.00 to 1 1.875% ------------------------------------------------------------- ** 1.00 * to 1 2.375% -------------------------------------------------------------
* less than or equal to ** greater than "Loan Papers" means this Agreement, the First 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 Assignment of Notes and Liens, and all other certificates, documents or instruments delivered in connection with this Agreement, as the foregoing may be amended from time to time. 4 "Redetermination" means (i) any Scheduled Redetermination, (ii) any --------------- Special Redetermination, (iii) any Unocal Redetermination and (iv) any Mandatory Redetermination. "Redetermination Date" means (a) with respect to any Scheduled -------------------- Redetermination, each June 1 and December 1, commencing December 1, 1999, (b) with respect to any Special Redetermination, the first day of the first month which is not less than twenty (20) Domestic Business Days following the date of a request for a Special Redetermination, (c) with respect to each Unocal Redetermination, the Unocal Redetermination Date, and (d) with respect to each Mandatory Redetermination (i) the date upon which Borrower consummates any Equity Contribution or Asset Disposition in accordance with the terms of Section 6.7(a) or (b), and (ii) December 1, 1999. -------------- --- "Reserve Report" means an unsuperseded engineering analysis of the -------------- Mineral Interests owned by Borrower, in form and substance reasonably acceptable to Required Banks, prepared in accordance with customary and prudent practices in the petroleum engineering industry and Financial Accounting Standards Board Statement 69. Each Reserve Report required to be delivered by March 31 of each year pursuant to Section 6.1 shall be ----------- prepared by the Approved Petroleum Engineer. Each other Reserve Report shall be prepared by Borrower's in-house staff. Notwithstanding the foregoing, in connection with any Special Redetermination requested by Borrower, the Reserve Report shall be in form and scope mutually acceptable to Borrower and Required Banks. Until superseded, each of the Initial Reserve Reports and the Unocal Reserve Report shall be considered a Reserve Report. "Restricted Payment" means, with respect to any Person, (a) any ------------------ Distribution by such Person, or (b) the retirement, redemption or prepayment prior to scheduled maturity by such Person or any Affiliate of such Person of any Debt of such Person (other than payments of the indebtedness evidenced by the Permitted Unsecured Loan). 1.3 Amendment to Borrowing Base Deficiency Provisions. Section 3.4 of the ------------------------------------------------- Credit Agreement is amended to read in full as follows: "SECTION 3.4. Mandatory Prepayments Resulting From Borrowing Base --------------------------------------------------- Deficiency. Except with respect to a Unocal Redetermination pursuant to ---------- Section 6.6 hereof, or a Mandatory Redetermination pursuant to Section 6.7 ----------- ----------- hereof, in the event a Borrowing Base Deficiency exists after giving effect to any Redetermination, Borrower shall, at its option, either (a) eliminate such Borrowing Base Deficiency by making a single mandatory prepayment of principal on the Loan in an amount equal to the entire amount of such Borrowing Base Deficiency on the first Monthly Date following the date on which such Borrowing Base Deficiency is determined to exist, or (b) eliminate such deficiency by making six (6) consecutive mandatory prepayments of principal on the Loan each of which shall be in the amount 5 of one sixth (1/6th) of the amount of such Borrowing Base Deficiency commencing on the first Monthly Date following the date on which such Borrowing Base Deficiency is determined to exist and continuing on each Monthly Date thereafter. If a Borrowing Base Deficiency cannot be eliminated pursuant to this Section 3.4 by prepayment of the Loan in full ----------- (as a result of outstanding Letter of Credit Exposure) on each Monthly Date, Borrower shall also deposit cash with Administrative Agent, to be held by Administrative Agent to secure outstanding Letter of Credit Exposure in the manner contemplated by Section 3.1(b), in an amount at -------------- least equal to one sixth (1/6th) of the balance of such Borrowing Base Deficiency (i.e., one-sixth (1/6th) of the difference between the Borrowing Base Deficiency and the remaining outstanding principal under the Loan on the date such Borrowing Base Deficiency is first determined to occur). In the event a Borrowing Base Deficiency shall occur (or an increase in any pre-existing Borrowing Base Deficiency shall occur) as a result of a Unocal Redetermination pursuant to Section 6.6 or a Mandatory Redetermination ----------- pursuant to Section 6.7, Borrower shall immediately make a single mandatory ----------- prepayment of principal on the Loan in an amount equal to the entire amount of such Borrowing Base Deficiency; provided, that in the event the -------- ---- Conforming Borrowing Base is reduced to an amount less than $95,000,000 pursuant to any Scheduled or Special Redetermination completed on or prior to December 1, 1999, the mandatory prepayment of the Loan required by the foregoing provisions and attributable to the reduction in the Borrowing Base in accordance with Section 6.7(c), will be limited to the amount -------------- necessary to immediately reduce the Outstanding Credit to $95,000,000, and any remaining Borrowing Base Deficiency will be eliminated, at Borrower's option, in accordance with clauses (a) or (b) of this Section 3.4." ----------- 1.4 Mandatory Prepayment Following Certain Events. Article III of the --------------------------------------------- Credit Agreement shall be amended by inserting a new Section 3.10 thereto which shall read in full as follows: "SECTION 3.10. Mandatory Prepayments Following Certain Events. ---------------------------------------------- Immediately upon the consummation by Borrower of an Equity Contribution, and at any time when the Borrowing Base exceeds the Conforming Borrowing, immediately upon the consummation of an Asset Disposition, Borrower shall make a mandatory prepayment of principal on the Loan in the amount of the Net Cash Proceeds received by Borrower from such transaction." 1.5 Amendments to Article VI. Article VI of the Credit Agreement shall be ------------------------ amended by inserting new Sections 6.6 and 6.7 thereto which shall read in full as follows: "SECTION 6.6. Unocal Redetermination. In addition to Scheduled ---------------------- Redeterminations, Special Redeterminations and Mandatory Redeterminations, Required Banks shall be permitted to make an additional Redetermination of the Borrowing Base and the Conforming Borrowing Base on each Unocal Redetermination Date (or as of a date shortly thereafter to be designated by Administrative Agent in a notice to Borrower), pursuant to which Required Banks may reduce the Borrowing Base and the Conforming Borrowing Base by such amount as Required Banks shall determine in their sole discretion as a result of (a) the 6 existence of any uncured Title Defect or Material Environmental Deficiency (as each such term is defined in the Unocal Acquisition Agreement), and (b) the exclusion from the Unocal Acquisition of any Borrowing Base Properties (or any interest therein) pursuant to Sections 3.6, 3.8 or 4.9 of the Unocal Acquisition Agreement. SECTION 6.7. Mandatory Redetermination; Mandatory Reduction of ------------------------------------------------- Borrowing Base. Notwithstanding anything to the contrary contained herein, -------------- the Borrowing Base shall reduce (a) immediately upon the consummation by Borrower of any Equity Contribution by the amount of the Net Cash Proceeds received by Borrower from such transaction (but in no event to an amount less than the Conforming Borrowing Base then in effect), (b) immediately upon the consummation by Borrower of any Asset Disposition by an amount equal to the loan value of such assets sold or disposed of pursuant to such transaction as determined by NationsBank for purposes of determining the portion of the Borrowing Base which it attributes to such assets in accordance with Article VI hereof (but in no event to an amount less than ---------- the Conforming Borrowing Base then in effect and after giving effect to any Redetermination of the Conforming Borrowing Base as a result of such Asset Disposition), and (c) on December 1, 1999 to the Conforming Borrowing Base (unless the Borrowing Base has previously been reduced to an amount less than $95,000,000 pursuant to any Scheduled or Special Redetermination)." 1.6 Amendment to Debt Covenant. Section 11.1 of the Credit Agreement -------------------------- shall be 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 the Obligations and Debt evidenced by the Permitted Unsecured Loan; provided, that, at any time when the Outstanding Credit is -------- ---- less than the Conforming Borrowing Base and no Default or Event of Default 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 $1,000,000." 1.7 Amendment to Transactions with Affiliates Covenant. Section 11.9 of -------------------------------------------------- the Credit Agreement shall be amended to read in full as follows: "SECTION 11.9. Transactions with Affiliates. Except for the ---------------------------- Permitted Unsecured Loan and the transactions contemplated thereby, Borrower will not, nor will Borrower permit any other Credit Party to, engage in any transaction with an Affiliate unless such transaction is as favorable to such party as could be obtained in an arm's length transaction with an unaffiliated Person in accordance with prevailing industry customs and practices." 7 1.8 Schedule 1. Schedule 1 to the Credit Agreement shall be amended to ---------- read in full as set forth in Schedule 1 attached to this First Amendment which ---------- Schedule 1 is incorporated into the Credit Agreement in its entirety. - ---------- SECTION 2. Certain Agreements Regarding the Borrowing Base and the --------- ------------------------------------------------------- Conforming Borrowing Base. Borrower, Administrative Agent and each Bank agree, - ------------------------- subject to the satisfaction of each condition precedent set forth in Section 4 --------- of this First Amendment, that the Borrowing Base and the Conforming Borrowing Base in effect during the period commencing on May 17, 1999 and ending on the next Redetermination thereafter (taking into account the waiver described in Section 3 hereof) shall be $115,000,000 and $95,000,000, respectively. - --------- Borrower, Administrative Agent and each Bank agree that the Redetermination provided for in this Section 2 shall not be deemed, or construed to be, a --------- Special Redetermination for purposes of Section 6.3 of the Credit Agreement. SECTION 3. Waiver of June 1, 1999 Scheduled Redetermination. Borrower, --------- ------------------------------------------------ each Bank and Administrative Agent hereby agree to waive the Scheduled Redetermination of the Borrowing Base and the Conforming Borrowing Base scheduled to occur on or promptly following June 1, 1999 (the "June 1, 1999 ------------ Redetermination"). The waiver of the June 1, 1999 Redetermination herein - --------------- contained is expressly limited as follows: (a) such waiver is limited solely to Section 6.2 of the Credit Agreement, and solely with respect to the June 1, 1999 Redetermination, and (b) such waiver is a limited, one-time waiver, and nothing contained herein shall obligate any Bank to grant any additional or future waiver of (i) any Redetermination, (ii) Section 6.2 of the Credit Agreement, or (iii) any other provision of any Loan Paper. SECTION 4. Conditions Precedent to Effectiveness of Amendments. The --------- --------------------------------------------------- amendments to the Credit Agreement contained in Section 1 of this First --------- Amendment, the agreements of Administrative Agent and Banks contained in Section 2 of this First Amendment, and the waiver of the Scheduled - --------- Redetermination contained in Section 3 of this First Amendment shall be --------- effective only upon 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 and each of which shall, unless otherwise indicated, be dated the Effective Date: (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, 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 the Unocal Properties; (c) a copy of the Restated Certificate of Incorporation and all amendments thereto, of Borrower accompanied by a certificate that such copy is true, correct and complete, and dated 8 within ten (10) days of the Effective Date, issued by the appropriate Governmental Authority of the jurisdiction of incorporation of Borrower, and accompanied by a certificate of the Secretary or comparable Authorized Officer of Borrower that such copy is true, correct and complete on the Effective Date; (d) a copy of the bylaws of Borrower, and all amendments thereto, accompanied by a certificate of the Secretary or comparable Authorized Officer of Borrower that such copy is true, correct and complete as of the date hereof; (e) certain certificates and other documents issued by the appropriate Governmental Authorities of such jurisdictions as Administrative Agent has requested relating to the existence of Borrower and to the effect that Borrower is in good standing with respect to the payment of franchise and similar Taxes and is duly qualified to transact business in such jurisdictions; (f) a certificate of incumbency of all officers of Borrower (to the extent a party to any Loan Paper) who will be authorized to execute or attest to any Loan Paper, dated the date hereof, executed by the Secretary or comparable Authorized Officer of Borrower; (g) copies of resolutions or comparable authorizations approving the First Amendment, the Mortgages and the other Loan Papers executed in connection with the First Amendment and authorizing the transactions contemplated by this First Amendment and the other Loan Papers, duly adopted by the Board of Directors or comparable governing authority of Borrower accompanied by certificates of the Secretary or comparable officer of Borrower 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 Borrower) by the unanimous written consent of the Board of Directors or comparable governing authority of Borrower, 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 date hereof; (h) an opinion of Cantey & Hanger, L.L.P., special counsel for Borrower, dated the date hereof, favorably opining as to the enforceability of this First Amendment and each of the other Loan Papers and otherwise in form and substance satisfactory to Administrative Agent and Banks; (i) an opinion of Loomis, Ewert, Parsley, Davis & Gotting, special Michigan counsel to Administrative Agent, favorably opining as to such matters as Administrative Agent or Banks may request; (j) such UCC-11 search reports as Administrative Agent shall require, prepared as of a date not more than twenty (20) days prior to the Effective Date, conducted in such jurisdictions and reflecting such names as Administrative Agent shall request; (k) a Certificate of Ownership Interests signed by an Authorized Officer of Borrower in the form of Exhibit G attached to the Credit Agreement --------- (with applicable conforming changes relevant to the Unocal Properties and the Unocal Acquisition); 9 (l) a copy of each Unocal Acquisition Document and all other material documents, instruments and agreements executed and/or delivered by Borrower in connection with the Unocal Acquisition Agreement and the closing of the Unocal Acquisition, together with a certificate from an Authorized Officer of Borrower certifying that (A) such copies are accurate and complete and represent the complete understanding and agreement of the parties with respect to the subject matter thereof, and (B) subject only to the increase in the Borrowing Base and funding in connection therewith and herewith, the Unocal Acquisition has been consummated on the terms set forth in such Unocal Acquisition Documents; (n) a report or reports in form, scope and detail acceptable to Administrative Agent and Banks setting forth the results of a review of the Unocal Properties and other operations, which report(s) shall not reflect the existence of facts or circumstances which would constitute a material violation of any Applicable Environmental Law or which are likely to result in a material liability to any Credit Party, and/or otherwise reveal any conditions or circumstances which would reflect that the representations and warranties contained in Section 9.14 of the Credit Agreement (after giving effect to the Unocal Acquisition) are inaccurate in any respect; and (o) such other documents, instruments, agreements and actions as may reasonably be required by Administrative Agent and each Bank. 4.2 Title Review. Administrative Agent or its counsel shall have ------------ completed a review of title (including opinions of title) with respect to the Required Reserve Value of all Unocal Properties, and such review shall not have revealed any condition or circumstance which would reflect that the representations and warranties contained in Section 9.9 of the Credit Agreement (after giving effect to the Unocal Acquisition) are inaccurate in any respect. 4.3 No Material Adverse Change. In the sole discretion of each Bank, no -------------------------- Material Adverse Change shall have occurred since December 31, 1998. 4.4 No Legal Prohibition. The transactions contemplated by this First -------------------- Amendment shall be permitted by applicable Law and regulation and shall not subject Administrative Agent, any Bank, Borrower or any Credit Party to any Material Adverse Change. 4.5 No Litigation. No litigation, arbitration or similar proceeding shall ------------- be pending or threatened which calls into question the validity or enforceability of this First Amendment, the other Loan Papers or the transactions contemplated hereby or thereby. 4.6 Closing Fees. All fees and expenses of each Agent and their ------------ Affiliates in connection with the execution of this First Amendment and the consummation of the transactions contemplated hereby shall have been paid, including, without limitation, any fees payable to each such Agent or any Affiliate of each such Agent to be paid on the Effective Date pursuant to any separate agreement between or among Borrower and each such Agent or such Affiliates. 4.7 Unocal Acquisition. Subject only to the increase in the Borrowing ------------------ Base and the disbursement and application of the Borrowing in connection with this First Amendment, the Unocal 10 Acquisition shall have been completed pursuant to the terms of the Unocal Acquisition Documents as in effect on the date hereof, and as a result thereof, Borrower shall have acquired good and defensible title to all Unocal Properties, free and clear of all Liens except Permitted Encumbrances. 4.8 Other Matters. All matters related to this First Amendment, the ------------- Mortgages, the other Loan Papers, Borrower and the other Credit Parties shall be acceptable to each Bank in its sole discretion, and Borrower shall have delivered to Administrative Agent and each Bank such evidence as they shall request to substantiate any matters related to this First Amendment, the Mortgages, and the other Loan Papers, as Administrative Agent or any Bank shall request. SECTION 5. Representations and Warranties of Borrower. To induce Banks ------------------------------------------ and Administrative Agent to enter into this First Amendment, Borrower hereby represents and warrants to Administrative Agent and Banks as follows: 5.1 Unocal Acquisition Documents. Borrower has provided each Bank with a ---------------------------- true and correct copy of each of the Unocal Acquisition Documents including all amendments and modifications thereto. No material rights or obligations of any party to any of such Unocal Acquisition Documents have been waived and neither Borrower nor any of its Subsidiaries, nor to the best knowledge of Borrower, any other party to any of such Unocal Acquisition Documents, is in default of its obligations thereunder. Each of the Unocal Acquisition Documents is a valid, binding and enforceable obligation of the parties thereto in accordance with its terms and is in full force and effect. Each representation and warranty made by Borrower, and to the best knowledge of Borrower, by Unocal in the Unocal Acquisition Agreement and the other Unocal Acquisition Documents (a) was true and correct in all material respects when made, and (b) will be true and correct in all material respects on the date of closing of the Unocal Acquisition. 5.2 Credit Agreement. Each representation and warranty of Borrower ---------------- contained in the Credit Agreement and the other Loan Papers was true and correct on the date thereof and will be true and correct in all material respects after giving effect to the Unocal Acquisition and each of the other transactions contemplated hereby. 5.3 Authorization. The execution, delivery and performance by Borrower of ------------- this First Amendment, the Mortgages and each of the other documents, instruments and agreements contemplated hereby 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 result in the creation or imposition of any Lien upon any of the assets of Borrower other than the Liens securing the Obligations. 5.4 Binding Effect. This First Amendment, the Mortgages and the other -------------- Loan Papers executed in connection herewith constitute the valid and binding obligation of Borrower enforceable in accordance with their 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. 11 5.5 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 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 First ------------------- 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 First Amendment and all related documents. 6.4 Counterparts. This First Amendment may be executed in counterparts, ------------ and all parties need not execute the same counterpart. Facsimiles shall be effective as originals. 6.5 Complete Agreement. THIS FIRST AMENDMENT, THE CREDIT AGREEMENT AND ------------------ THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES 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. 6.6 Headings. The headings, captions and arrangements used in this First -------- Amendment are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or modify the terms of this First Amendment, nor affect the meaning thereof. [Signature Pages Follow] 12 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed by their respective Authorized Officers effective as of the date and year first above written. BORROWER: -------- QUICKSILVER RESOURCES, INC., a Delaware corporation /s/ GLENN DARDEN By: _________________________________________ Glenn Darden, President ADMINISTRATIVE AGENT: -------------------- NATIONSBANK, N.A. /s/ J. SCOTT FOWLER By: _________________________________________ J. Scott Fowler, Vice President BANKS: ----- NATIONSBANK, N.A. /s/ J. SCOTT FOWLER By: _________________________________________ J. Scott Fowler, Vice President PARIBAS /s/ A. DAVID DODD By: _________________________________________ A. David Dodd Name: _________________________________________ Vice President Title: _________________________________________ /s/ MARIAN LIVINGSTON By: _________________________________________ Marian Livingston Name: _________________________________________ Vice President Title: _________________________________________ 13 FROST NATIONAL BANK /s/ W.H. ADAMS, III By: _________________________________________ W.H. Adams, III Name: _________________________________________ Senior Vice President Title: _________________________________________ 14 SCHEDULE 1 FINANCIAL INSTITUTIONS
---------------------------------------------------------------- Banks Commitment Amount Commitment Percentage ----- ----------------- --------------------- ---------------------------------------------------------------- NationsBank, N.A. $123,785,166.24 61.892583120% ---------------------------------------------------------------- Paribas $ 58,823,529.41 29.411764706% ---------------------------------------------------------------- Frost National Bank $ 17,391,304.35 8.695652174% ---------------------------------------------------------------- Totals $ 200,000,000 100% ----------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- Banks Domestic Lending Office Eurodollar Lending Office Address for Notice ----- ----------------------- ------------------------- ------------------ - --------------------------------------------------------------------------------------------------------------------- NationsBank, N.A. 901 Main Street 901 Main Street 901 Main Street 64/th/ Floor 64/th/ Floor 64/th/ Floor Dallas, Texas 75202 Dallas, Texas 75202 Dallas, Texas 75202 Fax No. (214) 508-1285 Fax No. (214) 508-1285 Fax No. (214) 508-1285 - --------------------------------------------------------------------------------------------------------------------- Paribas 1200 Smith Street 1200 Smith Street 1200 Smith Street Suite 3100 Suite 3100 Suite 3100 Houston, Texas 77002 Houston, Texas 77002 Houston, Texas 77002 Fax No. (713) 659-6915 Fax No. (713) 659-6915 Fax No. (713) 659-6915 - --------------------------------------------------------------------------------------------------------------------- Frost National Bank Continental Plaza Continental Plaza Continental Plaza 777 Main Street 777 Main Street 777 Main Street Fort Worth, Fort Worth, Fort Worth, Texas 76102-5304 Texas 76102-5304 Texas 76102-5304 Fax No. (817) 336-5615 Fax No. (817) 336-5615 Fax No. (817) 336-5615 - ---------------------------------------------------------------------------------------------------------------------
15 EX-10.10 6 MASTER GAS PURCHASE AND SALE AGREEMENT EXHIBIT 10.10 MASTER GAS PURCHASE AND SALE AGREEMENT between RELIANT ENERGY SERVICES, INC. and QUICKSILVER RESOURCES INC. dated as of March 1, 1999 TABLE OF CONTENTS -----------------
PAGE ARTICLE 1 - DEFINITIONS................................... 1 ARTICLE 2 - SCOPE OF AGREEMENT............................ 6 ARTICLE 3 - REPRESENTATIONS AND WARRANTIES................ 7 ARTICLE 4 - OBLIGATIONS AND DELIVERIES.................... 7 ARTICLE 5 - FINANCIAL RESPONSIBILITY...................... 12 ARTICLE 6 - DEFAULTS AND REMEDIES......................... 13 ARTICLE 7 - LIMITATIONS; DUTY TO MITIGATE................. 16 ARTICLE 8 - BILLING; PAYMENT.............................. 17 ARTICLE 9 - TAXES......................................... 18 ARTICLE 10 - MISCELLANEOUS................................ 20 SPECIAL PROVISIONS - EFP and ADP Transactions............. Special Provisions-1 EXHIBIT A - Notice and Payment Addresses.................. Exhibit A-1 EXHIBIT B - Transaction Confirmation...................... Exhibit B-1 EXHIBIT C - Form of Guarantee Agreement................... Exhibit C-1
MASTER GAS PURCHASE AND SALE AGREEMENT General Terms and Conditions This Master Gas Purchase and Sale Agreement consists of these General Terms and Conditions and all other Exhibits and Transaction Confirmations (collectively, this "Agreement") and is entered into as of this 1st day of March, 1999 (the "Effective Date") by and between Reliant Energy Services, Inc., a Delaware corporation ("RES"), and Quicksilver Resources Inc., a Delaware Corporation ("Quicksilver"). RES and Quicksilver may also be referred to individually as "Party" or collectively as "Parties." ARTICLE 1 DEFINITIONS All references to Articles and Sections are to those set forth in this Agreement. Reference to any document means such document as amended from time to time and reference to any Party includes any permitted successor or assignee thereof. The following definitions and any terms defined internally in this Agreement shall apply for all purposes of this Agreement and all notices and communications made pursuant to this Agreement. 1.1 "Alternative Delivery Procedure" or "ADP" means that the Parties have --------------------------------------- agreed to make and accept deliveries of Gas under a NYMEX Gas Futures Contract under terms that are different from the delivery terms specified in the Futures Contract and have notified NYMEX that the transaction will be completed under the Alternative Delivery Procedure as provided in the NYMEX Rules. ADP shall incorporate the meaning and remedies of Priority Firm as described herein. 1.2 "Affiliate" means, with respect to any Person, any other Person that, --------- directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such person. For this purpose, "control" means the direct or indirect power, whether by contract or through the ownership of capital stock or equity interests or otherwise, to elect a majority of such other Person's board of directors or similar governing body or to direct or cause the direction of the management and policies of such Person. 1.3 "Bankruptcy Proceeding" means, with respect to a Person, any of the --------------------- following: (i) the making of an assignment or any general arrangement for the benefit of creditors; (ii) the filing by such Person of a petition or otherwise commencing, authorizing or acquiescing in the commencement of a proceeding or cause of action under any bankruptcy or similar law for the protection of creditors, or the filing of such a petition against such Person if such petition is not withdrawn or dismissed for 30 Days after such filing; (iii) such Person otherwise becomes bankrupt or insolvent (however evidenced); or (iv) such Person is unable to pay its debts as they fall due. 1.4 "Business Day" means any day other than a Saturday, Sunday or a ------------ Federal Reserve Bank holiday. 1 1.5 "Buyer" means the Party to a Transaction who is obligated to purchase ----- and receive, or cause to be received, Gas during a Delivery Period. 1.6 "Collateral Requirement" means the sum of (a) the maximum of (i) the ---------------------- net amount owed by one Party to the other Party for performance provided pursuant to any and all Transactions performed in the immediately preceding month and (ii) the net amount owed by one Party to the other Party for performance to be provided pursuant to any and all Transactions to be performed in the immediately following month, plus (b) the net amount owed by one Party to ---- the other Party for performance provided (or to be provided) pursuant to any and all Transactions performed in the current month, plus (c) the sum of Gains, ---- Losses and Costs, as defined in Section 6.3. 1.7 "Claims" means all actions, suits or proceedings, whether threatened ------ or filed and whether groundless, false or fraudulent, that directly or indirectly relate to the subject matter of an indemnity, and the resulting losses, damages, expenses, attorneys' fees and court costs, whether incurred by settlement or otherwise, and whether such actions, suits or proceedings are threatened or filed prior to or after the termination of this Agreement. 1.8 "Confirm Deadline" means 5:00 p.m. on the second Business Day ---------------- following the date of receipt of the Transaction Confirmation. 1.9 "Contract Price" means the price in $U.S. (unless otherwise provided -------------- for) per MMBtu to be paid by Buyer to Seller for the Gas pursuant to a Transaction. 1.10 "Contract Quantity" means that quantity of Gas that Seller agrees to ----------------- sell and deliver, or cause to be delivered, to Buyer, and that Buyer agrees to purchase and receive, or cause to be received, from Seller pursuant to the terms of a Transaction. 1.11 "Day", "day" or "daily" means a period of twenty-tour (24) consecutive --- --- ----- hours coextensive with a "day" as defined by the Receiving Transporter; or as otherwise stated in the Transaction Confirmation. 1.12 "Daily Contract Quantity" means the agreed upon quantity of Gas to be ----------------------- delivered and received, pursuant to a Transaction, each Day during the Delivery Period. 1.13 "Delivery Period" means the period during which deliveries are to be --------------- made. 1.14 "Delivery Point(s)" means the point(s) agreed upon by Seller and Buyer ----------------- where Seller will deliver and Buyer will receive Gas. 1.15 "Demand Charges" means the amount of reservation charge, if any, -------------- specified for a Transaction. 1.16 "Eligible Collateral" shall mean (i) cash or (ii) a Letter of Credit ------------------- from a financial institution acceptable to the beneficiary Party. 2 1.17 "Equitable Defenses" means any bankruptcy, insolvency, reorganization ------------------ and other laws affecting creditor's rights generally, and with regard to equitable remedies, the discretion of the court before which proceedings to obtain same may be pending. 1.18 "Exchange for Physical" or "EFP" means the purchase, sale or exchange ------------------------------ of natural Gas as the "physical" side of an exchange for physical transaction involving gas future contracts. EFP shall incorporate the meaning and remedies of Priority Firm as defined herein. 1.19 "Firm" means, with respect to a Transaction, that the only excuse for ---- the failure to deliver Gas by Seller or the failure to receive Gas by the Buyer pursuant to a Transaction is the existence of Force Majeure. 1.20 "Force Majeure" means an event or circumstance not within the ------------- reasonable control of the Party (or in the case of third party obligations or facilities, the third party) seeking to have its performance obligation excused thereby (the "Claiming Party"). Force Majeure includes, but is not limited to: acts of God; landslide; lightning; earthquake; fire; storm; hurricane; flood; explosion; accident or breakage or necessity of repairs to machinery, equipment, or pipelines; weather related events affecting an entire geographic region such as low temperatures which cause freezing or failure of wells, lines of pipe, or other facilities; interruption of firm transportation or storage; riot; civil disturbance; insurrection; war; strike, lockout or labor dispute; labor or material shortage; sabotage; and action, inaction or restraint by court order or public or governmental authority (so long as the Claiming Party has not applied for or assisted in the application for, and has opposed where and to the extent reasonable, such government action). Force Majeure specifically excludes (i) the loss of Buyer's markets or Buyer's inability economically to use or resell Gas purchased hereunder; (ii) Seller's ability to sell Gas to a market at a more advantageous price; and (iii) the curtailment of interruptible transportation. 1.21 "GAAP" means United States generally accepted accounting principles, ---- consistently applied. 1.22 "Gas" means any mixture of hydrocarbons and non-combustible gases as a --- gaseous state consisting primarily of methane. 1.23 "Guarantor" for RES means Reliant Energy Resources Corp. --------- 1.24 "Imbalance Charges" means any scheduling penalties, imbalance ----------------- penalties, overpull or unauthorized overrun penalties, operational flow order penalties, cash out charges, banking charges or similar penalties, fees or charges (in cash or in kind) assessed by a Transporter for failure to satisfy the Transporter's balance, scheduling and/or nomination requirements. 1.25 "Interest Rate" means, for any day, 20% per annum plus the per annum ------------- rate of interest equal to the prime lending rate as may from time to time be published in The Wall -------- 3 Street Journal under "Money Rates" on such day, or if such day is not a Business - -------------- Day, the immediately preceding Business Day; provided, however, that the Interest Rate shall never exceed the maximum rate permitted by applicable law. 1.26 "Interruptible" means that either Party may interrupt its performance ------------- at any time for any reason, with no liability, except such interrupting Party may be responsible for any Imbalance Charges related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by Transporter. 1.27 "Law" means any law, rule, regulation, order, writ, judgment, decree --- or other legal or regulatory determination by a court, regulatory agency or governmental authority of competent jurisdiction. 1.28 "Legal Proceedings" means any suits, proceedings, judgments, rulings ----------------- or orders by or before any court, arbitration panel or governmental authority. 1.29 "Letter of Credit" means one or more irrevocable, standby letters of ---------------- credit from a U.S. commercial bank or a U.S. branch office of a foreign bank, with such bank having a credit rating of at least "A-" from S&P or "A3" from Moody's, in a form, for an amount required under the Agreement and for a term acceptable to the beneficiary party. 1.30 "Material Adverse Change" is defined as (i) with respect to RES, ----------------------- Reliant Energy Resources Corp. shall have an unsecured, long-term, senior debt rating S&P below "BBB-" or its equivalent or by Moody's Investor Services, Inc. below "Baa3" or its equivalent; and (ii) with respect to Quicksilver, Quicksilver shall have either (a)(1) indebtedness to third parties at any one time which exceeds three hundred percent (300%) of Stockholders' Equity or (2) Stockholders' Equity below twenty million dollars ($20,000,000.00), or (b) as of each fiscal year-end occurring during the term of this Agreement, Quicksilver's Proved Gas Reserves (as defined in SECURITIES and EXCHANGE ACCOUNTING SERIES RELEASE No. 257) shall be less than 135% of the total volume of natural gas that Quicksilver is required to deliver to RES under the remaining term of the Agreement. 1.31 "MMBtu" or "dekatherm" means one million British thermal units (each ----- Btu representing the amount of heat required to raise the temperature of one avoirdupois pound of pure water from fifty-eight and five tenths degrees (58.5E) Fahrenheit to fifty-nine and five-tenths degrees (59.5E) Fahrenheit at a constant pressure of fourteen and seventy-three hundredths (14.73) pounds per square inch absolute). 1.32 "Moody's" means Moody's Investor Services, Inc. or its successor. ------- 1.33 "New Taxes" means (i) any Taxes enacted and effective after the --------- earlier of the Effective Date of the Agreement or the beginning date of the first Delivery Period under the Agreement, or (ii) any law, order, rule or regulation, or interpretation thereof, enacted and effective after the earlier of the Effective Date of the Agreement or the beginning date of the 4 first Delivery Period under the Agreement resulting in application of any Tax to a new or different class of Persons. 1.34 "Person" means any individual, partnership, limited partnership, ------ limited liability partnership, corporation, limited liability company, trust, association or other entity. 1.35 "Priority Firm" means Firm service that is subject to the more ------------- restrictive Force Majeure provision set out in Section 4.8(b) of this Agreement. 1.36 "Receiving Transporter" means the Transporter receiving Gas at the --------------------- Delivery Point, or absent such Receiving Transporter, the Transporter delivering Gas at the Delivery Point. 1.37 "Regulatory Approvals" means all current and future approvals of or -------------------- filings with courts or governmental, administrative or regulatory bodies (state or federal) having jurisdiction over a Party or any Transaction, as required by applicable Law. 1.38 "S&P" means the Standard & Poor's Rating Group (a division of McGraw- --- Hill, Inc.) or its successor. 1.39 "Scheduling" or "Scheduled" means the acts of Seller, Buyer and/or ---------- --------- their designated representatives, including each Party's Transporters, if applicable, of notifying, requesting and confirming to each other the quantity of Gas (and specific requirements therefor) to be delivered on a daily basis during the Delivery Period at a specified Delivery Point. 1.40 "Seller" means the Party to a Transaction who is obligated to sell and ------ deliver, or cause to be delivered, Gas during a Delivery Period. 1.41 "Stockholders' Equity" means, at any time, the amount of paid-in -------------------- capital in respect of all issued and fully-paid and non-assessable shares of the share capital of the relevant entity, together with the contributed surplus, the cumulative translation adjustment (if any) and the retained earnings calculated in accordance with generally accepted accounting principles, in the country in which such entity is organized, consistently applied. 1.42 "Taxes" means any or all ad valorem, property, occupation, severance, ----- generation, first use, conversion, Btu or Gas, transport, transmission, utility, gross receipts, privilege, sales, use, consumption, excise, lease, transaction, and other taxes, governmental charges, regulatory assessments by federal, state or local agencies or commissions (including, but not limited to, FERC assessments), license fees, permits or assessments or increases therein, other than taxes based on net income or net worth. 1.43 "Transaction" means a particular transaction agreed to by the Parties ----------- relating to the purchase and sale of Gas for a particular Delivery Period pursuant to this Agreement. 5 1.44 "Transaction Confirmation" means a written document, similar in form ------------------------ to Exhibit B, which sets forth certain terms of a Transaction which have been agreed to by the Parties. 1.45 "Transportation Charges" means the amount, if any, to be paid by Buyer ---------------------- to Seller for Gas transportation services as agreed by the Parties in a Transaction. 1.46 "Transporter" means any gathering company, pipeline or local ----------- distribution company on which Gas is transported under this Agreement on behalf of Seller or Buyer to or from the Delivery Point in a particular Transaction. 1.47 "Year 2000 Problems" means potential costs, problems and uncertainties ------------------ associated with the inability of certain computer applications to effectively handle data including dates on and after January 1, 2000, as such inability affects the business, operations and financial condition of the Parties and the Parties' material customers, suppliers and vendors. ARTICLE 2 SCOPE OF AGREEMENT 2.1 Scope of Agreement. From time to time the Parties may, but shall not ------------------ be obligated to, enter into Transactions for, or related to, the purchase or sale of Gas hereunder. Each Transaction shall be effectuated and evidenced in accordance with this Agreement and shall constitute a part of this Agreement. The Parties are relying upon the fact that all Transactions, together with this Agreement, shall constitute a single integrated agreement, and that the Parties would not otherwise enter into any Transaction. Any conflict between this Agreement and a Transaction Confirmation shall be resolved in favor of the Transaction Confirmation. This Agreement shall govern all outstanding Transactions between the Parties which are not governed by a separate executed contractual agreement between the Parties and Transactions between the Parties which are effectuated from and after the Effective Date unless expressly stated otherwise. 2.2 Transaction Procedures. ---------------------- (a) During the term of this Agreement, the Parties may notify each other that Gas is available for purchase or sale. Transactions may be effectuated and evidenced by exchange and acceptance of a Transaction Confirmation (Written Transaction Procedure) signed by both Parties. No Party shall be deemed to have accepted any Transaction Confirmation unless and until it has been signed by such party. (b) The specific terms to be established by the Parties for each Transaction shall include the Buyer and Seller, the Gas, the Delivery Period, the Contract Price, the Delivery Point, the Contract Quantity, whether the Service 6 Level is Firm, Priority Firm, EFP, ADP or Interruptible, and such other terms as the Parties shall agree upon. (c) Each Party consents to the recording of its representatives' telephone conversations without any further notice. 2.3 Term of Agreement. The term of this Agreement shall commence on the ----------------- Effective Date and shall remain in effect until terminated (a) by either Party upon 30 Days' prior written notice, or (b) as otherwise provided herein; provided, however, that this Agreement shall remain in effect with respect to any Transaction(s) entered into prior to the effective date of its termination until both Parties have fulfilled all their obligations with respect to such Transaction(s). 2.4 Electronic Signatures. If a Party has the capability to affix a --------------------- signature to an electronically transmitted document, the terms "signature," "signed," "executed," "execution," or similar terms shall include the same in electronic forms. ARTICLE 3 REPRESENTATIONS AND WARRANTIES On the Effective Date and the date of entering into each Transaction, each Party represents and warrants to the other Party that (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and is qualified to conduct its business in each jurisdiction in which a Transaction will be performed by it, (ii) it has all Regulatory Approvals necessary for it to perform legally its obligations under this Agreement and each Transaction, (iii) the execution, delivery and performance of this Agreement and each Transaction are within its power, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a Party or any Law applicable to it, (iv) this Agreement and each Transaction when entered into in accordance with this Agreement constitutes its legally valid and binding obligation enforceable against it in accordance with its terms, subject to any Equitable Defenses, (v) there are no Bankruptcy Proceedings pending or being contemplated by it or, to its knowledge, threatened against it, (vi) there are no Legal Proceedings that materially adversely affect its ability to perform its obligations under this Agreement and each Transaction, (vii) it understands and agrees that the other Party is not acting as its fiduciary, advisor or agent with respect to this Agreement or any Transaction, (viii) it is not relying upon the advice, assurance or representations of the other Party, except for those representations set forth in this Agreement, (ix) it has knowledge and experience in financial matters and its industry that enable it to evaluate the merits and risks of entering into this Agreement and each Transaction, (x) it is a "Merchant" as that term is defined in the Uniform Commercial Code, and (xi) it is a producer, processor or commercial user of, or merchant handling, the Gas subject to this Agreement or the products or byproducts thereof, and it has entered into this Agreement, and will enter into each Transaction, solely for the purposes related to its business as such. 7 During the term of this Agreement, Quicksilver agrees not to commit to future fixed-price natural gas sales in excess of its Proved Gas Reserves, as defined in Section 1.30 hereof. Each Party covenants that it will cause these representations and warranties to be true and correct throughout the term of the Agreement. ARTICLE 4 OBLIGATIONS AND DELIVERIES 4.1 Purchase and Sale of Gas. With respect to each Transaction and subject ------------------------ to the terms of this Agreement, Seller shall sell and deliver, or cause to be delivered, and Buyer shall purchase and receive, or cause to be received, at the Delivery Point the Contract Quantity, and Buyer shall pay Seller the Contract Price in accordance with Article 8. The price shall be the complete consideration to Seller and Seller shall be responsible for the cost of compressing, gathering, processing, treating, liquefying, and transporting the Gas, together with royalties and taxes on the Gas, and all other costs and charges which are incurred prior to the Delivery Point. If Buyer is required to remit or pay such royalties and/or such taxes, then Buyer may deduct or withhold such amounts from payments made to Seller. Buyer shall be responsible for the costs of transporting the Gas and any other costs related to the Gas or its sale, use or possession, at and from the Delivery Point. 4.2 Service Levels. A Transaction may specify any of the following service -------------- levels. (a) Firm. Buyer shall be required to purchase and receive, and Seller ---- shall be required to sell and deliver on a Firm basis during the term hereof the Contract Quantity agreed upon in a Transaction. Failure to receive or deliver the Contract Quantity agreed upon in a Transaction may, at the option of the performing Party, constitute a breach of this Agreement for which damages shall be recoverable pursuant to the terms of this Agreement, unless such failure is caused by an event of Force Majeure as provided herein. (b) Priority Firm. Firm service that is subject to the more ------------- restrictive Force Majeure provision set out in Section 4.8(b) of this Agreement. Failure to receive or deliver the Contract Quantity agreed upon in a Transaction may, at the option of the performing Party, constitute a breach of this Agreement for which damages shall be recoverable pursuant to the terms of this Agreement, unless such failure is caused by an event of Force Majeure as provided herein and as specifically restricted in Section 4.8(b). (c) Exchange For Physical (EFP). Exchange For Physical (EFP) shall --------------------------- mean that the Parties have agreed to make and accept deliveries of Gas, subject to the additional terms under the Special Provisions for EFP and ADP, and the Parties have also assumed, or caused to be assumed, equal and opposite positions in NYMEX Gas Futures contracts and have closed out such positions 8 to effectuate the EFP transaction in compliance with the NYMEX Rules. The EFP Transaction will be subject to the additional terms under the Special Provisions for EFP and ADP Transactions. The performance obligation on EFP Transactions will be Priority Firm. Failure to receive or deliver the Contract Quantity agreed upon in a Transaction may, at the option of the performing Party, constitute a breach of this Agreement, for which damages shall be recoverable pursuant to the terms of this Agreement, unless such failure is caused by an event of Force Majeure as provided herein and specifically restricted in Section 4.8(b). (d) Alternative Delivery Procedure (ADP). Alternative Delivery ------------------------------------ Procedure (ADP) shall mean that the Parties have agreed to make and accept deliveries of Gas under a NYMEX Gas Futures contract under different terms than the standard delivery terms in the NYMEX Gas Futures contract. In addition, the Parties have notified NYMEX, in compliance with the NYMEX rules, that the transaction will be completed under the Alternative Delivery Procedure. The Alternative Delivery Procedure Transaction will be subject to the additional terms under the Special Provisions for EFP and ADP Transactions. The performance obligation on ADP Transactions will be Priority Firm. Failure to receive or deliver the Contract Quantity agreed upon in a Transaction may, at the option of the performing Party, constitute a breach of this Agreement, for which damages shall be recoverable pursuant to the terms of this Agreement, unless such failure is caused by an event of Force Majeure as provided herein and specifically restricted in Section 4.8(b). (e) Interruptible. Buyer shall be required to purchase and receive, ------------- and Seller shall be required to sell and deliver on an interruptible basis during the term hereof, the Contract Quantity specified in a Transaction, with the understanding that such volumes may be reduced, interrupted or terminated by receipt of proper scheduling notice as provided in Sections 4.3 and 4.4 of this Agreement. 4.3 Transportation. Seller shall have the sole responsibility for -------------- transporting the Gas, or ensuring that the Gas is transported, to the Delivery Point. Buyer shall have the sole responsibility for transporting the Gas, or ensuring that the Gas is transported at and after the Delivery Point. If the supply or transportation necessary to deliver or receive the Contract Quantity is unavailable for any reason, the Party responsible for or having notice of such interruption shall promptly notify the other Party by telecopy. 4.4 Nominations; Scheduling. The Parties shall coordinate their ----------------------- nomination activities, giving sufficient time to meet the deadlines of the affected Transporters. Each Party shall give the other Party timely prior notice, sufficient to meet the requirements of all Transporters involved in the Transaction, of the quantities of Gas to be delivered and received each Day. Should either Party become aware that actual deliveries at the Delivery Point are greater or lesser than the Scheduled Gas, such Party shall promptly notify the other Party. 9 Unless otherwise agreed, Seller is obligated to Schedule, or cause to be Scheduled, with the appropriate Transporters and to deliver, or cause to be delivered, Gas to the Delivery Point and Buyer is obligated to Schedule, or cause to be Scheduled, with the appropriate Transporters and to receive, or cause to be received, Gas at and from the Delivery Point, in accordance with the Transporters' notice requirements. If the Parties have agreed to allow variations in the daily quantities of Gas to be delivered, Buyer, or if so agreed, Seller, shall notify the other Party, in accordance with the applicable Transporters' Scheduling deadlines, of the Daily Contract Quantities of Gas to be delivered and received during a Delivery Period. 4.5 Rate of Flow; Imbalance Charges. The Scheduled Gas to be received by ------------------------------- Buyer hereunder shall be delivered by Seller at uniform hourly and daily rates of flow as nearly as practicable, but it is recognized that due to operating conditions the quantities of Gas received and delivered may not be in balance on any one particular Day. The Parties shall use commercially reasonable efforts to avoid imposition of any Imbalance Charges. If Buyer or Seller receives an invoice from a Transporter that includes Imbalance Charges, the Parties shall determine the validity as well as the cause of such Imbalance Charges. If the Imbalance Charges were incurred as a result of Buyer's actions or inactions (which shall include, but not be limited to, Buyer's failure to accept quantities of Gas equal to the Scheduled Gas), then Buyer shall pay for such Imbalance Charges, or reimburse Seller for such Imbalance Charges paid by the Seller to the Transporter. If the Imbalance Charges were incurred as a result of Seller's actions or inactions (which shall include, but shall not be limited to, Seller's failure to deliver quantities of Gas equal to the Scheduled Gas), then Seller shall pay for such Imbalance Charges, or reimburse Buyer for such Imbalance Charges paid by the Buyer to the Transporter. During Force Majeure interruptions, the Party invoking Force Majeure may be responsible for any Imbalance Charges related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by the Transporter. 4.6 Quality; Measurement; Pressure. There is no warranty by Seller, ------------------------------ express or implied, concerning the quality of Gas delivered other than a warranty that all Gas delivered by Seller shall be of the quality maintained in the pipeline of the first Transporter upstream of the Delivery Point. Measurement of Gas quantities hereunder shall be in accordance with the tariff of the first Transporter immediately downstream of the Delivery Point. The unit of quantity measurement for purposes of this Agreement shall be one (1) MMBtu. Gas Delivered hereunder shall be at commercial operating pressures sufficient to deliver such quantities at the Delivery Point; however, in no event shall such operating pressure exceed the maximum operating pressure of the system receiving the Gas hereunder. Each of Buyer and Seller are completely and solely responsible for the installation and maintenance of overpressure protection equipment on each Party's respective pipelines, valves, and/or other interconnection equipment. 4.7 Title, Risk of Loss and Indemnity. As between the Parties, Seller --------------------------------- shall be deemed to be in exclusive possession and control (and responsible for any damages or injury resulting therefrom or caused thereby) of the Contract Quantity prior to the Delivery Point and Buyer shall be deemed to be in exclusive control (and responsible for any damages or injury 10 resulting therefrom or caused thereby) of the Contract Quantity at and from the Delivery Point. Seller represents that it will have paid or caused to have been paid all royalties, taxes and other sums due on production and delivery of the Gas to the Delivery Point. Seller warrants that it will deliver to Buyer at the Delivery Point the Contract Quantity free and clear of all liens, claims and encumbrances arising prior to the Delivery Point. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, ARE DISCLAIMED. Title to and risk of loss related to the Contract Quantity shall transfer from Seller to Buyer at the Delivery Point. Seller shall indemnify, defend and hold harmless Buyer from and against any Claims arising out of or in any way relating to Seller's ownership, possession or control of the Contract Quantity up to the Delivery Point, and Buyer shall indemnify, defend and hold harmless Seller from and against any Claims arising out of or in any way relating to Buyers ownership, possession or control of the Contract Quantity at and from the Delivery Point. 4.8 Force Majeure. ------------- (a) If either Party is rendered unable by Force Majeure to carry out, in whole or part, its obligations under a Transaction and such Party gives notice and full details of the event to the other Party as soon as practicable after the occurrence of the event, then during, but for no longer than, the period such Party shall be unable to perform its obligations in whole or in part, the obligations of the Party affected by the event (other than the obligation to make payments then due or becoming due with respect to performance prior to the event) shall be suspended to the extent required; provided, however, Buyer shall be obligated to pay (i) Demand Charges with respect to a Transaction notwithstanding the Force Majeure and (ii) any Imbalance Charges related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by the Transporter. The Party claiming the Force Maj cure shall remedy the Force Maj cure with all reasonable dispatch; provided, however, that this provision shall not require Seller to deliver, or Buyer to receive, the Contract Quantity at points other than the Delivery Point. (b) For Priority Firm Transactions, Force Majeure will not apply to excuse performance under the Transaction if an alternative gas supply is available at a hub, a pooling point, multiple pipeline interconnect, or other aggregation point where alternate sources of gas supply and transportation are available for purchase, regardless of the source and price of the gas supply initially scheduled for delivery. (c) Neither Party shall be entitled to the benefit of this Section 4.8 under any or all of the following circumstances: (i) to the extent that the inability was caused by the negligence or fault of the Party claiming relief; (ii) to the extent the event constituting Force Majeure was intentionally initiated or intentionally acquiesced in by the Party claiming relief for the purpose of allowing that Party to claim Force Majeure; or (iii) if the inability was caused by a Party's lack of funds. 11 (d) It is understood and agreed that the settlement of strikes or lockouts shall be entirely within the discretion of the Party having the difficulty, and that the above requirement of the use of commercially reasonable efforts in restoring normal operating conditions shall not require the settlement of strikes or lockouts by acceding to the terms of the opposing Party when such is inadvisable in the discretion of the Party having the difficulty. 4.9 Failure to Deliver/Receive in Firm, Priority Firm, EFP and ADP -------------------------------------------------------------- Transactions. ------------ (a) Unless excused by Force Majeure or Buyer's failure to perform, if Seller fails to deliver all or part of the Contract Quantity that the Parties agreed to Schedule pursuant to a Firm, Priority Firm,, EFP or ADP Transaction, Seller shall pay Buyer, on the date payment would otherwise be due to Seller an amount for each MMBtu of such deficiency equal to the positive difference, if any, obtained by subtracting the Contract Price from the Replacement Price. "Replacement Price" means the price at which Buyer, acting in a commercially reasonable manner, purchases a substitute for the Contract Quantity not delivered by Seller (plus any additional transportation costs, if any, incurred by Buyer for transportation of Gas to the Delivery Point). Buyer, at its sole option, may elect not to replace Gas, in which case Buyer shall recover the positive difference, if any, obtained by subtracting the Contract price from the market price for such quantity as determined by Buyer in a commercially reasonable manner. (b) Unless excused by Force Majeure or Seller's failure to perform, if Buyer fails to receive all or part of the Contract Quantity that the Parties Scheduled pursuant to a Finn, Priority Firm, EFP or ADP Transaction, Buyer shall pay Seller, on the date payment would otherwise be due, an amount for each MMBtu of such deficiency equal to the positive difference, if any, obtained by subtracting the Sales Price from the Contract Price. "Sales Price" means the price at which Seller, acting in a commercially reasonable manner, resells the Gas not received by Buyer (including additional transportation costs, if any, incurred by Seller for transportation of Gas to the Delivery Point). Seller, at its sole option, may elect not to resell Gas, in which case Seller shall recover the positive difference, if any, obtained by subtracting the market price for such quantity as determined by Seller in a commercially reasonable manner from the Contract Price. 4.10 Failure to Deliver/Receive in Interruptible Transactions. A Party -------------------------------------------------------- shall be excused from delivering or receiving the Contract Quantity, in whole or in part, in an Interruptible Transaction for any reason without liability, unless otherwise provided in a Transaction Confirmation, except such interrupting Party may be responsible for any Imbalance Charges related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by Transporter. 12 ARTICLE 5 FINANCIAL RESPONSIBILITY 5.1 Security/Guarantee Agreement. In order to secure all payment ---------------------------- obligations of RES to Quicksilver, RES shall cause its Guarantor to execute and deliver to Quicksilver the Guaranty Agreement substantially in the form attached hereto as Exhibit C. --------- 5.2 Collateral Requirement. Upon the occurrence and during the ---------------------- continuance of a Material Adverse Change or Event of Default with respect to one Party, the other Party (the "Beneficiary Party"), on any Business Day, may request the first Party ("the "Posting Party") to provide Eligible Collateral (in such form as selected by the Posting Party) in an amount equal to the Collateral Requirement. Eligible Collateral shall be delivered within two (2) Business Days of the date of such request. ARTICLE 6 DEFAULTS AND REMEDIES 6.1 An "Event of Default". An "Event of Default" shall mean with respect --------------------- to a Party ("Defaulting Party"): (i) the failure by the Defaulting Party to make any payment required pursuant to this Agreement, provided the payment is not the subject of a good faith dispute as described in Section 8.1, within five (5) Business Days after the payment due date, (ii) the failure by the Defaulting Party to perform any obligation to the other Party (the "Non-Defaulting Party") set forth in this Agreement including the failure to deliver or receive described in Section 4.9, and such failure is not excused by Force Majeure or cured within two (2) Business Days after written notice thereof to the Defaulting Party, (iii) the occurrence of a Material Adverse Change with respect to the Defaulting Party; provided, however, that such Material Adverse Change shall not constitute an Event of Default if the Defaulting Party establishes within two (2) Business Days after written notice and maintains for so long as the Material Adverse Change is continuing, Eligible Collateral in an amount equal to the Collateral Requirement for the Defaulting Party, (iv) the -- Defaulting Party shall fail to establish, maintain, extend or increase Eligible Collateral, if required; (v) the Guarantor of the Defaulting Party shall fail to perform any covenant set forth in the guaranty agreement it delivered in respect of this Agreement, or any representation or warranty made by such Guarantor in said guaranty agreement shall be false or misleading when made or when deemed to be repeated, the guaranty agreement shall expire or be terminated or shall in any way cease to guaranty the obligations of the Defaulting Party under this Agreement, and the same shall not be cured within two (2) Business Days after written notice to the Defaulting Party, or (vi) with respect to RES, at any time, Reliant Energy Resources Corp. defaults on its indebtedness to third parties, resulting in obligations of Reliant Energy Resources Corp. in excess of $30,000,000 being accelerated or capable of becoming accelerated, or with respect to Quicksilver, at any time, Quicksilver defaults on its indebtedness to third parties, resulting in obligations of Quicksilver in excess of three, percent (3%) of Stockholders' Equity being accelerated or capable of becoming accelerated, and the same shall not be cured within two (2) Business Days after written notice to the Defaulting Party, (vii) any false or misleading representation or warranty herein made by the Defaulting Party or its Guarantor, and the same 13 shall not be cured within two (2) Business Days after written notice to the Defaulting Party, or (viii) the Defaulting Party or the Guarantor shall be the subject of a Bankruptcy Proceeding. 6.2 Other Events. In the event Buyer is regulated by a federal, state or ------------ local regulatory body, and such body shall disallow all or any portion of any costs incurred or yet to be incurred by Buyer under any provision of this Agreement, such action shall not operate to excuse Buyer from performance of any obligation nor shall such action give rise to any right of Buyer to any refund or retroactive adjustment of the Contract Price provided in any Transaction. Notwithstanding the foregoing, if a Party's activities hereunder become subject to regulation of any kind whatsoever under any law to a greater or different extent than that existing on the earlier of the Effective Date or the beginning date of the first Delivery Period under the Agreement and such regulation either (i) renders this Agreement illegal of performance by, or unenforceable against, a Party, or (ii) materially adversely affects the business of a Party, with respect to its financial position or otherwise, then in the case of (i) above, either Party, and in the case of (ii) above, only the affected Party, shall at such time have the right to declare an Early Termination Date with respect to all Transactions in accordance with the provisions of Section 6.3(a) in which case the Parties shall determine their Gains, Losses and Costs and make payment to each other in the manner set forth in Sections 8.1 and 8.2. 6.3 Early Termination. ----------------- (a) If an Event of Default occurs with respect to a Defaulting Party at any time during the term of this Agreement and the Defaulting Party fails to cure prior to expiration of the cure period, the Non-Defaulting Party may, for so long as the Event of Default is continuing, (i) establish a date (which date shall be between the first (1st) Day following the last day of the cure period or the Day of the Event of Default in the case where there is no cure period and ten (10) Business Days after the Non-Defaulting Party notifies the Defaulting Party )("Early Termination Date") on which any or all Transactions selected by it shall terminate (individually a "Terminated Transaction" and collectively the "Terminated Transactions") and (ii) withhold any payments due in respect of the Terminated Transactions; provided, however, upon the occurrence of any Event of Default listed in item (viii) of Section 6.1, all Transactions and this Agreement in respect thereof shall automatically terminate, without notice, and without any other action by either Party as if a payment due date had been declared immediately prior to such event. The notice of the Early Termination Date may be by telephone if such notice is confirmed in writing within two (2) Business Days. If an Early Termination Date has been designated, the Non-Defaulting Party shall in good faith calculate its Gains, Losses and Costs resulting from the termination of the Terminated Transactions pursuant to Section 6.3(b) and (c). The Non-Defaulting Party shall aggregate such Gains, Losses and Costs with respect to all Transactions into a single net amount ("Termination Payment") and notify the Defaulting Party, including detailed support for the Termination Payment calculation. It is expressly agreed that a Party shall not be required to enter into replacement transactions in order to determine the Termination Payment. If the Non-Defaulting Party's aggregate Losses and Costs 14 exceed its aggregate Gains, the Defaulting Party shall, within five (5) Business Days of receipt of such notice, pay the Termination Payment to the Non-Defaulting Party, which amount shall bear interest at the Interest Rate from the payment due date until paid. If the Non-Defaulting Party's aggregate Gains exceed its aggregate Losses and Costs, if any, resulting from termination of the Terminated Transactions, the Non-Defaulting Party shall pay such excess to the Defaulting Party on or before the later of: (1) ten (10) Days after the end of the month ending on or after the Early Termination Date; or (2) the date five (5) Business Days after receipt by the Defaulting Party of the Non-Defaulting Party's notice given above, which amount shall bear interest at the Interest Rate from the payment due date until paid. (b) Gains, Losses and Costs shall be determined by comparing the value of the remaining Delivery Period, Contract Quantities and Contract Prices under each Terminated Transaction had it not been terminated to the equivalent quantities and relevant market prices for the remaining Delivery Period either quoted by a bona fide third party offer or which are reasonably expected to be available in the market under a replacement contract for each Terminated Transaction. To ascertain the market prices of a replacement contract, the NonDefaulting Party may consider, among other valuations, any or all of the settlement prices of the KCBT or NYMEX gas future contracts, quotations from leading dealers or brokers in Gas contracts and other bona fide third party offers, all adjusted for the length of the remaining Delivery Period and differences in transportation costs. (c) As used herein with respect to the Non-Defaulting Party: (i) "Costs" shall mean brokerage fees, commissions and other similar ----- transaction costs and expenses reasonably incurred by such Party either in terminating any arrangement pursuant to which it has hedged its obligations or entering into new arrangements which replace a Terminated Transaction, and attorneys' fees, if any, incurred in connection with enforcing its rights under this Agreement; (ii) "Gain" shall mean an amount equal to the ---- present value of the economic benefit (determined (A) using the "Asked Yield" interest rate for the appropriate United States Treasury Bond or Note, whose maturity coincides with the month of the future delivery obligation, as quoted in the Government Bonds and Notes section of The Wall -------- Street Journal plus one percent (1%) and (B) exclusive of Costs), if any, -------------- to it resulting from the termination of its obligations with respect to a Terminated Transaction, determined in a commercially reasonable manner; and (iii) "Losses" shall mean an amount equal to the present value of the ------ economic loss (determined (A) using the "Asked Yield" interest rate for the appropriate United States Treasury Bond or Note, whose maturity coincides with the month of the future delivery obligation, as quoted in the Government Bonds and Notes section of The Wall Street Journal plus one ----------------------- percent (1%) and (B) exclusive of Costs), if any, to it resulting from the termination of its obligations with respect to a Terminated Transaction, determined in a commercially reasonable manner. At the time for payment of any amount due under this Section 6.3, each Party shall pay to the other Party all additional amounts payable by it pursuant to this Agreement. 15 (d) The Defaulting Party must provide written notice of any objection to the Termination Payment calculation within two (2) Business Days after receipt of notice from the Non-Defaulting Party. If written objections are provided, the Parties will negotiate in good faith to agree on the Termination Payment prior to the payment due date. If good faith negotiations between the Parties do not result in a mutually agreeable resolution, the Parties agree to consider the use of alternative dispute resolutions prior to submitting such dispute to litigation proceedings. 6.4 Setoff. Without affecting or prejudicing the provisions of this ------ Agreement requiring the calculation and payment of certain net payment amounts for monthly payments as provided under Section 8.2 and Termination Payments as provided under Section 6.3, all payments will be made without setoff or counterclaim; provided, however, if an Event of Default occurs, in addition to and not in limitation of any other right or remedy (including any right to setoff, counterclaim, or otherwise right to withhold payment) under applicable law, the Non-Defaulting Party may, at its option and in its discretion, setoff against any amounts owed to the Defaulting Party (whether under this Agreement or otherwise and whether or not then due) any amounts due from the Defaulting Party (whether under this Agreement or otherwise and whether or not then due). The obligations of the Parties under this Agreement in respect of such amounts shall be deemed satisfied and discharged to the extent of any such setoff. If the amount of an obligation has not been ascertained, the Non-Defaulting Party may, in good faith, estimate that obligation and setoff in respect of the estimate, subject to the Non-Defaulting Party or the Defaulting Party, as the case may be, accounting to the other Party when the obligation is ascertained. The Non-Defaulting Party shall give the Defaulting Party notice of any setoff effected hereunder provided that failure to give such notice shall not affect the validity of the setoff. Nothing in this Section shall be deemed to create a charge or other security interest. 6.5 Other Remedies for Nonpayment. Notwithstanding any other provision of ----------------------------- this Agreement, if Buyer or Seller fails to pay to the other Party any amounts due within two (2) Business Days after the due date, the Non-Defaulting Party shall have the right to (i) suspend performance under any or all Transactions until such amounts, plus interest at the Interest Rate, have been paid and/or (ii) exercise any remedy available at law or in equity to enforce payment of such amount plus interest at the Interest Rate; provided, however, that if the Defaulting Party, in good faith, shall dispute the amount of any such billing or part thereof and shall pay such amount as it concedes to be correct, no suspension shall be permitted. ARTICLE 7 LIMITATIONS; DUTY TO MITIGATE 7.1 Limitation of Remedies, Liability and Damages. THE PARTIES CONFIRM --------------------------------------------- THAT THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT SATISFY THE ESSENTIAL PURPOSES HEREOF. FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED, UNLESS OTHERWISE STATED HEREIN, SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL BE THE SOLE AND EXCLUSIVE 16 REMEDY, THE OBLIGOR'S LIABILITY SHALL BE LIMITED AS' SET FORTH IN SUCH PROVISION AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN PROVIDED, THE OBLIGOR'S LIABILITY SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY WHICH SHALL INCLUDE ANY COURT COSTS AND ATTORNEY FEES INCURRED TO ENFORCE OBLIGATIONS UNDER THE AGREEMENT, SUCH DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. UNLESS EXPRESSLY HEREIN PROVIDED, NEITHER PARTY SHALL BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY PROVISION OR OTHERWISE. IT IS THE INTENT OF THE PARTIES THAT THE LIMITATIONS HEREIN IMPOSED ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE CAUSE OR CAUSES RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A REASONABLE APPROXIMATION OF THE HARM OR LOSS. 7.2 Duty to Mitigate. Each Party agrees that it has a duty to mitigate ---------------- damages and covenants that it will use commercially reasonable efforts to minimize any damages it may incur as a result of the other Party's performance or non-performance of this Agreement. 7.3 UCC. Except as otherwise provided for herein, the provisions of the --- Uniform Commercial Code ("UCC") of the state the law of which shall govern this Agreement shall be deemed to apply to all Transactions and the Commodities shall be deemed to be "goods" for purposes of the UCC. EXCEPT AS EXPRESSLY SET FORTH HEREIN, SELLER EXPRESSLY DISCLAIMS ANY, AND MARES NO OTHER, REPRESENTATION OR WARRANTY, WRITTEN OR ORAL, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO CONFORMITY TO MODELS OR SAMPLES, MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSES. ARTICLE 8 BILLING; PAYMENT 8.1 Billing and Payment. Seller shall invoice Buyer for Gas delivered and ------------------- received in the preceding Month and for any other applicable charges, providing supporting documentation acceptable in industry practice to support the amount charged. If the actual quantity delivered is not known by the billing date, billing will be prepared based on the Scheduled Contract Quantities. The invoice quantity will then be adjusted to the actual quantity 17 on the following Month's billing or as soon thereafter as actual delivery information is available. Buyer shall pay, by wire transfer, the amount set forth on the invoice on or before the later of the twenty-fifth (25th) Day of the calendar month in which the invoice is received, or ten (10) Days after receipt of the invoice by Buyer; provided that if the due date is not a Business Day, payment is due on the next Business Day following the due date. If Buyer fails to remit the full amount payable by it when due, interest on the unpaid portion shall accrue at the Interest Rate from the due date until the date of payment. If Buyer, in good faith, disputes the amount of any such statement, Buyer will pay to Seller such amount as it concedes to be correct no later than the due date and shall provide a written explanation of the basis for the disputed amount. If any amount disputed by Buyer is determined to be due to Seller, it shall be paid within ten (10) Days of such determination, along with interest accrued at the Interest Rate from the due date of the original invoice until the date paid. In the event payments are due to Buyer hereunder, payment to Buyer shall be made in accordance with this Section 8.1. 8.2 Payment Netting Arrangement. Notwithstanding the provisions of --------------------------- Section 8.1, the Parties agree to the automatic netting of all amounts due to or from each other arising out of all Transactions under this Agreement. Such netting to be effected by a net payment arrangement whereby each month each Party shall calculate the excess of all unpaid amounts due the other Party over all unpaid amounts due it under the Agreement and remit payment of such excess, if any. 8.3 Audit. Each Party has the right, at its sole expense and during ----- normal working hours and after providing written notice at least five (5) Business Days prior to the audit, to examine the records of the other Party (including recorded telephone conversations) to the extent reasonably necessary to verify the content of any telephone conversation, the accuracy of any statement, charge or computation made pursuant to this Agreement. If requested, a Party shall provide to the other Party statements evidencing the quantities of Gas delivered at the Delivery Point. If any such examination reveals any inaccuracy in any statement, the necessary adjustments in such statement and the payments thereof will be made promptly and interest calculated at the Interest Rate from the date the overpayment or underpayment was due until paid; provided, however, that no adjustment for any statement or payment will be made unless objection to the accuracy thereof was made prior to the lapse of two (2) years from the rendition thereof; and provided further that this provision will survive any termination of the Agreement for a period of two (2) years from the date of such termination for the purpose of such statement and payment objections. ARTICLE 9 TAXES 9.1 Taxes. Seller is liable for and shall pay, or cause to be paid, or ----- reimburse Buyer if Buyer has paid, all Taxes applicable to a Transaction or upon the Gas that is the subject thereof arising prior to the Delivery Point. If Buyer is required to remit such Tax, the amount shall be deducted from any sums due to Seller. Seller shall indemnify, defend and hold harmless Buyer from any Claims for such Taxes. The Contract Price does not include reimbursement for, and Buyer is liable for and shall pay, cause to be paid, or reimburse Seller 18 if Seller has paid, all Taxes applicable to a Transaction or upon the Gas that is the subject thereof arising at and from the Delivery Point, including any Taxes imposed or collected by a taxing authority with jurisdiction over Buyer. Buyer shall indemnify, defend and hold harmless Seller from any Claims for such Taxes. Either Party, upon written request of the other, shall provide a certificate of exemption or other reasonably satisfactory evidence of exemption if either Party is exempt from Taxes, and shall use reasonable efforts to obtain and cooperate with obtaining any exemption from any Tax. 9.2 GST. For Gas delivered and received in Canada, Buyer is liable for --- the Canadian goods and services tax ("GST") provided for in the Excise Tax Act (Canada) or a similar tax enacted under successor legislation. Buyer will pay Seller the amount of GST payable for purchase of the Gas in addition to all other amounts payable under the Agreement. Seller will hold the GST paid by Buyer and will remit such GST as required by law. Each Party will provide the other Party with any information required to satisfy GST payment or remittance requirements, including GST registration numbers. Buyer will provide valid certificate(s) of exemption for any Transaction for which Buyer is claiming exception from the GST. Until an exemption from the GST is properly claimed and documented, Buyer's obligation to pay the GST to Seller, and Seller's obligation to collect, hold and remit the GST, remain as enumerated above. 9.3 New Taxes. --------- (a) Notwithstanding any other provision of this Agreement to the contrary, if (i) a New Tax is imposed and (ii) Buyer or Seller would be responsible for such New Tax and (iii) such New Tax is (as a result of laws, regulations and applicable contracts of Buyer in effect as of the effective date of the New Tax) of the type that Buyer can pass directly through to, or be reimbursed by, another person or entity, Buyer shall pay or cause to be paid, or reimburse Seller if Seller has paid, all such New Taxes and Buyer shall indemnify, defend and hold harmless Seller from any Claims for such New Taxes. (b) If (i) a New Tax is imposed and (ii) Buyer or Seller would be responsible for paying such New Tax and (iii) paragraph (a) does not apply, the Party responsible for the New Tax ("Affected Party") shall be entitled to declare an Early Termination Date with respect to those Transactions affected by the New Tax ("Affected Transactions") in accordance with the provisions of this Agreement subject to the following conditions: (a) the Affected Party must give the other Party ("Non-Affected Party") at least 30 Days prior written notice (the "Agreement Period") of its intent to declare an Early Termination Date (which notice shall be given no later than 90 Days after the later of the enactment or effective date of the relevant New Tax), and prior to the proposed Early Termination Date, Buyer and Seller shall attempt to reach a mutual agreement as to the sharing of the New Tax, (b) if a mutual sharing agreement is not reached, the Non-Affected Party shall have the right, but not the obligation, upon written notice to the Affected Party within the Agreement Period, to pay the New Tax for any continuous period it so elects on a month to month basis, and in such case the Affected Party shall not have the right during such continuous period to declare the Early Termination Date on the basis of the New Tax, (c) should the Non-Affected Party at its election agree to 19 pay the New Tax on a month to month basis, then upon 30 Days prior written notice to the Affected Party of its election to cease payment of such New Tax, the Affected Party shall then be liable for the payment of the New Tax and the Parties shall again be subject to this Section 9.3 as if the New Tax had an effective date as of the date the Non-Affected Party ceases payment of such New Tax, (d) if a mutual sharing agreement is not reached and the Non-Affected Party does not elect to pay the New Tax for any period of time within the Agreement Period, the Early Termination Date shall take effect and all Affected Transactions must be terminated and be subject to the same Early Termination Date, (e) the Early Termination Date shall be effected as if an Event of Default had occurred; provided, however, that both Seller and Buyer shall calculate in a commercially reasonable manner their net Gain (amount of Gain after netting Losses and Costs) or net Loss (amount of Losses and Costs after netting Gains) resulting from the termination of all Affected Transactions as if they each were a Notifying Party; and provided further, however, that each Party's Gains and Losses shall be determined without taking into effect the impact of the New Taxes, (f) (i) if both Parties have a net Gain, the Party with the greater net Gain shall pay to the other Party fifty percent (50%) of the difference between the two (2) net Gains; (ii) if both Parties have a net Loss, the Party with the lesser net Loss shall pay to the other Party fifty percent (50%) of the absolute value of the difference between the two (2) net Losses; and (iii) if one Party shall have a net Gain and the other Party shall have a net Loss, the Party with the net Gain shall pay to the other Party fifty percent (50%) of the sum of the absolute value of the net Gain and the absolute value of the net Loss and (g) such payment shall be payable as provided in Section 8.1. Prior to and including the initial Agreement Period invoked under this Section 9.3, New Taxes shall be allocated as if they were Taxes as provided in Section 9.1. The intent of this Section 9.3 is to leave neither Party with an unfair burden as a result of New Taxes. ARTICLE 10 MISCELLANEOUS 10.1 Assignment. This Agreement shall be binding upon and inure to the ---------- benefit of the successors and permitted assigns of the respective Parties. No assignment of this Agreement, in whole or in part, will be made without the prior written consent of the non-assigning Party, which consent shall not be unreasonably withheld as long as the assignee has a credit status which is at least equivalent to the credit status of the assignor including any guarantor; provided, however, that this Agreement may be assigned to any affiliate of either Party without the prior written consent of the non-assigning Party, as long as the entity has a credit status which is at least equivalent to the credit status of the assignor including any guarantor. Any person which shall succeed by purchase, merger or consolidation to the properties, substantially as an entirety, of either Party hereto, shall be entitled to the rights and shall be subject to the obligations of its predecessor in title under this Agreement; and either Party may assign or pledge this Agreement under the provisions of any mortgage, deed of trust, indenture, bank credit agreement, assignment or similar instrument which it has executed or may execute hereafter. 20 10.2 Financial Information. If requested by the other Party, each Party --------------------- shall deliver (i) within 120 Days following the end of each fiscal year, a copy of its annual report or the annual report of its Guarantor, in either case containing audited consolidated financial statements for such fiscal year certified by independent certified public accountants, and (ii) within 60 Days after the end of each of its first three fiscal quarters of each fiscal year, a copy of its quarterly report or the quarterly report of its Guarantor, in either case containing unaudited consolidated financial statements for such fiscal quarter. In all cases the statements required to be provided hereunder shall be provided only to the extent generally made available to the public and shall be for the most recent accounting period and prepared in accordance with GAAP or such other principles then in effect; provided, however, that should any such statements not be available timely due to a delay in preparation or certification, such delay shall not be considered a default so long as such Party diligently pursues the preparation, certification and delivery of the statements. 10.3 Notices. All notices, requests, statements or payments shall be made ------- or given as specified in Exhibit A. Notices required to be in writing shall be --------- delivered by letter, facsimile or other documentary form. Notice by facsimile or hand delivery shall be effective at the close of business on the Day on which it is received, and if actually received after the close of the Business Day on which it was transmitted or hand delivered (or if not transmitted or hand delivered on a Business Day) it shall be deemed received at the close of the next Business Day. Notice by overnight mail or courier shall be effective at the close of business two Business Days after it was sent. A Party may change its addresses by providing notice of same in accordance herewith. 10.4 Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT ------------- OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY LAWS OF THE STATE OF TEXAS APPLYING THE LAWS OF ANOTHER JURISDICTION. 10.5 Survival. All indemnity and audit rights shall survive the termination -------- of this Agreement. All obligations provided in this Agreement shall remain in effect for the purpose of complying herewith. 10.6 Confidentiality. Unless otherwise agreed by both Parties, the terms of --------------- this Agreement and of any Transaction hereunder, including but not limited to the Contract Price, the Contract Quantity, the Delivery Period, the identified Transporter(s), and all other material terms thereof shall be kept confidential by the Parties hereto for one (1) year from the expiration of the applicable Transaction, except (i) information shall not be considered confidential if at the time of disclosure such information is fully within the public domain through no breach of this Agreement by the other Party; is shown by evidence to have been, and in fact has been known or independently developed by and is currently in the possession of either Party prior to disclosure hereunder; or was or is acquired from a third party who did not breach an obligation of confidentiality by disclosing it to either Party; and (ii) each Party shall be permitted to disclose Transaction information to its officers, directors, employees, agents and professional advisors who have a need to know information related to this Agreement 21 and/or a Transaction entered into under this Agreement and agrees to notify such persons of the confidential nature of the information disclosed, and to be responsible for any breaches of this Agreement by such persons; and (ii) to the extent that any information must be disclosed to a third party for the purpose of effectuating transportation of Gas subject to the Agreement or to meet reliability council, regulatory, administrative, judicial, governmental or regulated commodity exchange requirements where necessary. If disclosure is required, the disclosing Party will immediately notify the other Party. 10.7 YEAR 2000 READINESS DISCLOSURE STATEMENT. The Parties each have made ---------------------------------------- an assessment of the Year 2000 Problem and developed a program for remediating the Year 2000 Problem on a timely basis. Based on such assessments, neither Party reasonably anticipates that the Year 2000 Problem will have a material adverse effect on such Party's performance under this Agreement. The Parties will use reasonable commercial efforts to cooperate and share information to minimize the impact of any Year 2000 Problem on performance of this Agreement, and it will inform the other Party of any circumstance indicating a possible obstacle to such compliance and the steps being taken to avoid or overcome the obstacle. PROVIDED A PARTY COMPLIES WITH THE FOREGOING YEAR 2000 REQUIREMENTS, IT WILL NOT BE LIABLE TO THE OTHER PARTY FOR ANY FAILURE TO PERFORM' ANY OF ITS OBLIGATIONS UNDER THIS AGREEMENT TO THE EXTENT SUCH FAILURE ARISES FROM A YEAR 2000 PROBLEM (I) AFFECTING ONE OF ITS SUPPLIERS, OR (II) BEYOND ITS REASONABLE CONTROL. IN PARTICULAR, SUCH NONPERFORMING PARTY SHALL HAVE NO LIABILITY FOR ANY DAMAGES RESULTING FROM YEAR 2000 PROBLEMS, INCLUDING DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES. 10.8 General. This Agreement constitutes the entire agreement between the ------- Parties relating to the subject matter contemplated by this Agreement. No amendment or modification to this Agreement shall be enforceable unless reduced to writing and executed by both Parties. This Agreement shall not impart any rights enforceable by any third party (other than a permitted successor or assignee bound to this Agreement). No waiver by a Party of any default by the other Party shall be construed as a waiver of any other default. Nothing in this Agreement shall be construed to create a partnership or joint venture between the Parties. Any provision declared or rendered unlawful by any applicable court of law or regulatory agency or deemed unlawful because of a statutory change will not otherwise affect the remaining lawful obligations that arise under this Agreement. The term "including" when used in this Agreement shall be by way of example only and shall not be considered in any way to be in limitation. The headings used herein are for convenience and reference purposes only. The Parties have executed this Agreement in multiple counterparts to be construed as one agreement effective as of the Effective Date. 22 RELIANT ENERGY SERVICES, INC. /s/ PATRICK J. STRANGE By:_____________________________________________ Patrick J. Strange Name:___________________________________________ Vice President Gas Trading and Marketing Title:__________________________________________ QUICKSILVER RESOURCES, INC. /s/ GLENN DARDEN By:_____________________________________________ Glenn Darden Name:___________________________________________ President Title:__________________________________________ 23 SPECIAL PROVISIONS EFP and ADP Transactions - -------------------------------------------------------------------------------- Special Provisions ("Special Provisions") attached to and forming a part of that certain Master Gas Purchase and Sale Agreement dated April 1, 1999 by and between Reliant Energy Services, Inc. and Quicksilver Resources Inc. (the "Agreement"). These Special Provisions shall apply to any Transaction identified as an EFP or ADP Transaction on the relevant Transaction Confirmation or in a recorded telephone conversation provided for in Section 2.2 of the Agreement. Capitalized terms used in these Special Provisions shall have the meanings ascribed to them in the Agreement. - -------------------------------------------------------------------------------- 1. In the event of any conflict between the terms of (i) these Special Provisions and (ii) the other terms of the Agreement, the terms of these Special Provisions shall govern. 2. The following terms shall have the meanings indicated: 1.49 "NYMEX" shall mean the New York Mercantile Exchange, a corporation organized and existing under the Not-For-Profit Corporation Laws of the State of New York. 1.50 "NYMEX Business Day" shall mean a day, other than Saturday or Sunday, a NYMEX holiday or a Federal Reserve Bank holiday. 1.51 "NYMEX Gas Futures Contract" shall mean Natural Gas Futures Contract entered into pursuant to the NYMEX Rules. 1.52 "NYMEX Rules" shall mean the rules of the NYMEX applicable to the terms of the NYMEX Gas Futures Contract, including without limitation Rule 220.17 regarding EFP and Rule 220.17A regarding the adoption of ADP delivery procedures by the Parties and any successor to any such rule. 1.53 "NYMEX Payment Date" shall mean (i) twentieth day of the Month following the Delivery Period unless such date is not a NYMEX Business Day; (ii) the preceding day which is a NYMEX Business Day if such day occurs other than on a Monday; or (iii) the following day which is a NYMEX Business Day if such day is a Monday. 3. NYMEX Rules shall apply to all EFP and ADP Transactions between the Parties under the Agreement. 24 4. The following provision shall be incorporated into the Agreement: Seller and Buyer agree to deliver and receive the Gas at an approximately constant rate of delivery throughout the Delivery Period. To that end the Transaction Confirmation shall set forth the average quantities to be scheduled. 5. Buyer shall remit payment on the NYMEX Payment Date. 25 EXHIBIT A Notice and Payment Addresses RES: - --- Notices & Correspondence: Federal Express: - ------------------------ --------------- RELIANT ENERGY SERVICES, INC. RELIANT ENERGY SERVICES, INC. Attn: Contract Administration Attn: Contract Administration P.O. Box 4455 1111 Louisiana Street Houston, Texas 77210-4455 Houston, Texas 77002-5231 Telephone: (713) 207-1300 Telephone: (713) 207-1300 Fax: (713) 207-9562 Fax: (713) 207-9562 Invoices: Payments: - -------- -------- RELIANT ENERGY SERVICES, INC. Chase Bank of Texas, Houston, Texas Attn: Accounting ABA Routing No.: 113000609 P.O. Box 4455 Account No.: 0010-2612158 Houston, Texas 77210-4455 Beneficiary: Reliant Energy Services, Inc. Telephone: (713)207-1300 Fax: (713)207-9663 QUICKSILVER RESOURCES INC.: - -------------------------- Notices & Correspondence: Federal Express: - ------------------------ --------------- Quicksilver Resources Inc. Quicksilver Resources Inc. Attn: Gas Marketing Attn: Gas Marketing 7205. Otsego 720 S. Otsego Gaylord, MI 49735 Gaylord, MI 49735 Telephone: (517) 732-0020 Fax: (517) 731-0341 Invoices: Payment: - -------- ------- Quicksilver Resources Inc. Nations Bank Dallas Attn: Accounting ABA Routing No.: 111000012 1619 Pennsylvania Ave. Account No.: 375-079-8782 Ft. Worth, Texas 76104 Account Title: _______________________ Telephone: (817) 877-3151 Fax: (817) 332-1883 or to such other address as RES or Quicksilver shall from time to time designate by written notice in accordance with Section 10.3. Exhibit A-1 26 EXHIBIT B Transaction Confirmation for Immediate Delivery Reliant Energy Services, Inc. Phone (713) 207-5067 Fax (713) 207-9562 Date:_________________________, 199_ Reliant Energy Services, Inc. Transaction Confirmation #:_________ Version:____________________________ - -------------------------------------------------------------------------------------------------------------------------- This Transaction Confirmation is subject to the Agreement between Seller and Buyer dated ________________. The terms of this Transaction Confirmation are binding unless disputed in writing within 2 Business Days of receipt unless otherwise specified in the Agreement. - -------------------------------------------------------------------------------------------------------------------------- SELLER: BUYER: ___________________________________________________ ____________________________________________________________ ___________________________________________________ ____________________________________________________________ ___________________________________________________ ____________________________________________________________ Attn: _____________________________________________ Attn: ______________________________________________________ Phone: ____________________________________________ Phone: _____________________________________________________ Fax: ______________________________________________ Fax: _______________________________________________________ Agreement No. _____________________________________ Agreement No. ______________________________________________ Transportation Provider: __________________________ Transportation Provider: ___________________________________ Transportation Provider Contract Number:___________ Transportation Provider Contract Number:____________________ - -------------------------------------------------------------------------------------------------------------------------- Contract Price $__________________/MMBtu or __________________________________________________ Delivery Period: Begin: ______________________, 199_ End: ________________________, 199_ - -------------------------------------------------------------------------------------------------------------------------- Service Level; Contract Quantity; Daily or Hourly Contract Quantities: (Select One) [_] Firm [_] Priority Firm [_] EFP [_] ADP Interruptible: ___________ MMBtu Up to ________________ MMBtu ___________ MMBtu/Day Up to ________________ MMBtu/day - -------------------------------------------------------------------------------------------------------------------------- Delivery Point(s): Scheduling: - -------------------------------------------------------------------------------------------------------------------------- Special Provisions: This Transaction Confirmation is being provided pursuant to and in accordance with the Master Gas Purchase and Sale Agreement dated ___________, 199_ (the "Agreement") between Quicksilver and RES, and constitutes part of and is subject to all of the terms and provisions of such Agreement. Terms used but not defined herein shall have the meanings ascribed to them in the Agreement. If the Parties to this Transaction Confirmation have not reached agreement on and executed a valid Agreement, the Parties agree, by their signatures below, that the terms and conditions applicable to the particular Transaction described in this Transaction Confirmation shall be the terms and conditions of the latest version of the Gas Industry Standards Board, Inc. (GlSB) Base Contract for Short-Term Sale and Purchase of Natural Gas in place as of the Transaction Date, including RES's standard form of Special Provisions. If, prior to the end of the Delivery Period, the Parties reach agreement on and execute a valid Agreement, then the terms and conditions thereof shall be applicable to the particular transaction described in this Transaction Confirmation. [_] Other Special Provisions attached. ________________ pages. - -------------------------------------------------------------------------------------------------------------------------- Seller: ___________________________________________ Buyer: _____________________________________________________ By: _______________________________________________ By: ________________________________________________________ Title: ____________________________________________ Title: _____________________________________________________ Date: _____________________________________________ Date: ______________________________________________________ - --------------------------------------------------------------------------------------------------------------------------
Exhibit B-1 27 TRANSACTION CONFIRMATION MASTER GAS PURCHASE AND SALE AGREEMENT DATED AS OF MARCH 1, 1999 This Confirmation Notice is executed pursuant to and becomes a part of the Master Gas Purchase and Sale Agreement between Reliant Energy Services, Inc. ("RES") and Quicksilver Resources Inc. and provides the following: Reliant Energy Services, Inc. (RES) agrees to purchase and Quicksilver Resources Inc. agrees to sell baseload Gas volumes as follows: Service Level: Firm Delivery Period: April 1, 1999 - March 31, 2009 Daily Contract Quantity: 20,000 MMBtu/day Firm Baseload Delivery Point(s): Consumers Pool - Meter: Pool-CONSU Pool Contract Price: $2.49/MMBtu Special Provisions: From time to time, RES or Quicksilver may encounter opportunities for optimizing the value of this Gas supply. In those events, either party may propose a 50-50 profit sharing arrangement with the other party. Pursuant to such transactions, the parties may obtain incremental transportation to capture these opportunities, in which event the profits to be shared would take into account all costs and expenses associated with each transaction. If the above accurately reflects your understanding of our agreement, please indicate your approval by signing in the space below and returning it via fax to Reliant Energy Services, Inc. at (713) 207-9562. SELLER BUYER QUICKSILVER RESOURCES INC. RELIANT ENERGY SERVICES, INC. By: _____________________ By: ________________________ Title: __________________ Title: _____________________ Date: ___________________ Date: ______________________ 28 TRANSACTION CONFIRMATION MASTER GAS PURCHASE AND SALE AGREEMENT DATED AS OF MARCH 1, 1999 This Confirmation Notice is executed pursuant to and becomes a part of the Master Gas Purchase and Sale Agreement between Reliant Energy Services, Inc. ("RES") and Quicksilver Resources Inc. and provides the following: Reliant Energy Services, Inc. (RES) agrees to purchase and Quicksilver Resources Inc. agrees to sell baseload Gas volumes as follows: Service Level: Firm Delivery Period: April 1, 1999 - March 31, 2009 Daily Contract Quantity: 5,000 MMBtu/day Firm Baseload Delivery Point(s): Into Michigan Consolidated (MICHCON) Contract Price: $2.49/MMBtu Special Provisions: From time to time, RES or Quicksilver may encounter opportunities for optimizing the value of this Gas supply. In those events, either party may propose a 50-50 profit sharing arrangement with the other party. Pursuant to such transactions, the parties may obtain incremental transportation to capture these opportunities, in which event the profits to be shared would take into account all costs and expenses associated with each transaction. If the above accurately reflects your understanding of our agreement, please indicate your approval by signing in the space below and returning it via fax to Reliant Energy Services, Inc. at (713) 207-9562. SELLER BUYER QUICKSILVER RESOURCES INC. RELIANT ENERGY SERVICES, INC. /s/ GLENN DARDEN /s/ PATRICK J. STRANGE By: _____________________ By: ________________________ Vice President, Gas President Trading and Marketing Title: __________________ Title: _____________________ May 11, 1999 May 11, 1999 Date: ___________________ Date: ______________________ 29 EX-10.27 7 QUICK SILVER RESOURCES MANAGEMENT INCENTIVE PLAN EXHIBIT 10.27 QUICKSILVER RESOURCES MANAGEMENT INCENTIVE PLAN (3 YEAR PLAN) --------------------------------------- Officers Salaries -------- -------- Thomas F. Darden $150,000 Chairman and Chief Executive Officer Glenn M. Darden $150,000 President and Chief Operating Officer Bill Lamkin $135,000 Executive Vice President and Chief Financial Officer Houston J. Kauffman $105,000 Vice President Acquisitions, Divestments and Trades Robert N. Wagner $100,000 Vice President of Engineering Fred Van Naerssen $120,000 Vice President of Finance and Controller Bonus Structure: A bonus of up to 100% of salary can be earned in each of - --------------- the first 3 years in cash and stock (maximum 75% in cash) based on achieving certain growth targets: Growth Bonus ------ ----- [ 20% - Discretionary 20% - 25% 30% - 50% 40% - 75% 50% - 100% Definition of Growth = A combination of all four of the following parameters: 1) Assets = Sec PV10 Minus Debt 2) Available Cash Flow 3) Net Income Per Share 4) Stock Price Per share *each parameter "weighted" 25% The Bonus will be taken over 3 years: 50% of Bonus paid in year one 25% of Bonus paid in year two 25% of Bonus paid in year three Employee must be employed at the time of vesting to receive bonus. EX-10.28 8 QUICK SILVER RESOURCES 1999 STOCK OPTION & RETENTI EXHIBIT 10.28 QUICKSILVER RESOURCES INC. 1999 STOCK OPTION AND RETENTION STOCK PLAN - -------------------------------------------------------------------------------- 1. PURPOSE This 1999 Stock Option and Retention Stock Plan of Quicksilver Resources Inc. is to promote and closely align the interests of officers and employees with those of the shareholders of Quicksilver Resources Inc. by providing stock based compensation. The Plan is intended to strengthen Quicksilver Resources Inc.'s ability to reward performance which enhances long term shareholder value; to increase employee stock ownership through performance based compensation plans; and to strengthen the company's ability to attract and retain an outstanding employee and executive team. - -------------------------------------------------------------------------------- 2. DEFINITIONS The following terms shall have the following meanings: "Act" means the Securities Exchange Act of 1934, as amended "Approved Leave of Absence" means a leave of absence of definite length approved by any executive officer of the Company to whom the Committee delegates such authority. "Award" means an award of Retention Shares pursuant to the Plan. "Beneficiary" means any person or persons designated in writing by a Participant to the Committee on a form prescribed by it for that purpose, which designation shall be revocable at any time by the Participant prior to his or her death, provided that, in the absence of such a designation or the failure of the person or persons so designated to survive the Participant, "Beneficiary" shall mean such Participant's estate; and further provided that no designation of Beneficiary shall be effective unless it is received by the Company before the Participant's death. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, or the corresponding provisions of any successor statute. "Committee" means the Committee designated by the Board to administer the Plan pursuant to Section 3. "Common Stock" means the Common Stock of the Company. 1 "Company" means Quicksilver Resources Inc., a Delaware corporation, or any successor corporation. "Executive Officer" means the Chairman of the Board, President, Executive Vice President or Vice President of the Company. "Grant" means a grant of an Option pursuant to the Plan. "Option" means each non-qualified stock option, incentive stock option and stock appreciation right granted under the Plan. "Optionee" means any employee of the Company or a Subsidiary (including directors who are also such employees) who is granted an Option under the Plan. "Participant" means any employee of the Company or a Subsidiary (including directors who are also such employees) who is granted an Award under the Plan. "Plan" means this 1999 Stock Option and Retention Stock Plan of Quicksilver Resources Inc., as amended from time to time. "Retention Shares" means shares of Common Stock subject to an Award granted under the Plan. "Restriction Period" means the period defined in Section 9(a). "Subsidiary" means any corporation, partnership, or limited liability company of which the Company owns directly or indirectly at least a majority of the outstanding shares of voting stock or other voting interest. "Vesting Condition" means any condition to the vesting of Retention Shares established by the Committee pursuant to Section 9. - -------------------------------------------------------------------------------- 3. ADMINISTRATION The Plan shall be administered by the Committee which shall comprise not less than three persons, who shall be members of the Board, none of whom shall be employees of the Company or any Subsidiary. Any actions taken with respect to a "covered employee" within the meaning of Code section 162(m) shall be taken by two or more "outside directors" as required by Code section 162(m). The Committee shall (i) grant Options to Optionees and make Awards of Retention Shares to Participants, and (ii) determine the terms and conditions of such Options and Awards of Retention Shares, all in accordance 2 with the provisions of the Plan. The Committee shall have full authority to construe and interpret the Plan, to establish, amend and rescind rules and regulations relating to the Plan, to administer the Plan, and to take all such steps and make all such determinations in connection with the Plan and Options and Awards granted thereunder as it may deem necessary or advisable. The Committee may delegate its authority under the Plan to one or more Executive Officers or employees of the Company or a Subsidiary, provided, however, that no delegation shall be made of authority to take an action which is required by Rule 16b-3 promulgated under the Act to be taken by "non-employee directors" in order that the Plan and transactions thereunder meet the requirements of such Rule. Each Option and grant of Retention Shares shall be evidenced by an agreement to be executed by the Company and the Optionee or Participant, respectively, and contain provisions not inconsistent with the Plan. All determinations of the Committee shall be by a majority of its members and shall be evidenced by resolution, written consent or other appropriate action, and the Committee's determinations shall be final. Each member of the Committee, while serving as such, shall be considered to be acting in his or her capacity as a director of the Company. - -------------------------------------------------------------------------------- 4. ELIGIBILITY To be eligible for selection by the Committee to participate in the Plan an individual must be an employee of the Company or a Subsidiary. Directors, who are not full-time salaried employees, shall not be eligible. In granting Options or Awards of Retention Shares to eligible persons, the Committee shall take into account their duties, their present and potential contributions to the success of the Company or a Subsidiary, and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. - -------------------------------------------------------------------------------- 5. STOCK SUBJECT TO THE PLAN Subject to the provisions of Section 11 hereof, the maximum number and kind of shares as to which Options or Retention Shares may at any time be granted under the Plan are 1.3 million shares of Common Stock. No Participant may receive Options or Awards aggregating more than 20% of the shares of Common Stock available under the Plan. Shares of Common Stock subject to Options or Awards under the Plan may be either authorized but unissued shares, issued and held for use in employee compensation plans or shares previously issued and reacquired by the Company. Upon the expiration, termination or cancellation (in whole or in part) of unexercised Options, shares of Common Stock subject thereto shall again be available for option or grant as Retention Shares under the Plan. Shares of Common Stock covered by an Option, or portion thereof, which is surrendered upon the exercise of a stock appreciation right, shall thereafter be unavailable for option or grant as Retention Shares under the Plan. Upon the forfeiture (in whole or in part) of a grant of Retention Shares, the shares of Common Stock subject to such forfeiture shall again be available for option or grant as Retention Shares under the Plan. 3 - -------------------------------------------------------------------------------- 6. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS All non-qualified options under the Plan shall be granted subject to the following terms and conditions: (a) Option Price. The option price per share with respect to each option ------------ shall be determined by the Committee but shall not be less than 100% of the fair market value of the Common Stock on the date the option is granted, such fair market value to be determined in accordance with the procedures to be established by the Committee. (b) Duration of Options. Options shall be exercisable at such time or times ------------------- and under such conditions as set forth in the written agreement evidencing such option but in no event shall any option be exercisable subsequent to the tenth anniversary of the date on which the option is granted. (c) Exercise of Option. Except as provided in Section 6(f) and 6(g), the ------------------ shares of Common Stock covered by an option may not be purchased prior to the first anniversary of the date on which the option is granted or such longer period or periods, and subject to such conditions, as the Committee may determine, but thereafter may be purchased at one time or in such installments over the balance of the option period as may be provided in the option. Any shares not purchased on the applicable installment date may be purchased thereafter at any time prior to the final expiration of the option. To the extent that the right to purchase shares has accrued thereunder, options may be exercised from time to time by written notice to the Company stating the number of shares with respect to which the option is being exercised. (d) Payment. Shares of Common Stock purchased under options shall, at the ------- time of purchase, be paid for in full. All, or any portion, of the option exercise price may be paid by the surrender to the Company, at the time of exercise, of shares of previously acquired Common Stock owned by the Optionee, to the extent that such payment does not require the surrender of a fractional share of such previously acquired Common Stock. In addition, the option exercise price may be paid by authorizing the Company to withhold Common Stock otherwise issuable on exercise of the option. Such shares previously acquired or shares withheld to pay the option exercise price shall be valued at fair market value on the date the option is exercised in accordance with the procedures to be established by the Committee. A holder of an option shall have none of the rights of a stockholder until the shares of Common Stock are issued to him or her. If an amount is payable by an Optionee to the Company or a Subsidiary under applicable withholding tax laws in connection with the exercise of non- qualified options the Optionee may make such payment, in whole or in part, by electing to authorize the Company to withhold or accept shares of Common Stock having a fair market value equal to the amount to be paid under such withholding tax laws. 4 (e) Non-Transferability of Options. During an Optionee's lifetime, the ------------------------------ option may be exercised only by the Optionee. Options shall not be transferable, except for exercise by the Optionee's legal representatives or heirs. An officer of the Company may, with prior approval from the Committee (or its designee) as to form, transfer an exercisable non-qualified Option to (a) a member or members of the officer's immediate family (spouse, children and grandchildren, including step and adopted children and grandchildren), (b) a trust, the beneficiaries of which consist exclusively of members of the officer's immediate family, (c) a partnership, the partners of which consist exclusively of members of the officer's immediate family, or (d) any similar entity created for the exclusive benefit of members of the officer's immediate family. The Committee or its designee must approve the form of any transfer of a Grant to or for the benefit of any immediate family member or members before such transfer shall be recognized as valid hereunder. For purposes of the preceding sentence, any remote, contingent interest of persons other than a member of the officer's immediate family shall be disregarded. For purposes of this Section 6(e), the term "officer" shall have the same meaning as that term is defined in Rule 16a- I (f) of the Act. A person's status as an officer shall be determined at the time of the intended transfer. (f) Termination of Employment. Upon the termination of an Optionee's ------------------------- employment, for any reason other than death, the option shall be exercisable only as to those shares of Common Stock which were then subject to the exercise of such option, provided that (I) in the case of retirement, at or after age 55 and with at least five (5) years of credited Company service, or disability, as described below, any holding period required by Section 6(c) shall automatically be deemed to be satisfied and (II) the Committee may determine that particular limitations and restrictions under the Plan shall not apply, and such option shall expire according to the following schedule: (i) Retirement. Option shall expire, unless exercised, five (5) years ---------- after the Optionee's retirement, at or after age 55 with at least five (5) years of credited Company service, from the Company. (ii) Disability. Option shall expire, unless exercised, five (5) years ---------- after the date the Optionee is terminated due to the determination by the Company that the Optionee is disabled as defined in section 22(e)(3) of the Code. (iii) Gross Misconduct. Option shall expire upon receipt by the ---------------- Optionee of the notice of termination if he or she is terminated for deliberate, willful or gross misconduct as determined by the Company. (iv) All Other Terminations. Option shall expire, unless exercised, ---------------------- three (3) months after the date of such termination. 5 In no event, however, shall any option be exercisable pursuant to this Section 6(f) subsequent to the tenth anniversary of the date on which it is granted. (g) Death of Optionee. Upon the death of an Optionee during his or her ----------------- period of employment, the option shall be exercisable only as to those shares of Common Stock which were subject to the exercise of such option at the time of his or her death, provided that (I) any holding period required by Section 6(c) shall automatically be deemed to be satisfied and (II) the Committee may determine that particular limitations and restrictions under the Plan shall not apply, and such option shall expire, unless exercised by the Optionee's legal representatives or heirs, five (5) years after the date of death. In no event, however, shall any option be exercisable pursuant to this Section 6(g) subsequent to the tenth anniversary of the date on which it is granted. - -------------------------------------------------------------------------------- 7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS (a) General. The Committee may also grant a stock appreciation right in ------- connection with a non-qualified option, either at the time of grant or by amendment. Such stock appreciation right shall cover the same shares covered by such option (or such lesser number of shares of Common Stock as the Committee may determine) and shall, except for the provisions of Section 6(d) hereof, be subject to the same terms and conditions as the related non-qualified option. (b) Exercise and Payment. Each stock appreciation right shall entitle the -------------------- Optionee to surrender to the Company unexercised the related option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to the excess of the fair market value of one share of Common Stock over the option price per share times the number of shares covered by the option, or portion thereof, which is surrendered. Payment shall be made in shares of Common Stock valued at fair market value, or in cash, or partly in shares and partly in cash, all as shall be determined by the Committee. The fair market value shall be the value determined in accordance with procedures established by the Committee. Stock appreciation rights may be exercised from time to time upon actual receipt by the Company of written notice stating the number of shares of Common Stock with respect to which the stock appreciation right is being exercised, provided that if a stock appreciation right expires unexercised, it shall be deemed exercised on the expiration date if any amount would be payable with respect thereto. No fractional shares shall be issued but instead cash shall be paid for a fraction. If an amount is payable by an Optionee to the Company or a Subsidiary under applicable withholding tax laws in connection with the exercise of stock appreciation rights the Optionee may make such payment, in whole or in part, by electing to authorize the Company to withhold or accept shares of Common Stock having a fair market value equal to the amount to be paid under such withholding tax laws. 6 (c) Restrictions. The obligation of the Company to satisfy any stock ------------ appreciation right exercised by an Optionee subject to Section 16 of the Act shall be conditioned upon the prior receipt by the Company of an opinion of counsel to the Company that any such satisfaction will not create an obligation on the part of such Optionee pursuant to Section 16(b) of the Act to reimburse the Company for any statutory profit which might be held to result from such satisfaction. - -------------------------------------------------------------------------------- 8. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS (a) General. The Committee may also grant incentive stock options as ------- defined under section 422 of the Code. All incentive stock options issued under the Plan shall, except for the provisions of Sections 6(e) (to the extent it allows the Committee to permit options to be transferred to, or for the benefit of, the Optionee's immediate family members), 6(f) and (g) and Section 7 hereof, be subject to the same terms and conditions as the non-qualified options granted under the Plan. In addition, incentive stock options shall be subject to the conditions of Sections 8(b), (c) and (d). (b) Limitation of Exercise. The aggregate fair market value (determined as ---------------------- of the date the incentive stock option is granted) of the shares of stock with respect to which incentive stock options are exercisable for the first time by such Optionee during any calendar year shall not exceed $100,000. If any incentive stock options become exercisable in any year in excess of a $100,000 limitation, options representing such excess shall become non-qualified options exercisable pursuant to the terms of Section 6 hereof and shall not be exercisable as incentive stock options. (c) Termination of Employment. Upon the termination of an Optionee's ------------------------- employment, for any reason other than death, his or her incentive stock option shall be exercisable only as to those shares of Common Stock which were then subject to the exercise of such option provided that (I) in the case of retirement, at or after age 55 and with at least five (5) years of credited Company service, or disability, as described below, any holding period required by Section 6(c) shall automatically be deemed to be satisfied and (II) the Committee may determine that particular limitations and restrictions under the Plan shall not apply. Such option shall expire as an incentive stock option (but shall become a non-qualified option exercisable pursuant to the terms of Section 6 hereof less the period already elapsed under such Section) according to the following schedule: (i) Retirement. The incentive stock option shall expire, unless ---------- exercised, one (1) year after the Optionee's retirement, at or after age 55 with at least five (5) years of credited Company service, from the Company. (ii) Disability. The incentive stock option shall expire, unless ---------- exercised, one (1) year after the date the Optionee is terminated due to the determination by the Company that the Optionee is disabled as defined in section 22(e)(3) of the Code. 7 (iii) Gross Misconduct. The incentive stock option shall expire upon ---------------- receipt by the Optionee of the notice of termination if he or she is terminated for deliberate, willful or gross misconduct as determined by the Company. (iv) All Other Terminations. The incentive stock option shall expire, ---------------------- unless exercised, three (3) months after the date of such termination. In no event, however, shall any incentive stock option be exercisable pursuant to this Section 8(c) subsequent to the tenth anniversary of the date on which it was granted. (d) Death of Optionee. Upon the death of an Optionee during his or ----------------- her period of employment, the incentive stock option shall be exercisable as an incentive stock option only as to those shares of Common Stock which were subject to the exercise of such option at the time of death, provided that (I) any holding period required by Section 6(c) shall automatically be deemed to be satisfied, and (II) the Committee may determine that particular limitations and restrictions under the Plan shall not apply, and such option shall expire as incentive stock options, but shall become a non-qualified option exercisable pursuant to the terms of Section 6, less the period already elapsed under such Section 6. In no event, however, shall any incentive stock option be exercisable pursuant to this Section 8(d) subsequent to the tenth anniversary of the date on which it was granted. - -------------------------------------------------------------------------------- 9. TERMS AND CONDITIONS OF AWARDS OF RETENTION STOCK (a) General. Retention Shares may be granted to reward the attainment of ------- individual, Company or Subsidiary goals, or to attract or retain officers or other employees of the Company or any Subsidiary. With respect to each grant of Retention Shares under the Plan, the Committee shall determine the period or periods, including any conditions for determining such period or periods, during which the restrictions set forth in Section 9(b) shall apply, provided that in no event, other than as provided in Section 9(c), shall such restrictions terminate prior to one (1) year after the date of grant and further provided that the Committee may also specify any other terms or conditions to the right of the Participant to receive such Retention Shares ("Vesting Conditions"). Subject to Section 9(c) and any such Vesting Conditions, a grant of Retention Shares shall be effective for the Restriction Period and may not be revoked. (b) Restrictions. At the time of grant of Retention Shares to a ------------ Participant, a certificate representing the number of shares of Common Stock granted shall be registered in the Participant's name but shall be held by the Company for his or her account. The Participant shall have the entire beneficial ownership interest in, and all 8 rights and privileges of a stockholder as to, such Retention Shares, including the right to vote such Retention Shares and, unless the Committee shall determine otherwise, the right to receive dividends thereon, subject to the following: (i) subject to Section 9(c), the Participant shall not be entitled to delivery of the stock certificate until the expiration of the Restriction Period and the satisfaction of any Vesting Conditions; (ii) none of the Retention Shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restriction Period or prior to the satisfaction of any Vesting Conditions; and (iii) all of the Retention Shares shall be forfeited and all rights of the Participant to such Retention Shares shall terminate without further obligation on the part of the Company unless the Participant remains in the continuous employment of the Company or a Subsidiary for the entire Restriction Period, except as provided by Sections 9(a) and 9(c), and any applicable Vesting Conditions have been satisfied. Any shares of Common Stock or other securities or property received as a result of a transaction listed in Section 11 shall be subject to the same restrictions as such Retention Shares. (c) Termination of Employment. ------------------------- (i) Disability and Retirement. If (A) a Participant ceases to be an ------------------------- employee of the Company or a Subsidiary prior to the end of a Restriction Period, by reason of disability due to the determination by the Company that the Optionee is disabled, as defined in section 22(e)(3) of the Code, or retirement, at or after age 55 and with at least five (5) years of credited Company service, and (B) all Vesting Conditions have been satisfied, the Retention Shares granted to such Participant shall immediately vest and all restrictions applicable to such shares shall lapse. A certificate for such shares shall be delivered to the Participant in accordance with the provisions of Section 9(d). (ii) Death. If (A) a Participant ceases to be an employee of the ----- Company or a Subsidiary prior to the end of a Restriction Period by reason of death, and (B) all Vesting Conditions have been satisfied, the Retention Shares granted to such Participant shall immediately vest in his or her Beneficiary, and all restrictions applicable to such shares shall lapse. A certificate for such shares shall be delivered to the Participant's Beneficiary in accordance with the provisions of Section 9(d). (iii) All Other Terminations. If a Participant ceases to be an ---------------------- employee of the Company or a Subsidiary prior to the end of a Restriction Period for any reason other than death, disability or retirement as provided in Section 9(c)(i) and (ii), the Participant shall immediately forfeit all Retention Shares then subject to the restrictions of Section 9(b) in accordance with the provisions thereof, except that the Committee may, if it finds that the circumstances in the particular case so warrant, allow a Participant whose employment so terminated to retain any or all of the Retention Shares then subject to the restrictions of Section 9(b) and all restrictions applicable to 9 such retained shares shall lapse. In such latter event, a certificate for such retained shares shall be delivered to the Participant in accordance with the provisions of Section 9(d). (iv) Vesting Conditions. If a Participant ceases to be an employee of ------------------ the Company or a Subsidiary for any reason prior to the satisfaction of any Vesting Conditions, the Participant shall immediately forfeit all Retention Shares then subject to the restrictions of Section 9(b) in accordance with the provisions thereof, except that the Committee may, if it finds that the circumstances in the particular case so warrant, allow a Participant whose employment has so terminated to retain any or all of the Retention Shares then subject to the restrictions of Section 9(b) and all restrictions applicable to such retained shares shall lapse. In such latter event, a certificate for such retained shares shall be delivered to the Participant in accordance with the provisions of Section 9(d). (d) Payment of Retention Shares. At the end of the Restriction Period and --------------------------- after all Vesting Conditions have been satisfied, or at such earlier time as provided for in Section 9(c) or as the Committee, in its sole discretion, may otherwise determine, all restrictions applicable to the Retention Shares shall lapse, and a stock certificate for a number of shares of Common Stock equal to the number of Retention Shares, free of all restrictions, shall be delivered to the Participant or his or her Beneficiary, as the case may be. If an amount is payable by a Participant to the Company or a Subsidiary under applicable withholding tax laws in connection with the lapse of such restrictions the Participant may make such payment, in whole or in part, by authorizing the Company to transfer to the Company Retention Shares otherwise deliverable to the Participant having a fair market value equal to the amount to be paid under such withholding tax laws. - -------------------------------------------------------------------------------- 10. REGULATORY APPROVALS AND LISTING The Company shall not be required to issue to an Optionee, Participant or a Beneficiary, as the case may be, any certificate for any shares of Common Stock upon exercise of an option or for any Retention Shares granted under the Plan prior to (i) the obtaining of any approval from any governmental agency which the Company, in its sole discretion, shall determine to be necessary or advisable, (ii) the admission of such shares to listing on any stock exchange on which the Common Stock may then be listed, and (iii) the completion of any registration or other qualification of such shares under any state or Federal law or rulings or regulations of any governmental body which the Company, in its sole discretion, shall determine to be necessary or advisable. - -------------------------------------------------------------------------------- 11. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION 10 In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, spin- off, reorganization or liquidation, or any other change in the corporate structure or shares of the Company, the Board, upon recommendation of the Committee, may make such equitable adjustments as it may deem appropriate in the number and kind of shares authorized by the Plan, in the option price of outstanding Options, and in the number and kind of shares or other securities or property subject to Options or covered by outstanding Awards. - -------------------------------------------------------------------------------- 12. TERM OF THE PLAN No Options or Retention Shares shall be granted pursuant to the Plan after August 18, 2009 but grants of Options and Retention Shares theretofore granted may extend beyond that date and the terms and conditions of the Plan shall continue to apply thereto. - -------------------------------------------------------------------------------- 13. TERMINATION OR AMENDMENT OF THE PLAN The Board may at any time terminate the Plan with respect to any shares of Common Stock not at that time subject to outstanding Options or Awards, and may from time to time alter or amend the Plan or any part thereof (including, but without limiting the generality of the foregoing, any amendment deemed necessary to ensure that the Company may obtain any approval referred to in Section 10 or to ensure that the grant of Options or Awards, the exercise of Options or payment of Retention Shares or any other provision or the Plan complies with Section 16(b) of the Act), provided that no change with respect to any Options or Retention Shares theretofore granted may be made which would impair the rights of an Optionee or Participant without the consent of such Optionee or Participant and, further, that without the approval of stockholders, no alteration or amendment may be made which would (i) increase the maximum number of shares of Common Stock subject to the Plan as set forth in Section 5 (except by operation of Section 11), (ii) extend the term of the Plan, (iii) change the class of eligible persons who may receive Options or Awards of Retention Shares under the Plan or (iv) increase the limitation set forth in Section 5 on the maximum number of shares that any Participant may receive under the Plan. - -------------------------------------------------------------------------------- 14. LEAVE OF ABSENCE A leave of absence other than an Approved Leave of Absence shall be deemed a termination of employment for purposes of the Plan. An Approved Leave of Absence shall not be deemed a termination of employment for purposes of the Plan (except for purposes of Section 8), but the period of such Leave of Absence shall not be counted toward satisfaction of any Restriction Period or any holding period described in Section 6(c). - -------------------------------------------------------------------------------- 11 15. GENERAL PROVISIONS (a) Neither the Plan nor the grant of any Option or Award nor any action by the Company, any Subsidiary or the Committee shall be held or construed to confer upon any person any right to be continued in the employ of the Company or a Subsidiary. The Company and each Subsidiary expressly reserve the right to discharge, without liability but subject to his or her rights under the Plan, any Optionee or Participant whenever in the sole discretion of the Company or a Subsidiary, as the case may be, its interest may so require. (b) All questions pertaining to the construction, regulation, validity and effect of the Plan shall be determined in accordance with the laws of the State of Delaware, without regard to conflict of laws doctrine. (c) Notwithstanding any provision herein to the contrary, the Committee, under terms and conditions as it may prescribe, may permit certain Optionees (with respect to non-qualified options and stock appreciation rights) and certain Participants (with respect to Awards of Retention Shares) to make elections, engage in transactions or take any other action intended to defer the receipt of compensation for federal income tax purposes with respect to such Non-Qualified Options, Stock Appreciation Rights or Retention Shares. - -------------------------------------------------------------------------------- 16. EFFECTIVE DATE The Plan was adopted by the Board effective as of October 4, 1999. It shall be submitted to the stockholders of the Company for their approval within twelve (12) months after such date. If such approval is not obtained, any Award or grant of an Option under the Plan shall be void and all Awards and grants under the Plan shall be contingent upon stockholder approval. QUICKSILVER RESOURCES INC. /s/ GLENN DARDEN By: ____________________________ Glenn Darden, President 12 EX-10.29 9 SECOND AMENDMENT TO SECOND AMENDED & RESTATED CRED EXHIBIT 10.29 SECOND AMENDMENT TO ------------------- SECOND AMENDED AND RESTATED CREDIT AGREEMENT -------------------------------------------- This Second Amendment to Second Amended and Restated Credit Agreement (this "Second Amendment") is entered into as of October 6, 1999 by and among ---------------- QUICKSILVER RESOURCES INC., a Delaware corporation ("Borrower"), BANK OF -------- AMERICA, N.A., successor by merger to NationsBank, N.A., a national banking association, as Administrative Agent ("Administrative Agent") and each of the -------------------- financial institutions set forth on the signature pages hereto as Banks. W I T N E S S E T H: ------------------- WHEREAS, Borrower, Administrative Agent, Bank of America, N.A., successor by merger to NationsBank, N.A. (in its individual capacity), Paribas, Frost National Bank, CIBC, Inc. and Christiania Bank (collectively, the "Banks") are ----- parties to that certain Second Amended and Restated Credit Agreement dated as of March 1, 1999 (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 Revolving Loan to Borrower and provided certain other credit accommodations to Borrower; and WHEREAS, Borrower intends to effect a secondary offering of up to 8,050,000 shares of its common stock $.01 par value per share; and WHEREAS, as a result of such secondary offering, the Darden Group's percentage ownership of Borrower's outstanding common stock will decrease; and WHEREAS, Borrower desires to amend the definition of "Change in Control" contained in the Credit Agreement to accommodate such decrease; and WHEREAS, subject to the terms and conditions herein contained, 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 Banks hereby agree as follows: SECTION 1. Amendments. In reliance on the representations, warranties, ---------- ---------- covenants and agreements contained in this Second Amendment, the Credit Agreement is hereby amended 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 "Second ------ Amendment," "Secondary Offering" and "Secondary Offering Registration Statement" - --------- ------------------ ----------------------------------------- which shall read in full as follows: "Second Amendment" means that certain Second Amendment to Second ---------------- Amended and Restated Credit Agreement dated as of October 6, 1999 among Borrower, Administrative Agent and the financial institutions a party thereto as Banks. "Secondary Offering" means the offering of up to 8,050,000 shares of ------------------ Borrower's common stock, par value $.01 per share, contemplated by the Secondary Offering Registration Statement. "Secondary Offering Registration Statement" means a Registration ----------------------------------------- Statement to be filed with the Securities Exchange Commission on Form S-1 pertaining to a secondary public offering of up to 8,050,000 shares of Borrower's common stock, par value $.01 per share, a draft of which has been provided by Borrower to Administrative Agent. 1.2 Amendment to Definitions. The definitions of "Change of Control" and ------------------------ ----------------- "Loan Papers" set forth in Section 2.1 of the Credit Agreement are amended to ----------- read in full as follows: "Change of Control" means that, for any reason, the Darden Group fails ----------------- to own and control, directly or indirectly, at least the following percentage of the outstanding voting power of the issued and outstanding capital stock of every class of Borrower: (a) prior to the Secondary Offering, 51% , and (b) from and after the Secondary Offering, 35%. "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 Assignment of Notes and Liens, 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. Representations and Warranties of Borrower. To induce Banks ------------------------------------------ and Administrative Agent to enter into this Second Amendment, Borrower hereby represents and warrants to Administrative Agent and Banks as follows: 2.1 Credit Agreement. Each representation and warranty of Borrower ---------------- contained in the Credit Agreement and the other Loan Papers is true and correct on the date thereof. 2.2 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 result in the creation or imposition of any Lien upon any of the assets of Borrower other than the Liens securing the Obligations. 2 2.3 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. 2.4 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 3. Miscellaneous. ------------- 3.1 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 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. 3.2 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. 3.3 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. 3.4 Counterparts. This Second Amendment may be executed in counterparts, ------------ and all parties need not execute the same counterpart. Facsimiles shall be effective as originals. 3.5 Complete Agreement. THIS SECOND AMENDMENT, THE CREDIT AGREEMENT AND ------------------ THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES 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. 3.6 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] 3 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed by their respective Authorized Officers effective as of the date and year first above written. BORROWER: -------- QUICKSILVER RESOURCES, INC., a Delaware corporation By: /s/ GLENN DARDEN ------------------------------------- Glenn Darden, President ADMINISTRATIVE AGENT: -------------------- BANK OF AMERICA, N.A., successor by merger to NationsBank, N.A. By: /s/ J. SCOTT FOWLER ------------------------------------- J. Scott Fowler, Managing Director BANKS: ----- BANK OF AMERICA, N.A., successor by merger to NationsBank, N.A. By: /s/ J. SCOTT FOWLER ------------------------------------- J. Scott Fowler, Managing Director 4 PARIBAS By: /s/ MICHAEL H. FIUZAT ------------------------------------- Name: Michael H. Fiuzat ----------------------------------- Title: Vice President ---------------------------------- By: /s/ BRIAN M. MALONE ------------------------------------- Name: Brian M. Malone ----------------------------------- Title: Director ---------------------------------- FROST NATIONAL BANK By: /s/ WILLIAM A. ADAMS ------------------------------------- Name: William A. Adams ----------------------------------- Title: Senior Vice President ---------------------------------- CIBC, INC. By: /s/ ROGER COLDEN ------------------------------------- Name: Roger Colden ----------------------------------- Title: Authorized Signatory ---------------------------------- CHRISTIANIA BANK By: /s/ WILLIAM S. PHILLIPS /s/ PETER M. DODGE ------------------------------------- Name: William S. Phillips Peter M. Dodge ----------------------------------- Title: First Vice President Senior Vice President ---------------------------------- 5 EX-21.1 10 LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES OF QUICKSILVER RESOURCES INC. Name Under Jurisdiction of Which Business Name of Subsidiary Organization is Conducted --------------------------- ------------------- ------------------ Beaver Creek Pipeline, L.L.C. Michigan Same MGV Energy, Inc. Alberta, Canada Same EX-23.1 11 CONSENT OF DELOITTE & TOUCHE Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Quicksilver Resources Inc. on Form S-1 of our report dated March 29, 1999, on the combined consolidated balance sheets of Quicksilver Resources Inc. as of December 31, 1998 and 1997, and the related combined consolidated statement of income, stockholders' equity and cash flows for the year ended December 31, 1998; our report dated March 25, 1998 (December 18, 1998 as to Note 12) on the consolidated balance sheet of MSR Exploration Ltd. and subsidiaries as of December 31, 1997, and the related consolidated statement of operations, stockholders' equity and cash flows for the period from inception March 7, 1997 to December 31, 1997; and our report dated July 22, 1999, on the statement of revenues and direct operating expenses of the Unocal Corporation's Spirit Energy 76 unit interests for the year ended December 31, 1998, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "'Experts" in such Prospectus. /s/ Deloitte & Touche LLP Deloite & Touche LLP Fort Worth, Texas October 18, 1999 EX-23.2 12 CONSENT OF WEAVER & TIDWELL [LETTERHEAD OF WEAVER AND TIDWELL APPEARS HERE] EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITOR As independent auditors, we hereby consent to the incorporation by reference in this Form S-1 Registration Statement of our report dated October 26, 1998, on the consolidated balance sheets of Mercury Exploration Company as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997; our report dated November 30, 1998 on the consolidated balance sheet of Mercury Exploration Company as of December 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the three months then ended; and our report dated October 26, 1998 on the balance sheets of Michigan Gas Partners Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. We also consent to the reference to this firm under the heading "Experts" in this Registration Statement. /s/ WEAVER AND TIDWELL, L.L.P. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas October 18, 1999 EX-23.3 13 CONSENT OF HOLDITCH-RESERVOIR TECHNOLOGIES Exhibit 23.3 As independent oil and gas consultants, Holditch-Reservoir Technologies Consulting Services hereby consents to the inclusion of our letter regarding estimated net reserves and income of certain oil and gas interests audited for Quicksilver Resources Inc. as of September 1, 1999 and the references to our firm in the Registration Statement of Quicksilver Resources Inc. on Form S-1 (Registration No. ) to be filed with the Securities and Exchange Commission. /s/ Holditch-Reservoir Technologies Consulting Services Holditch-Reservoir Technologies Consulting Services Pittsburgh, Pennsylvania October 15, 1999 EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 6-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 JUN-30-1999 294 157 0 0 7,776 8,959 0 1,350 751 751 8,821 8,517 191,776 230,622 56,966 63,144 144,600 177,684 7,530 4,171 84,972 114,945 0 0 0 0 115 129 32,473 42,594 144,600 177,684 42,080 19,747 45,687 21,897 17,781 9,381 30,146 15,510 1,430 1,836 0 1,350 6,698 3,738 8,171 (396) 3,286 (135) 4,885 (261) 0 0 0 0 0 0 4,885 (261) 0.42 (0.02) 0.42 (0.02)
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