<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1996
REGISTRATION NO. 333-4437
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
THE HOUSTON EXPLORATION COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 22-2674487
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
JAMES F. WESTMORELAND
1331 LAMAR, SUITE 1065 1331 LAMAR, SUITE 1065
HOUSTON, TEXAS 77010 HOUSTON, TEXAS 77010
(713) 652-2847 (713) 652-2847
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number, including area code, of
principal executive offices) agent for service)
</TABLE>
------------------------
Copies to:
<TABLE>
<S> <C>
DAVID J. GRAHAM JOHN S. WATSON
JEFFREY L. WADE KEITH R. FULLENWEIDER
ANDREWS & KURTH L.L.P. VINSON & ELKINS L.L.P.
4200 TEXAS COMMERCE TOWER 1001 FANNIN STREET, 36TH FLOOR
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-4200 (713) 758-2222
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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, please 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(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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS BE PRICE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Common Stock, par value $.01 7,130,000
per share..................... shares $15.00 $106,950,000 $36,879(3)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 930,000 shares subject to purchase by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for purpose of calculating the registration fee pursuant to
Rule 457(a) under the Securities Act.
(3) $44,414 has previously been paid.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NO. ITEM IN FORM S-1 LOCATION OR HEADING IN PROSPECTUS
- -------- ------------------------------------------------ -----------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover Page; Outside
Back Cover Page; Additional
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges..................... Prospectus Summary; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page;
Underwriting
6. Dilution........................................ Dilution
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Front Cover Page; Underwriting
9. Description of the Securities to be
Registered.................................... Front Cover Page; Prospectus
Summary; Capitalization;
Description of Capital Stock;
Underwriting
10. Interests of Named Experts and Counsel.......... Not Applicable
11. Information With Respect to the Registrant...... Front Cover Page; Prospectus
Summary; Risk Factors; The
Company; Dividend Policy;
Selected Historical Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Related
Party Transactions; Security
Ownership of Certain Beneficial
Owners and Management;
Description of Capital Stock;
Shares Eligible for Future Sale;
Underwriting
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................... Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED AUGUST 27, 1996
<TABLE>
<S> <C> <C>
LOGO 6,200,000 SHARES
THE HOUSTON EXPLORATION COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
</TABLE>
---------------------
All of the shares offered hereby are being sold by the Company. Prior to
the offering, all of the outstanding shares of Common Stock of the Company have
been owned by a wholly-owned subsidiary of The Brooklyn Union Gas Company. Upon
completion of the offering, a wholly-owned subsidiary of The Brooklyn Union Gas
Company will own approximately 68% of the outstanding shares of Common Stock
(approximately 65% if the Underwriters' over-allotment option is exercised in
full). It is currently estimated that the initial public offering price per
share will be between $13.00 and $15.00. For factors considered in determining
the initial public offering price, see "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange under the symbol "THX."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total(3)........................... $ $ $
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting estimated expenses of $1,500,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 930,000 shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Company
will be $ , $ and $ , respectively. See "Underwriting."
---------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
, 1996 against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
---------------------
The date of this Prospectus is , 1996.
<PAGE> 4
THE HOUSTON EXPLORATION COMPANY
NATURAL GAS AND OIL PROPERTIES
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. In addition, unless otherwise specified, all numbers of shares and
per share amounts have been restated to reflect the reclassification of each
outstanding share of common stock of the Company into 2.47 shares of Common
Stock, par value $.01 per share ("Common Stock"), to be effected immediately
prior to the offering made hereby (the "Offering"). Prior to the Offering, all
of the outstanding shares of Common Stock of the Company have been owned by a
wholly-owned subsidiary of The Brooklyn Union Gas Company ("Brooklyn Union").
The Company was incorporated in December 1985, and has focused since its
inception primarily upon natural gas and oil exploration and development
offshore in the Gulf of Mexico. In February 1996, Brooklyn Union implemented a
reorganization of its exploration and production assets by transferring to the
Company certain onshore producing properties and developed and undeveloped
acreage previously held by Fuel Resources, Inc., another Brooklyn Union
subsidiary. Unless otherwise indicated, all information set forth in this
Prospectus gives effect to such reorganization. Unless otherwise indicated, the
December 31, 1995 reserve and acreage and the current production data included
in this Prospectus includes the pro forma net reserves, acreage and production
attributable to (i) properties acquired by the Company in July 1996 from
TransTexas Gas Corporation and (ii) properties that the Company will acquire
from Smith Offshore Exploration Company in an acquisition that will close
concurrently with this Offering. Investors should carefully consider the
information set forth under "Risk Factors." Oil and gas industry terms used in
this Prospectus are defined in "Glossary of Oil and Gas Terms."
THE COMPANY
The Houston Exploration Company ("Houston Exploration" or the "Company") is
an independent natural gas and oil company engaged in the exploration,
development and acquisition of domestic natural gas and oil properties. The
Company's offshore properties are located in the shallow waters (up to 600 feet)
of the Gulf of Mexico, and its onshore properties are located in South Texas,
the Arkoma Basin, East Texas and West Virginia. The Company has grown its Gulf
of Mexico reserves and production through exploratory drilling and subsequent
development of prospects originally generated utilizing in-house geological and
geophysical expertise. The Company has grown its onshore reserves and production
through successful acquisitions and subsequent exploitation and development of
low risk, long-lived reserves. The Company believes that these lower risk
projects and the stable production from its longer-lived onshore properties
complement its high potential exploratory prospects in the Gulf of Mexico by
balancing risk and reducing volatility.
The Company believes that its primary strengths are its high quality
reserves, its substantial inventory of exploration and development
opportunities, its expertise in generating new prospects and its geographic
focus and low-cost operating structure. At December 31, 1995, the Company had
net proved reserves of 346 Bcfe. Approximately 98% of the Company's net proved
reserves on such date were natural gas and approximately 73% of proved reserves
were classified as proved developed. The Company operates approximately 82% of
its Gulf of Mexico production and approximately 92% of its onshore production.
The geographic focus of the Company's operations in the Gulf of Mexico and
core onshore areas of operation enable it to manage a large asset base with a
relatively small number of employees and to add production at relatively low
incremental cost. The Company achieved pro forma lease operating expenses of
$0.25 per Mcfe of production and pro forma general and administrative expenses
of $0.08 per Mcfe of production for the year ended December 31, 1995.
3
<PAGE> 6
STRATEGY. The Company's strategy is to expand its reserves and increase its
cash flow through the exploration of Gulf of Mexico prospects which are
internally generated by the Company, the continued development of its existing
offshore and onshore properties and the selective acquisition of additional
properties both offshore and onshore. The Company implements its strategy by
focusing on the following key strengths:
- High potential exploratory drilling in the Gulf of Mexico
- Low risk exploitation and development drilling in core onshore areas of
operation
- Use of advanced technology for in-house prospect generation
- Opportunistic acquisitions with additional exploratory and/or development
potential
- High percentage of operated properties to control operations and costs
- Geographically focused operations
HIGH POTENTIAL EXPLORATORY DRILLING IN THE GULF OF MEXICO. The Company
plans to drill at least five additional exploratory wells in the Gulf of Mexico
in the remainder of 1996, the successful completion of any one of which could
substantially increase the Company's reserves. The Company believes it has
assembled a three year inventory of exploration and development drilling
opportunities in the Gulf of Mexico. The Company holds interests in 49 lease
blocks, representing 230,531 gross (147,180 net) acres, in federal and state
waters in the Gulf of Mexico, of which 28 have current operations. The Company
has a 100% working interest in 16 of these lease blocks and a 50% or greater
working interest in 17 other lease blocks. During 1994 and 1995, the Company
drilled five successful exploratory wells and 11 successful development wells in
the Gulf of Mexico, resulting in added net proved reserves of approximately 61
Bcfe. During the first half of 1996, the Company drilled three successful
exploratory wells and one successful development well. The Company anticipates
that approximately $50 million of its $63 million 1996 capital expenditure
budget (excluding acquisitions) will be spent on offshore projects. In addition,
the Company intends to continue its participation in federal lease sales and to
actively pursue attractive farm-in opportunities as they become available.
During July 1996, average net production from the Company's Gulf of Mexico
properties was approximately 52,900 Mcfe per day.
LOW RISK EXPLOITATION AND DEVELOPMENT DRILLING ONSHORE. The Company owns
significant onshore natural gas and oil properties in South Texas, the Arkoma
Basin of Oklahoma and Arkansas, East Texas and West Virginia, accounting for
approximately 63% of its net proved reserves as of December 31, 1995. Since the
beginning of 1994, the Company has drilled or participated in the drilling of 25
successful development wells and three successful exploratory wells onshore. The
Company plans to drill 16 development wells onshore during the remainder of
1996. The Company believes that these lower risk projects and the stable
production from its longer-lived onshore properties complement its higher
potential Gulf of Mexico operations and reserve base. The Company's onshore
properties represent interests in 1,060 gross (657 net) wells, and 138,385 gross
(93,419 net) acres. The Company anticipates that approximately $13 million of
its $63 million 1996 capital expenditure budget (excluding acquisitions) will be
spent on onshore projects. In addition, the Company anticipates that it will
continue to acquire onshore properties with exploitation and development
potential in its core areas of operation as opportunities arise. During July
1996, average net production from the Company's onshore properties was
approximately 69,300 Mcfe per day.
USE OF ADVANCED TECHNOLOGY FOR IN-HOUSE PROSPECT GENERATION. The Company
generates virtually all of its Gulf of Mexico exploration prospects utilizing
in-house geological and geophysical expertise. The Company uses advanced
technology, including 3-D seismic and in-house computer-aided exploration
technology, to reduce risks, lower costs and prioritize drilling prospects. The
Company has acquired approximately 1,100 square miles of 3-D seismic data,
including 3-D seismic surveys on 29 of its offshore lease blocks and on possible
lease and acquisition prospects, and
4
<PAGE> 7
60,500 linear miles of 2-D seismic data on its offshore properties. The Company
has 12 geologists/geophysicists with average industry experience of
approximately 30 years and five geophysical workstations for use in interpreting
3-D seismic data. The availability of 3-D seismic data for Gulf of Mexico
properties at reasonable costs has enabled the Company to identify multiple
exploration and development prospects in the Company's existing inventory of
properties and to define possible lease and acquisition prospects.
OPPORTUNISTIC ACQUISITIONS. Although the Company's primary strategy is to
grow its reserves through the drillbit, the Company anticipates making
opportunistic acquisitions in the Gulf of Mexico with exploratory potential and
in core areas of operation onshore with exploitation and development potential.
The Company has a successful track record of building its reserves through
opportunistic acquisitions in the Gulf of Mexico and onshore. In this regard the
Company recently acquired significant onshore properties in South Texas and has
agreed to acquire additional interests in offshore properties in the Gulf of
Mexico.
HIGH PERCENTAGE OF OPERATED PROPERTIES. The Company prefers to operate its
properties in order to manage production performance while controlling operating
expenses and the timing and amount of capital expenditures. Properties operated
by the Company account for 82% of its Gulf of Mexico production and
approximately 92% of its onshore production. Houston Exploration operates 16
platforms and 64 wells in the Gulf of Mexico and 924 wells onshore. The Company
also pursues cost savings through the use of outside contractors for much of its
offshore field operations activities and administrative work. As a result of
these and other factors, the Company achieved pro forma lease operating expense
of $0.25 per Mcfe of production and pro forma general and administrative expense
of $0.08 per Mcfe of production for the year ended December 31, 1995.
GEOGRAPHICALLY FOCUSED OPERATIONS. Focusing drilling activities on
properties in a relatively concentrated area in the Gulf of Mexico permits the
Company to utilize its base of geological, engineering, exploration and
production experience in the region. The geographic focus of the Company's
operations allows it to manage a large asset base with a relatively small number
of employees and enables the Company to add production at relatively low
incremental costs. Management believes that the Gulf of Mexico area remains
attractive for future exploration and development activities due to the
availability of geologic data, remaining reserve potential and the
infrastructure of gathering systems, pipelines, platforms and providers of
drilling services and equipment. The Company's onshore strategy is to make
opportunistic acquisitions of low risk, long-lived natural gas reserves of
sufficient size to provide a core area of operation and to use that base to
develop additional acquisition opportunities and exploitation drilling at little
or no incremental overhead cost.
RECENT ACQUISITION. On July 2, 1996, the Company acquired certain natural
gas and oil properties and associated gathering pipelines and equipment located
in Zapata County, Texas (the "TransTexas Acquisition") from TransTexas Gas
Corporation and TransTexas Transmission Corporation (together, "TransTexas").
The properties acquired in the TransTexas Acquisition represent approximately
113 Bcfe of the Company's net proved reserves of 346 Bcfe as of December 31,
1995. The Company acquired a 100% working interest (95% after the exercise by
James G. Floyd, the Company's President and Chief Executive Officer, of his
right to purchase a 5% working interest) in the approximately 156 wells on such
properties. The purchase price of $62.2 million ($59.1 million after giving
effect to the exercise of Mr. Floyd's purchase option) for the TransTexas
Acquisition is subject to adjustment based upon production and expenses related
to the assets between the May 1, 1996 effective date of the TransTexas
Acquisition and the July 2, 1996 closing date. The purchase price for the
TransTexas Acquisition was paid in cash, financed by borrowings under the
Company's credit facility. The properties acquired by the Company are subject to
two judgment liens imposed on substantially all of TransTexas' properties in the
aggregate amount of $20 million. TransTexas has agreed to indemnify the Company
against any loss arising from such judgment liens. TransTexas has appealed the
judgments to which such liens relate, and has posted bonds secured by a letter
of credit and cash in the full aggregate amount of such judgments. One of the
judgments, in the amount of $18 million, has been reversed, a decision
5
<PAGE> 8
which, if upheld, will result in the release of the related judgment lien. As a
result, the Company believes that the properties purchased in the TransTexas
Acquisition are not subject to any material risk as a result of such judgment
liens.
PENDING ACQUISITION. On July 1, 1996, the Company entered into an asset
purchase agreement with Smith Offshore Exploration Company ("Soxco"), providing
for the acquisition by the Company of substantially all of the natural gas and
oil properties and related assets of Soxco, representing approximately 32 Bcfe
of the Company's net proved reserves of 346 Bcfe as of December 31, 1995 (the
"Soxco Acquisition"). Soxco's natural gas and oil properties consist solely of
working interests in producing properties and developed and undeveloped acreage
located in the Gulf of Mexico that are operated by the Company or in which the
Company also has a working interest. Pursuant to the Soxco Acquisition, the
Company will pay Soxco cash in the aggregate amount of $23.7 million (subject to
certain adjustments), and issue to Soxco a number of shares of Common Stock
(estimated to be approximately 844,071 shares) with an aggregate value
(determined by reference to the initial public offering price) of $11.8 million.
The cash portion of the purchase price will be funded with the proceeds of this
Offering. In addition to the foregoing, the Company will pay Soxco a deferred
purchase price of up to $17.6 million payable in two installments, on January
31, 1997 and January 31, 1998. The amount of the deferred purchase price
installments will be determined by the amount of the probable reserves of Soxco
as of December 31, 1995 (approximately 17.6 Bfce) that are produced prior to or
classified as proved as of December 31, 1996 and December 31, 1997,
respectively, provided that Soxco will be entitled to receive a minimum deferred
purchase price of $8.8 million. The amounts so determined will be paid in shares
of Common Stock based upon the fair market value of such stock at the time of
issuance. The Soxco Acquisition will close concurrently with, is conditioned
upon and is a condition to the completion of this Offering.
PRINCIPAL STOCKHOLDER. The Company is currently an indirect wholly-owned
subsidiary of Brooklyn Union. Brooklyn Union distributes gas in an area of New
York City with a population of four million. Upon completion of this Offering
and giving effect to the Soxco Acquisition, a wholly-owned subsidiary of
Brooklyn Union will own approximately 68% of the outstanding shares of Common
Stock (approximately 65% if the Underwriters' over-allotment option is exercised
in full). Brooklyn Union believes that Houston Exploration will provide a
competitive vehicle with a stand-alone capital structure through which Brooklyn
Union can continue to participate in the exploration for and production of
natural gas and oil to maximize the long-term value of its substantial
investment in that business. Brooklyn Union has advised the Company that it does
not currently intend to engage in the domestic exploration for and production of
natural gas and oil except through its ownership of Common Stock of the Company.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................... 6,200,000 shares
Common Stock to be outstanding after this Offering..... 22,500,000 shares (1)
Proposed New York Stock Exchange symbol................ "THX"
Use of Proceeds........................................ To repay outstanding indebtedness
under the Company's Credit Facility
and to pay the cash portion of the
purchase price for the Soxco
Acquisition.
</TABLE>
- ---------------
(1) Assumes 844,071 shares to be issued in connection with the Soxco Acquisition
and 160,714 shares to be issued to the Company's President and Chief
Executive Officer in connection with the Offering (based upon an assumed
initial public offering price of $14.00 per share). Does not include (i)
1,125,000 shares of Common Stock (1,171,500 shares if the Underwriters'
over-allotment option is exercised in full) issuable pursuant to options
that will be granted to management and other employees upon completion of
the Offering, at an exercise price per share equal to the initial public
offering price, or (ii) shares of Common Stock with a fair market value at
the time of issuance of up to $17.6 million issuable as the deferred
purchase price for the Soxco Acquisition. See "Management -- 1996 Stock
Option Plan" and "Soxco Acquisition."
6
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents certain historical and pro forma financial
data of the Company as of and for each of the periods indicated. The historical
financial data for the years ended December 31, 1993, 1994 and 1995 have been
derived from the audited financial statements of the Company. The historical
financial data for the six months ended June 30, 1995 and 1996 and as of June
30, 1996 are derived from unaudited financial statements of the Company. The
results for the six months ended June 30, 1996 are not necessarily indicative of
results for the full year. The following information should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Financial Information," the Financial Statements of the
Company and Soxco and the Historical Summaries to the properties acquired from
TransTexas included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Natural gas and oil revenues..... $37,462 $41,755 $39,431 $75,263 $20,324 $21,252 $41,055
Other............................ 799 467 1,778 1,778 825 535 535
------- ------- ------- --------- ------- ------- ---------
Total revenues............ 38,261 42,222 41,209 77,041 21,149 21,787 41,590
Expenses:
Lease operating.................. 4,477 5,344 5,468 11,580 2,875 3,634 7,036
Depreciation, depletion and
amortization................... 23,225 25,365 21,969 45,859 11,662 11,571 20,324
General and administrative,
net............................ 2,454 3,460 3,486 3,701 1,754 2,702 2,796
Nonrecurring charge(2)........... -- -- 12,000 12,000 -- -- --
------- ------- ------- --------- ------- ------- ---------
Total operating
expenses................ 30,156 34,169 42,923 73,140 16,291 17,907 30,156
------- ------- ------- --------- ------- ------- ---------
Income (loss) from operations...... 8,105 8,053 (1,714) 3,901 4,858 3,880 11,434
Interest expense, net.............. 1,764 2,102 2,398 2,453 1,319 1,118 1,097
------- ------- ------- --------- ------- ------- ---------
Income (loss) before income taxes.. 6,341 5,951 (4,112) 1,448 3,539 2,762 10,337
Income tax provision (benefit)..... 1,790 597 (3,809) (1,863) 514 (27) 2,624
------- ------- ------- --------- ------- ------- ---------
Net income (loss).................. $ 4,551 $ 5,354 $ (303) $ 3,311 $ 3,025 $ 2,789 $ 7,713
======= ======= ======= ======== ======= ======= ========
Net income (loss) per share........ $ 0.30 $ 0.35 $ (0.02) $ 0.15 $ 0.20 $ 0.18 $ 0.34
Weighted average shares
outstanding...................... 15,295 15,295 15,295 22,500 15,295 15,295 22,500
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------
PRO
HISTORICAL FORMA(3)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Property, plant and equipment, net........................................... $234,211 $ 339,764
Total assets................................................................. 263,842 372,639
Long-term debt............................................................... 77,853 84,534
Stockholders' equity......................................................... 116,318 209,609
</TABLE>
- ---------------
(1) Gives effect to the TransTexas Acquisition, the Soxco Acquisition and the
application of the net proceeds from the Offering as if such transactions
had been consummated as of January 1, 1995.
(2) Represents an accrual for a nonrecurring charge incurred in connection with
the reorganization effective in February 1996. See Note 10 of Notes to
Combined Financial Statements.
(3) Gives effect to the TransTexas Acquisition, the Soxco Acquisition and the
application of the net proceeds from the Offering as if such transactions
had been consummated on June 30, 1996.
7
<PAGE> 10
SUMMARY NATURAL GAS AND OIL RESERVE DATA
The following table summarizes the estimates of the Company's historical
and pro forma net proved natural gas and oil reserves as of the dates indicated
and the present value attributable to these reserves at such dates. The reserve
and present value data as of December 31, 1993, 1994 and 1995 have been prepared
by Ryder Scott Company, Netherland, Sewell & Associates, Inc., Huddleston & Co.,
Inc. and Miller and Lents, Ltd., independent petroleum engineering consultants.
For additional information relating to the Company's natural gas and oil
reserves, see "Business -- Natural Gas and Oil Reserves" and Note 13 of the
Notes to the Combined Financial Statements of the Company included elsewhere in
this Prospectus. Summaries of the December 31, 1995 reserve reports and the
letters of the independent petroleum engineering consultants with respect
thereto are included as Appendix A to this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
PRO FORMA
1993 1994 1995 1995(1)
-------- -------- -------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Proved Reserves:
Natural gas (Mmcf)........................... 118,118 145,945 195,946 338,529
Oil (Mbbls).................................. 536 636 889 1,234
Total (Mmcfe)................................ 121,334 149,761 201,280 345,933
Present value of future net revenues before
income taxes(2).............................. $119,326 $135,869 $206,574 $ 326,346
Standardized measure of discounted future net
cash flows(3)................................ $106,061 $118,434 $171,459 $ 282,066
</TABLE>
- ---------------
(1) Gives effect to the TransTexas Acquisition and the Soxco Acquisition.
(2) The present value of future net revenues attributable to the Company's
reserves was prepared using prices in effect as of the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis. Such
amounts reflect the effects of the Company's hedging contracts and do not
reflect the effects of Section 29 tax credits.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
Such amounts reflect the effects of the Company's hedging contracts.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)......... 22,555 22,437 21,077 45,940 10,604 11,498 20,956
Oil (Mbbls)................ 101 102 100 130 68 41 51
Total (Mmcfe).............. 23,161 23,049 21,677 46,720 11,012 11,744 21,262
Average sales prices:
Natural gas (per Mcf)(2)... $ 1.58 $ 1.79 $ 1.79 $ 1.59 $ 1.81 $ 1.78 $ 1.91
Oil (per Bbl).............. 16.96 15.85 16.54 16.65 16.97 18.93 18.69
Expenses (per Mcfe):
Lease operating............ $ 0.19 $ 0.23 $ 0.25 $ 0.25 $ 0.26 $ 0.31 $ 0.32
Depreciation, depletion and
amortization............ 1.00 1.10 1.01 0.98 1.06 0.99 0.96
General and administrative,
net..................... 0.11 0.15 0.16 0.08 0.16 0.23 0.13
</TABLE>
- ---------------
(1) Gives effect to the TransTexas Acquisition and the Soxco Acquisition as if
such transactions had been consummated as of January 1, 1995.
(2) Reflects the effects of hedging. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Marketing
and Customers."
8
<PAGE> 11
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
risk factors set forth below, as well as the other information contained in this
Prospectus, before purchasing the shares of Common Stock offered hereby.
VOLATILITY OF NATURAL GAS AND OIL PRICES
Revenues generated from the Company's operations are highly dependent upon
the price of, and demand for, natural gas and oil. Historically, the markets for
natural gas and oil have been volatile, and such markets are likely to continue
to be volatile in the future. Prices for natural gas and oil are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for natural gas and oil, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of natural gas and oil, the
price of foreign imports and overall economic conditions. It is impossible to
predict future natural gas and oil price movements with any certainty. Declines
in natural gas and oil prices may materially adversely affect the Company's
financial condition, liquidity, ability to finance planned capital expenditures
and results of operations. Lower natural gas and oil prices also may reduce the
amount of natural gas and oil that the Company can produce economically.
In order to reduce its exposure to short-term fluctuations in the price of
natural gas, the Company enters into hedging arrangements from time to time. The
Company's hedging arrangements apply to only a portion of its production and
provide only partial price protection against declines in natural gas prices. In
addition, the Company's hedging arrangements limit the benefit to the Company of
increases in the price of natural gas. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General" and
"Business -- Marketing and Customers."
The Company uses the full cost method of accounting for its investment in
natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. If a writedown is required, it would result in a charge to earnings
but would not have an impact on cash flows from operating activities.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
There are numerous uncertainties inherent in estimating natural gas and oil
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. Estimates of economically recoverable natural gas and oil reserves
and of future net cash flows necessarily depend upon a number of variable
factors and assumptions, such as historical production from the area compared
with production from other producing areas, the assumed effects of regulations
by governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development costs
and workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of natural gas and oil attributable to any
9
<PAGE> 12
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers but at different times
may vary substantially and such reserve estimates may be subject to downward or
upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material. See "Business -- Natural Gas and
Oil Reserves."
RESERVE REPLACEMENT RISK
In general, the volume of production from natural gas and oil properties
declines as reserves are depleted. The rate of decline depends on reservoir
characteristics, and varies from the steep decline rate characteristic of Gulf
of Mexico reservoirs, where the Company has a significant portion of its
production, to the relatively slow decline rate characteristic of the
longer-lived fields in South Texas, the Arkoma Basin, East Texas and West
Virginia. Except to the extent the Company acquires properties containing proved
reserves or conducts successful exploration and development activities, or both,
the proved reserves of the Company will decline as reserves are produced. The
Company's future natural gas and oil production is, therefore, highly dependent
upon its level of success in finding or acquiring additional reserves. The
business of exploring for, developing or acquiring reserves is capital
intensive. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, the Company's ability to make
the necessary capital investment to maintain or expand its asset base of natural
gas and oil reserves would be impaired. In addition, there can be no assurance
that the Company's future exploration, development and acquisition activities
will result in additional proved reserves or that the Company will be able to
drill productive wells at acceptable costs.
CONTROL BY PRINCIPAL STOCKHOLDER
Prior to this offering all of the outstanding shares of Common Stock of the
Company have been owned by a wholly-owned subsidiary of Brooklyn Union. After
giving effect to this Offering and the Soxco Acquisition, a wholly-owned
subsidiary of Brooklyn Union will own approximately 68% of the outstanding
shares of Common Stock (approximately 65% if the Underwriters' over-allotment
option is exercised in full). As a result of Brooklyn Union's beneficial
holdings of Common Stock, after consummation of the Offering, Brooklyn Union
will remain in the position to control the election of the entire Board of
Directors of the Company and Brooklyn Union will be able to determine the
outcome of all matters requiring the vote of the Company's stockholders. See
"Related Party Transactions -- Transactions between the Company and Brooklyn
Union and its Affiliates."
RELATIONSHIP WITH BROOKLYN UNION AND POTENTIAL CONFLICTS OF INTEREST
There may be conflicts of interest arising in the future between the
Company and Brooklyn Union and its subsidiaries in a number of areas relating to
their past and ongoing relationships, including dividends, acquisitions of
natural gas and oil businesses or properties, transfers of assets, insurance
matters, marketing, financial commitments, registration rights and issuances and
sales of capital stock of the Company. The Company sold approximately 24% of its
gas production during July 1996, and, subject to certain conditions, has agreed
to sell substantially all of its subsequently developed or acquired production,
to an affiliate of Brooklyn Union. The Company's Chairman of the Board, Robert
B. Catell, is also the Chairman of the Board of Directors and Chief Executive
Officer of Brooklyn Union. In addition, two other directors of the Company,
Craig G. Matthews and James Q. Riordan, are the President and a director of
Brooklyn Union, respectively. See "Related Party Transactions -- Transactions
between the Company and Brooklyn Union and Affiliates" and "Management."
10
<PAGE> 13
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive natural gas or oil reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities in
formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. The Company's future drilling
activities may not be successful and, if unsuccessful, such failure will have an
adverse effect on the Company's future results of operations and financial
condition.
OPERATING RISKS OF NATURAL GAS AND OIL OPERATIONS
The natural gas and oil business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Company. The Company's offshore operations
also are subject to the additional hazards of marine operations, such as severe
weather, capsizing and collision. The availability of a ready market for the
Company's natural gas and oil production also depends on the proximity of
reserves to, and the capacity of, natural gas and oil gathering systems,
pipelines and trucking or terminal facilities. In addition, the Company may be
liable for environmental damages caused by previous owners of property purchased
and leased by the Company. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for exploration, development or acquisitions or
result in the loss of the Company's properties. In accordance with customary
industry practices, the Company maintains insurance against some, but not all,
of such risks and losses. The Company does not carry business interruption
insurance. The occurrence of such an event not fully covered by insurance could
have a material adverse effect on the financial condition and results of
operations of the Company.
ACQUISITION RISKS
The acquisition of prospects that yield cost-effective and successful
exploration or development opportunities requires assessment of numerous
factors, many of which are beyond the Company's control. While the Company
believes that its technological expertise and geological database give it
advantages over some of its competitors, there can be no assurances that the
Company's acquisition of property interests will be successful and, if
unsuccessful, that such failure will not have an adverse effect on the Company's
future results of operations and financial condition.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the exploration, development, acquisition and production of
natural gas and oil reserves. Historically, the Company has financed these
expenditures primarily with cash generated by operations, proceeds from bank
borrowings and capital contributions by Brooklyn Union. The Company plans to
incur capital expenditures (excluding acquisitions) of approximately $63 million
in 1996. Management believes that the Company will have sufficient cash provided
by operating activities and borrowings under the Credit Facility to fund planned
capital expenditures in 1996. If revenues or the Company's borrowing base
decrease as a result of lower natural gas and oil prices, operating difficulties
or declines in reserves, the Company may have limited ability to expend the
capital necessary to undertake or complete future drilling programs or
acquisition opportunities. There can be no assurance that additional debt or
equity financing or cash generated by operations will be available to meet these
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
11
<PAGE> 14
PENDING LEGAL PROCEEDINGS
In connection with the February 1996 reorganization, certain former
employees of Fuel Resources Inc. ("FRI"), the subsidiary of Brooklyn Union that
previously owned the onshore properties, were entitled to remuneration for the
increase in the value of the transferred properties prior to the reorganization.
In February 1996, certain such former employees filed suit against Brooklyn
Union, FRI and the Company alleging breach of contract, breach of fiduciary
duty, fraud, negligent misrepresentation and conspiracy, seeking actual damages
in excess of $35 million and punitive damages in excess of $70 million. FRI has
agreed to indemnify the Company against such suit. In addition, THEC Holdings
Corp. ("Holdings"), the subsidiary of Brooklyn Union that holds all of the
currently outstanding Common Stock of the Company, has agreed to indemnify the
Company against the suit, and has agreed to pledge all of its holdings of Common
Stock to the Company to secure such indemnification obligation. As a result of
such arrangements, the Company believes that it will not be required to pay any
damages resulting from such suit, even if a judgment adverse to the Company is
rendered in the suit. However, the Company would incur a non-cash charge in
addition to the $12 million charge previously taken by the Company in the event
such damages are determined to be in excess of such $12 million amount, which
would have the effect of reducing the Company's reported income (or resulting in
or increasing a loss) in the period in which such additional charge is
determined. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" and "Business -- Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of certain key
management personnel. The loss of the services of such management personnel
could have a material adverse effect on the Company's operations. The Company
intends to enter into employment agreements with certain of its executive
officers prior to the completion of the Offering. The Company believes that its
success is also dependent upon its ability to continue to employ and retain
skilled technical personnel. See "Management -- Employment Agreements."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's business is regulated by certain local, state and federal
laws and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, natural gas and
oil. The Company's business is also subject to extensive and changing
environmental and safety laws and regulations governing plugging and
abandonment, the discharge of materials into the environment or otherwise
relating to environmental protection. In addition, the Company is subject to
changing and extensive tax laws, and the effect of newly enacted tax laws cannot
be predicted. The implementation of new, or the modification of existing, laws
or regulations, including regulations which may be promulgated under the Oil
Pollution Act of 1990, could have a material adverse effect on the Company. See
"Business -- Abandonment Costs," "-- Regulation" and "-- Environmental Matters."
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs. Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the oil and gas
business for a much longer time than the Company. Such companies may be able to
pay more for productive natural gas and oil properties and exploratory prospects
and to define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be
12
<PAGE> 15
dependent upon its ability to evaluate and select suitable properties and to
consummate transactions in this highly competitive environment.
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company currently intends to retain its cash for the operation and
expansion of its business, including exploration, development and acquisition
activities. The terms of the Credit Facility contain restrictions on the payment
of dividends to holders of Common Stock. Accordingly, the Company's ability to
pay dividends will depend upon such restrictions and the Company's results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors. See "Dividend Policy," "Management's
Discussions and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 2 to the Company's
Combined Financial Statements.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law contain provisions that may have the effect of
discouraging unsolicited takeover proposals for the Company. These provisions,
among other things, provide for the classification of the board of directors,
restrict the ability of stockholders to take action by written consent,
authorize the Board of Directors to designate the terms of and issue new series
of preferred stock, limit the personal liability of directors, require the
Company to indemnify directors and officers to the fullest extent permitted by
applicable law and impose restrictions on business combinations with certain
interested parties. See "Description of Capital Stock -- Certain Provisions of
the Company's Charter and Bylaws and Delaware Law."
NO PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the shares of
the Common Stock. Although the Company has applied for the listing of its Common
Stock on the New York Stock Exchange, there can be no assurance that an active
trading market for such shares will develop or be sustained. The initial public
offering price for the Common Stock has been determined by negotiations among
the Company and the Underwriters, and may not be indicative of the market price
of the Common Stock after this Offering. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The Company, Brooklyn Union, Soxco, each holder of options to purchase
shares of Common Stock, and each director and executive officer of the Company
have agreed not to sell any shares of Common Stock for a period of 180 days from
the date of this Prospectus without the consent of the representatives of the
Underwriters. The lockup provisions in these agreements are subject to waiver by
the parties to these agreements. After expiration of the lockup period, the
15,295,215 currently outstanding shares of Common Stock, will be eligible for
resale, subject to the volume and other limitations of Rule 144 under the
Securities Act, or pursuant to the exercise of demand registration rights. In
connection with the Soxco Acquisition, the Company will issue a number of shares
of Common Stock (estimated to be approximately 844,071 shares) with an aggregate
value (determined by reference to the initial public offering price) of $11.8
million. In addition, the Company will be obligated to issue additional shares
of Common Stock with a value at the time of issuance of between $8.8 and $17.6
million as the deferred purchase price for the Soxco Acquisition. Soxco will
receive demand registration rights relating to such shares. In addition, upon
completion of the Offering, there will be 1,125,000 shares of Common Stock
(1,171,500 shares if the Underwriters' over-allotment option is exercised in
full) issuable pursuant to outstanding options held by management and other
employees, all of which are covered by demand or piggyback registration rights
or will be issued pursuant to a registration statement on Form S-8 and become
13
<PAGE> 16
freely tradeable, subject to certain requirements of Rule 144. See "Shares
Eligible for Future Sale" and "Soxco Acquisition."
THE COMPANY
Houston Exploration is an independent natural gas and oil company engaged
in the exploration, development and acquisition of domestic natural gas and oil
properties. The Company's offshore properties are located in the shallow waters
(up to 600 feet) of the Gulf of Mexico, and its onshore properties are located
in South Texas, the Arkoma Basin, East Texas and West Virginia. At December 31,
1995, the Company had net proved reserves of 346 Bcfe. Approximately 98% of the
Company's net proved reserves on such date were natural gas and approximately
73% of proved reserves were classified as proved developed. The Company operates
approximately 82% of its Gulf of Mexico production and approximately 92% of its
onshore production. The Company believes its primary strengths are its high
quality reserves, its substantial inventory of exploration and development
opportunities, its in-house expertise in generating new prospects, and its
geographic focus and low-cost operating structure.
The Company was incorporated in Delaware in December 1985 and commenced
operations in January 1986. The Company has focused since its inception
primarily on the exploration and development of high potential prospects
offshore in the Gulf of Mexico. In February 1996, Brooklyn Union implemented a
reorganization of its exploration and production assets by transferring to
Houston Exploration certain onshore producing properties and developed and
undeveloped acreage. Brooklyn Union believes that Houston Exploration will
provide a competitive vehicle with a stand-alone capital structure through which
Brooklyn Union can continue to participate in the exploration for and production
of natural gas and oil and maximize the long-term value of its substantial
investment in that business. Brooklyn Union distributes natural gas in an area
of New York City with a population of four million. A marketing company
affiliated with Brooklyn Union purchases approximately 39% of the Company's
natural gas production at market prices, based upon production during June 1996.
See "Related Party Transactions."
The Company's principal executive offices are located at 1331 Lamar, Suite
1065, Houston, Texas 77010 and its telephone number is (713) 652-2847.
TRANSTEXAS ACQUISITION
On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated gathering pipelines and equipment located in Zapata
County, Texas from TransTexas. The properties acquired in the TransTexas
Acquisition represent approximately 113 Bcfe of the Company's net proved
reserves of 346 Bcfe as of December 31, 1995. The Company acquired a 100%
working interest (95% after the exercise by James G. Floyd, the Company's
President and Chief Executive Officer, of his right to purchase a 5% working
interest) in the approximately 156 wells on such properties. The purchase price
of $62.2 million ($59.1 million after giving effect to the exercise of Mr.
Floyd's purchase option) for the TransTexas Acquisition is subject to adjustment
based on production and expenses related to the assets between the May 1, 1996
effective date of the TransTexas Acquisition and July 2, 1996. The purchase
price for the TransTexas Acquisition was paid in cash, financed by borrowings
under the Company's credit facility. If the Company notifies TransTexas of title
defects to any of the properties acquired in the TransTexas Acquisition at any
time during the 60 days following the closing of the TransTexas Acquisition,
TransTexas must cure the title defect at its expense or the Company will be
entitled to reconvey the property in question to TransTexas and receive a return
of the purchase price paid for such property. Of the purchase price, $6 million
has been placed in escrow to satisfy title defects during such 60 day period.
In connection with the TransTexas Acquisition, the Company and TransTexas
entered into a Gas Exchange Agreement whereby the Company has agreed, subject to
certain conditions, to deliver, for the term of the acquired leases, all of the
gas produced from such leases to TransTexas'
14
<PAGE> 17
pipeline in exchange for an equivalent amount of gas (measured in Btus) at a
designated delivery point where the TransTexas pipeline connects with several
major interstate pipelines. The Company has agreed to pay TransTexas a fee on a
per Mmbtu basis for exchanging the gas production at the collection point with
the gas at the designated delivery point.
SOXCO ACQUISITION
On July 1, 1996, the Company entered into an asset purchase agreement with
Soxco, providing for the acquisition by the Company of substantially all of the
natural gas and oil properties and related assets of Soxco, representing
approximately 32 Bcfe of the Company's net proved reserves of 346 Bcfe as of
December 31, 1995. Soxco's natural gas and oil properties consist solely of
working interests in producing properties and developed and undeveloped acreage
located in the Gulf of Mexico that are operated by the Company or in which the
Company also has a working interest. Pursuant to the Soxco Acquisition, the
Company will pay Soxco cash in the aggregate amount of $23.7 million (subject to
certain adjustments), and issue to Soxco a number of shares of Common Stock
(estimated to be approximately 844,071 shares) with an aggregate value
(determined by reference to the initial public offering price) of $11.8 million.
The cash portion of the purchase price paid in connection with the Soxco
Acquisition will be funded with the proceeds of this Offering. In addition to
the foregoing, the Company will pay Soxco a deferred purchase price of up to
$17.6 million payable in two installments, on January 31, 1997 and January 31,
1998. The amount of the deferred purchase price installments will be determined
by the probable reserves of Soxco as of December 31, 1995 (approximately 17.6
Bcfe) that are produced prior to or classified as proved as of December 31, 1996
and December 31, 1997, respectively, provided that Soxco is entitled to receive
a minimum deferred purchase price of approximately $8.8 million. The amounts so
determined will be paid in shares of Common Stock based on the fair market value
of such stock at the time of issuance. The Soxco Acquisition will close
concurrently with, is conditioned upon and is a condition to the completion of
this Offering.
Under the terms of the Soxco agreement, the Company has granted three
demand and certain piggyback registration rights with respect to the shares of
Common Stock to be issued in connection with the Soxco Acquisition. Such
registration rights are subject to certain conditions and are exercisable
beginning 180 days after the date of this Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from this Offering at an assumed initial
public offering price of $14.00 per share are expected to be approximately $79.2
million, after deducting estimated underwriting discounts and offering expenses
($91.3 million if the Underwriters' over-allotment option is exercised in full).
Of such net proceeds, (i) approximately $55.5 million will be used to repay
outstanding indebtedness under the Company's Credit Facility and (ii)
approximately $23.7 million will be used to pay the cash portion of the Soxco
Acquisition purchase price.
The Credit Facility provides for maximum borrowings of $150 million,
subject to borrowing base limitations, on a revolving basis. At August 21, 1996,
the borrowing base was $150 million, $143 million of which was borrowed and $1.6
million of which was committed under outstanding letter of credit obligations.
The Credit Facility matures on July 1, 2000. Borrowings under the Credit
Facility bear interest, at the Company's option, at (i) a fluctuating rate equal
to the higher of the Federal Funds Rate plus 0.5% or the agent bank's prime rate
or (ii) a fixed rate equal to a quoted LIBOR rate plus a margin between 0.5% and
1.125% depending upon the amount outstanding under the Credit Facility.
Borrowings under the Credit Facility are used, together with cash generated from
operations, to fund the Company's exploration and development expenditures and
property acquisitions and to meet working capital needs. The Company financed
the $62.2 million purchase price of the TransTexas Acquisition with borrowings
under the Credit Facility. For a description of
15
<PAGE> 18
certain other terms of the Credit Facility, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain its cash for the operation and
expansion of its business, including exploration, development and acquisition
activities. The Credit Facility contains restrictions on the payment of
dividends to holders of Common Stock. Accordingly, the Company's ability to pay
dividends will depend upon such restrictions and the Company's results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 2 to the Company's
Combined Financial Statements.
DILUTION
As of June 30, 1996, the pro forma net tangible book value (total tangible
assets less total liabilities) of the Company giving effect to the TransTexas
Acquisition and the Soxco Acquisition as if such transactions had been completed
as of June 30, 1996 was approximately $128.1 million, or $7.94 per share of
Common Stock. After giving effect to the receipt of $79.2 million of estimated
net proceeds from this Offering (net of estimated underwriting discounts and
commissions and offering expenses) at an assumed initial public offering price
of $14.00 per share, the net tangible book value of the Common Stock outstanding
at June 30, 1996 would have been $9.32 per share, representing an immediate
increase in net tangible book value of $1.38 per share to the existing
stockholder and an immediate dilution of $4.68 per share (the difference between
the assumed initial public offering price and the net tangible book value per
share after this Offering) to persons purchasing Common Stock at the assumed
initial public offering price. The following table illustrates such per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $14.00
Pro forma net tangible book value per share before this Offering......... $ 7.94
Increase in net tangible book value per share attributable to the sale of
Common Stock in this Offering......................................... $ 1.38
Net tangible book value per share after giving effect to this Offering..... $ 9.32
Dilution in net tangible book value to the purchasers of Common Stock
offered hereby........................................................... $ 4.68
</TABLE>
The following table sets forth, as of June 30, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid
therefor and the average price per share paid by the existing stockholder and by
new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONTRIBUTION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder.................. 15,295,215 68% $111,375,000 52% $ 7.28
Management............................ 160,714 * 2,250,000 1 14.00
Soxco................................. 844,071 4 11,817,000 6 14.00
New investors......................... 6,200,000 28 86,800,000 41 14.00
---------- --- -------- --- ------
Total....................... 22,500,000 100% $212,242,000 100% $ 9.43
========== === ======== === ======
</TABLE>
- ---------------
* Less than 1%.
16
<PAGE> 19
The foregoing computations do not include (i) 1,125,000 shares of Common
Stock (1,171,500 shares if the Underwriters' over-allotment option is exercised
in full) issuable pursuant to options that will be granted to management and
other employees upon completion of the Offering, at an exercise price per share
equal to the initial public offering price, or (ii) shares of Common Stock with
a fair market value at the time of issuance of up to $17.6 million issuable as
the deferred purchase price for the Soxco Acquisition. See "Management -- 1996
Stock Option Plan" and "Soxco Acquisition." If the foregoing calculations
assumed exercise of all such employee options (assuming an initial public
offering price of $14.00 per share), the net tangible book value per share
before this Offering would be $8.33, the net tangible book value per share after
this Offering would be $9.60 and the dilution per share to new investors would
be $4.40.
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 on a historical basis and on a pro forma basis to reflect the
TransTexas Acquisition, the Soxco Acquisition, the issuance of shares of Common
Stock to an executive officer of the Company, the sale of the shares of Common
Stock in this Offering and the application of the net proceeds therefrom to
repay debt and to pay the cash portion of the purchase price for the Soxco
Acquisition. This table should be read in conjunction with "Use of Proceeds,"
"Pro Forma Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Combined Financial
Statements of the Company and the related Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
HISTORICAL PRO FORMA(1)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current maturities)...................... $ 77,853 $ 84,534
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding.............................. -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized; 15,295,215 shares issued and outstanding(2);
22,500,000 shares issued and outstanding, as adjusted(3)...... 153 224
Additional paid in capital......................................... 111,222 204,442
Retained Earnings.................................................. 4,943 4,943
-------- --------
Total stockholders' equity............................... 116,318 209,609
-------- --------
Total capitalization................................... $194,171 $294,143
======== ========
</TABLE>
- ---------------
(1) Gives effect to the Offering, the TransTexas Acquisition, the Soxco
Acquisition and the issuance of shares of Common Stock to the Company's
President and Chief Executive Officer, including the assumed issuance of
7,204,785 shares of Common Stock and the application of the net proceeds of
this Offering to pay the cash portion of the purchase price of the Soxco
Acquisition and to repay a portion of the Company's outstanding indebtedness
under the Credit Facility.
(2) Reflects the number of shares issued and outstanding immediately prior to
the completion of the Offering.
(3) Does not include (i) 1,125,000 shares of Common Stock (1,171,500 shares if
the Underwriters' over-allotment option is exercised in full) issuable
pursuant to options to purchase Common Stock that will be granted to
management and other employees upon completion of the Offering or (ii)
shares of Common Stock with a fair market value at the time of issuance of
up to $17.6 million issuable as the deferred purchase price for the Soxco
Acquisition. See "Management -- 1996 Stock Option Plan" and "Soxco
Acquisition."
18
<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected combined historical financial data
for the Company as of and for each of the periods indicated. The financial data
for each of the five years ended December 31, 1995 are derived from the
financial statements for the Company audited by Arthur Andersen LLP, the
Company's independent public accountants. The financial data for the six months
ended June 30, 1995 and 1996 are derived from the Company's unaudited financial
statements, and in the opinion of management, include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of the financial position and results of operations of the Company for such
interim periods. The results for the six months ended June 30, 1996 are not
necessarily indicative of results for the full year. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues:
Natural gas and oil revenues............. $ 17,566 $ 21,980 $ 37,462 $ 41,755 $ 39,431 $ 20,324 $ 21,252
Other.................................... 1,295 841 799 467 1,778 825 535
-------- -------- -------- -------- -------- -------- --------
Total revenues..................... 18,861 22,821 38,261 42,222 41,209 21,149 21,787
-------- -------- -------- -------- -------- -------- --------
Expenses:
Lease operating.......................... 3,192 3,123 4,477 5,344 5,468 2,875 3,634
Depreciation, depletion and
amortization........................... 10,252 14,440 23,225 25,365 21,969 11,662 11,571
General and administrative, net.......... 3,460 2,840 2,454 3,460 3,486 1,754 2,702
Nonrecurring charge(1)................... -- -- -- -- 12,000 -- --
Writedown in carrying value of natural
gas and oil properties................. -- 19,697 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses........... 16,904 40,100 30,156 34,169 42,923 16,291 17,907
Income (loss) from operations.............. 1,957 (17,279) 8,105 8,053 (1,714) 4,858 3,880
Interest expense, net...................... 1,700 1,469 1,764 2,102 2,398 1,319 1,118
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.......... 257 (18,748) 6,341 5,951 (4,112) 3,539 2,762
Income tax provision (benefit)............. (673) (7,440) 1,790 597 (3,809) 514 (27)
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......................... $ 930 $(11,308) $ 4,551 $ 5,354 $ (303) $ 3,025 $ 2,789
======== ======== ======== ======== ======== ======== ========
Net income (loss) per share................ $ 0.06 $ (0.74) $ 0.30 $ 0.35 $ (0.02) $ 0.20 $ 0.18
Weighted average shares outstanding........ 15,295 15,295 15,295 15,295 15,295 15,295 15,295
BALANCE SHEET DATA:
Property, plant and equipment, net......... $ 92,863 $ 92,698 $127,911 $169,714 $216,678 $ 195,227 $234,211
Total assets............................... 125,491 130,154 165,031 201,678 247,496 229,359 263,842
Long-term debt............................. 34,500 40,800 46,600 65,650 71,862 72,882 77,853
Stockholder's equity....................... 40,252 48,466 65,575 88,866 103,236 92,682 116,318
</TABLE>
- ---------------
(1) Represents an accrual for a nonrecurring charge incurred in connection with
the reorganization effective in February 1996. See Note 10 of Notes to
Combined Financial Statements.
19
<PAGE> 22
PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statements of operations for the year
ended December 31, 1995 and the six months ended June 30, 1996 give effect to
the TransTexas Acquisition, the Soxco Acquisition and the application of the net
proceeds of the Offering as if such transactions had been consummated as of
January 1, 1995. The unaudited pro forma combined balance sheet as of June 30,
1996 gives effect to the TransTexas Acquisition, the Soxco Acquisition and the
application of the net proceeds of the Offering as if such transactions had been
consummated as of June 30, 1996. The unaudited pro forma combined statements of
operations include certain adjustments to the historical combined statement of
operations of the Company to give effect to the acquisition of the natural gas
and oil properties.
The pro forma combined financial information does not purport to be
indicative of the results of operations of the Company had such transactions
occurred on the dates assumed, nor is the pro forma combined financial
information necessarily indicative of the future results of operations of the
Company. The pro forma combined financial information should be read together
with the Combined Financial Statements of the Company, including the Notes
thereto, included elsewhere in the Prospectus.
20
<PAGE> 23
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON TRANSTEXAS SOXCO OFFERING PRO FORMA
EXPLORATION ACQUISITION ACQUISITION AND OTHER COMBINED
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Natural gas and oil revenues.......... $39,431 $25,460(1) $10,372(2) $75,263
Other................................. 1,778 -- -- 1,778
------- ------- ------- -------
Total revenues................... 41,209 25,460 10,372 77,041
EXPENSES:
Lease operating....................... 5,468 4,315(1) 1,797(2) 11,580
Depreciation, depletion and
amortization....................... 21,969 16,767(3) 7,123(3) 45,859
General and administrative, net....... 3,486 --(4) 215(4) 3,701
Nonrecurring charge................... 12,000 -- -- 12,000
------- ------- ------- ------- -------
Total operating expenses......... 42,923 21,082 9,135 73,140
INCOME (LOSS) FROM OPERATIONS........... (1,714) 4,378 1,237 3,901
Interest expense, net................... 2,398 1,788(5) -- (1,733)(6) 2,453
------- ------- ------- ------- -------
Income (loss) before income taxes....... (4,112) 2,590 1,237 1,733 1,448
Provision (benefit) for federal income
taxes................................. (3,809) 906(7) 433(7) 607(8) (1,863)
------- ------- ------- ------- -------
NET INCOME (LOSS)....................... $ (303) $ 1,684 $ 804 $ 1,126 $ 3,311
======= ======= ======= ======= =======
Pro forma net income per share.......... $ 0.15
Pro forma average shares outstanding.... 22,500
</TABLE>
- ---------------
(1) Adjustment to reflect 95% of the historical revenues and lease operating
expenses of the properties acquired from TransTexas.
(2) Adjustment to add all revenues and operating expenses related to the oil and
gas properties acquired from Soxco.
(3) Adjustment to reflect additional depreciation, depletion and amortization
for a combined full cost pool.
(4) Adjustment to general and administrative expense to reflect producing
overhead charged by Houston Exploration to Soxco. Other than this
adjustment, the Company does not expect to incur any other additional
general and administrative expenses as a result of the TransTexas
Acquisition and the Soxco Acquisition. However, the Company does expect to
incur incremental general and administrative, specifically legal and outside
professional services, expenses associated with the Company becoming a
publicly traded entity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
(5) Adjustment to reflect additional interest expense related to the borrowed
purchase price for the TransTexas Acquisition.
(6) Adjustment to interest expense to reflect the repayment of $55.5 million of
debt under the Credit Facility with proceeds from the Offering, excluding
any interest income that would be earned from the note receivable from the
Company's President.
(7) Adjustment to income tax expense to reflect the respective TransTexas
Acquisition and the Soxco Acquisition adjustments.
(8) Adjustment to income tax expense to reflect the Offering adjustments.
21
<PAGE> 24
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON TRANSTEXAS SOXCO PRO FORMA
EXPLORATION ACQUISITION ACQUISITION OFFERING COMBINED
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Natural gas and oil revenues.......... $21,252 $ 14,568(1) $ 5,235(2) $41,055
Other................................. 535 -- -- 535
------- ------ ------ -------
Total revenues................... 21,787 14,568 5,235 41,590
EXPENSES:
Lease operating....................... 3,634 2,605(1) 797(2) 7,036
Depreciation, depletion and
amortization....................... 11,571 6,180(3) 2,573(3) 20,324
General and administrative, net....... 2,702 --(4) 94(4) 2,796
------- ------ ------ ----- -------
Total operating expenses......... 17,907 8,785 3,464 30,156
INCOME FROM OPERATIONS.................. 3,880 5,783 1,771 11,434
Interest expense, net................... 1,118 699(5) -- (720)(6) 1,097
------- ------ ------ ----- -------
Income before income taxes.............. 2,762 5,084 1,771 720 10,337
Provision (benefit) for federal income
taxes................................. (27) 1,779(7) 620(7) 252(8) 2,624
------- ------ ------ ----- -------
NET INCOME.............................. $ 2,789 $ 3,305 $ 1,151 $ 468 $ 7,713
======= ====== ====== ===== =======
Pro forma net income per share.......... $ 0.34
Pro forma average shares outstanding.... 22,500
</TABLE>
- ---------------
(1) Adjustment to reflect 95% of the historical revenues and lease operating
expenses of the properties acquired from TransTexas.
(2) Adjustment to add all revenues and operating expenses related to the oil and
gas properties acquired from Soxco.
(3) Adjustment to reflect additional depreciation, depletion and amortization
for a combined full cost pool.
(4) Adjustment to general and administrative expense to reflect producing
overhead charged by Houston Exploration to Soxco. Other than this
adjustment, the Company does not expect to incur any other additional
general and administrative expenses as a result of the TransTexas
Acquisition and the Soxco Acquisition. However, the Company does expect to
incur incremental general and administrative, specifically legal and outside
professional services, expenses associated with the Company becoming a
publicly traded entity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
(5) Adjustment to reflect additional interest expense related to the borrowed
purchase price for the TransTexas Acquisition.
(6) Adjustment to interest expense to reflect the repayment of the $55.5 million
of debt under the Credit Facility with proceeds from the Offering, excluding
any interest income that would be earned from the note receivable from the
Company's President.
(7) Adjustment to income tax expense to reflect the respective TransTexas
Acquisition and the Soxco Acquisition adjustments.
(8) Adjustment to income tax expense to reflect the Offering adjustments.
22
<PAGE> 25
PRO FORMA COMBINED BALANCE SHEETS
AS OF JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON TRANSTEXAS SOXCO OFFERING PRO FORMA
EXPLORATION ACQUISITION ACQUISITION PRO FORMA AND OTHER COMBINED
HISTORICAL ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
ASSETS:
Current assets........... $ 27,679 $ -- $ 134(1) $ 27,813 -- $ 27,813
Net property, plant and
equipment............. 234,211 59,095(2) 44,208(3) 337,514 2,250(4) 339,764
Other assets............. 1,952 3,110(5) -- 5,062 -- 5,062
-------- ------- ------- -------- -------- --------
TOTAL ASSETS........ $ 263,842 $62,205 $44,342 $370,389 $ 2,250 $ 372,639
======== ======= ======= ======== ======== ========
LIABILITIES:
Current liabilities...... 19,652 -- 23,700(6) 43,352 (23,700)(8) 19,652
Long-term debt........... 77,853 62,205(7) -- 140,058 (55,524)(8) 84,534
Deferred federal income
tax................... 49,885 -- -- 49,885 -- 49,885
Other deferred
liabilities........... 134 -- 8,825(9) 8,959 -- 8,959
-------- ------- ------- -------- -------- --------
TOTAL LIABILITIES... 147,524 62,205 32,525 242,254 (79,224) 163,030
STOCKHOLDER'S EQUITY:
Common stock............. 153(10) -- 8(11) 161 62(12) 224
1(4)
Additional paid-in
capital............... 111,222(10) -- 11,809(11) 123,031 79,162(12) 204,442
2,249(4)
Retained earnings........ 4,943 -- -- 4,943 -- 4,943
-------- ------- ------- -------- -------- --------
TOTAL STOCKHOLDER'S
EQUITY........... 116,318 -- 11,817 128,135 81,474 209,609
-------- ------- ------- -------- -------- --------
TOTAL LIABILITIES
AND STOCKHOLDER'S
EQUITY........... $ 263,842 $62,205 $44,342 $370,389 $ 2,250 $ 372,639
======== ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) Adjustment to reflect the assumption of Soxco's tubular inventory and gas
imbalance receivable.
(2) Adjustment to reflect the amount of the purchase price of $62.2 million
($59.1 million after giving effect to the exercise of the Company
President's purchase option) for the TransTexas Acquisition.
(3) Adjustment to reflect the amount of the purchase price for the Soxco
Acquisition allocated to natural gas and oil properties as follows: (i)
$31.9 million for proved reserves, (ii) $3.5 million for leasehold
interests and (iii) $8.8 million for the minimum deferred purchase price.
(4) Adjustment to reflect the issuance of 160,714 shares of Common Stock to the
Company's President in exchange for certain after program-payout working
interests based upon an assumed initial public offering price of $14.00 per
share.
(5) Adjustment to reflect a note receivable from the Company's President for
his purchase of a 5% working interest in properties acquired by the Company
in the TransTexas Acquisition.
(6) Adjustment to reflect the accrual of $23.7 million for the cash portion of
the purchase price for the Soxco Acquisition.
(7) Adjustment to reflect incremental borrowings under the Credit Facility for
the TransTexas Acquisition.
(8) Adjustment to reflect use of proceeds: (i) payment of the $23.7 million
cash portion of the purchase price for the Soxco Acquisition and (ii)
repayment of $55.5 million of debt under the Credit Facility.
(9) Adjustment to reflect the minimum deferred purchase price for the Soxco
Acquisition.
(10) Reflects the number of shares issued and outstanding immediately prior to
the completion of the Offering.
(11) Adjustment to reflect the issuance of 844,071 shares of Common Stock to
Soxco, based upon an assumed initial public offering price of $14.00 per
share.
(12) Adjustment to reflect the estimated net proceeds from the sale of 6,200,000
shares of Common Stock in this Offering at an assumed initial public
offering price of $14.00 per share.
23
<PAGE> 26
PRO FORMA PRODUCTION DATA
(Mmcfe)
The following table summarizes the pro forma production for the year ended
December 31, 1995 and the six months ended June 30, 1995 and 1996, reflecting
the actual production of the Company and the pro forma production from the
properties acquired in the TransTexas Acquisition and to be acquired in the
Soxco Acquisition. This table gives effect to the TransTexas Acquisition and the
Soxco Acquisition as if such transactions had been consummated as of January 1,
1995.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1995 1995 1996
------------ ------ ------
<S> <C> <C> <C>
Houston Exploration........................................ 21,677 11,012 11,744
TransTexas Acquisition..................................... 18,592 10,238 7,275
Soxco Acquisition.......................................... 6,451 3,577 2,243
------ ------ ------
Total (Mmcfe).................................... 46,720 24,827 21,262
====== ====== ======
</TABLE>
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's historical financial position and results of operations for the six
months ended June 30, 1995 and 1996 and each year of the three-year period ended
December 31, 1995. The Company's historical combined financial statements and
notes thereto included elsewhere in this Prospectus contain detailed information
that should be referred to in conjunction with the following discussion.
GENERAL
Houston Exploration was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of Brooklyn
Union. The Company has focused since its inception primarily on the exploration
and development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to Houston Exploration certain
onshore producing properties and developed and undeveloped acreage. At December
31, 1995, the Company had historical net proved reserves of 201 Bcfe, 97% of
which were natural gas and 83% of which were classified as proved developed.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been highly
volatile, and future decreases in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, quantities of natural gas and oil reserves that may be economically
produced, and access to capital.
The Company uses the full cost method of accounting for its investment in
natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a writedown is
required, it would result in a charge to earnings but would not have an impact
on cash flows from operating activities.
Although the Company will incur additional general and administrative
expenses as a result of becoming a public company and will experience the
elimination of certain overhead reimbursements from Soxco, the Company believes
that cost savings resulting from the February 1996 reorganization, the increase
in its interest in certain Gulf of Mexico properties resulting from the Soxco
Acquisition and expected production increases as recently drilled wells come
on-line will result in lower general and administrative costs as compared to
recent historical levels on a per unit of production basis. Further, primarily
as a result of the small number of working interest and royalty owners, the
TransTexas assets will not require any material increase in general and
administrative costs, further reducing such expenses on a per unit of production
basis. In addition, the Company believes that the geographic focus of its
operations will allow the Company to achieve significant reserve and production
growth without materially increasing the existing level of general and
administrative expenses.
The Company incurs certain production gas volume imbalances in the ordinary
course of business and utilizes the entitlements method to account for its gas
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production or nominated deliveries. Deliveries in excess of
these amounts are recorded as liabilities, while underdeliveries
25
<PAGE> 28
are reflected as assets. Production imbalances are valued using market value.
Management does not believe that the Company has any material overproduced gas
balances.
The Company receives reimbursement for administrative and overhead expenses
incurred on the behalf of other working interest owners of properties operated
by the Company. In addition, the Company capitalizes general and administrative
costs and interest expense directly related to its acquisition, exploration and
development activities.
The Company utilizes natural gas forward contracts or fixed-floating price
swaps for a portion of its natural gas production to achieve a more predictable
cash flow, as well as to reduce its exposure to adverse price fluctuations of
natural gas. The swap agreements call for the Company to receive or make payment
based upon the differential between a fixed and a variable commodity price
specified in the contracts. The Company accounts for these transactions as
hedging activities and, accordingly, gains or losses are included in natural gas
and oil revenues in the period of the hedged production. The Company has entered
into contracts covering an average of approximately 68,900 Mmbtu per day (66,300
Mcf/d) of natural gas production for September through March 1997 at a weighted
average price of $2.04 per Mmbtu, before transaction and transportation costs.
The Company has also entered into contracts covering an average of approximately
49,600 Mmbtu per day (47,700 Mcf/d) for April through October 1997 at a weighted
average price of $1.93 per Mmbtu and contracts covering an average of
approximately 22,600 Mmbtu per day (21,800 Mcf/d) for November 1997 through
March 1998 at a weighted average price of $1.91 per Mmbtu, in each case before
transaction and transportation costs. During July 1996, net production from the
Company's properties averaged approximately 122,200 Mcfe per day.
Prior to the completion of this Offering, Houston Exploration has been
included in the consolidated federal income tax return of its parent Brooklyn
Union. Under the Company's tax sharing agreement with Brooklyn Union, the
Company receives from, or pays to, Brooklyn Union an amount equal to the
reduction or increase in the currently payable federal income taxes of Brooklyn
Union resulting from the inclusion of the Company's taxable income or loss in
the consolidated Brooklyn Union return whether or not such amounts could be
utilized by the Company on a separate return basis. After completion of this
Offering, the Company will no longer be included in Brooklyn Union's
consolidated federal income tax return. Thus, any reduction in currently payable
federal income taxes that cannot be utilized by the Company on a separate return
basis will now have to be deferred or, in the case of certain tax credits,
possibly forgone.
The Company's combined historical financial statements include the
historical results of operations associated with the onshore producing
properties and developed and undeveloped acreage transferred to the Company by
FRI, a subsidiary of Brooklyn Union, in the February 1996 reorganization
implemented by Brooklyn Union. Accordingly, the Company's historical results of
operations reflect a nonrecurring charge of $12 million accrued in the year
ended December 31, 1995 with respect to remuneration to which certain employees
of FRI were entitled for the increase in the value of the transferred properties
prior to the reorganization. In February 1996, certain of these individuals
filed suit against Brooklyn Union, FRI and the Company alleging breach of
contract, breach of fiduciary duty, fraud, negligent misrepresentation and
conspiracy, seeking actual damages in excess of $35 million and punitive damages
in excess of $70 million. FRI has agreed to indemnify the Company against any
damages awarded in the suit. In addition, Holdings, the subsidiary of Brooklyn
Union that holds all of the currently outstanding Common Stock of the Company,
has agreed to indemnify the Company against any such liabilities, and has agreed
to pledge all of its holdings of Common Stock to secure such indemnification
obligation. Brooklyn Union has announced its intention to establish a
publicly-traded holding company which would hold all of the stock of Brooklyn
Union. If the holding company is established, the pledge may be released at the
option of Holdings if the obligations of Holdings under such indemnification
agreement are assumed or guaranteed by the holding company. As a result of such
arrangements, the Company believes that it will not be required to pay any
damages resulting from such suit, even if a judgment adverse to the Company is
rendered in the suit. However, the Company would incur an additional
26
<PAGE> 29
non-cash charge in addition to the $12 million charge previously taken by the
Company in the event it is determined that the remuneration payable to the
former employees of FRI and any damages from the suit exceed $12 million, which
would have the effect of reducing the Company's reported income (or resulting in
or increasing a loss) in the period in which any such additional charge is
determined. See "Risk Factors -- Pending Legal Proceedings" and
"Business -- Legal Proceedings."
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and oil
production data during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)............................... 22,555 22,437 21,077 10,604 11,498
Oil (Mbbls)...................................... 101 102 100 68 41
Total (Mmcfe).................................... 23,161 23,049 21,677 11,012 11,744
Average sales prices:
Natural gas (per Mcf)(1)......................... $ 1.58 $ 1.79 $ 1.79 $ 1.81 $ 1.78
Oil (per Bbl).................................... 16.96 15.85 16.54 16.97 18.93
Expenses (per Mcfe):
Lease operating.................................. $ 0.19 $ 0.23 $ 0.25 $ 0.26 $ 0.31
Depreciation, depletion and amortization......... 1.00 1.10 1.01 1.06 0.99
General and administrative, net.................. 0.11 0.15 0.16 0.16 0.23
</TABLE>
- ---------------
(1) Reflects the effects of hedging. Absent the effects of hedging, average
realized natural gas prices would have been $2.06, $1.83 and $1.53 per Mcf
for the years ended December 31, 1993, 1994, and 1995, respectively, and
$1.47 and $2.31 per Mcf for the six months ended June 30, 1995 and 1996,
respectively.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1995 AND 1996
General. Houston Exploration's production increased 7% from 11,012 Mmcfe
for the first six months of 1995 to 11,744 Mmcfe for the first six months of
1996. The increase in production can be attributed to shut-in production in the
first quarter of 1995 due to severely depressed natural gas prices and the
commencement of production in 1996 from additional properties.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased 5%
from $20.3 million for the first six months of 1995 to $21.3 million for the
first six months of 1996 as a result of the 7% increase in production, offset in
part by a decrease in average realized natural gas prices of 2% from $1.81 per
Mcf in the first six months of 1995 to $1.78 per Mcf in the first six months of
1996.
As a result of hedging activities, the Company realized an average gas
price of $1.78 per Mcf for the first six months of 1996, compared to an average
price of $2.31 per Mcf that otherwise would have been received resulting in a
$6.0 million decrease in natural gas revenues for the six month period. For the
first six months of 1995, the average realized gas price was $1.81 per Mcf
compared to an unhedged average gas price of $1.47, resulting in an increase to
natural gas revenues of $3.5 million for the six month period.
Lease Operating Expenses. Lease operating expenses increased 24% from $2.9
million for the first six months of 1995 to $3.6 million for the first six
months of 1996. On an Mcfe basis, lease operating expenses increased 19% from
$0.26 for the first six months of 1995 to $0.31 for the first
27
<PAGE> 30
six months of 1996. The increase in costs for the first six months of 1996
reflects the higher initial operating costs associated with bringing new
facilities and wells on line.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense remained relatively flat for both the first six months of
1995 and the first six months of 1996. Depreciation, depletion and amortization
expense per Mcfe decreased from $1.06 for the first six months of 1995 to $0.99
for the first six months of 1996. The lower rate for the first six months of
1996 reflects added reserves.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$0.7 million and $0.3 million for the first six months of 1995 and 1996,
respectively, increased 50% from $1.8 million for the first six months of 1995
to $2.7 million for the first six months of 1996. The Company capitalized
general and administrative expenses directly related to oil and gas exploration
and development activities of $1.8 million and $2.4 million, respectively for
the first six months of 1995 and 1996. The increase in net general and
administrative expenses for the first six months of 1996 is a result of certain
one-time expenses incurred in conjunction with the combination of offshore and
onshore operations. On an Mcfe basis, general and administrative expenses
increased from $0.16 for the first six months of 1995 to $0.23 for the first six
months of 1996.
Income Tax Provision. Income tax expense decreased from an expense of $0.5
million for the first six months of 1995 to a benefit of $0.03 million for the
first six months of 1996 due to the utilization of incremental Section 29 tax
credits associated with increased production from certain onshore properties.
Net Income. Net income decreased slightly from $3.0 million for the first
six months of 1995 to $2.8 million for the first six months of 1996. Although
production increased for the first six months of 1996 as compared to the first
six months of 1995, operating income decreased from $4.9 million for the first
six months of 1995 to $3.9 million for the first six months of 1996 as a result
of a decline in natural gas revenues of $6.0 million due to hedging activities,
higher lease operating costs associated with new properties and an increase in
general and administrative expense during the first six months of 1996 as
compared to the first six months in 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995
General. Houston Exploration's production decreased 6% from 23,049 Mmcfe in
1994 to 21,677 Mmcfe in 1995. Lower production rates from year earlier levels
resulted from voluntary shut-ins in the first quarter of 1995 due to severely
depressed natural gas prices, combined with natural production declines. In
addition, capital spending constraints for offshore exploration in 1992 and 1993
contributed to the 1995 production shortfall. Production declines were offset
somewhat by new production at Mustang Island 759 and East Cameron 82. Despite
the successful drilling of eight offshore wells, only one of these new wells,
East Cameron 82, was producing by year end 1995. In 1994, capital expenditures
for offshore exploration increased to $15.4 million, compared with capital
expenditures for offshore exploration of $6.0 million in 1993 and $3.9 million
in 1992. The Company anticipates improvement in production performance as its
1994 exploratory successes, together with 1995 development wells, are brought on
line in 1996.
Natural Gas and Oil Revenues. Natural gas and oil revenues decreased 6%
from $41.7 million in 1994 to $39.4 million in 1995 as a result of the 6%
decrease in production. Average realized natural gas prices remained flat at
$1.79 per Mcf in both 1994 and 1995.
As a result of hedging activities, the Company realized an average gas
price of $1.79 per Mcf compared to an average price of $1.53 per Mcf that
otherwise would have been received, resulting in a $5.6 million increase in
natural gas and oil revenues for 1995. For 1994, the average realized gas price
was $1.79 per Mcf compared to an unhedged average gas price of $1.83, resulting
in a $0.8 decrease in natural gas and oil revenues for the year.
28
<PAGE> 31
Lease Operating Expenses. Lease operating expense for the year ended 1995
increased 4% from $5.3 million in 1994 to $5.5 million in 1995. On an Mcfe
basis, lease operating costs increased 9% from $0.23 in 1994 to $0.25 in 1995,
corresponding to the decrease in 1995 production.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 13% from $25.4 million in 1994 to $22.0 million
in 1995. The decrease was attributable to a lower depletion rate per Mcfe
combined with decreased production. Depreciation, depletion and amortization
expense per Mcfe decreased from $1.10 in 1994 to $1.01 in 1995, due to a higher
successful drilling rate in 1995 as compared to 1994.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$1.3 million and $1.2 million in 1994 and 1995, respectively, remained flat at
$3.5 million for both 1994 and 1995. The Company capitalized general and
administrative expenses directly related to oil and gas exploration and
development activities of $3.9 million and $4.1 million, respectively for 1994
and 1995. On an Mcfe basis, general and administrative expenses increased from
$0.15 in 1994 to $0.16 in 1995, reflecting flat costs and lower production.
Nonrecurring Charge. The Company accrued a $12 million nonrecurring charge
in the year ended December 31, 1995 to reflect the estimated amount of
remuneration payable to former employees of FRI. See "-- General" and Note 10 to
Notes to Combined Financial Statements.
Income Tax Provision. Income tax expense decreased from an expense of $0.6
million in 1994 to a benefit of $3.8 million in 1995. The benefit in 1995
reflects the tax effect of the $12.0 million nonrecurring charge as well as the
utilization of Section 29 tax credits received for specific onshore properties.
Net Income (Loss). Net income decreased $5.7 million from $5.4 million in
1994 to a loss of $0.3 million in 1995, primarily as a result of the $12.0
million nonrecurring charge. Operating income before the $12.0 million
nonrecurring charge increased $2.2 million from $8.1 million in 1994 to $10.3
million in 1995 as a result of additional revenues recognized from hedging
activities and lower depreciation, depletion and amortization expense resulting
from lower production volumes and lower depletion rates.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1994
General. The Company's production remained flat with only a slight decrease
from 23,161 Mmcfe in 1993 to 23,049 Mmcfe in 1994. Offshore production declined
by approximately 5,000 Mmcfe while onshore production increased by approximately
the same amount. Both onshore and offshore properties were voluntarily shut-in
during October and November 1994 due to severely depressed natural gas prices.
This voluntary shut-in included the Matagorda Island 600 complex, a key offshore
producing property. The net onshore production increases were attributable to
the acquisition of properties in the Arkoma Basin, West Virginia and the Willow
Springs field in East Texas in 1994, combined with a full year of production
from properties acquired in the Arkoma Basin in 1993.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased 11%
from $37.5 million in 1993 to $41.8 million in 1994. Production of natural gas
decreased from 22,555 Mmcf in 1993 to 22,437 Mmcf in 1994, while the average net
realized price of natural gas increased 13% from $1.58 per Mcf in 1993 to $1.79
per Mcf for the year ended December 31, 1994. Average net realized natural gas
prices would have been $2.06 per Mcf in 1993 and $1.83 per Mcf in 1994 if hedges
had not been in place during such periods. Hedging activities reduced natural
gas revenues by $10.7 million in 1993 as compared to a reduction of $0.8 million
in 1994.
Lease Operating Expenses. Lease operating expenses increased by 19% from
from $4.5 million in 1993 to $5.3 million in 1994. On an Mcfe basis, lease
operating costs increased by 21% from $0.19
29
<PAGE> 32
in 1993 to $0.23 in 1994. The cost increase and the per unit increase reflects
the increase in onshore operating costs from acquired properties.
Depreciation, Depletion and Amortization. Total depreciation, depletion and
amortization expense increased by 9% from $23.2 million in 1993 to $25.4 million
in 1994. Depreciation, depletion and amortization expense per Mcfe increased 10%
from $1.00 in 1993 to $1.10 in 1994 due to increases in finding costs during
1994.
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received by the Company from other working
interest owners of $1.2 million and $1.3 million in 1993 and 1994, respectively,
increased 40% from $2.5 million in 1993 to $3.5 million in 1994. The increase
was a result of a decrease, beginning in the fourth quarter of 1993, in overhead
reimbursements received from a joint interest partner. The Company capitalized
general and administrative costs directly related to gas and oil exploration and
development activities of $4.4 million and $3.9 million for years ended 1993 and
1994.
Income Tax Provision. The provision for income taxes decreased from a
provision of $1.8 million in 1993 to $0.6 million in 1994 due to a decrease in
the effective tax rate from 28% in 1993 to 10% in 1994 as a result of the
utilization of additional Section 29 tax credits and an increase in percentage
depletion.
Net Income. Operating income in 1994 remained flat at $8.1 million as
compared to 1993. The Company's income tax provision decreased from $1.8 million
in 1993 to $0.6 million in 1994 and as a result, net income increased from $4.6
million in 1993 to $5.4 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flows from operations,
bank borrowings and capital contributions from Brooklyn Union. The Company had
$8.0 million in working capital as of June 30, 1996.
The Company's primary sources of funds for each of the past four years is
reflected in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities........ $ 7,396 $40,896 $26,074 $55,778
Net borrowings under Credit Facility............. 6,300 5,800 19,050 6,212
Capital contributions by Brooklyn Union.......... 21,047 12,558 18,021 6,873
</TABLE>
The Company's net cash provided by operating activities for the first six
months of 1996 was $16.8 million compared to $29.3 million for the same period
of 1995.
30
<PAGE> 33
The Company's capital expenditures for each of the past four years and the
six months ended June 30, 1996 are reflected in the following table:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996
------- ------- ------- ------- ----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OFFSHORE
Acquisitions of properties.......... $ 7,472 $ 9,796 $12,890 $18,236 $ 5,137
Development......................... 12,146 10,058 9,351 32,228 10,504
Exploration......................... 3,930 5,983 15,370 6,355 10,073
------- ------- ------- ------- -------
23,548 25,837 37,611 56,819 25,714
ONSHORE
Acquisitions of properties.......... $ 3,519 $31,446 $22,886 $ 2,803 $ 577
Development......................... 5,463 1,274 2,439 8,935 3,496
Exploration......................... -- -- 2,060 869 216
------- ------- ------- ------- -------
8,982 32,720 27,385 12,607 4,289
------- ------- ------- ------- -------
Total..................... $32,530 $58,557 $64,996 $69,426 $ 30,003
======= ======= ======= ======= =======
</TABLE>
The Company's capital expenditure budget for 1996 includes $28 million and
$35 million, respectively, for exploration and development. These amounts
include development costs associated with recently acquired properties and
amounts that are contingent upon drilling success. The Company will continue to
evaluate its capital spending plans through the year. No significant abandonment
or dismantlement costs are anticipated through 1996. Actual levels of capital
expenditures may vary significantly due to a variety of factors, including
drilling results, natural gas and oil prices, industry conditions and outlook
and future acquisitions of properties. The Company believes cash flows from
operations and borrowings under its credit facility will be sufficient to fund
these expenditures. The Company will continue to selectively seek acquisition
opportunities for proved reserves with substantial exploration and development
potential both offshore and onshore. The size and timing of capital requirements
for acquisitions is inherently unpredictable. The Company expects to fund
exploration and development through a combination of cash flow from operations,
borrowings under its credit facility, additional borrowing facilities or the
issuance of equity or debt securities.
The Company has entered into a credit facility (the "Credit Facility") with
a syndicate of lenders led by Texas Commerce Bank National Association ("TCB")
which provides a maximum loan amount of $150 million, subject to borrowing base
limitations, on a revolving basis. On August 15, 1996, the borrowing base was
$150 million, $143 million of which was borrowed and $1.6 million was committed
under outstanding letter of credit obligations. The Credit Facility matures on
July 1, 2000. The Credit Facility is secured by a pledge of all of the Company's
outstanding capital stock; however, upon the closing of the Offering the shares
will be released and the Credit Facility will be unsecured. Advances under the
Credit Facility bear interest, at the Company's election at (i) a fluctuating
rate ("Base Rate") equal to the higher of the Federal Funds Rate plus 0.5% or
TCB's prime rate or (ii) a fixed rate ("Fixed Rate") equal to a quoted LIBOR
rate plus a margin between 0.5% and 1.125% depending on the amount outstanding
under the Credit Facility. Interest is due at calendar quarters for Base Rate
loans and at the earlier of maturity or three months from the date of the loan
for Fixed Rate loans. The Credit Facility contains covenants of the Company,
including certain restrictions on liens and financial covenants which require
the Company to, among other things, maintain (i) a minimum tangible net worth of
$95 million plus 50% of net income (excluding net losses) and 75% of net equity
proceeds and (ii) a total debt to capitalization ratio of less than 60% prior to
the Offering and 55% thereafter. The Credit Facility also restricts the
Company's ability to purchase or redeem its capital stock or to pledge its oil
and gas properties or other assets. The borrowing base under the Credit Facility
is determined by TCB in its discretion in accordance with
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<PAGE> 34
TCB's then current standards and practices for similar oil and gas loans taking
into account such factors as TCB deems appropriate.
Pursuant to the Credit Facility, the Company may declare and pay cash
dividends to its stockholders provided that (i) no defaults exist and the
Company will not be in default with respect to any financial covenants as a
result of such dividend payment and (ii) the Company continues to have a ratio
of consolidated total debt to consolidated total capitalization of less than
55%. Accordingly, the Company's ability to pay dividends will depend upon such
restrictions and the Company's results of operations, financial condition,
capital requirements and other factors deemed relevant by the Board of
Directors. See "Dividend Policy."
For a description of certain bonding requirements related to offshore
production proposed by the Minerals Management Service, see
"Business -- Environmental Matters."
32
<PAGE> 35
BUSINESS
OVERVIEW
Houston Exploration is an independent natural gas and oil company engaged
in the exploration, development and acquisition of domestic natural gas and oil
properties. The Company's offshore properties are located in the shallow waters
(up to 600 feet) of the Gulf of Mexico, and its onshore properties are located
in South Texas, the Arkoma Basin, East Texas and West Virginia. The Company has
grown its Gulf of Mexico reserves and production through exploratory drilling
and subsequent development of prospects originally generated utilizing in-house
geological and geophysical expertise. The Company has grown its onshore reserves
and production through successful acquisitions and subsequent exploitation and
development of low risk, long-lived reserves. The Company believes that these
lower risk projects and the stable production from its longer-lived onshore
properties complement its high potential exploratory prospects in the Gulf of
Mexico by balancing risk and reducing volatility.
The Company believes its primary strengths are its high quality reserves,
its substantial inventory of exploration and development opportunities, its
expertise in generating new prospects and its geographic focus and low-cost
operating structure. At December 31, 1995, the Company had net proved reserves
of 346 Bcfe. Approximately 98% of the Company's net proved reserves on such date
were natural gas and approximately 73% of proved reserves were classified as
proved developed. The Company operates approximately 82% of its Gulf of Mexico
production and approximately 92% of its onshore production.
The geographic focus of the Company's operations in the Gulf of Mexico and
core onshore areas of operation enable it to manage a large asset base with a
relatively small number of employees and to add production at relatively low
incremental cost. The Company achieved pro forma lease operating expenses of
$0.25 per Mcfe of production and pro forma general and administrative expenses
of $0.08 per Mcfe of production for the year ended December 31, 1995.
STRATEGY
The Company's strategy is to expand its reserves and increase its cash flow
through the exploration of Gulf of Mexico prospects which are internally
generated by the Company, the continued development of its existing offshore and
onshore properties and the selective acquisition of additional properties both
offshore and onshore. The Company implements its strategy by focusing on the
following key strengths:
- High potential exploratory drilling in the Gulf of Mexico
- Low risk exploitation and development drilling in core onshore areas of
operation
- Use of advanced technology for in-house prospect generation
- Opportunistic acquisitions with additional exploratory and/or development
potential
- High percentage of operated properties to control operations and costs
- Geographically focused operations
High Potential Exploratory Drilling in the Gulf of Mexico. The Company
plans to drill at least five additional exploratory wells in the Gulf of Mexico
in the remainder of 1996, the successful completion of any one of which could
substantially increase the Company's reserves. The Company believes it has
assembled a three year inventory of exploration and development drilling
opportunities in the Gulf of Mexico. The Company holds interests in 49 lease
blocks, representing 230,531 gross (147,180 net) acres, in federal and state
waters in the Gulf of Mexico, of which 28 have current operations. The Company
has a 100% working interest in 16 of these lease blocks and a 50% or greater
working interest in 17 other lease blocks. During 1994 and 1995, the Company
drilled
33
<PAGE> 36
five successful exploratory wells and 11 successful development wells in the
Gulf of Mexico, resulting in added net proved reserves of approximately 61 Bcfe.
During the first half of 1996, the Company drilled three successful exploratory
wells and one successful development well. The Company anticipates that
approximately $50 million of its $63 million 1996 capital expenditure budget
(excluding acquisitions) will be spent on offshore projects. In addition, the
Company intends to continue its participation in federal lease sales and to
actively pursue attractive farm-in opportunities as they arise. During July
1996, net production from the Company's Gulf of Mexico properties averaged
approximately 52,900 Mcfe per day.
Low Risk Exploitation and Development Drilling Onshore. The Company owns
significant onshore natural gas and oil properties in South Texas, the Arkoma
Basin of Oklahoma and Arkansas, East Texas and West Virginia, accounting for
approximately 63% of its net proved reserves as of December 31, 1995. Since the
beginning of 1994, the Company has drilled or participated in the drilling of 25
successful development wells and three successful exploratory wells onshore. The
Company plans to drill 16 development wells onshore during the remainder of
1996. The Company believes that these lower risk projects and the stable
production from its longer-lived onshore properties complement its higher
potential Gulf of Mexico operations and reserve base. The Company's onshore
properties represent interests in 1,060 gross (657 net) wells, and 138,385 gross
(93,419 net) acres. The Company anticipates that approximately $13 million of
its $63 million 1996 capital expenditure budget (excluding acquisitions) will be
spent on onshore projects. In addition the Company anticipates that it will
continue to acquire onshore properties with exploitation and development
potential in its core areas of operation as opportunities arise. During July
1996, net production from the Company's onshore properties averaged
approximately 69,300 Mcfe per day.
Use of Advanced Technology for In-House Prospect Generation. The Company
generates virtually all of its Gulf of Mexico exploration prospects utilizing
in-house geological and geophysical expertise. The Company uses advanced
technology, including 3-D seismic and in-house computer-aided exploration
technology, to reduce risks, lower costs and prioritize drilling prospects. The
Company has acquired approximately 1,100 square miles of 3-D seismic data,
including 3-D seismic surveys on 29 of its offshore lease blocks and on possible
lease and acquisition prospects, and 60,500 linear miles of 2-D seismic data on
its offshore properties. The Company has 12 geologists/geophysicists with
average industry experience of approximately 30 years and five geophysical
workstations for use in interpreting 3-D seismic data. The availability of 3-D
seismic data for Gulf of Mexico properties at reasonable costs has enabled the
Company to identify multiple exploration and development prospects in the
Company's existing inventory of properties and to define possible lease and
acquisition prospects.
Opportunistic Acquisitions. Although the Company's primary strategy is to
grow its reserves through the drillbit, the Company anticipates making
opportunistic acquisitions in the Gulf of Mexico with exploratory potential and
in core areas of operation onshore with exploitation and development potential.
The Company has a successful track record of building its reserves through
opportunistic acquisitions in the Gulf of Mexico and onshore. The Company
recently acquired significant onshore properties in South Texas and has agreed
to acquire additional interests in offshore properties in the Gulf of Mexico.
High Percentage of Operated Properties. The Company prefers to operate its
properties in order to manage production performance while controlling operating
expenses and the timing and amount of capital expenditures. Properties operated
by the Company account for 82% of its Gulf of Mexico production and
approximately 92% of its onshore production. Houston Exploration operates 16
platforms and 64 wells in the Gulf of Mexico and 924 wells onshore. The Company
also pursues cost savings through the use of outside contractors for much of its
offshore field operations activities and administrative work. As a result of
these and other factors, the Company achieved pro forma lease operating expense
of $0.25 per Mcfe of production and pro forma general and administrative expense
of $0.08 per Mcfe of production for the year ended December 31, 1995.
34
<PAGE> 37
Geographically Focused Operations. Focusing drilling activities on
properties in a relatively concentrated area in the Gulf of Mexico permits the
Company to utilize its base of geological, engineering, exploration and
production experience in the region. The geographic focus of the Company's
operations allows it to manage a large asset base with a relatively small number
of employees and enables the Company to add production at relatively low
incremental costs. Management believes that the Gulf of Mexico area remains
attractive for future exploration and development activities due to the
availability of geologic data, remaining reserve potential and the
infrastructure of gathering systems, pipelines, platforms and providers of
drilling services and equipment. The Company's onshore strategy is to make
opportunistic acquisitions of low risk, long-lived natural gas reserves of
sufficient size to provide a core area of operation and to use that base to
develop additional acquisition opportunities and exploitation drilling at little
or no incremental overhead cost.
GULF OF MEXICO PROPERTIES
The Company holds interests in 49 offshore blocks, of which 28 have current
operations, and operates 22 of these blocks, accounting for approximately 82% of
the Company's offshore production. The following table lists the Company's
average working interest, net proved reserves and the operator for the Company's
largest offshore properties as of December 31, 1995, representing 97% of the
Company's Gulf of Mexico proved reserves and 90% of its offshore production:
<TABLE>
<CAPTION>
PRO FORMA PROVED RESERVES AT
DECEMBER 31, 1995(1)
AVERAGE -----------------------------
WORKING GAS OIL TOTAL
FIELD INTEREST (MMCF) (MBBLS) (MMCFE) OPERATOR
- ---------------------------------------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Mustang Island Block 858................ 82.5% 21,476 523 24,614 Company
Mustang Island Block 807................ 100.0% 13,190 66 13,586 Company
Mustang Island Block 759................ 25.0% 12,997 50 13,297 Third Party
West Cameron Block 76/77/60/61 Unit..... 10.9% 11,500 48 11,788 Third Party
East Cameron Block 82/83................ 97.8% 9,616 43 9,874 Company
Mustang Island Block 785................ 71.3% 9,363 2 9,375 Company
Matagorda Island Block 650/672/671...... 45.4% 7,946 13 8,024 Company
Matagorda Island Block 651.............. 79.6% 7,491 1 7,497 Company
Vermilion Block 203..................... 50.0% 6,532 52 6,844 Company
Galveston Block 272/252................. 43.9% 5,256 10 5,316 Company
South Marsh Island Block 252/253........ 50.0% 5,129 5 5,159 Company
Eugene Island Block 48.................. 86.5% 4,315 80 4,795 Company
Mustang Island Block 738................ 49.9% 3,444 34 3,648 Company
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition as if such transaction had been
consummated at December 31, 1995.
During 1994 and 1995, the Company drilled five successful exploratory wells
and 11 successful development wells on its Gulf of Mexico properties. During
this same period, the Company drilled three exploratory wells and one
development well that were not successful. Capital spending associated with the
Company's Gulf of Mexico properties during 1994 and 1995 was $94.4 million,
including $21.7 million for exploratory drilling, $41.6 million for development
drilling and $31.1 million for acquisitions.
The Company has drilled three successful exploratory wells and one
successful development well on its Gulf of Mexico properties in 1996 to date.
During the same period, the Company drilled two exploratory wells that were not
successful. During the remainder of 1996, the Company intends to focus on
exploratory drilling and plans to drill at least five exploratory wells, along
with limited development drilling. The Company's exploratory projects are
located in East Cameron Block 185,
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<PAGE> 38
West Bayou Sale, Matagorda Island Block 651, Mustang Island Block 785, Matagorda
Island Block 680 and Mustang Island Block 736. The Company's development
projects are located in Mustang Island Block 807 and Mustang Island Block 759.
Capital spending for offshore projects during 1996 is budgeted at approximately
$50 million, including $28 million for exploration and $22 million for
development and platform construction. The following is a summary description of
the Company's exploration and development activity since 1994 and significant
additional activity that is currently planned during the remainder of 1996. The
Company is the operator of each of these properties except for Mustang Island
Block 736 and Mustang Island Block 759.
Mustang Island Block 858. The Company acquired a 50% working interest in
Mustang Island Block 858 in September 1990. The Company will acquire an
additional 32.5% working interest in this block in the Soxco Acquisition. The
Company began drilling an exploratory well in Mustang Island Block 858 during
late 1993. The well was successfully completed in 1994. The Company contracted
for a proprietary 3-D seismic survey across the block to assist in planning its
development activity. The Company drilled and completed two development wells on
Mustang Island Block 858 during 1995, and installed production facilities in
1996. Initial production began the first week of July 1996. The three completed
wells are producing at a combined rate of 19,000 Mcf/d (12,400 Mcf/d net) of gas
and 450 Bbls/d (300 Bbls/d net) of condensate. The Company owns substantial
leasehold interests in adjacent blocks and is contemplating additional
exploratory and development drilling.
Mustang Island Block 807. The Company acquired a 25% working interest in
Mustang Island Block 807 in September 1993. An exploratory well was successfully
drilled in June 1994. In December 1994, the Company purchased the remaining 75%
working interest in the block. The Company intends to drill an additional
development well and begin platform construction during the fourth quarter of
1996, and to commence initial production during the first quarter of 1997.
Mustang Island Block 759. The Company acquired a 25% working interest in
Mustang Island Block 759 in September 1993. An exploratory well was successfully
drilled in December 1993, and development drilling commenced in May 1994 with
the drilling of three development wells. In December 1994, an exploratory well
was successfully drilled to test a new separate fault block not tested by the
previous wells, although the well did not reach its targeted objective because
of drilling difficulties. During the fourth quarter of 1995 an additional
exploratory well was drilled to reach the targeted objective of the December
1994 well. The Company completed the drilling of one development well on Mustang
Island Block 759 in early 1996. The "A" Platform and the "B" Platform were
constructed and installed in early 1995, and four wells on the "A" Platform were
completed and two wells on the "B" Platform were completed. Initial production
began in late July 1995. The field is currently producing 24,000 Mcf/d (4,800
Mcf/d net) of gas and 140 Bbls/d (29 Bbls/d net) of condensate. The Company
intends to participate in additional development drilling in Mustang Island
Block 759 to further develop this property.
East Cameron 82/83. The Company purchased a 100% working interest in East
Cameron Blocks 82, 83, 44 and 49 in February 1995. The property currently has
two platforms, one on Block 82 and one on Block 44. The wells on Block 82 are
currently awaiting a workover program to commence early in the fourth quarter of
1996. In connection with its purchase of the field, the Company committed to
drill two exploratory wells, a shallow well to be drilled within 90 days of the
closing of the acquisition and a deep well to be drilled after completion of the
shallow well. The Company completed the shallow well in May 1995. The well (in
which the Company has a 95% working interest) commenced production in September
1995, and is currently producing 6,750 Mcf/d (4,300 Mcf/d net) of gas and 36
Bbls/d (23 Bbls/d net) of condensate. The Company drilled the deep well during
the first quarter of 1996 and encountered no commercial amounts of hydrocarbons
in the prospective deep zone, but the well is being completed in a shallower
productive zone.
Mustang Island Block 785. The Company holds a 71.3% working interest in
Mustang Island Block 785, which currently has a platform and four producing
wells. The Company is preparing to
36
<PAGE> 39
drill a well in an untested fault block to test objectives that have been found
productive to the west of Mustang Island Block 785.
Matagorda Island Block 651. The Company holds a 79.6% working interest in
Matagorda Island Block 651, which currently has a platform and three producing
wells. The Company is preparing to drill a well in an untested fault block to
test objectives that are productive in its adjacent Matagorda Island Block 650
field. The Company plans to begin drilling this well in the third quarter of
1996.
Vermilion Block 203. The Company acquired a 50% working interest in
Vermilion Block 203 in March 1991. The Company successfully drilled an
exploratory well in February 1994. The Company contracted for a proprietary 3-D
seismic survey across the block in May 1994 to assist in planning its
exploration and development activities. The Company drilled three development
wells on Vermilion Block 203 in 1995. Initial production began in the first
quarter of 1996. The Company drilled a deep well during the first quarter of
1996 and encountered no commercial amounts of hydrocarbons. The field is
currently producing 25,000 Mcf/d (9,750 Mcf/d net) of gas and 60 Bbls/d (23
Bbls/d net) of oil. The Company has identified several untested fault blocks in
Vermilion Block 203 through its 3-D seismic survey which it intends to begin
exploring in 1996 or thereafter.
East Cameron Block 185. The Company acquired a 100% working interest in
East Cameron Block 185 in March 1996. The property has one platform currently
producing approximately 2,000 Mcf/d of gas. In connection with its purchase of
the field, the Company committed to drill two exploratory wells. The Company has
drilled one of the exploratory wells, which did not encounter commercial amounts
of hydrocarbons. The Company plans to begin drilling the second exploratory well
in the third quarter of 1996.
Matagorda Island Block 680. The Company holds a 100% working interest in
Matagorda Island Block 680. The Company is preparing to drill an exploratory
well to test objectives that have been found productive to the north and west of
the property. The Company plans to begin drilling this well in the third quarter
of 1996.
Mustang Island Block 736. The Company acquired a 50% working interest in
Mustang Island Block 736 in September 1993. The Company intends to drill a well
in Mustang Island Block 736 to test objectives that have been found productive
to the southwest of Mustang Island Block 759.
West Bayou Sale. The Company holds a 25% working interest in a West Bayou
Sale prospect located in South Louisiana that is adjacent to several productive
areas. The Company is currently participating in a deep exploratory test on this
prospect.
ONSHORE PROPERTIES
The Company also owns significant onshore natural gas and oil properties in
South Texas, the Arkoma Basin of Oklahoma and Arkansas, East Texas and West
Virginia. These properties represent interests in 1,060 gross (657 net) wells,
92% of which the Company is the operator of record, and 138,385 gross (93,419
net) acres.
37
<PAGE> 40
The following table lists the Company's average working interest and net
proved reserves for the Company's three largest onshore fields and the Charco
and Appalachian Areas as of December 31, 1995, representing 98% of the Company's
onshore reserves:
<TABLE>
<CAPTION>
PRO FORMA PROVED RESERVES AT
DECEMBER 31, 1995(1)
AVERAGE -----------------------------
WORKING GAS OIL TOTAL
FIELD INTEREST (MMCF) (MBBLS) (MMCFE)
- ---------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Charco Area......................................... 95% 112,476 49 112,770
Chismville/Massard Field............................ 73% 48,776 -- 48,776
Willow Springs and Surrounding Fields............... 53% 16,575 137 17,397
Wilburton, Panola and Surrounding Fields............ 23% 13,663 -- 13,663
Appalachian Area.................................... 60% 21,068 52 21,380
</TABLE>
- ---------------
(1) Gives effect to the TransTexas Acquisition as if such transaction had been
consummated at December 31, 1995.
During 1994 and 1995, the Company participated in the drilling of 18
successful development and three successful exploratory wells on its onshore
properties. During this same period, the Company participated in the drilling of
seven development wells and one exploratory well that were not successful.
Capital spending associated with the Company's onshore drilling program during
1994 and 1995 was approximately $14.3 million, substantially all of which was
used for development drilling.
Since the beginning of 1996, the Company has drilled six successful
development wells in Arkansas and one successful development well in West
Virginia. The Company participated in two unsuccessful exploratory wells during
the same period. For the remainder of 1996 the Company has budgeted funds to
drill an additional two wells on the South Texas properties acquired in the
TransTexas Acquisition, three wells in East Texas, six wells in Arkansas, and
five wells in Oklahoma. The total 1996 capital spending for onshore projects is
budgeted at approximately $13 million with the majority being spent on
development projects. The Company has identified enough additional development
and exploratory projects on its existing acreage to maintain an active drilling
program for the next four to six years.
The following is a description of several of the Company's most significant
onshore properties:
Charco Area. The Charco Area is located in Zapata County, Texas. The
Company acquired its properties in the Charco Area in July 1996 in the
TransTexas Acquisition. The Company owns a 95% working interest in the
approximately 156 active wells on such properties, all of which are operated by
the Company. During July 1996, the Company's Charco Area properties had average
production of 39,000 Mcfe/d net to the Company. The Company has contracted for a
3-D seismic survey covering all of its Charco Area properties. The Company
anticipates undertaking an active drilling program beginning in the fourth
quarter of 1996 to fully exploit this property.
Chismville/Massard Field. The Chismville/Massard Field is located in Logan
and Sebastian Counties, Arkansas. The Company owns working interests in
approximately 75 active wells, of which it operates 58 wells. Working interests
range from 11% to 100% and average approximately 73%. During July 1996,
production averaged 12,200 Mcfe/d net to the Company.
Willow Springs and Surrounding Fields. The Willow Springs Field is located
in Gregg County, with surrounding fields located in Panola and Harrison
Counties, Texas. The Company owns working interests in 44 active wells, of which
it operates 17 wells. Working interests range from 3% to 100% and average
approximately 53%. During July 1996, production averaged 3,800 Mcfe/d net to the
Company.
Wilburton, Panola and Surrounding Fields. The Wilburton and Panola Fields
are located in Latimer County, Oklahoma. The Company owns working interest in 38
active wells, of which it
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<PAGE> 41
operates 12 wells. Working interests range from 1% to 63% and average
approximately 23%. During July 1996, production averaged 4,000 Mcfe/d net to the
Company.
Appalachian Area. The Belington, Clarksburg and Seneca Upshur Fields are
located in Barbour, Randolph, Upshur and Mingo Counties, West Virginia. The
Company owns working interests in 675 wells, 660 of which are operated by the
Company. Working interests range from 6% to 100% and average approximately 60%.
During July 1996, production averaged 4,600 Mcfe/d net to the Company.
ADDITIONAL FUTURE PROJECTS
In addition to the properties described above, the Company has accumulated
a large inventory of offshore leases comprised of 100,024 undeveloped gross
(73,351 pro forma net) acres. These leases are under review by the Company's
geologists and geophysicists based upon 3-D seismic data acquired in 1994 and
1995. The Company has assembled a team of geologists and geophysicists to
evaluate unleased acreage offshore which will be available at upcoming lease
sales. The Company is also actively pursuing farm-ins from other companies,
interests in other companies' joint ventures and potential acquisitions.
Finally, the Company is also evaluating its producing properties for workovers
and recompletions in which it will undertake in the next several years.
NATURAL GAS AND OIL RESERVES
The following table summarizes the estimates of the Company's historical
net proved reserves as of December 31, 1994 and 1995 and pro forma reserves as
of December 31, 1995, and the present values attributable to these reserves at
such dates. The reserve data and present values as of December 31, 1994 and 1995
were prepared by Ryder Scott Company ("Ryder Scott"), Netherland, Sewell &
Associates, Inc. ("NSA"), Huddleston & Co., Inc. ("Huddleston") and Miller and
Lents, Ltd. ("Miller and Lents"), independent petroleum engineering consultants.
The pro forma December 31, 1995 reserve data and present values are presented to
include the TransTexas Acquisition and the Soxco Acquisition. Summaries of the
December 31, 1995 reserve reports and the letters of Ryder Scott, NSA,
Huddleston and Miller and Lents with respect thereto are included as Appendix A
to this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
AS OF AS OF AS OF
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1995
------------------------------- --------------------------------- ---------------------------------
OFFSHORE ONSHORE TOTAL OFFSHORE ONSHORE TOTAL OFFSHORE ONSHORE TOTAL
-------- -------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Proved
Reserves(1):
Natural gas (Mmcf).. 71,876 74,069 145,945 91,529 104,417 195,946 121,636 216,893 338,529
Oil (Mbbls)......... 326 310 636 665 224 889 961 273 1,234
Total (Mmcfe)....... 73,832 75,929 149,761 95,519 105,761 201,280 127,402 218,531 345,933
Present value of
future net revenues
before income taxes
(000s)(2)........... $69,721 $66,148 $ 135,869 $ 119,490 $ 87,084 $ 206,574 $ 162,730 $ 163,616 $ 326,346
Standardized measure
of discounted future
net cash flows
(000s)(3)........... $54,638 $63,796 $ 118,434 $ 93,637 $ 77,822 $ 171,459 $ 136,124 $ 145,942 $ 282,066
</TABLE>
- ---------------
(1) Ryder Scott, NSA and Huddleston prepared reserve data and present values
with respect to properties comprising approximately 60%, 34% and 6%,
respectively, of the present values attributable to the Company's Gulf of
Mexico pro forma proved reserves as of December 31, 1995. NSA and Miller and
Lents prepared reserve data and present values with respect to properties
comprising approximately 52% and 48%, respectively, of the present values
attributable to the Company's onshore pro forma proved reserves as of
December 31, 1995.
39
<PAGE> 42
(2) The present value of future net revenue attributable to the Company's
reserves was prepared using prices in effect at the end of the respective
periods presented, discounted at 10% per annum on a pre-tax basis. Such
amounts reflect the effects of the Company's hedging contracts and do not
reflect the effects of Section 29 tax credits.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
Such amounts reflect the effects of the Company's hedging contracts.
In accordance with applicable requirements of the Securities and Exchange
Commission, estimates of the Company's proved reserves and future net revenues
are made using sales prices estimated to be in effect as of the date of such
reserve estimates and are held constant throughout the life of the properties
(except to the extent a contract specifically provides for escalation).
Estimated quantities of proved reserves and future net revenues therefrom are
affected by gas prices, which have fluctuated widely in recent years. There are
numerous uncertainties inherent in estimating natural gas and oil reserves and
their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this Prospectus represents only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates of different engineers, including those used by the
Company, may vary. In addition, estimates of reserves are subject to revision
based upon actual production, results of future development and exploration
activities, prevailing natural gas and oil prices, operating costs and other
factors, which revisions may be material. Accordingly, reserve estimates are
often different from the quantities of natural gas and oil that are ultimately
recovered and are highly dependent upon the accuracy of the assumptions upon
which they are based. The Company's estimated proved reserves have not been
filed with or included in reports to any federal agency.
The present value of future net revenues before income taxes and the
standardized measure of discounted net cash flows set forth in this Prospectus
do not reflect any adjustment for after program-payout working interests held by
the Company's President and Chief Executive Officer in certain properties of the
Company. The amounts expected to be payable in respect of such after
program-payout working interests would not have a material effect on the
information presented. See "Related Party Transactions -- Transactions between
the Company and Management."
40
<PAGE> 43
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company on its
properties for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------- SIX MONTHS ENDED
1995 JUNE 30, 1996
1993 1994 --------------------------- ---------------------------
----------- ----------- PRO FORMA PRO FORMA
OFFSHORE DRILLING ACTIVITY: GROSS NET GROSS NET GROSS NET NET(1) GROSS NET NET(1)
- ------------------------------- ----- --- ----- --- ----- ---- ------------ ----- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive................... 3 1.0 4 2.3 1 1.0 1.0 3 1.7 1.7
Non-productive............... 2 0.5 3 1.5 -- -- -- 2 1.5 1.5
-- --- -- --- -- --- ---- -- ---- ----
Total.................. 5 1.5 7 3.8 1 1.0 1.0 5 3.2 3.2
Development:
Productive................... 6 1.8 4 1.3 7 2.8 3.5 1 .5 .5
Non-productive............... -- -- 1 0.3 -- -- -- -- -- --
-- --- -- --- -- ---- ---- -- ---- ----
Total.................. 6 1.8 5 1.6 7 2.8 3.5 1 .5 .5
ONSHORE DRILLING ACTIVITY:
Exploratory:
Productive................... -- -- -- -- 3 0.5 0.5 -- -- --
Non-productive............... -- -- 1 0.3 -- -- -- 1 0.3 0.3
-- --- -- --- -- ---- ---- -- ---- ----
Total.................. -- -- 1 0.3 3 0.5 0.5 1 0.3 0.3
Development:
Productive................... 3 3.0 6 3.1 12 7.4 7.4 7 4.6 4.6
Non-productive............... -- -- 2 1.7 5 2.5 2.5 -- -- --
-- --- -- --- -- ---- ---- -- ---- ----
Total.................. 3 3.0 8 4.8 17 9.9 9.9 7 4.6 4.6
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition as if such transaction had been
consummated at the beginning of the period presented.
PRODUCTIVE WELLS
The following table sets forth the number of productive wells in which the
Company owned an interest as of June 30, 1996.
<TABLE>
<CAPTION>
NON-OPERATED WELLS
COMPANY OPERATED WELLS TOTAL PRODUCTIVE WELLS
--------------------------------- --------------------- ---------------------------------
COMPANY PRO PRO PRO PRO PRO
OPERATED FORMA FORMA FORMA FORMA FORMA
OFFSHORE PLATFORMS GROSS NET GROSS(1) NET(1) GROSS NET NET(1) GROSS NET GROSS(1) NET(1)
- ------------------- --------- ----- ----- -------- ------ ----- ---- ------ ----- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gas................ 16 64 29.4 64 38.9 16 2.9 3.3 80 32.3 80 42.2
Oil................ -- -- -- -- -- 7 0.7 0.7 7 0.7 7 0.7
--
--- ----- --- ----- --- ---- ---- --- ----- ----- -----
Total...... 16 64 29.4 64 38.9 23 3.6 4.0 87 33.0 87 42.9
ONSHORE
- -------------------
Gas................ 765 471.1 921 618.5 119 29.7 29.7 884 500.8 1,040 648.2
Oil................ 3 2.9 3 2.9 17 6.3 6.3 20 9.2 20 9.2
--- ----- --- ----- --- ---- ---- --- ----- ----- -----
Total...... 768 474.0 924 621.4 136 36.0 36.0 904 510.0 1,060 657.4
</TABLE>
- ---------------
(1) Gives effect to the TransTexas Acquisition and the Soxco Acquisition as if
such transactions had been consummated at June 30, 1996.
Productive wells consist of producing wells capable of production,
including gas wells awaiting connections. Wells that are completed in more than
one producing horizon are counted as one well.
41
<PAGE> 44
ACREAGE DATA
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold mineral or other interest as of
June 30, 1996. Undeveloped acreage includes leased acres 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 or not such
acreage contains proved reserves:
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
------------------------------------- ------------------------------------
PRO PRO PRO PRO
FORMA FORMA FORMA FORMA
GROSS NET GROSS(2) NET(2) GROSS NET GROSS(2) NET(2)
------- ------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Offshore(1)............................... 130,506 57,725 130,506 73,829 100,024 58,980 100,024 73,351
Onshore................................... 97,040 59,539 128,292 84,985 3,264 1,990 10,093 8,434
------- ------- ------- ------- ------- ------ ------- ------
Total............................. 227,546 117,264 258,798 158,814 103,288 60,970 110,117 81,785
======= ======= ======= ======= ======= ====== ======= ======
</TABLE>
- ---------------
(1) Offshore includes acreage in federal and state waters.
(2) Gives effect to the TransTexas Acquisition and the Soxco Acquisition as if
such transactions had been consummated at June 30, 1996.
MARKETING AND CUSTOMERS
Substantially all of the Company's production is sold at market prices.
During July 1996, the Company sold approximately 24% of its gas production and
has agreed, subject to certain conditions, to sell substantially all of its
subsequently developed or acquired gas production, to PennUnion Energy Services,
L.L.C. ("PennUnion"), an affiliate of Brooklyn Union. However, the gas produced
from the properties acquired in the TransTexas Acquisition is not covered by the
Agreement with PennUnion. The gas production sold to PennUnion is sold at market
prices, based upon an index price adjusted to reflect the point of delivery of
such production. During 1994 and 1995, PennUnion and BRING Gas Services Corp.
("BRING"), another affiliate of Brooklyn Union, purchased approximately 63% and
46%, respectively, of the natural gas sold by the Company. The Company believes
that the prices at which it sells and has sold gas to PennUnion and BRING are
similar to those it would be able to obtain in the open market, and that the
loss of PennUnion as a purchaser would not have a material adverse effect on the
Company. See Note 5 to the Company's Combined Financial Statements.
The Company enters into commodity swaps with unaffiliated third parties for
portions of its natural gas production to achieve more predictable cash flows
and to reduce its exposure to short-term fluctuations in gas prices. The Company
has entered into contracts covering an average of approximately 68,900 Mmbtu per
day (66,300 Mcf/d) of natural gas production for September through March 1997 at
a weighted average price of $2.04 per Mmbtu, before transaction and
transportation costs. The Company has also entered into contracts covering an
average of approximately 49,600 Mmbtu per day (47,700 Mcf/d) for April through
October 1997 at a weighted average price of $1.93 per Mmbtu and contracts
covering an average of approximately 22,600 Mmbtu per day (21,800 Mcf/d) for
November 1997 through March 1998 at a weighted average price of $1.91 per Mmbtu,
in each case before transaction and transportation costs. The Company accounts
for its commodity swaps and futures as hedging activities and, accordingly,
gains or losses are included in natural gas and oil revenues in the period the
production occurs. See Note 7 to the Company's Combined Financial Statements.
Most of the Company's natural gas is transported through gas gathering
systems and gas pipelines which are not owned by the Company. Transportation
space on such gathering systems and pipelines is occasionally limited and at
times unavailable due to repairs or improvements being made to such facilities
or due to such space being utilized by other gas shippers with priority
transportation agreements. While the Company has not experienced any inability
to market its natural gas, if transportation space is restricted or is
unavailable, the Company's cash flow from the affected properties could be
adversely affected. See "-- Regulation."
42
<PAGE> 45
ABANDONMENT COSTS
The Company is responsible for the payment of abandonment costs on the
natural gas and oil properties pro rata to its working interest. The Company
provides for its expected future abandonment liabilities by accruing for such
costs as a component of depletion, depreciation and amortization as the
properties are produced. As of December 31, 1995, total pro forma undiscounted
abandonment costs estimated to be incurred through the year 2006 were
approximately $3.2 million for properties in the federal and state waters and
are not considered significant for onshore properties. Estimates of abandonment
costs and their timing may change due to many factors including actual drilling
and production results, inflation rates, and changes in environmental laws and
regulations.
The Minerals Management Service ("MMS") requires lessees of Outer
Continental Shelf ("OCS") properties to post bonds in connection with the
plugging and abandonment of wells located offshore and the removal of all
production facilities. Operators in the OCS waters of the Gulf of Mexico are
currently required to post an area wide bond of $3 million or $500,000 per
producing lease. The Company is presently exempt from any requirement by MMS to
provide supplemental bonding on its offshore leases, although no assurance can
be made that it will continue to satisfy the requirements for such exemption in
the future. Whether or not the Company qualifies for such exemption, the Company
does not believe that the cost of any such bonding requirements will materially
affect the Company's financial condition or results of operations. Under certain
circumstances, the MMS has the authority to suspend or terminate operations on
federal leases for failure to comply with applicable bonding requirements or
other regulations applicable to plugging and abandonment. Any such suspensions
or terminations of the Company's operations could have a material adverse effect
on the Company's financial condition and results of operations.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company makes only a
cursory review of title to farmout acreage and to undeveloped natural gas and
oil leases upon execution of the contracts. Prior to the commencement of
drilling operations, a thorough title examination is conducted and curative work
is performed with respect to significant defects. To the extent title opinions
or other investigations reflect title defects, the Company, rather than the
seller of the undeveloped property, is typically responsible for curing any such
title defects at its expense. If the Company were unable to remedy or cure any
title defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in the property. The Company has obtained title opinions on
substantially all of its producing properties and believes that it has
satisfactory title to such properties in accordance with standards generally
accepted in the oil and gas industry. Prior to completing an acquisition of
producing natural gas and oil leases, the Company obtains title opinions on the
most significant leases. The Company's natural gas and oil properties are
subject to customary royalty interests, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. Substantially all of the Company's
natural gas and oil properties are and will continue to be mortgaged to secure
borrowings under the Credit Facility.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors include major integrated oil and gas companies and
numerous independent oil and gas companies, individuals and drilling and income
programs. Many of its competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company's and which, in many instances, have been engaged in the oil and gas
business for a much longer time than the Company. Such companies may be able to
pay more for productive natural gas and oil properties and exploratory prospects
and to define, evaluate, bid for and purchase a greater
43
<PAGE> 46
number of properties and prospects than the Company's financial or human
resources permit. The Company's ability to acquire additional properties and to
discover reserves in the future will be dependent upon its ability to evaluate
and select suitable properties and to consummate transactions in this highly
competitive environment.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in
drilling for and production and transportation of natural gas and oil, such as
fires, natural disasters, explosions, encountering formations with abnormal
pressures, blowouts, cratering, pipeline ruptures, and spills, any of which can
result in loss of hydrocarbons, environmental pollution, personal injury claims,
and other damage to properties of the Company and others. Additionally, certain
of the Company's natural gas and oil operations are located in an area that is
subject to tropical weather disturbances, some of which can be severe enough to
cause substantial damage to facilities and possibly interrupt production. As
protection against operating hazards, the Company maintains insurance coverage
against some, but not all, potential losses. The Company's coverages include,
but are not limited to, operator's extra expense, to include loss of well,
blowouts and certain costs of pollution control, physical damage on certain
assets, employer's liability, comprehensive general liability, automobile and
worker's compensation. The Company believes that its insurance is adequate and
customary for companies of a similar size engaged in operations similar to those
of the Company, but losses could occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. The occurrence of an event
that is not fully covered by insurance could have an adverse impact on the
Company's financial condition and results of operations.
REGULATION
The availability of a ready market for natural gas and oil production
depends upon numerous factors beyond the Company's control. These factors
include regulation of natural gas and oil production, federal and state
regulations governing environmental quality and pollution control, state limits
on allowable rates of production by a well or proration unit, the supply of
natural gas and oil available for sale, the availability of adequate pipeline
and other transportation and processing facilities and the marketing of
competitive fuels. For example, a productive natural gas well may be "shut-in"
because of an oversupply of natural gas or the lack of an available natural gas
pipeline in the areas in which the Company may conduct operations. State and
federal regulations generally are intended to prevent waste of natural gas and
oil, protect rights to produce natural gas and oil between owners in a common
reservoir, control the amount of natural gas and oil produced by assigning
allowable rate of production and control contamination of the environment.
Regulation of Oil and Gas Exploration and Production. Exploration and
production operations of the Company are subject to various types of regulation
at the federal, state and local levels. Such regulation includes requiring
permits for the drilling of wells, maintaining bonding requirements in order to
drill or operate wells, and regulating the location of wells, the method of
drilling and casing wells, the surface use and restoration of properties upon
which wells are drilling and the plugging and abandonment of wells. The
Company's operations are also subject to various conservation laws and
regulations. These include the regulation of the size of drilling and spacing
units or proration units and the density of wells which may be drilled and
unitization or pooling of oil and gas properties. In this regard, some states
allow the forced pooling or integration of tracts to facilitate exploration
while other states rely on voluntary pooling of lands and leases. In addition,
state conservation laws establish maximum rates of production from natural gas
and oil wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. The effect
of these regulations is to limit the amounts of natural gas and oil the
Company's operator or the Company can produce from its wells, and to limit the
number of wells or the locations of which the Company can drill. Legislation
affecting the oil and gas industry also is under constant review for amendment
or expansion. Generally, state-established allowables have
44
<PAGE> 47
been influenced by overall natural gas market supply and demand in the United
States, as well as the specific "nominations" for natural gas from the parties
who produce or purchase gas from the field and other factors deemed relevant by
the agency. The Company cannot predict whether further changes will be made in
how these states set allowables or what impact, if any, such further changes
might have. In addition, numerous departments and agencies, both federal and
state, are authorized by statute to issue rules and regulations binding on the
oil and gas industry and its individual members, some of which carry substantial
penalties for failure to comply. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and, consequently,
affects its profitability. Inasmuch as such laws and regulations are frequently
expanded, amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such regulations.
Natural Gas Marketing and Transportation. Federal legislation and
regulatory controls in the United States have historically affected the price of
the natural gas produced by the Company and the manner in which such production
is marketed. The transportation and sale for resale of natural gas in interstate
commerce are regulated pursuant to the Natural Gas Act of 1938 (the "NGA") the
Natural Gas Policy Act of 1978 (the "NGPA") and the Federal Energy Regulatory
Commission (the "FERC"). Although maximum selling prices of natural gas were
formerly regulated, on July 26, 1989, the Natural Gas Wellhead Decontrol Act of
1989 ("Decontrol Act") was enacted, which amended the NGPA to remove completely
by January 1, 1993 price and nonprice controls for all "first sales" of domestic
natural gas, which include all sales by the Company of its own production;
consequently, sales of the Company's natural gas production currently may be
made at market prices, subject to applicable contract provisions. The FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act.
In July 1994, the FERC eliminated a regulation that had rendered virtually
all sales of natural gas by pipeline and distribution company affiliates, such
as the Company, to be deregulated first sales. As a result, all sales by the
Company of gas for resale in interstate commerce, other than sales by the
Company of its own production, are now jurisdictional sales subject to an NGA
certificate. This includes, for example, sales for resale of gas purchased from
third parties. The Company does not anticipate this change will have any
significant current adverse effects in light of the flexible terms and
conditions of the existing blanket certificate. Such sales are subject to the
future possibility of greater federal oversight, however, including the
possibility the FERC might prospectively impose more restrictive conditions on
such sales.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to natural gas buyers and
sellers on an open and nondiscriminatory basis. The FERC's efforts have
significantly altered the marketing and pricing of natural gas. Commencing in
April 1992, the FERC issued Order Nos. 636, 636-A and 636-B (collectively,
"Order No. 636"), which, among other things, require interstate pipelines to
"restructure" to provide transportation separate or "unbundled" from the
pipelines' sales of natural gas. Also, Order No. 636 requires pipelines to
provide open-access transportation on a basis that is equal for all natural gas
supplies. Order No. 636 has been implemented through negotiated settlements in
individual pipeline service restructuring proceedings. In many instances, the
result of the Order No. 636 and related initiatives have been to substantially
reduce or bring to an end the interstate pipelines' traditional role as
wholesalers of natural gas in favor of providing only storage and transportation
services. The FERC has issued final orders in virtually all pipeline
restructuring proceedings, and has now commenced a series of one year reviews to
determine whether refinements are required regarding individual pipeline
implementations of Order No. 636.
Although Order No. 636 does not regulate natural gas producers such as the
Company, the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural
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<PAGE> 48
gas industry under Order No. 636 will have on the Company and its natural gas
marketing efforts. The United States Court of Appeals for the District of
Columbia Circuit (the "Court") recently issued its decision in the appeals of
Order No. 636. The Court largely upheld the basic tenets of Order No. 636,
including the requirements that interstate pipelines "unbundle" their sales of
gas from transportation and that pipelines provide open-access transportation on
a basis that is equal for all gas suppliers. The Court remanded five relatively
narrow issues for further explanation by the FERC. In doing so, the Court made
it clear that the FERC's existing rules on the remanded issues would remain in
effect pending further consideration. The Court's decision is still subject to
rehearing and parties could potentially petition for writ of certiorari to the
United States Supreme Court. It is not possible to predict what effect, if any,
the ultimate outcome of this judicial review process will have on the Company.
Although Order No. 636, assuming it is upheld in its entirety in its current
form, could provide the Company with additional market access and more fairly
applied transportation service rates, terms and conditions, it could also
subject the Company to more restrictive pipeline imbalance tolerances and
greater penalties for violation of those tolerances. The Company does not
believe, however, that it will be affected by any action taken with respect to
Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.
The FERC recently issued a statement of policy and a request for comments
concerning alternatives to its traditional cost-of-service ratemaking
methodology. This policy statement articulates the criteria that the FERC will
use to evaluate proposals to charge market-based rates for the transportation of
natural gas. The policy statement also provides that the FERC will consider
proposals for negotiated rates for individual shippers of natural gas, so long
as a cost-of-service-based rate is available. The FERC requested comments on
whether it should allow gas pipelines the flexibility to negotiate the terms and
conditions of transportation service with prospective shippers. The Company
cannot predict what further action the FERC will take on these matters; however,
the Company does not believe that it will be affected by any action taken
materially differently than other natural gas producers and marketers with which
it competes.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary markets. While any resulting FERC action would
affect the Company only indirectly, the FERC's current rules and policy
statements may have the effect of enhancing competition in natural gas markets
by, among other things, encouraging non-producer natural gas marketers to engage
in certain purchase and sale transactions. The Company cannot predict what
action the FERC will take on these matters, nor can it accurately predict
whether the FERC's actions will achieve the goal of increasing competition in
markets in which the Company's natural gas is sold. However, the Company does
not believe that it will be affected by any action taken materially differently
than other natural gas producers and marketers with which it competes.
Recently, the FERC issued policy statements on how interstate natural gas
pipelines can recover the costs of new pipeline facilities and on how the FERC
intends to regulate natural gas gathering facilities owned (or previously owned
but either "spun down" to an affiliate or "spun off" to a non-affiliate) by
interstate pipeline companies after Order No. 636. While the FERC's policy
statement on new construction cost recovery affects the Company only indirectly,
in its present form, the new policy should enhance competition in natural gas
markets and facilitate construction of gas supply laterals. However, requests
for rehearing of this policy statement are currently pending. In respect of
interstate pipeline-owned gathering, the FERC has approved the spin down or spin
off by several interstate pipelines of their gathering facilities. These
approvals were given despite the strong protests of a number of producers
concerned that any diminution in FERC's oversight of interstate pipeline-related
gathering services might result in a denial of open access or otherwise enhance
the pipeline's monopoly power. While the FERC has stated that it will retain
limited jurisdiction over such gathering facilities and will hear complaints
concerning any denial of
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<PAGE> 49
access, it is unclear what effect the FERC's new gathering policy will have on
producers such as the Company and the Company cannot predict what further action
the FERC will take on these matters.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the Company's
operations. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
Offshore Leasing. Certain operations the Company conducts are on federal
oil and gas leases, which the MMS administers. The MMS issues such leases
through competitive bidding. These leases contain relatively standardized terms
and require compliance with detailed MMS regulations and orders pursuant to the
Outer Continental Shelf Lands Act ("OCSLA") (which are subject to change by the
MMS). For offshore operations, lessees must obtain MMS approval for exploration
plans and development and production plans prior to the commencement of such
operations. In addition to permits required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the OCS to meet stringent engineering and construction
specifications, and has recently proposed additional safety-related regulations
concerning the design and operating procedures for OCS production platforms and
pipelines. The MMS also has issued regulations restricting the flaring or
venting of natural gas, and has recently proposed to amend such regulations to
prohibit the flaring of liquid hydrocarbons and oil without prior authorization.
Similarly, the MMS has promulgated other regulations governing the plugging and
abandonment of wells located offshore and the removal of all production
facilities. To cover the various obligations of lessees on the OCS, the MMS
generally requires that lessees post substantial bonds or other acceptable
assurances that such obligations will be met. The cost of such bonds or other
surety can be substantial and there is no assurance that the Company can obtain
bonds or other surety in all cases. See "-- Environmental Matters."
In addition, the MMS is conducting an inquiry into certain contract
settlement agreements from which producers on MMS leases have received
settlement proceeds that are royalty bearing and the extent to which producers
have paid the appropriate royalties on those proceeds.
The MMS has recently issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and the
valuation of natural gas produced from federal leases. The principal feature in
the amendments, as proposed, would establish an alternative market-index based
method to calculate royalties on certain natural gas production sold to
affiliates or pursuant to non-arm's-length contracts. The MMS has proposed this
rulemaking to facilitate royalty valuation in light of changes in the natural
gas marketing environment. The Company cannot predict what action the MMS will
take on these matters, nor can it predict at this state of the rulemaking
proceeding how the Company might be affected by amendments to the regulations.
The OCSLA requires that all pipelines operating on or across the OCS
provide open-access, non-discriminatory service. Although the FERC has opted not
to impose the regulations of Order No. 509, which implements these requirements
of the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has
retained the authority to exercise jurisdiction over those entities if necessary
to permit non-discriminatory access to services on the OCS. If the FERC were to
apply Order No. 509 to gatherers in the OCS, eliminate the exemption of
gathering lines, and redefine its jurisdiction over gathering lines, then these
acts could result in a reduction in available pipeline space for existing
shippers in the Gulf of Mexico and elsewhere.
Oil Sales and Transportation Rates. Sales of crude oil, condensate and gas
liquids by the Company are not regulated and are made at market prices. The
price the Company receives from the sale of these products is affected by the
cost of transporting the products to market. Effective as
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<PAGE> 50
of January 1, 1995, the FERC implemented regulations establishing an indexing
system for transportation rates for oil pipelines, which would generally index
such rates to inflation, subject to certain conditions and limitations. These
regulations are subject to pending petitions for judicial review. The Company is
not able to predict with certainty what effect, if any, these regulations will
have on it, but other factors being equal, under certain conditions the
regulations may tend to increase transportation costs or reduce wellhead prices
for such commodities.
Safety Regulation. The Company's gathering operations are subject to safety
and operational regulations relating to the design, installation, testing,
construction, operation, replacement, and management of facilities. Pipeline
safety issues have recently been the subject of increasing focus in various
political and administrative arenas at both the state and federal levels. In
addition, the major federal pipeline safety law is subject to change this year
as it is considered for reauthorization by Congress. For example, federal
legislation addressing pipeline safety issues has been introduced, which, if
enacted, would establish a federal "one call" notification system. Additional
pending legislation would, among other things, increase the frequency with which
certain pipelines must be inspected, as well as increase potential civil and
criminal penalties for violations of pipeline safety requirements. The Company
believes its operations, to the extent they may be subject to current natural
gas pipeline safety requirements, comply in all material respects with such
requirements. The Company cannot predict what effect, if any, the adoption of
this or other additional pipeline safety legislation might have on its
operations, but the industry could be required to incur additional capital
expenditures and increased costs depending upon future legislative and
regulatory changes.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, require remedial measures to prevent
pollution from former operations, such as pit closure and plugging abandoned
wells, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws, rules and regulations may
restrict the rate of oil and natural gas production below the rate that would
otherwise exist. The regulatory burden on the oil and gas industry increases the
cost of doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, disposal and clean-up requirements
could have a significant impact on the operating costs of the Company, as well
as the oil and gas industry in general. Management believes that the Company is
in substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site or
sites where the release occurred and companies that disposed or arranged for the
disposal of the hazardous substances. Under CERCLA, such persons may be subject
to joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for damages to natural
resources and for the costs of certain health studies, 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 release of hazardous
substances.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose
a variety of requirements on "responsible parties" related to the prevention of
oil spills and liability for damages
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resulting from such spills in "waters of the United States." A "responsible
party" includes the owner or operator of a facility or vessel, or the lessee or
permittee of the area in which an offshore facility is located. The term "waters
of the United States" has been broadly defined to include not only the waters of
the Gulf of Mexico but also inland waterbodies, including wetlands, playa lakes
and intermittent streams. The OPA also requires owners and operators of
"offshore facilities" to establish $150 million in financial responsibility to
cover environmental cleanup and restoration costs likely to be incurred in
connection with an oil spill. In August, 1993, the MMS published an advance
notice of its intention to adopt a rule under the OPA that would define
"offshore facilities" to include all oil and gas facilities that have the
potential to affect "waters of the United States." Since the Company has many
oil and gas facilities that could affect "waters of the United States," the
Company could become subject to the financial responsibility rule if it is
adopted as proposed. However, in May of 1995, the U.S. House of Representatives
passed a bill that would reduce the level of financial responsibility required
under OPA to $35 million (the current requirement under the Outer Continental
Shelf Lands Act ("OCSLA") and that would limit the definition of "offshore
facility" to include only Territorial Seas and Outer Continental Shelf
production, transportation, and storage facilities. In November of 1995, the
U.S. Senate adopted similar but slightly different legislation that must be
reconciled with the House of Representatives bill before either bill can be
submitted to President Clinton for approval. The Senate bill would limit the
definition of "offshore facility" to not only Territorial Sea and Outer
Continental Shelf production, transportation and storage facilities but also
inland waters, such as coastal bays, estuaries or perhaps even rivers. Both
bills allow the financial responsibility limit to be increased to $150 million
if a formal risk assessment indicates the increase is warranted. The Company
cannot predict the final form of any financial responsibility rule that may be
imposed under the OPA, but any rule that requires the Company to establish $150
million in financial responsibility for oil spills has the potential to result
in increased annual operating costs. The Clinton Administration has indicated
tentative support for changes to the OPA financial responsibility requirements.
Whether these legislative efforts will reduce the Oil Pollution Act financial
responsibility requirements applicable to the Company cannot be determined at
this time. In any event, the impact of any rule is not expected to be any more
burdensome to the Company than it will be to other similarly situated companies
involved in oil and gas exploration and production.
OPA imposes a variety of additional requirements on responsible parties for
vessels or oil and gas facilities related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States.
OPA assigns liability to each responsible party for oil spill removal costs and
a variety of public and private damages from oil spills. While liability limits
apply in some circumstances, a party cannot take advantage of liability limits
if the spill is caused by gross negligence or willful misconduct or resulted
from violation of a federal safety, construction or operating regulation. If a
party fails to report a spill or to cooperate fully in the cleanup, liability
limits likewise do not apply. OPA establishes a liability limit for offshore
facilities of all removal costs plus $75,000,000. Few defenses exist to the
liability for oil spills imposed by OPA. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
Failure to comply with ongoing requirements or inadequate cooperation in a spill
event may subject a responsible party to civil or criminal enforcement actions.
As of this date, the Company is not the subject of any civil or criminal
enforcement actions under the OPA.
In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating in the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing operations
and the cancellation of leases. Such enforcement liabilities can result from
either governmental or private prosecution. As of this date, the Company is not
the subject of any civil or criminal enforcement actions under OCSLA.
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The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and gas
wastes into navigable waters. Permits must be obtained to discharge pollutants
to state and federal waters. The FWPCA provides for civil, criminal and
administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and, along with the OPA, imposes
substantial potential liability for the costs of removal, remediation and
damages. State laws for the control of water pollution also provide varying
civil, criminal and administrative penalties and liabilities in the case of a
discharge of petroleum or its derivatives into state waters. In January 1995,
the U.S. Environmental Protection Agency ("EPA") issued general permits
prohibiting the discharge of produced water and produced sand derived from oil
and gas point source facilities to coastal waters in Louisiana and Texas,
effective February 8, 1995. However, concurrent with this action, EPA Region VI
issued an administrative order effectively delaying the prohibition on
discharges of produced water and produced sands to January 1, 1997, unless an
earlier compliance date is required by the State. Although the costs to comply
with zero discharge mandates under federal or state law may be significant, the
entire industry will experience similar costs and the Company believes that
these costs will not have a material adverse impact on the Company's financial
conditions and operations. Some oil and gas exploration and production
facilities are required to obtain permits for their storm water discharges.
Costs may be associated with treatment of wastewater or developing storm water
pollution prevention plans. Further, the Coastal Zone Management Act authorizes
state implementation and development of programs of management measures for
nonpoint source pollution to restore and protect coastal waters.
EMPLOYEES
As of June 30, 1996, the Company had 74 full time employees, 47 of whom are
located at the Company's headquarters in Houston, Texas and the remainder of
whom are located at field offices. None of the Company's employees are
represented by a labor union. The Company contracts with third parties to
conduct its offshore field operations.
OFFICES
The Company currently leases approximately 54,000 square feet of office
space in Houston, Texas, where its principal offices are located. In addition,
the Company maintains field operations offices in the areas where it operates
onshore properties.
LEGAL PROCEEDINGS
In connection with the February 1996 reorganization, certain former
employees of FRI, the subsidiary of Brooklyn Union that previously owned the
onshore properties, were entitled to remuneration for the increase in the value
of the transferred properties prior to the reorganization. In February 1996,
certain such former employees filed suit against Brooklyn Union, FRI and the
Company in the 164th Judicial District Court of Harris County, Texas alleging
breach of contract, breach of fiduciary duty, fraud, negligent misrepresentation
and conspiracy, seeking actual damages in excess of $35 million and punitive
damages in excess of $70 million. FRI has agreed to indemnify the Company
against such suit. In addition, Holdings, the subsidiary of Brooklyn Union that
holds all of the currently outstanding Common Stock of the Company, has agreed
to indemnify the Company against the suit, and has agreed to pledge all of its
holdings of Common Stock to the Company to secure such indemnification
obligation. Brooklyn Union has announced its intention to establish a
publicly-traded holding company which would hold all of the stock of Brooklyn
Union. If the holding company is established, the pledge may be released at the
option of Holdings if the obligations of Holdings under such indemnification
agreement are assumed or guaranteed by the holding company. As a result of such
arrangements, the Company believes that it will not be required to pay any
damages resulting from such suit, even if a judgment adverse to the Company is
rendered in the suit. However, the Company would incur a non-cash charge in
addition to the
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$12 million charge previously taken by the Company in the event such damages are
determined to be in excess of such $12 million amount, which would have the
effect of reducing the Company's reported income (or resulting in or increasing
a loss) in the period in which such additional charge is determined.
The properties purchased in the TransTexas Acquisition are subject to two
judgment liens imposed on substantially all of TransTexas' properties in the
aggregate amount of $20 million. TransTexas has agreed to indemnify the Company
with respect to any loss arising from such judgment liens. TransTexas has
appealed the judgments to which such liens relate, and has posted bonds to
ensure payment of such judgments pending the completion of such appeals. One
such bond, in the approximate amount of $18 million, is secured by an
irrevocable letter of credit, and the other bond is secured by cash. The $18
million judgment against TransTexas has been reversed, a decision which, if
upheld, will result in the release of the related judgment lien. As a result of
such arrangements, the Company believes that the properties purchased in the
TransTexas Acquisition are not subject to any material risk that any such
judgment against TransTexas will not be paid.
The Company is not a party to any other pending legal proceedings, other
than ordinary routine litigation incidental to its business that management
believes will not have a material adverse effect on its financial condition or
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently has seven members. In accordance
with the Certificate of Incorporation of the Company, the members of the Board
of Directors are divided into three classes and are elected for a term of office
expiring at the third succeeding annual shareholders' meeting following their
election to office or until a successor is duly elected and qualified. The
Certificate of Incorporation also provides that such classes shall be as nearly
equal in number as possible. The terms of office of the Class I, Class II and
Class III directors expire at the annual meeting of stockholders in 1996, 1997
and 1998, respectively. The officers of the Company are elected by, and serve
until their successors are elected by, the Board of Directors.
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------
<S> <C> <C>
James G. Floyd.............. 60 President and Chief Executive Officer and Director
(Class III)
Randall J. Fleming.......... 54 Senior Vice President -- Exploration and
Production
Thomas W. Powers............ 52 Senior Vice President -- Business Development and
Finance and Treasurer
Sammye L. Dees.............. 60 Vice President -- Land
James F. Westmoreland....... 40 Vice President, Chief Accounting Officer,
Comptroller and Secretary
Charles W. Adcock........... 43 Vice President -- Project Development
Robert B. Catell............ 59 Chairman of the Board of Directors (Class III)
Gordon F. Ahalt............. 68 Director (Class II)
Russell D. Gordy............ 45 Director (Class I)
Craig G. Matthews........... 53 Director (Class I)
James Q. Riordan............ 69 Director (Class II)
Lester H. Smith............. 54 Director (Class I)
</TABLE>
James G. Floyd has been President and Chief Executive Officer and a
Director of the Company since 1986. Mr. Floyd was President of Seagull E&P Inc.
("Seagull") and a director of Seagull Energy Corporation, Seagull's parent, from
1981 to 1986. Mr. Floyd was general manager of the offshore division of Houston
Oil and Minerals Corporation ("Houston Oil and Minerals") from 1978 to 1981. Mr.
Floyd joined Houston Oil and Minerals in 1972 after five years as an independent
geologist. Mr. Floyd began his career with Amoco Production Company in 1962. Mr.
Floyd holds a B.S. and an M.S. in geology from the University of Florida.
Randall J. Fleming has been Senior Vice President -- Exploration and
Production of the Company since October 1995 and was Vice President --
Exploration of the Company from 1986 to 1995. Mr. Fleming was Vice President --
Geology of Seagull from 1981 to 1986 and was an exploration geologist at Houston
Oil and Minerals from 1976 to 1981. Prior to such time, Mr. Fleming was an
exploration geologist for Superior Oil Company and Sinclair Oil Company. Mr.
Fleming holds a B.A. and M.S. in geology from the University of Alabama.
Thomas W. Powers has been Senior Vice President -- Business Development and
Finance of the Company since October 1995 and Treasurer since May 1996. Mr.
Powers was General Manager for Diversification of Brooklyn Union from 1991 to
1995 and Executive Vice President of FRI, a Brooklyn Union subsidiary, from 1986
to 1991. Prior to joining Brooklyn Union, Mr. Powers was Manager of Corporate
Development of Anglo Energy. Mr. Powers holds a B.S. in Economics from Bowling
Green University and an M.B.A. from Long Island University.
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<PAGE> 55
Sammye L. Dees has been Vice President -- Land of the Company since 1986.
Ms. Dees was Vice President of Land of Seagull from 1981 to 1986, and was Land
Manager, Offshore Division, of Houston Oil and Minerals from 1974 to 1981. Prior
to joining Houston Oil and Minerals, Ms. Dees worked for Allied Chemical
Corporation. Ms. Dees is a Certified Petroleum Landman and attended Stephen F.
Austin University.
James F. Westmoreland has been Vice President, Chief Accounting Officer,
Comptroller and Secretary of the Company since October 1995 and was Vice
President and Comptroller of the Company from 1986 to 1995. Mr. Westmoreland was
supervisor of natural gas and oil accounting at Seagull from 1983 to 1986. Mr.
Westmoreland holds a B.B.A. in accounting from the University of Houston.
Charles W. Adcock has been Vice President -- Project Development of the
Company since 1996. Mr. Adcock was Vice President of Project Development of FRI,
the Brooklyn Union subsidiary that previously owned the Company's onshore
properties, from 1993 to 1996. Prior to joining FRI, Mr. Adcock worked at NERCO
Oil & Gas as Reservoir Engineering Specialist. Prior to NERCO, he held various
engineering positions with Apache, ANR Production and Aminoil U.S.A. Mr. Adcock
is a Registered Professional Engineer in the State of Texas, and received his
B.S. in Civil Engineering from Texas A&M University and an M.B.A. from the
University of St. Thomas.
Robert B. Catell has been Chairman of the Board of Directors of the Company
since 1986. Mr. Catell has been Chairman of the Board and Chief Executive
Officer of Brooklyn Union since 1991 and was President from 1991 to 1996. Mr.
Catell has been associated with Brooklyn Union since 1958 and has been an
officer of Brooklyn Union since 1974. Mr. Catell received both his Bachelor's
and Master's Degrees in Mechanical Engineering from City College of New York. He
holds a Professional Engineer's License in New York State, and attended Columbia
University's Executive Development Program and Harvard Business School's
Advanced Management Program. Mr. Catell is Trustee of Brooklyn Law School,
Independence Savings Bank and Kingsborough Community College Foundation, Inc.;
Chairman and Director of Alberta Northeast Inc. and Boundary Gas, Inc.; Chairman
of Energy Association of New York State; Director and Past Chairman, American
Gas Association; Director of The Business Council of New York State, Inc., Gas
Research Institute, New York City Partnership and New York State Energy Research
and Development Authority.
Gordon F. Ahalt has been a director of the Company since 1996. Mr. Ahalt
has been President of G.F.A. Inc., a petroleum industry financial and management
consulting firm, since 1982. Mr. Ahalt is a consultant to Brooklyn Union and
W.H. Reaves Co., Inc. Mr. Ahalt serves as a director for the Bancroft and
Ellsworth Convertible Funds, the Harbinger Group and Cal Dive International. Mr.
Ahalt received a B.S. in Petroleum Engineering in 1951 from the University of
Pittsburgh, attended New York University's Business School and is a graduate of
Harvard Business School's Advanced Management Program. He worked for Amoco from
1951 to 1955, Chase Manhattan Bank from 1955 to 1972, White Weld from 1972 to
1973, Chase Manhattan Bank from 1974 through 1976, served as President and Chief
Executive Officer of International Energy Bank London from 1977 to 1979 and as
Chief Financial Officer of Ashland Oil Inc. from 1980 to 1981.
Russell D. Gordy has been a Director of the Company since 1986. Mr. Gordy
has been Managing Partner of S.G. Interests, a private firm specializing in oil
and gas investments, since 1988. Prior to forming S.G. Interests, Mr. Gordy was
Managing Partner of Northwind Exploration, a private oil and gas firm formed in
1981 to specialize in exploration along the Texas and Louisiana Gulf Coast. From
1974 to 1981 Mr. Gordy served in various financial capacities for Houston Oil
and Minerals Corporation. Mr. Gordy holds a B.B.A. in accounting from Sam
Houston State University and is a C.P.A.
Craig G. Matthews has been a Director of the Company since 1993. Mr.
Matthews has been President and Chief Operating Officer of Brooklyn Union since
May 1996, was Executive Vice President of Brooklyn Union since 1994, and was
Executive Vice President and Chief Financial
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<PAGE> 56
Officer of Brooklyn Union from 1991 to 1994. Mr. Matthews joined Brooklyn Union
in 1965. He graduated from Rutgers University in 1965 with a Bachelor's Degree
in Civil Engineering, and acquired an M.S. Degree in Industrial Management from
Polytechnic University. Mr. Matthews is a member of the Board of Directors for
the Brooklyn Philharmonic, the Public Utilities Reports, Inc., the Brooklyn
Chamber of Commerce, Neighborhood Housing Services, Greater Jamaica Development
Corp., Regional Plan Association, Prospect Park Alliance, the National and New
York Advisory Board of the Salvation Army and Inform. Mr. Matthews is the
Treasurer of the Society of Gas Lighters.
James Q. Riordan has been a director of the Company since 1996 and a
director of Brooklyn Union since 1991. Mr. Riordan is the retired Vice Chairman
and Chief Financial Officer of Mobil Corp. He joined Mobil Corp. in 1957 as Tax
Counsel and was named Director and Chief Financial Officer in 1969. Mr. Riordan
served as Vice Chairman of Mobil Corp. from 1986 until his retirement in 1989.
He joined Bekaert Corporation in 1989 and was elected its President, and served
as President until his retirement in 1992. Mr. Riordan is a Director of Dow
Jones & Co., Inc., Tri-Continental Corporation and the Public Broadcasting
Service; Director/Trustee of the mutual funds in the Seligman Group of
investment companies; and Trustee for the Committee for Economic Development and
The Brooklyn Museum.
Lester H. Smith has been a director of the Company since 1996. Mr. Smith is
the founder, Chairman of the Board and President of Soxco. Mr. Smith is Chairman
of the Board and President of Smith Energy Company, an independent oil and gas
exploration company, and Chairman of the Board of Founders International, Ltd.,
an international downhole drilling tool company. Mr. Smith has been active in
the energy business as an independent since 1973. He attended the University of
Oklahoma where he majored in finance.
COMMITTEES
The Company's Board of Directors has established Executive, Audit and
Compensation Committees. The Audit Committee consists of Messrs. Riordan, Ahalt
and Gordy, each of whom is a non-employee director of the Company. The Audit
Committee meets separately with representatives of the Company's independent
auditors and with representatives of senior management in performing its
functions. The Audit Committee reviews the general scope of audit coverages, the
fees charged by the independent auditors, matters relating to the Company's
internal control systems, and other matters related to audit functions.
The Compensation Committee consists of Messrs. Catell, Ahalt and Riordan,
each of whom is a non-employee director of the Company. The Compensation
Committee administers the Company's 1996 Long-Term Stock Incentive Plan, and in
this capacity makes all option grants or awards to Company employees, including
executive officers, under such plans. In addition, the Compensation Committee is
responsible for making recommendations to the Board of Directors with respect to
the compensation of the Company's Chief Executive Officer and its other
executive officers, and is responsible for the establishment of policies dealing
with various compensation and employee benefit matters for the Company.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Prior to completion of the Offering, Messrs. Floyd, Fleming, Powers and
Westmoreland will enter into employment agreements with the Company effective as
of the closing of this Offering pursuant to which they serve as executive
officers of the Company. Mr. Floyd's existing employment agreement with the
Company will be terminated effective as of such time.
Such employment agreements provide for Messrs. Floyd, Fleming, Powers and
Westmoreland to receive annual base salaries of $340,000, $220,000, $140,000 and
$130,000, respectively. Under such agreements, Messrs. Floyd, Fleming, Powers
and Westmoreland are entitled to annual incentive bonuses of 60%, 50%, 45% and
45%, respectively, of base salary if the Company meets
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<PAGE> 57
financial targets established by the Board of Directors. In addition, Messrs.
Floyd, Fleming, Powers and Westmoreland will be entitled to participate in such
incentive compensation and other programs as are adopted by the Company's Board
of Directors, including the Company's 1996 Long-Term Stock Incentive Plan. The
initial term of each employment agreement extends to the third anniversary of
the effective date of such agreement; provided, however, that the term of each
agreement is automatically extended one year on each anniversary unless notice
that the agreement will not be extended is given by either party at least 90
days prior to such anniversary.
Each of the employment agreements is subject to early termination by the
Company for cause or upon the death or disability of the employee and is subject
to early termination by the employee for any reason. If an employment agreement
is terminated without cause by the Company or with good reason (including
certain changes in control of the Company) by the employee, the Company is
obligated to pay such employee a lump-sum severance payment of 2.99 times the
employee's then current annual rate of total compensation. Based upon their
current annual rate of compensation, Messrs. Floyd, Fleming, Powers and
Westmoreland would be entitled to lump sum severance payments of $1,017,000,
$658,000, $419,000 and $389,000, respectively, if terminated without cause.
DIRECTOR COMPENSATION
Directors currently receive a fee of $1,250 per calendar quarter for
serving on the Board of Directors and $500 per board meeting attended. Upon
completion of this Offering, each director who is not also an officer or
employee of the Company will receive a fee of $4,000 per calendar quarter and
$1,000 per board meeting attended. Members of committees of Board of Directors
will receive a fee of $500 per calendar quarter.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation provided by the Company in 1995 to its Chief Executive Officer and
each other person serving as an executive officer during 1995 who earned
$100,000 or more in combined salary and bonus during such year (collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
------------------------------------------------- --------- -------- ---------
<S> <C> <C> <C>
James G. Floyd, President and Chief Executive
Officer........................................ $ 250,000 $ 10,000 $ 52,000
Randall J. Fleming, Senior Vice
President -- Exploration and Production........ $ 173,000 $ 7,000 $ 19,000
Sammye L. Dees, Vice President -- Land........... $ 107,000 $ 4,500 $ 14,000
James F. Westmoreland, Vice President, Chief
Accounting Officer, Comptroller and
Secretary...................................... $ 102,000 $ 4,000 $ 6,000
</TABLE>
- ---------------
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each executive officer.
(2) Consists of the value of overriding royalty interests and net profits
interests in properties of the Company conveyed during 1995. See "Related
Party Transactions -- Transactions Between the Company and Management."
1996 STOCK OPTION PLAN
Prior to completion of the Offering, it is anticipated that the Board of
Directors will adopt the Company's 1996 Stock Option Plan (the "Incentive Plan")
and that the stockholder of the Company will approve the Incentive Plan as
adopted. The purposes of the Incentive Plan are to attract, retain
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<PAGE> 58
and motivate key employees, consultants and advisors by means of grants of stock
options, to enable such persons to participate in the long-term growth of the
Company. The aggregate amount of Common Stock with respect to which options may
be granted may not exceed 10% of the shares of the Company's Common Stock
outstanding from time to time. The aggregate amount of Common Stock with respect
to which incentive stock options may be granted under the Incentive Plan may not
exceed 1,125,000 shares of Common Stock. No individual may receive, during any
period of three consecutive years, stock options under the Incentive Plan in
respect of more than 1,125,000 shares of Common Stock.
To comply with the requirements of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), the Incentive Plan will be administered
following the Offering by the Compensation Committee of the Board of Directors
of the Company (the "Committee"), which shall be comprised solely of two or more
directors who are "outside directors" within the meaning of the Treasury
Regulations promulgated under Section 162(m) of the Code. To comply with the
requirements of Rule 16b-3 of the Securities Exchange Act of 1934, as amended,
the Incentive Plan will provide that the shares of Common Stock issuable upon
the exercise of an option may not be sold for six months from its date of grant.
The Committee will have complete authority to construe, interpret and administer
provisions of the Incentive Plan, to determine which persons are to be granted
options, the terms and conditions of options, and to make all other
determinations necessary or deemed advisable in the administration of the
Incentive Plan.
Options granted under the Incentive Plan may be either nonqualified stock
options or incentive stock options. The exercise price of any option will be as
determined by the Committee as of the date of grant, provided that the exercise
price of such options shall not be less than the fair market value of the Common
Stock as the date of grant. The exercise price must be paid in full in cash at
the time an option is exercised or, if permitted by the Board of Directors or a
committee of "non-employee directors" (as defined in Rule 16b-3), by means of a
"cashless exercise" through a broker, by tendering Common Stock already owned by
the participant, or any combination of the foregoing. The Committee will
determine the period over which individual options become exercisable.
In the event of a change in control of the Company, the Committee in its
discretion may, at the time an option is made or any time thereafter: (i)
provide for the acceleration of any time period relating to the exercise of the
option, (ii) provide for the purchase of the option upon the participant's
request for an amount of cash or other property that could have been received
upon the exercise or realization of the option had the option been currently
exercisable or payable, (iii) adjust the terms of the option in a manner
determined by the Committee to reflect the change in control, (iv) cause the
option to be assumed, or new rights substituted therefor, by another entity, or
(v) make such other provision as the Committee may consider equitable and in the
best interests of the Company.
In the event of any stock dividend, recapitalization, reorganization,
merger, consolidation or other extraordinary event, the Committee may, to the
extent deemed necessary to preserve the benefits under the Incentive Plan,
adjust the number and kind of shares which thereafter may be made the subject of
options, the number and kind of shares subject to outstanding options, and the
grant, exercise or conversion price with respect to any of the foregoing and, if
deemed appropriate, make provision for cash payments to participants. Subject to
certain limitations, the Board of Directors is authorized to amend, suspend or
terminate the Incentive Plan to meet any changes in legal requirements or for
any other purpose permitted by law.
Upon completion of the Offering, options with respect to an aggregate of
1,125,000 shares (1,171,500 shares if the Underwriters' over-allotment option is
exercised in full) of Common Stock will be granted to certain key employees of
the Company, including options for 324,000 shares to Mr. Floyd, options for
168,750 shares to Mr. Fleming, options for 101,250 shares to Mr. Powers and
options for 81,000 shares to Mr. Westmoreland. All of these options will have an
exercise price
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<PAGE> 59
equal to the initial public offering price of the Common Stock, and will vest in
one-fifth increments on each of the first five anniversaries of the grant date.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective immediately prior to the Offering, the Company will adopt an
unfunded, nonqualified Supplemental Executive Retirement Plan (the "SERP") for
the benefit of Mr. Floyd. The SERP will provide that, if the executive remains
with the Company until age 65, upon his retirement on or after age 65, the
executive will be paid $100,000 per year for life. If, after retirement, the
executive predeceases his spouse, 50% of the executive's SERP benefit will
continue to be paid to the executive's surviving spouse for her life.
401(K) PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its employees. Under the 401(k) Plan, eligible employees may elect to have the
Company contribute on their behalf up to 10% of their base compensation (subject
to certain limitations imposed under the Code) on a before tax basis. The
Company makes a matching contribution of $0.50 for each $1.00 of employee
deferral, not to exceed 5% of an employee's base compensation, subject to
limitations imposed by the Code. The amounts contributed under the 401(k) Plan
are held in a trust and invested among various investment funds in accordance
with the directions of each participant. An employee's salary deferral
contributions under the 401(k) Plan are 100% vested. The Company's matching
contributions vest at the rate of 20% per year of service. Participants are
entitled to payment of their vested account balances upon termination of
employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Robert B. Catell, a member of the Compensation Committee, is Chairman of
the Board and Chief Executive Officer of Brooklyn Union. As a result of the
termination, upon completion of the Offering, of certain options to purchase
Common Stock held by Mr. Catell, the Company will pay $420,000 to Mr. Catell.
See "Related Party Transactions -- Transactions Between the Company and Brooklyn
Union and Affiliates."
RELATED PARTY TRANSACTIONS
TRANSACTIONS BETWEEN THE COMPANY AND BROOKLYN UNION AND AFFILIATES
Houston Exploration was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of Brooklyn
Union. The Company has focused since its inception primarily on the exploration
and development of high potential prospects in the Gulf of Mexico. Effective
February 29, 1996, Brooklyn Union implemented a reorganization of its
exploration and production assets by transferring to Houston Exploration certain
onshore producing properties and developed and undeveloped acreage not
previously owned by the Company. Brooklyn Union has advised the Company that it
does not currently intend to engage in the domestic exploration for or
production of natural gas and oil except through ownership of Common Stock of
the Company.
In 1993, 1994 and 1995 Brooklyn Union made capital contributions to the
Company of $12.6 million, $18.0 million and $6.9 million, respectively. Brooklyn
Union made capital contributions to the Company of $10.3 million during the
period from January 1, 1996 to June 30, 1996. Brooklyn Union has received shares
of Common Stock in consideration of such capital contributions.
During 1993, 1994 and 1995, the Company had natural gas sales of $32.9
million, $26.4 million and $18.9 million representing 86%, 63% and 46% of total
revenues for the years ended 1993, 1994 and 1995, respectively, to PennUnion and
BRING, both of which are affiliates of Brooklyn Union. Such natural gas sales
were made at market prices, based on an index price adjusted to reflect the
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<PAGE> 60
point of delivery of such production. The Company believes that the prices at
which it has sold natural gas to affiliates of Brooklyn Union were similar to
those it would have been able to obtain in the open market.
In July 1994, the Company granted options to purchase an aggregate of
247,000 shares of Common Stock to three officers of Brooklyn Union, including
Messrs. Catell and Matthews, with an exercise price of $3.40 per share. Upon
completion of the Offering, such options will be terminated in exchange for
payment by the Company of an aggregate of $840,000. As a result of the
termination of their options, Messrs. Catell and Matthews will receive payments
of $420,000 and $294,000, respectively. Theodore Spar, who is an officer of
Brooklyn Union but is not an officer or director of the Company, will receive a
payment of $126,000.
The Company has been and will be included in the consolidated federal
income tax returns filed by Brooklyn Union during all periods in which it has
been or will be a wholly-owned subsidiary of Brooklyn Union ("Affiliation
Years"). The Company and Brooklyn Union have entered into an agreement (the "Tax
Sharing Agreement") providing for the manner of determining payments with
respect to federal income tax liabilities and benefits arising in Affiliation
Years. Under the Tax Sharing Agreement, the Company has paid or will pay to
Brooklyn Union an amount equal to the Company's share of Brooklyn Union's
consolidated federal income tax liability, generally determined on a separate
return basis, for the years ended and the portion of 1996 preceding consummation
of the Offering, and Brooklyn Union will pay the Company for any reduction in
Brooklyn Union's consolidated federal income tax liability resulting from
utilization or deemed utilization of deductions, losses, and credits arising in
such periods which are attributable to the Company, in each case net of any
amounts theretofore paid or credited by Brooklyn Union or the Company to the
other with respect thereto. In the event that Brooklyn Union's consolidated
federal income tax liability for any Affiliation Year is adjusted upon audit or
otherwise, the Company will bear any additional liability or receive any refund
which is attributable to adjustments of items of income, deduction, gain, loss
or credit of the Company. Brooklyn Union shall permit the Company to participate
in any audits or litigation with respect to Affiliation Years, but Brooklyn
Union will otherwise have exclusive and sole responsibility and control over any
such proceedings. The Company will cease to be included in the consolidated
federal income tax returns filed by Brooklyn Union, and will file on a separate
basis, with respect to periods after consummation of the Offering.
Under a Registration Rights Agreement (the "Brooklyn Union Registration
Rights Agreement") to be entered into between the Company and Brooklyn Union,
the Company will file, upon the request of Brooklyn Union, a registration
statement under the Securities Act of 1933 for the purpose of enabling Brooklyn
Union to offer and sell any securities of the Company which Brooklyn Union may
hold. Brooklyn Union may exercise these rights at any time after the expiration
of 180 days following the completion of this Offering. The Company will bear the
costs of any registered offering, except that Brooklyn Union will pay any
underwriting commissions relating to any such offering, any transfer taxes and
any costs of complying with foreign securities laws at Brooklyn Union's request,
and each will pay for its counsel and accountants. The Company has the right to
require Brooklyn Union to delay any exercise by Brooklyn Union of its rights to
require registration and other actions for a period of up to 180 days if, in the
judgment of the Company, the Company or any offering by the Company then being
conducted or about to be conducted would be adversely affected. The Company has
also granted Brooklyn Union the right to include its securities in certain
registration statements covering offerings by the Company, and the Company will
pay all costs of such offerings other than underwriting commissions and transfer
taxes attributable to the securities sold on behalf of Brooklyn Union. The
Company has agreed to indemnify Brooklyn Union, its officers, directors, agents,
any underwriter, and each person controlling any of the foregoing, against
certain liabilities under the Securities Act or the securities laws of any state
or country in which securities of the Company are sold pursuant to the Brooklyn
Union Registration Rights Agreement.
In connection with the February 1996 reorganization, the Company and FRI,
the subsidiary of Brooklyn Union that previously owned the onshore properties,
entered into an agreement whereby
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<PAGE> 61
the Company assumed FRI's bank debt and the liabilities of FRI directly related
to the transferred properties and acreage. FRI agreed to indemnify the Company
against all of FRI's other liabilities, including any liabilities associated
with the suit filed by certain of FRI's former employees. In addition, the
Company entered into an agreement with Holdings, the subsidiary of Brooklyn
Union that holds all of the currently outstanding Common Stock of the Company,
whereby Holdings agreed to indemnify the Company against any liabilities
associated with such remuneration and suit, and agreed to pledge all of its
holdings of Common Stock to the Company to secure such indemnification
obligation.
TRANSACTIONS BETWEEN THE COMPANY AND MANAGEMENT
In July 1996, the Company entered into employment agreements with Messrs.
Floyd, Fleming, Powers and Westmoreland effective as of the completion of this
Offering. These employment agreements will replace the Company's existing
employment agreements with such officers. See "Management -- Employment
Agreements" for a description of such employment agreements.
The Company's existing employment agreement with Mr. Floyd, its President
and Chief Executive Officer, provides Mr. Floyd with the option to obtain up to
a 5% working interest in certain exploration prospects of the Company,
exercisable prior to the commencement of drilling of the initial well on any
such prospect. During 1993, 1994 and 1995, affiliates of Mr. Floyd obtained a 5%
working interest in 12 wells operated by the Company pursuant to such agreement.
In addition, during 1993, 1994 and 1995, respectively, affiliates of Mr. Floyd
paid $0.9 million, $0.7 million and $0.7 million, respectively, in expenses
attributable to working interests owned in properties operated by the Company,
and received $2.6 million, $1.6 million and $0.9 million for years ended 1993,
1994 and 1995, respectively, in distributions attributable to such working
interests. Concurrently with the closing of the TransTexas Acquisition, Mr.
Floyd exercised his right to purchase a 5% working interest in the properties
acquired by the Company in the TransTexas Acquisition on the same terms as such
properties were acquired by the Company for a purchase price of $3.1 million.
The Company's existing employment agreement with Mr. Floyd, including the option
described above, will be terminated effective upon the completion of this
Offering, provided that such termination shall not affect working interests in
properties of the Company acquired by Mr. Floyd or his affiliates prior to the
date of termination.
The Company has agreed to loan Mr. Floyd the $3.1 million purchase price
for his purchase of a 5% working interest in the properties purchased by the
Company in the TransTexas Acquisition. In addition, the Company has agreed to
loan Mr. Floyd, on a revolving basis, the amounts required to fund the expenses
attributable to Mr. Floyd's working interest. Mr. Floyd is required to repay
amounts owned under the loan in the amount of 65% of all distributions received
by Mr. Floyd in respect of such working interest, as distributions are received.
Amounts outstanding under such loan bear interest at an interest rate equal to
the Company's cost of borrowing under the Credit Facility. Mr. Floyd's
obligations under the agreement are secured by a pledge of his working interest
in, and production from, such properties. The outstanding balance owed by Mr.
Floyd under the agreement will mature on July 2, 2006.
The Company's existing employment agreement with Mr. Floyd also provides
for the assignment to Mr. Floyd of a 2% net profits interest in all exploration
prospects of the Company at the time such properties are acquired by the
Company. During 1993, 1994 and 1995, the Company assigned a 2% net profits
interest to Mr. Floyd in all such properties acquired by the Company during such
periods pursuant to such agreement. In addition, during 1993, 1994 and 1995, Mr.
Floyd received $656,000, $516,000 and $307,000, respectively, in distributions
attributable to net profits interests in properties of the Company. The
Company's existing employment agreement with Mr. Floyd, including the rights
described above, will be terminated effective upon the completion of this
Offering, provided that such termination shall not affect net profits interests
in properties of the Company assigned to Mr. Floyd prior to the date of
termination.
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The Company's existing employment agreement with Mr. Floyd also provides
for the assignment to certain key employees designated by Mr. Floyd of
overriding royalty interests in certain properties of the Company at the time
such properties are acquired by the Company. During 1993, 1994 and 1995, the
Company assigned overriding royalty interests to Mr. Fleming, Ms. Dees and Mr.
Westmoreland in all properties acquired by the Company during such periods
pursuant to such agreement. During 1993, 1994 and 1995, Mr. Fleming received
$453,000, $326,000, and $213,000, respectively, and Ms. Dees received $427,000,
$302,000 and $189,000, respectively, in distributions attributable to overriding
royalty interests in properties of the Company. The Company's existing
employment agreement with Mr. Floyd, including the provisions described above,
will be terminated effective upon the completion of this offering, provided that
such termination shall not affect overriding royalty interests in properties of
the Company assigned to key employees prior to the date of termination.
The Company's existing employment agreement with Mr. Floyd also provides
for the assignment to Mr. Floyd of a 6.75% after program-payout working interest
in the leases upon which the Company begins drilling an initial exploratory well
(whether or not successful) during a calendar year (a "program"). These working
interests entitle Mr. Floyd to receive 6.75% of the excess, if any, of the
aggregate revenues from the properties within a program over the aggregate costs
(including capital expenditures) associated with such properties. At the date of
this Offering, Mr. Floyd has not received any distributions under this
arrangement. The Company's existing employment agreement, including the rights
described above will be terminated effective upon completion of this Offering,
provided that such termination shall not affect the after program-payout working
interest in properties of the Company assigned to Mr. Floyd prior to date of
termination. Concurrently with the completion of the Offering, Mr. Floyd will
exchange certain of his after program-payout working interests for shares of
Common Stock with a value (at the initial public offering price) of $2.3
million.
SOXCO ACQUISITION
Under an agreement with Soxco, Lester H. Smith has received a 1.25% net
profits interest, proportionately reduced for Soxco's interest, in all
properties in which Soxco has participated. Upon the sale by Soxco of its
properties, Mr. Smith has the right to sell all such net profits interests on
the same economic terms to be received by Soxco in the transaction. Mr. Smith
has exercised such right in connection with the Soxco Acquisition, with the
result that his net profits interests will be sold to Soxco prior to the
completion of the Soxco Acquisition and included in the assets to be purchased
by the Company. Soxco estimates that, as a result of the Soxco Acquisition, Mr.
Smith will receive approximately $90,000 in cash, 15,000 initial shares of
Common Stock and additional shares of Common Stock with a value between $100,000
and $200,000 (relating to the deferred purchase price of the Soxco Acquisition).
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<PAGE> 63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 15, 1996
concerning the persons known by the Company to be beneficial owners of more than
five percent of the Company's outstanding Common Stock, the members of the Board
of Directors of the Company, the Named Executive Officers listed in the Summary
Compensation Table above and all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------------------
PERCENT
-----------------------
SUBSEQUENT
PRIOR TO TO
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- --------------------------------------------------------- ----------- -------- ----------
<S> <C> <C> <C>
The Brooklyn Union Gas Company........................... 15,295,215 100% 68%
James G. Floyd........................................... 160,714(1) -- *
Randall J. Fleming....................................... -- -- --
Thomas W. Powers......................................... -- -- --
Sammye L. Dees........................................... -- -- --
James F. Westmoreland.................................... -- -- --
Charles W. Adcock........................................ -- -- --
Robert B. Catell......................................... --(2) * --
Craig G. Matthews........................................ --(2) * --
Gordon F. Ahalt.......................................... -- -- --
Russell D. Gordy......................................... -- -- --
James Q. Riordan......................................... -- -- --
Lester H. Smith(3)....................................... 15,000(4) -- *
All directors and officers as a group
(12 persons)(1)(2)(3)(4)............................... 175,714(4) * *
</TABLE>
- ---------------
* Less than 1%.
(1) Represents shares issuable upon completion of the Offering, based upon an
assumed initial public offering price of $14.00 per share.
(2) Messrs. Catell and Matthews hold outstanding stock options exercisable for
123,500 and 86,450 shares of Common Stock, respectively, that will be
terminated upon completion of the Offering. See "Related
Transactions -- Transactions between the Company and Brooklyn Union and
Affiliates."
(3) Mr. Smith, who is Chairman of the Board and President of Soxco, may be
deemed to be the beneficial owner of the shares of Common Stock to be
issued to Soxco pursuant to the Soxco Acquisition. Mr. Smith disclaims
beneficial ownership of all such shares except for the estimated 15,000
shares of Common Stock to which he will be entitled as a result of the
Soxco Acquisition. See "Related Transactions -- Soxco Acquisition."
(4) Based upon the assumed issuance of 844,071 shares of Common Stock to Soxco
pursuant to the Soxco Acquisition.
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DESCRIPTION OF CAPITAL STOCK
The Company's Restated Certificate of Incorporation (the "Certificate")
provides for authorized capital stock consisting of 50,000,000 shares of Common
Stock, par value $0.01 per share, and 5,000,000 shares of Preferred Stock, par
value $0.01 per share. The following summary, which describes the material terms
of the Company's capital stock, is qualified in its entirety by reference to the
Certificate, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of common stockholders
and do not have cumulative voting rights. Holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefore, subject to any preferential
dividend rights of holders of outstanding Preferred Stock. See "Dividend
Policy." Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after payment of all debts and other liabilities, subject to
the prior rights of any outstanding shares of Preferred Stock. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine variations in the
designations, preferences, and relative, participating, optional or other
special rights (including, without limitation, special voting rights,
preferential rights to receive dividends or to receive assets upon liquidation,
rights of conversion into Common Stock or other securities, redemption
provisions and sinking fund provisions) between series and between the Preferred
Stock or any series thereof and the Common Stock, and the qualifications,
limitations or restrictions of such rights; and the shares of Preferred Stock or
any series thereof may have full or limited voting powers, or be without voting
powers.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Preferred Stock could adversely affect the voting power of the
holders of the Common Stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction in
that some or a majority of stockholders might believe to be in their best
interest or in which stockholders might receive a premium for their stock over
the then market price for such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the regulations of the
exchange on which its Common Stock is listed.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate and Bylaws are intended to enhance
the likelihood of continuity and stability in the Board of Directors of the
Company and in its policies, but might have
62
<PAGE> 65
the effect of delaying or preventing a change in control of the Company and may
make more difficult the removal of incumbent management even if such
transactions could be beneficial to the interests of stockholders. Set forth
below is a summary description of such provisions:
Classification of Directors; Filling Vacancies. The Company's Bylaws
provide that the directors of the Company shall be divided into three classes as
equal in number as possible serving staggered three-year terms. The Board of
Directors of the Company, acting by a majority of the directors then in office,
may fill any vacancy or newly created directorship.
Stockholder Actions and Meetings. The Company's Certificate provides that
all actions required or permitted to be taken by the stockholders of the Company
may be taken only at a duly held annual or special meeting of the stockholders.
The Company's Bylaws establish procedures, including advance notice procedures,
with regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors and for stockholder proposals
to be submitted at meetings of the stockholders. The Company's Bylaws also
provide that special meetings of stockholders may be called only by the
President or by a majority of the directors.
Anti-takeover Provisions. Delaware law permits and the Certificate grants
the Company's Board broad discretionary authority to adopt any and all
anti-takeover measures approved by it in response to any proposal to acquire the
Company, its assets or more than 15% of its outstanding capital stock. Measures
to be adopted could include a shareholder rights plan or by-law provisions
requiring supermajority shareholder approval of acquisition proposals.
Limitation on Personal Liability of Directors. Delaware law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized by Delaware law, 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. The Certificate of the Company limits the liability of
directors of the Company to the Company or its stockholders (in their capacity
as directors but not in their capacity as officers) to the fullest extent
permitted by Delaware law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law,
or (iv) for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Certificate may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders. The
Company's Bylaws provide indemnification to the Company's officers and directors
and certain other persons with respect to certain matters.
Indemnification Arrangements. The Certificate of Incorporation and Bylaws
provide that, to the fullest extent permitted by the Delaware General
Corporation Law, the directors and officers of the Company shall be indemnified
and permit the advancement to them of expenses in connection with actual or
threatened proceedings and claims arising out of their status as such. The
Company intends to enter into indemnification agreements with each of its
directors and executive officers that provide for indemnification and expense
advancement to the fullest extent permitted under the Delaware General
Corporation Law.
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<PAGE> 66
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder become
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the rights to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following the
transaction in which such person become an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of the stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combination proposed by an
interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
become an interested stockholder with the approval of a majority of the
corporation's directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be The Bank of
New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 22,500,000 shares
of Common Stock outstanding. The shares sold in this Offering will be freely
tradeable without restriction or further registration, except for shares owned
by "affiliates" of the Company (as such term is defined under the Securities
Act) which may be sold subject to the resale limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). All of the remaining 16,300,000
outstanding shares, consisting of 15,295,215 shares of Common Stock owned by
Brooklyn Union, 844,071 shares to be issued to Soxco in the Soxco Acquisition
and 160,714 shares to be issued to certain executive officers of the Company
upon completion of the Offering, constitute "restricted securities" within the
meaning of Rule 144. Such shares may not be resold in a public distribution
except pursuant to an effective registration statement under the Securities Act
or an applicable exemption from registration, including pursuant to Rule 144. In
connection with this Offering, the Company and Brooklyn Union have entered into
the Brooklyn Union Registration Rights Agreement, pursuant to which Brooklyn
Union will have certain demand registration rights at the Company's expense and
certain piggyback registration rights. In connection with the Soxco Acquisition,
the Company will grant Soxco three demand registration rights at the Company's
expense and certain piggyback registration rights. Each of the Company, Brooklyn
Union, Soxco and the officers and directors of the Company have entered into
certain "lock up" agreements with the Underwriters pursuant to which they have
agreed not to offer or sell shares of Common Stock of the Company for a period
of 180 days after the date of this Prospectus without the written consent of the
representatives of the Underwriters. See "Underwriting."
Generally, Rule 144 provides that beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregate) who has
beneficially owned "restricted" securities for at
64
<PAGE> 67
least two years, including a person who may be deemed an "affiliate" of the
Company, as the term "affiliate" is defined under the Securities Act, is
entitled to sell in "brokers' transactions" or in transactions directly with a
"market maker", within any three-month period, a number of shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock or the
average weekly trading volume of the Common Stock on any national securities
exchange and/or over-the-counter market during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain notice requirements
and the availability of current public information about the Company. A person
(or persons whose shares are aggregated) who is not deemed an "affiliate" of the
Company would be entitled to sell such shares under Rule 144 without regard to
the volume, public information, manner of sale of notice provisions and
limitations described above, once a period of at least three years has elapsed
since the later date the shares were acquired from the Company or from an
"affiliate" of the Company.
Upon completion of the Offering, the Company will grant options to purchase
1,125,000 shares of Common Stock (1,171,500 shares if the Underwriters'
over-allotment option is exercised in full) to its employees pursuant to the
Incentive Plan. After this Offering, the Company intends to file a registration
statement on Form S-8 under the Securities Act to register the shares of Common
Stock issuable upon exercise of such options. Accordingly, such shares will be
freely tradeable by holders who are not affiliates of the Company and, subject
to the volume and manner of sale limitations of Rule 144, by holders who are
affiliates of the Company. See "Management -- 1996 Stock Option Plan."
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that future sales of shares or the availability of shares for sale will have on
the market price for Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock in the public market, or the perception of
the availability of shares for sale, could adversely affect the prevailing
market price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby are being passed upon for the Company by Andrews & Kurth L.L.P., Houston,
Texas, and for the Underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The combined audited financial statements of the Company as of December 31,
1994 and 1995, and for each of the three years in the period ended December 31,
1995, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The audited financial statements of Soxco as of December 31, 1994 and 1995,
and for each of the three years in the period ended December 31, 1995, included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report. Reference is made to said report which includes an explanatory paragraph
with respect to the change in the method of accounting for income taxes in 1993
as discussed in Note 2 to the financial statements.
The audited Historical Summaries of the interests in the oil and gas
properties acquired from TransTexas for each of the three years in the period
ended December 31, 1995 included in this Prospectus, have been included herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
65
<PAGE> 68
The reserve reports and estimates of the Company's net proved natural gas
and oil reserves included herein have been prepared by Ryder Scott, NSA,
Huddleston and Miller and Lents. The reserve reports and estimates of Soxco's
net proved natural gas and oil reserves included herein have been prepared by
Ryder Scott, NSA and Huddleston. Summaries of these estimates and the audit
letters of Ryder Scott, NSA, Huddleston and Miller and Lents have been included
in this Prospectus as Appendix A in reliance upon such firms as experts with
respect to such matters.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Commission a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the offer and sale of
Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement or the exhibits and schedules thereto in accordance
with the rules and regulations of the Commission and reference is hereby made to
such omitted information. Statements made in this Prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to the
Registration Statement are summaries of the terms of such contract, agreement or
document and are not necessarily complete. Reference is made to each such
exhibit for a more complete description of the matters involved. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facility maintained by the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission at 7 World Trade Center, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. The
Commission maintains a site on the World Wide Web at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement.
The Company intends to furnish holders of its Common Stock annual reports
containing audited consolidated financial statements as well as quarterly
reports containing unaudited consolidated financial statements for the first
three quarters of each fiscal year.
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<PAGE> 69
GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated at
the legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bbl/d. One Bbl per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Developed well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
Farm-in or farm-out. An agreement whereunder the owner of a working
interest in natural gas and oil lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage. Generally,
the assignee is required to drill one or more wells in order to earn its
interest in the acreage. The assignor usually retains a royalty or reversionary
interest in the lease. The interest received by an assignee is a "farm-in" while
the interest transferred by the assignor is a "farm-out."
Field. An area consisting of single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mbbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
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 Btus.
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<PAGE> 70
Mmcf. One million cubic feet.
Mmcf/d. One million cubic feet 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.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Oil. Crude oil and condensate.
Present value. When used with respect to natural gas and oil reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required from recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas 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 oil or gas production free of costs of production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of natural gas and oil regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
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<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE HOUSTON EXPLORATION COMPANY:
Report of Independent Public Accountants............................................. F-2
Combined Balance Sheets as of December 31, 1994 and 1995 and (unaudited)
June 30, 1996...................................................................... F-3
Combined Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995 and (unaudited) the Six Months Ended June 30, 1995 and 1996................... F-4
Combined Statement of Stockholder's Equity for the Years Ended December 31, 1993,
1994 and 1995 and (unaudited) the Six Months Ended June 30, 1996................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and (unaudited) the Six Months Ended June 30, 1995 and 1996................... F-6
Notes to Combined Financial Statements............................................... F-7
SMITH OFFSHORE EXPLORATION COMPANY:
Report of Independent Public Accountants............................................. F-24
Balance Sheets as of December 31, 1994 and 1995 and (unaudited) June 30, 1996........ F-25
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and
(unaudited) the Six Months Ended June 30, 1995 and 1996............................ F-26
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and
(unaudited) the Six Months Ended June 30, 1995 and 1996............................ F-27
Notes to Financial Statements........................................................ F-28
TRANSTEXAS GAS CORPORATION:
Report of Independent Accountants.................................................... F-42
Historical Summaries of the Interests in the Oil and Gas Revenues and Direct
Operating Expenses of the Properties to be Acquired by the Houston Exploration
Company for the Years Ended December 31, 1993, 1994 and 1995 and (unaudited) the
Six Months Ended June 30, 1995 and 1996............................................ F-43
Notes to the Historical Summaries.................................................... F-44
</TABLE>
F-1
<PAGE> 72
After the stock issuance and stock split discussed in Note 12 to The
Houston Exploration Company's combined financial statements is effected, we
expect to be in a position to render the following audit report.
ARTHUR ANDERSEN LLP
Houston, Texas
July 3, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying combined balance sheets of The Houston
Exploration Company (a Delaware corporation and an indirect wholly-owned
subsidiary of The Brooklyn Union Gas Company) as of December 31, 1994 and 1995,
and the related combined statements of operations, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Houston
Exploration Company, as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
F-2
<PAGE> 73
THE HOUSTON EXPLORATION COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 668 $ 598 $ 4,613
Accounts receivable....................................... 17,995 18,660 16,706
Accounts receivable -- Parent............................. 8,605 6,963 4,982
Inventories............................................... 1,296 963 996
Prepayments and other..................................... 1,557 1,141 382
---------- ---------- ----------
Total current assets.............................. 30,121 28,325 27,679
Natural gas and oil properties, full cost method
Unevaluated properties................................. 25,911 42,286 47,647
Properties subject to amortization..................... 257,102 309,378 332,488
Other property and equipment.............................. 7,378 7,707 8,363
---------- ---------- ----------
290,391 359,371 388,498
Less: Accumulated depreciation, depletion and
amortization........................................... (120,677) (142,693) (154,287)
---------- ---------- ----------
169,714 216,678 234,211
Other assets.............................................. 1,843 2,493 1,952
---------- ---------- ----------
TOTAL ASSETS...................................... $ 201,678 $ 247,496 $ 263,842
========== ========== ==========
LIABILITIES:
Accounts payable and accrued expenses..................... $ 18,767 $ 28,657 $ 19,652
---------- ---------- ----------
Total current liabilities......................... 18,767 28,657 19,652
Long-term debt............................................ 65,650 71,862 77,853
Deferred federal income tax............................... 28,314 43,681 49,885
Other deferred liabilities................................ 81 60 134
---------- ---------- ----------
TOTAL LIABILITIES................................. 112,812 144,260 147,524
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDER'S EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and
15,295 issued and outstanding at December 31, 1994 and
1995 and June 30, 1996, respectively................... 153 153 153
Additional paid-in capital................................ 86,256 100,929 111,222
Retained earnings......................................... 2,457 2,154 4,943
---------- ---------- ----------
TOTAL STOCKHOLDER'S EQUITY........................ 88,866 103,236 116,318
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $ 201,678 $ 247,496 $ 263,842
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 74
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Natural gas and oil revenues.... $ 37,462 $ 41,755 $ 39,431 $ 20,324 $ 21,252
Other........................... 799 467 1,778 825 535
------- -------- -------- -------- --------
Total revenues.......... 38,261 42,222 41,209 21,149 21,787
OPERATING COSTS AND EXPENSES
Lease operating................. 4,477 5,344 5,468 2,875 3,634
Depreciation, depletion and
amortization................. 23,225 25,365 21,969 11,662 11,571
General and administrative,
net.......................... 2,454 3,460 3,486 1,754 2,702
Nonrecurring charge (Note 10)... -- -- 12,000 -- --
------- -------- -------- -------- --------
Total operating
expenses.............. 30,156 34,169 42,923 16,291 17,907
INCOME (LOSS) FROM OPERATIONS..... 8,105 8,053 (1,714) 4,858 3,880
Interest expense, net............. 1,764 2,102 2,398 1,319 1,118
------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 6,341 5,951 (4,112) 3,539 2,762
Provision (benefit) for federal
income taxes.................... 1,790 597 (3,809) 514 (27)
------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ 4,551 $ 5,354 $ (303) $ 3,025 $ 2,789
======= ======== ======== ======== ========
Net income (loss) per share....... $ 0.30 $ 0.35 $ (0.02) $ 0.20 $ 0.18
Weighted average shares
outstanding..................... 15,295 15,295 15,295 15,295 15,295
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 75
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID IN EARNINGS STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
------ --------- -------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1992................ $153 $ 55,677 $ (7,448) $ 48,382
Capital contributions from Parent........... -- 12,558 -- 12,558
Net income.................................. -- -- 4,551 4,551
---- -------- ------ --------
Balance at December 31, 1993................ 153 68,235 (2,897) 65,491
Capital contributions from Parent........... -- 18,021 -- 18,021
Net income.................................. -- -- 5,354 5,354
---- -------- ------ --------
Balance at December 31, 1994................ 153 86,256 2,457 88,866
Capital contributions from Parent........... -- 14,673(1) -- 14,673
Net loss.................................... -- -- (303) (303)
---- -------- ------ --------
Balance at December 31, 1995................ 153 100,929 2,154 103,236
Capital contributions from Parent
(unaudited)............................... -- 10,293 -- 10,293
Net income (unaudited)...................... -- -- 2,789 2,789
---- -------- ------ --------
Balance at June 30, 1996 (unaudited)........ $153 $ 111,222 $ 4,943 $ 116,318
==== ======== ====== ========
</TABLE>
- ---------------
(1) Includes $7.8 million related to the $12.0 million nonrecurring charge, net
of the tax benefit of $4.2 million.
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 76
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 4,551 $ 5,354 $ (303) $ 3,025 $ 2,789
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization.......... 23,225 25,365 21,969 11,662 11,571
Deferred income tax expense....................... 3,028 5,847 9,632 6,885 6,206
Nonrecurring charge............................... -- -- 12,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........ 672 4,551 977 (2,948) 3,935
Decrease (increase) in inventories................ 78 (229) 333 276 (33)
Decrease (increase) in prepayments and other...... (472) (450) 416 937 759
Decrease (increase) in other assets............... 722 (1,188) 864 4,487 615
Increase (decrease) in accounts payable and
accrued expenses............................... 9,092 (13,176) 9,890 4,962 (9,005)
-------- -------- -------- -------- --------
Net cash provided by operating activities........... 40,896 26,074 55,778 29,286 16,837
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment................ (58,557) (64,996) (70,249) (37,212) (30,629)
Dispositions and other.............................. (53) (63) 1,316 37 1,523
-------- -------- -------- -------- --------
Net cash used in investing activities............... (58,610) (65,059) (68,933) (37,175) (29,106)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term borrowings.............. 5,800 19,050 6,212 7,232 5,991
Capital contributions from Parent................... 12,558 18,021 6,873 791 10,293
-------- -------- -------- -------- --------
Net cash provided by financing activities........... 18,358 37,071 13,085 8,023 16,284
Increase (decrease) in cash and cash equivalents.... 644 (1,914) (70) 134 4,015
Cash and cash equivalents, beginning of period...... 1,938 2,582 668 668 598
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period............ $ 2,582 $ 668 $ 598 $ 802 $ 4,613
======== ======== ======== ======== ========
Cash paid for interest.............................. $ 2,259 $ 3,318 $ 4,658 $ 2,290 $ 2,253
======== ======== ======== ======== ========
Cash paid for income taxes.......................... $ 5,423 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 77
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Houston Exploration Company ("Houston Exploration" or the "Company"),
is an indirect wholly owned subsidiary of The Brooklyn Union Gas Company
("Brooklyn Union" or the "Parent"), a New York corporation. Houston Exploration
is a Delaware corporation, incorporated in December 1985, and began operations
in January 1986 for the purpose of conducting certain natural gas and oil
exploration and development activities for Brooklyn Union. The Company's
operations focus on the exploration, development and acquisition of domestic
natural gas and oil properties offshore in the Gulf of Mexico and onshore in
West Virginia, East Texas and the Arkoma Basin.
Effective February 29, 1996 Brooklyn Union implemented a reorganization
(the "Reorganization") of its exploration and production assets and liabilities
by transferring to Houston Exploration certain onshore producing properties and
acreage not previously owned by Houston Exploration. These combined financial
statements have been prepared giving effect to the transfer of these assets and
liabilities from the time of acquisition of such assets and liabilities by
Brooklyn Union. The transfer of assets and liabilities has been accounted for at
historical cost as a reorganization of companies under common control in a
manner similar to a pooling-of-interests and the financial statements reflect
the combined historical results of Houston Exploration and the assets and
liabilities transferred by Brooklyn Union for all of the periods presented.
The financial statements reflect, retroactively, for all periods presented
(i) the increase in the authorized number of shares of common and preferred
stock to 50,000,000 and 5,000,000, respectively, and (ii) the conversion and
reclassification of each outstanding share of common stock of the Company into
2.47 shares of common stock, resulting in 15,295,215 shares of common stock
issued and outstanding effective immediately prior to the completion of the
Offering. (See Note 12 -- Subsequent Events.)
Net Income (Loss) Per Share
Net income (loss) per share for each period presented was determined by
dividing net income (loss) by the weighted average number of common shares
outstanding immediately prior to the completion of the Offering after giving
effect to the split referred to above.
Interim Financial Statements
The financial statements for the six months ended June 30, 1995 and 1996
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such statements include all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows. Interim period results
are not necessarily indicative of the results to be achieved for an entire year.
Use of Estimates
The preparation of the combined 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves (see Note 13 -- Supplemental
Information on Natural Gas and
F-7
<PAGE> 78
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Oil Exploration, Development and Production Activities). Because there are
numerous uncertainties inherent in the estimation process, actual results could
differ from the estimates.
Natural Gas and Oil Properties
Natural gas and oil properties are accounted for using the full cost method
of accounting. Under this method of accounting, all costs identified with
acquisition, exploration and development of natural gas and oil properties,
including leasehold acquisition costs, geological and geophysical costs, dry
hole costs, tangible and intangible drilling costs, interest and the general and
administrative overhead directly associated with these activities are
capitalized as incurred. The Company computes the provision for depreciation,
depletion and amortization of natural gas and oil properties on a quarterly
basis using the unit-of-production method. The quarterly provision is calculated
by multiplying the natural gas and oil production each quarter by a depletion
rate determined by dividing the total unamortized cost of natural gas and oil
properties (including estimates of the costs of future development and property
abandonment and excluding the cost of significant investments in unproved and
unevaluated properties) by net equivalent proved reserves at the beginning of
the quarter. Natural gas and oil reserve quantities represent estimates only.
Actual future production may be materially different from estimated quantities
and such differences could materially affect future amortization of natural gas
and oil properties. The Company believes that unevaluated properties at December
31, 1995 will be fully evaluated within five years.
Proceeds from the dispositions of natural gas and oil properties are
recorded as reductions of capitalized costs, with no gain or loss recognized,
unless such adjustments significantly alter the relationship of unamortized
capitalized costs and total proved reserves.
The Company limits the capitalized costs of natural gas and oil properties,
net of accumulated depreciation, depletion and amortization and related deferred
taxes to the estimated future net cash flows from proved natural gas and oil
reserves discounted at ten percent, plus the lower of cost or fair value of
unproved properties, as adjusted for related income tax effects (the "full cost
ceiling"). A current period charge to operating income is required to the extent
that capitalized costs plus certain estimated costs for future property
development, plugging, abandonment and site restorations, net of related
accumulated depreciation, depletion and amortization and related deferred income
taxes, exceed the full cost ceiling.
Other Property and Equipment
Other property and equipment include the costs of West Virginia gathering
facilities which are depreciated using the unit-of-production basis utilizing
estimated proved reserves accessible to the facilities. Also included in other
property and equipment are costs of office furniture, fixtures and equipment
which are recorded at cost and depreciated using the straight-line method over
estimated useful lives ranging between two to five years.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), effective January 1, 1993. Under
SFAS 109, deferred taxes are determined based on the estimated future tax effect
of differences between the financial statement and tax basis of assets and
liabilities given the provisions of enacted tax laws. These differences relate
primarily to (i) intangible drilling and development costs associated with
natural gas and oil properties, which are capitalized and amortized for
financial reporting purposes and expensed as incurred for tax reporting purposes
and (ii) provisions for depreciation and amortization for
F-8
<PAGE> 79
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
financial reporting purposes that differ from those used for income tax
reporting purposes. The cumulative effect of adopting SFAS 109 was not
significant.
The Company is included in the consolidated federal income tax return of
Brooklyn Union. Under the Company's tax sharing agreement with Brooklyn Union,
the Company receives or pays to Brooklyn Union an amount equal to the reduction
or increase in the currently payable federal income taxes for Brooklyn Union
resulting from the inclusion of the Company's taxable income or loss in the
consolidated Brooklyn Union return, whether or not such amounts could be
utilized on a separate return basis.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories consist primarily of tubular goods used in the Company's
operations and are stated at the lower of cost or market value.
General and Administrative Costs and Expenses
The Company receives reimbursement for administrative and overhead expenses
incurred on behalf of other working interest owners of properties operated by
the Company. These reimbursements totaling $1.2 million, and $1.3 million and
$1.2 million for the years ended December 31, 1993, 1994 and 1995, respectively,
were allocated as reductions to general and administrative expenses. The
capitalized general and administrative costs directly related to the Company's
acquisition, exploration and development activities, during 1993, 1994 and 1995,
aggregated $4.4 million, $3.9 million and $4.1 million, respectively.
Capitalization of Interest
The Company capitalizes interest related to its unevaluated natural gas and
oil properties and certain properties under development which are not currently
being amortized. For the years ended December 31, 1993, 1994 and 1995 interest
costs of $0.7 million, $1.5 million and $2.9 million, respectively, were
capitalized.
Gas Imbalances
The Company utilizes the entitlements method to account for its gas
imbalances. Under this method, income is recorded based on the Company's net
revenue interest in production or nominated deliveries. Net deliveries in excess
of these amounts are recorded as liabilities, while net underdeliveries are
reflected as assets. Production imbalances are valued using current market
prices. Production imbalances were not material as of December 31, 1994 and
1995.
Hedging
The Company enters into natural gas futures and forward contracts in the
normal course of business. Principally, these contracts are used to hedge
against the risk of adverse impacts of market price fluctuations of natural gas.
The Company's hedging strategies meet the criteria for hedge accounting
treatment under Statement of Financial Accounting Standards No. 80, "Accounting
for Futures Contracts" ("SFAS 80"). Accordingly, gains and losses are recognized
when the underlying transaction is completed, at which time these gains and
losses are included in earnings
F-9
<PAGE> 80
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
as a component of natural gas revenues in accordance with a hedged transaction.
Natural gas revenues were reduced by $10.7 million and $0.8 million during 1993
and 1994 and were increased by $5.6 million in 1995, relative to these
contracts. (See Note 7 -- Financial Instruments).
The Company regularly assesses the relationship between natural gas
commodity prices in the "cash" and futures markets. The correlation between
prices in these markets has been well within a range generally deemed to be
acceptable. If correlation ceases to exist for more than a temporary period of
time, the Company would account for its financial instrument positions as
trading activities and mark-to-market its open positions. At December 31, 1995
the Company recognized a pretax loss of $0.7 million attributable to hedges in
place at year end that lost correlation with the cash market price.
The Company also uses interest rate swaps to manage the interest rate
exposure arising from certain borrowings. Swaps used to hedge debt are
designated as hedges and are matched to the debt as to notional amount and
maturity. The periodic receipts or payments from each swap are recognized
ratably over the term of the swap as an adjustment to interest expense. Gains
and losses resulting from the termination of hedge contracts prior to their
stated maturity are recognized ratably over the remaining life of the instrument
being hedged.
Concentration of Credit Risk
Substantially all of the Company's accounts receivable result from natural
gas and oil sales or joint interest billings to third parties in the oil and gas
industry. This concentration of customers and joint interest owners may impact
the Company's overall credit risk in that these entities may be similarly
affected by changes in economic and other conditions. Historically the Company
has not experienced credit losses on such receivables.
NOTE 2 -- LONG-TERM DEBT
Prior Credit Facility. The Company maintained a revolving credit facility
("Prior Credit Facility") with a syndicate of lenders which provided for an
aggregate commitment of $100 million, subject to borrowing base limitations of
$74 million at December 31, 1994 and $76 million as of December 31, 1995. The
Prior Credit Facility limited advances to a borrowing base established by a
specified formula and was redetermined by the bank at least semi-annually. At
December 31, 1994 and 1995 $65.7 million and $71.9 million, respectively, were
outstanding under the Prior Credit Facility, and letter of credit obligations of
$1.6 million were outstanding at the end of both 1994 and 1995. Borrowings under
the Prior Credit Facility were secured by the stock of the Company.
The Prior Credit Facility provided for payments of interest only until the
scheduled maturity on October 1, 1998. The Company elected to borrow funds at
either (i) a fluctuating base rate ("Base Rate" loan) equal to the higher of the
Federal Funds rate plus 1/2% or the agent bank's prime rate, or (ii) a fixed
rate ("Fixed Rate" loan) at either (at the Company's option) a market Eurodollar
rate or an average market Certificate of Deposit ("CD") rate. Interest was
payable at calendar quarter end on Base Rate loans and at maturity of the
financial instrument (approximately every 90 days) for Fixed Rate loans. In
addition, the Prior Credit Facility required quarterly payments of a commitment
fee of (i) three-eighths of one percent per annum of the daily average unused
portion of the borrowing base and (ii) one-sixteenth of one percent per annum of
the daily average difference between the commitment and the borrowing base and
(iii) one-eighth of one percent per annum of the daily average difference
between the borrowing base and the "Accepted Borrowing Base" as defined in the
Agreement. The weighted average interest rate for the periods ended December 31,
1993, 1994 and 1995 was 6.3%, 7.4% and 6.9%, respectively.
F-10
<PAGE> 81
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interim Credit Facility. On April 23, 1996, the Company revised the terms
and conditions of the existing Credit Facility ("Interim Credit Facility"). The
Interim Credit Facility was provided by a syndicate of lenders led by the
Company's prior agent, Texas Commerce Bank National Association, again as agent,
and provided an aggregate commitment of $150 million, subject to borrowing base
limitations of $80 million as of April 23, 1996. In addition, up to $5 million
of the Interim Credit Facility was available for the issuance of letters of
credit to support performance guarantees. The Interim Credit Facility was
guaranteed by Fuel Resources Inc. ("FRI") and by THEC Holdings Corp., each of
which is a wholly-owned subsidiary of Brooklyn Union. Borrowings were secured by
the stock of the Company and the stock of FRI together with a negative pledge on
all the Company's assets. At June 30, 1996 $77.9 million was outstanding under
the Interim Credit Facility and outstanding letter of credit obligations were
$1.6 million.
Interest was payable on borrowings under the Interim Credit Facility at an
alternated base rate of the greater of the Federal Funds rate plus 0.5% or the
agent bank's prime rate or, at the Company's election, 0.8125% above a quoted
LIBOR rate. Interest was payable at calendar quarters on base rate loans and at
maturity on LIBOR loans. In addition a commitment fee of: (1) between 0.20% and
0.375% per annum on the unused portion of the Accepted Borrowing Base, (2)
0.125% per annum on the difference between the Borrowing Base and the Accepted
Borrowing Base with a 0.3125% clawback on any usage of the difference, and (3)
0.0625% per annum on the difference between the lower of the Facility Amount of
the Borrowing Base and the Borrowing Base.
The Interim Credit Facility required the maintenance of a defined net
worth, total debt to total capitalization of no greater than 50% and a defined
fixed charge coverage ratio of 2.0 to 1. In addition to maintenance of certain
financial ratios, cash dividends and/or purchase or redemption of the Company's
stock is restricted as well as the encumbering of the Company's gas and oil
assets or pledging of the assets as collateral.
New Credit Facility. On July 2, 1996, the Company revised the terms and
conditions of the existing Interim Credit Facility ("New Credit Facility"). The
New Credit Facility is provided by the Company's prior agent, Texas Commerce
Bank, National Association and provides an aggregate commitment of $150 million,
the full amount of which was available as of July 2, 1996. In addition, up to $5
million of the New Credit Facility will be available for the issuance of letters
of credit to support performance guarantees. The New Credit Facility matures on
July 1, 2000. The New Credit Facility is secured by a pledge of all of the
Company's outstanding capital stock; however, upon the closing of the Company's
initial public offering the pledged shares will be released and the facility
will be unsecured.
Interest is payable on borrowings under the New Credit Facility, at the
Company's option, at an alternate base rate of the greater of the Federal Funds
rate plus 0.5% or the agent bank's prime rate or at a margin of 0.50% to 1.125%
above a quoted LIBOR rate. Interest is payable at calendar quarters on base rate
loans and at maturity on LIBOR loans. In addition, a commitment fee of: (1)
between 0.20% and 0.375% per annum on the unused portion of the Designated
Borrowing Base, and (2) 33% of the fee in (1) above on the difference between
the lower of the Facility Amount or the Borrowing Base and the Designated
Borrowing Base.
The New Credit Facility covenants require the maintenance of a defined net
worth of $95 million plus 50% of net income and 75% of net equity proceeds,
total debt to total capitalization of no greater than 60% prior to the offering
and 55% thereafter. In addition to maintenance of certain financial ratios, cash
dividends and/or purchase or redemption of the Company's stock is restricted as
well as the encumbering of the Company's gas and oil assets or the pledging of
the assets as collateral. As of July 31, 1996, the Company was in compliance
with all such covenants.
F-11
<PAGE> 82
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- STOCKHOLDER'S EQUITY
Effective July 1, 1994 the Company adopted a Long-Term Stock Incentive Plan
(the "1994 Incentive Plan") for its officers, directors and other key employees.
The 1994 Incentive Plan allows for the granting of nonqualified stock options,
which may include tandem phantom option shares while the Company remains a
privately owned entity. The number of shares of common stock subject to stock
option grants cannot exceed 10% of the Company's common shares outstanding, and
the exercise price of options granted under the 1994 Incentive Plan may not be
less than the fair market value of the common stock at the date the option is
granted. On July 1, 1994, the Company granted options to purchase an aggregate
of 247,000 shares of common stock to certain officers and directors of the
Parent, with an exercise price of $11.22 per share. As of December 31, 1995, no
options had been exercised. (See Note 12 -- Subsequent Events.)
<TABLE>
<CAPTION>
SHARES PRICE
-------- -------
<S> <C> <C>
Options outstanding at December 31, 1994.............. 247,000 $ 11.22
Options granted during 1995........................... -- --
Options outstanding at December 31, 1995.............. 247,000 $ 11.22
======= ======
Options available for grant........................... --
=======
</TABLE>
NOTE 4 -- INCOME TAXES
The components of the federal income tax provision (benefit) are:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current................................ $(1,238) $(5,250) $(13,441)
Deferred............................... 3,028 5,847 9,632
------- ------- --------
Total.................................. $ 1,790 $ 597 $ (3,809)
======= ======= ========
</TABLE>
Amounts received from the Parent pursuant to the established tax-sharing
agreement were $2.3 million and $14.6 million in 1994 and 1995 respectively.
During 1993, the Company paid the Parent $5.4 million pursuant to the
tax-sharing agreement. State taxes are not considered material for the years
ended 1993, 1994 and 1995, respectively.
The following is a reconciliation of statutory federal income tax expense
(benefit) to the Company's income tax provision:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before income taxes........... $ 6,341 $ 5,951 $(4,112)
Statutory rates............................. 35% 35% 35%
Income tax (benefit) computed at statutory
rates..................................... 2,219 2,083 (1,439)
Reconciling items:
Section 29 tax credits.................... (1,023) (1,529) (1,985)
Percentage depletion...................... (73) (27) (231)
Adjustments from change in tax rates...... 534 -- --
Other..................................... 133 70 (154)
------- ------- -------
Tax expense (benefit)....................... $ 1,790 $ 597 $(3,809)
======= ======= =======
</TABLE>
F-12
<PAGE> 83
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Income Taxes
Deferred income tax provisions for the years ended December 31, 1993, 1994
and 1995 result from the following temporary differences:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Temporary differences related to natural gas and oil
properties:
Intangible drilling costs......................... $ 3,460 $ 6,182 $12,067
Nonrecurring charge............................... -- -- (3,200)
Depreciation and depletion........................ (4,614) (6,049) (2,229)
Dry hole costs.................................... 835 2,871 35
Capitalized general and administrative expense.... 1,240 1,243 1,429
Impairment of properties.......................... 501 1,334 1,145
Abandonment of properties......................... 474 -- --
Lease rentals..................................... 89 104 132
Other............................................. 1,043 162 253
------- ------- -------
Total deferred tax expense................ $ 3,028 $ 5,847 $ 9,632
======= ======= =======
</TABLE>
The Company's deferred tax position reflects 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 reporting. At
December 31, 1993, 1994 and 1995 the Company did not have deferred tax assets
(net operating loss carryforwards or alternative minimum taxes).
NOTE 5 -- RELATED PARTY TRANSACTIONS
Transactions with the Parent are comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Gas sales..................................... $ 1,067 $ 1,335 $ --
Gathering fee income.......................... 361 244 --
General and administrative costs.............. 839 776 724
</TABLE>
Gas sales with Brooklyn Union were at market prices, based upon an index
price adjusted to reflect the point of delivery of such production. The Company
believes that the prices at which it sold gas to Brooklyn Union were similar to
those it would have been able to obtain in the open market. The Company
reimburses the Parent for certain general and administrative costs and receives
overhead allocations for other general and administrative costs.
Gas Sales
The Company entered into a term supply agreement with BRING Gas Services
Corp. ("BRING") an affiliate of Brooklyn Union in October 1992, amended as of
November 1, 1992. As of April 1, 1995, this contract was superseded when the
Company entered into a term supply agreement with PennUnion Energy Services,
L.L.C. ("PennUnion"), an affiliate of Brooklyn Union. The new contract extends
until March 31, 1998, and year to year thereafter. Under the terms of the
agreement, the Company has agreed to sell and PennUnion has agreed to buy a
substantial portion of the Company's production at index-related prices. The
agreement contains provisions for both the commitment of gas reserves
subsequently developed or acquired by the Company and the release of gas
reserves sold, traded or exchanged to third parties.
F-13
<PAGE> 84
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ended December 31, 1993, 1994 and 1995, the Company had
natural gas sales of $32.9 million, $26.4 million and $18.9 million,
respectively, to PennUnion and BRING. At year end December 31, 1994 and 1995,
the Company had receivables of $1.0 million and $2.0 million, respectively,
relating to natural gas sales to PennUnion and BRING.
Employment Contracts
The Company maintained an employment agreement with its President and Chief
Executive Officer which provided him with the option to participate in up to a
5% working interest in certain prospects of the Company. During 1993, 1994 and
1995, affiliates of the Company's President obtained a 5% working interest in 12
wells operated by the Company pursuant to such agreement. In addition, during
1993, 1994 and 1995, affiliates of the Company's President paid $0.9 million,
$0.7 million and $0.7 million, respectively, in expenses attributable to working
interests owned in properties operated by the Company, and received $2.6
million, $1.6 million and $0.9 million, respectively, in distributions
attributable to such working interests. (See Note 11 -- Acquisitions.)
The employment agreement also provided for the assignment to the President
of a 2% net profits interest in all prospects of the Company and a 6.75% after
program-payout working interest. In addition, the employment agreement provided
for the assignment to certain key employees designated by the President of an
overriding royalty interest equivalent in the aggregate to a four percent net
revenue interest in certain properties acquired by the Company. (See Note 12 --
Subsequent Events.)
NOTE 6 -- EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its employees. Under the 401(k) Plan, eligible employees may elect to have the
Company contribute on their behalf up to 10% of their base compensation (subject
to certain limitations imposed under the Internal Revenue Code of 1986, as
amended) on a before tax basis. The Company makes a matching contribution of
$0.50 for each $1.00 of employee deferral, not to exceed 5% of an employee's
base compensation, subject to limitations imposed by the Internal Revenue
Service. The amounts contributed under the 401(k) Plan are held in a trust and
invested among various investment funds in accordance with the directions of
each participant. An employee's salary deferral contributions under the 401(k)
Plan are 100% vested. The Company's matching contributions vest at the rate of
20% per year of service. Participants are entitled to payment of their vested
account balances upon termination of employment. For the years ended December
31, 1993, 1994 and 1995, Company's contributions to the 401(k) Plan were
$115,000, $145,000 and $157,000, respectively.
F-14
<PAGE> 85
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1994 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $ 668 $ 668 $ 598 $ 598
Long-term debt..................................... 65,650 65,650 71,862 71,862
Derivative transactions:
Interest rate swap agreements
In a receivable position...................... -- -- -- --
In a payable position......................... -- -- -- (86)
Commodity price and basis swaps:
In a receivable position...................... -- 6,069 -- --
In a payable position......................... -- -- (704) (3,982)
Commodity futures:
In a receivable position...................... -- 41 -- --
In a payable position......................... -- -- -- (240)
</TABLE>
Cash and Cash Equivalents
The Carrying amount approximates fair value due to the short maturity of
these instruments.
Long-Term Debt
The carrying amount of borrowings outstanding under the Credit Facility
approximates fair value as the interest rate is tied to current market rates.
DERIVATIVE TRANSACTIONS
Interest Rate Swap Agreements
The fair values are obtained from the financial institutions that are
counterparties to the transactions. These values represent the estimated amount
the Company would pay or receive to terminate the agreements, taking into
consideration current interest rates and the current creditworthiness of the
counterparties. The Company's interest rate swap agreements are off balance
sheet transactions and, accordingly, no respective carrying amounts for these
transactions are included in the accompanying combined balance sheets at
December 31, 1995. At December 31, 1995, the Company had three interest rate
swap agreements to exchange an aggregate notional principal of $19.0 million
over various periods from January 1996 through November 1998 at rates between
5.39% and 5.66%.
Commodity Related Transactions
The Company uses derivative financial instruments for non-trading purposes
as a hedging strategy to reduce the impact of market volatility and to ensure
cash flows. Gains and losses on these hedging transactions are recorded when the
related natural gas production has been produced or delivered. While derivative
financial instruments are intended to reduce the Company's exposure to declines
in the market price of natural gas, the derivative financial instruments may
limit the Company's gain from increases in the market price.
The derivative instruments used to hedge commodity transactions have
historically had high correlation with commodity prices and are expected to
continue to do so. The correlation of indices
F-15
<PAGE> 86
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and prices is regularly evaluated to ensure that the instruments continue to be
effective hedges. In the event that correlation falls below allowable levels,
the gains or losses associated with the hedging instruments are immediately
recognized to the extent that correlation was lost. In December of 1995, the
Company recognized a pretax loss of $0.7 million due to the loss of correlation
of the New York Mercantile Exchange ("NYMEX") futures market for natural gas
with the market price for natural gas in certain parts of the country.
Commodity Price Swaps
Price swap agreements call for one party to make monthly payments to (or
receive from) another party based upon the differential between a fixed and a
variable price (fixed-price swap) or two variable prices (basis swap) for a
notional volume specified by the contract. The fair value is the estimated
amount the Company would receive or pay to terminate swap agreements at year-
end, taking into account the difference between NYMEX natural gas prices or
index prices at year-end and fixed swap prices. At December 31, 1995, the
Company had fixed-price swap agreements and basis swap agreements to exchange a
total notional volume of 38,135 MMmbtu of natural gas over the period January
1996 through December 1997.
Commodity Futures
Natural gas futures contracts and options on natural gas futures contracts
are traded on the NYMEX. Contracts are for fixed units of 10,000 MMBtu. The
Company uses futures contracts to lock in the price for a portion of its
expected future natural gas production when it believes that prices are at
acceptable levels. At December 31, 1995, the Company had a total of 420 net
contracts open (1,650 long and 2,070 short futures contracts). The fair value is
the estimated amount the Company would receive or pay to close the futures
contracts at year-end, taking into account the difference between the NYMEX
natural gas prices at year-end and the fixed futures price. In addition, the
Company had margin deposits relating to futures contracts held with brokers of
$0.2 million outstanding at December 31, 1995.
The Company is exposed to credit risk in the event of nonperformance by
counterparties to futures and swaps contracts. The Company believes that the
credit risk related to the futures and swap contracts is no greater than that
associated with the primary contracts which they hedge, as these contracts are
with major investment grade financial institutions, and that elimination of the
price risk lowers the Company's overall business risk.
NOTE 8 -- SALES TO MAJOR CUSTOMERS
As is the nature of the exploration, development and production business,
production is normally sold to relatively few customers. However, alternate
buyers are available to replace the loss of any of the Company's major
customers. For years ended December 31, 1993, 1994 and 1995, PennUnion and BRING
were the only customers for which sales exceeded 10% of total revenues. During
1993, 1994 and 1995, sales to PennUnion and BRING comprised 86%, 63% and 46%,
respectively, of total revenues. (See Note 5 -- Related Party Transactions). The
Company believes that prices at which it sells and has sold gas to PennUnion and
BRING are similar to those it would be able to obtain in the open market, and
that the loss of PennUnion as a purchaser would not have a material adverse
affect on the Company's operations.
F-16
<PAGE> 87
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved from time to time in various claims and lawsuits
incidental to its business. In the opinion of management, the ultimate liability
thereunder, if any, will not have a material adverse affect on the financial
position or results of operations of the Company. In addition, the Company has
been named in a suit involving certain former employees of Fuel Resources Inc.
("FRI"), as more fully discussed in Note 10 -- Nonrecurring Charge.
Leases
The Company has entered into certain noncancelable operating lease
agreements relative to office space and equipment with various expiration dates
through 2001. Minimum rental commitments under the terms of the leases are as
follows:
<TABLE>
<CAPTION>
MINIMUM NET MINIMUM
RENTAL SUBLEASE RENTAL
COMMITMENTS RENTALS COMMITMENTS
----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1996....................................... $ 522 $ (238 ) $ 284
1997....................................... 431 (244 ) 187
1998....................................... 354 (246 ) 108
1999....................................... 361 (250 ) 111
2000....................................... 364 (252 ) 112
Thereafter................................. 171 (135 ) 36
------ ------- ------
$ 2,203 $(1,365 ) $ 838
====== ======= ======
</TABLE>
Net rental expense related to these leases for the years ended December 31,
1993, 1994 and 1995 were $0.2 million, $0.3 million and $0.3 million,
respectively.
Guarantee of PennUnion Accounts Payable
Pursuant to the PennUnion joint venture agreement between Pennzoil Gas
Marketing and BRING, the Company has guaranteed certain trade payables of
PennUnion (not including PennUnion's trade payable to the Company). The
outstanding balances under these guarantees were $2.9 million and $3.9 million
at December 31, 1994 and 1995. The Company is of the opinion that PennUnion will
be able to perform under its obligations and that no losses will be incurred
pursuant to such guarantees.
NOTE 10 -- NONRECURRING CHARGE
In connection with the February 1996 reorganization, certain former
employees of FRI, the subsidiary of Brooklyn Union that previously owned the
onshore properties, were entitled to remuneration for the increase in the value
of the transferred properties prior to the reorganization. In February 1996,
certain such former employees filed suit against the Parent, FRI and the Company
alleging breach of contract, breach of fiduciary duty, fraud, negligent
misrepresentation and conspiracy, seeking actual damages in excess of $35
million and punitive damages in excess of $70 million. The board of directors of
FRI has approved an agreement whereby FRI would indemnify the Company against
such suit. In addition, the board of directors of THEC Holdings Corp.
("Holdings"), the subsidiary of Brooklyn Union that holds all of the currently
outstanding common stock of the Company, has approved an agreement whereby
Holdings would also indemnify the Company against the suit, and would pledge all
of its holdings of Common Stock to secure such
F-17
<PAGE> 88
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
indemnification obligations. The Company believes that it will not be required
to pay any damages resulting from such suit, even if a judgment adverse to the
Company is rendered in the suit, as a result of such arrangements. As of
December 31, 1995, the Company accrued a $12 million nonrecurring charge related
to these obligations which it believes is adequate to provide for the settlement
of these obligations and the ultimate resolution of the lawsuit. However, the
Company would incur a non-cash charge in addition to the $12 million charge
recorded by the Company in the event such damages are determined to be in excess
of $12 million, which would have the effect of reducing the Company's reported
income (or resulting in or increasing a loss) in the period in which such
additional charge is determined. Accordingly, management of the Company believes
that the ultimate resolution of these claims will not have a material adverse
impact on the Company's future financial position or results of operations.
NOTE 11 -- ACQUISITIONS
TransTexas
On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated gathering pipelines and equipment located in Zapata
County, Texas (the "TransTexas Acquisition") from TransTexas Gas Corporation and
TransTexas Transmission Corporation (together, "TransTexas"). The Company
acquired a 100% working interest (95% after the exercise by James G. Floyd, the
Company's President and Chief Executive Officer, of his right to purchase a 5%
working interest) in the approximately 156 wells on such properties. The
purchase price of $62.2 million ($59.1 million after giving effect to the
exercise of Mr. Floyd's purchase option) for the TransTexas Acquisition is
subject to adjustment based upon production and expenses related to the assets
between the May 1, 1996 effective date of the TransTexas Acquisition and July 2,
1996. The purchase price of the TransTexas Acquisition was paid in cash,
financed with borrowings under the Company's Credit Facility.
The Company has agreed to loan Mr. Floyd the $3.1 million purchase price
for his purchase of a 5% working interest in the properties purchased by the
Company in the TransTexas Acquisition. In addition, the Company has agreed to
loan Mr. Floyd, on a revolving basis, the amounts required to fund the expenses
attributable to Mr. Floyd's working interest. Mr. Floyd is required to repay
amounts owed under the loan in the amount of 65% of all distributions received
by Mr. Floyd in respect of such working interest, as distributions are received.
Amounts outstanding under such loan bear interest at an interest rate equal to
the Company's cost of borrowing under the New Credit Facility. Mr. Floyd's
obligations under the agreement are secured by a pledge of his working interest
in, and the production from, such properties. The outstanding balance owed by
Mr. Floyd under the agreement will mature on July 2, 2006.
Soxco
On July 1, 1996, the Company entered into an asset purchase agreement with
Smith Offshore Exploration Company ("Soxco"), providing for the acquisition by
the Company of substantially all of the natural gas and oil properties and
related assets of Soxco (the "Soxco Acquisition"). Soxco's natural gas and oil
properties consist solely of working interests in properties located in the Gulf
of Mexico that are operated by the Company or in which the Company also has a
working interest. Pursuant to the Soxco Acquisition, the Company will pay Soxco
cash in the aggregate amount of $23.7 million (subject to certain adjustments),
and issue to Soxco a number of shares of common stock (estimated to be
approximately 844,071 shares) with an aggregate value (determined by reference
to the initial public offering price) of $11.8 million. The cash portion of the
purchase price will be funded with the proceeds of the Offering. In addition to
the foregoing, the
F-18
<PAGE> 89
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Company will pay Soxco a deferred purchase price of up to $17.6 million payable
in two installments, on January 31, 1997 and January 31, 1998. The amount of the
deferred purchase price installments will be determined by the probable reserves
of Soxco as of December 31, 1995 (approximately 17.6 Bcfe) that are produced
prior to or classified as proved as of December 31, 1996 and December 31, 1997,
respectively, provided that Soxco is entitled to receive a minimum deferred
purchase price of approximately $8.8 million. The amounts so determined will be
paid in shares of common stock based on the fair market value of such stock at
the time of issuance. The Soxco Acquisition will close concurrently with, is
conditioned upon and is a condition to the completion of the Offering.
NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED)
Stock Offering
The Company intends to sell approximately 28% of its common stock in an
initial public offering ("Offering").
In connection with the Offering, the Company's board approved an increase
in the authorized capital stock of the Company, consisting of 50,000,000 shares
of common stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share. Additionally, approval was obtained to increase
the number of shares of common stock issued and outstanding to 15,295,215
effective immediately prior to the completion of the Offering.
Concurrently, with the completion of the Offering, the Company's President
will exchange certain of his after program-payout working interests for shares
of common stock with a value (at the initial offering price) of $2.3 million.
1996 Stock Option Plan
Prior to completion of the Offering, it is anticipated that the Board of
Directors will adopt the Company's 1996 Stock Option Plan (the "Incentive Plan")
and that Holdings will approve the Incentive Plan as adopted.
Employment Contracts
Certain employees of the Company will enter into employment agreements with
the Company effective as of the Closing of the Offering pursuant to which they
serve as executive officers of the Company. The President's existing employment
agreement with the Company will be terminated effective as of such time. (See
Note 5 -- Related Party Transactions).
Supplemental Executive Retirement Plan
Effective immediately prior to the Offering, the Company will adopt an
unfunded, nonqualified Supplemental Executive Retirement Plan for the benefit of
the President.
1994 Incentive Plan
Upon completion of the Offering, the options under this plan will be
terminated in exchange for a cash payment by the Company in the aggregate amount
of approximately $840,000.
F-19
<PAGE> 90
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- SUPPLEMENTAL INFORMATION ON NATURAL GAS AND OIL EXPLORATION,
DEVELOPMENT AND PRODUCTION ACTIVITIES
The following information concerning the Company's natural gas and oil
operations has been provided pursuant to Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities." The
Company's natural gas and oil producing activities are conducted onshore within
the continental United States and offshore in federal and state waters of the
Gulf of Mexico. The Company's natural gas and oil reserves were estimated by
independent reserve engineers.
CAPITALIZED COSTS OF NATURAL GAS AND OIL PROPERTIES
As of December 31, 1993, 1994 and 1995, the Company's capitalized costs of
natural gas and oil properties are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Unevaluated properties, not
amortized........................... $ 11,498 $ 25,911 $ 42,286
Properties subject to amortization.... 205,868 257,102 309,378
--------- ---------- ----------
Capitalized costs..................... 217,366 283,013 351,664
Accumulated depreciation, depletion
and amortization.................... (93,333) (118,392) (137,769)
--------- ---------- ----------
Net capitalized costs................. $ 124,033 $ 164,621 $ 213,895
========= ========== ==========
</TABLE>
The following is a summary of the costs which are excluded from the
amortization calculation as of December 31, 1995, by year of acquisition. The
Company is not able to accurately predict when these costs will be included in
the amortization base; however, the Company believes that unevaluated properties
at December 31, 1995 will be fully evaluated within five years.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1995.................................................. $ 27,439
1994.................................................. 10,609
1993.................................................. 2,727
Prior................................................. 1,511
--------------
$ 42,286
============
</TABLE>
F-20
<PAGE> 91
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred for natural gas and oil exploration, development and
acquisition are summarized below. Costs incurred during the years ended December
31, 1993, 1994 and 1995 include general and administrative costs related to
acquisition, exploration and development of natural gas and oil properties, of
$4.4 million, $3.9 million and $4.1 million, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Property acquisition:
Unevaluated(1)....................... $ 6,646 $ 11,148 $ 9,902
Proved............................... 34,596 24,628 11,137
Exploration costs...................... 5,983 17,430 7,224
Development costs...................... 11,332 11,790 41,163
-------- -------- --------
Total costs incurred......... $ 58,557 $ 64,996 $ 69,426
======== ======== ========
</TABLE>
- ---------------
(1) These amounts represent costs incurred by the Company and excluded from the
amortization base until proved reserves are established or impairment is
determined.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
NATURAL GAS AND OIL RESERVES (UNAUDITED)
The following summarizes the policies used by the Company in the
preparation of the accompanying natural gas and oil reserve disclosures,
standardized measures of discounted future net cash flows from proved natural
gas and oil reserves and the reconciliations of such standardized measures from
year to year. The information disclosed, as prescribed by the Statement of
Financial Accounting Standards No. 69 is an attempt to present such information
in a manner comparable with industry peers.
The information is based on estimates of proved reserves attributable to
the Company's interest in natural gas and oil properties as of December 31 of
the years presented. These estimates were principally prepared by independent
petroleum consultants. Proved reserves are estimated quantities of natural gas
and crude oil which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
The standardized measure of discounted future net cash flows from
production of proved reserves was developed as follows:
1. Estimates are made of quantities of proved reserves and future
periods during which they are expected to be produced based on year-end
economic conditions.
2. The estimated future cash flows are compiled by applying year-end
prices of natural gas and oil relating to the Company's proved reserves to
the year-end quantities of those reserves except for those reserves devoted
to future production that is hedged. The estimated future cash flows
associated with such reserves are compiled by applying the reference prices
of such hedges to the future production that is hedged. Future price
changes are considered only to the extent provided by contractual
arrangements in existence at year-end.
3. The future cash flows are reduced by estimated production costs,
costs to develop and produce the proved reserves and certain abandonment
costs, all based on year-end economic conditions.
F-21
<PAGE> 92
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. Future income tax expenses are based on year-end statutory tax
rates giving effect to the remaining tax basis in the natural gas and oil
properties, other deductions, credits and allowances relating to the
Company's proved natural gas and oil reserves.
5. Future net cash flows are discounted to present value by applying a
discount rate of 10 percent.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the
Company's natural gas and oil reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
The standardized measure of discounted future net cash flows relating to
proved natural gas and oil reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................. $ 250,745 $ 259,811 $ 418,822
Future production costs......................... (62,125) (45,428) (66,458)
Future development costs........................ (13,494) (21,973) (24,803)
Future income taxes............................. (26,592) (28,714) (74,933)
-------- -------- --------
Future net cash flows........................... 148,534 163,696 252,628
10% annual discount for estimated timing of cash
flows......................................... (42,473) (45,262) (81,169)
-------- -------- --------
Standardized measure of discounted future net
cash flows.................................... $ 106,061 $ 118,434 $ 171,459
======== ======== ========
</TABLE>
Future cash inflows include the effect of hedges in place at year end
December 31, 1993, 1994 and 1995. At December 31, 1993 and 1995, the effect of
the hedges in place is a reduction to future cash inflows of $12.3 million and
$4.4 million, respectively. At December 31, 1994, future cash inflows were
increased by $17.2 million for hedges in effect at year end.
F-22
<PAGE> 93
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the year........................... $ 95,255 $ 106,061 $ 118,434
Revisions to previous estimates:
Changes in prices and costs................... (29,083) (10,077) 35,497
Changes in quantities......................... (3,914) (2,393) 11,306
Changes in future development costs........... (7,964) 511 531
Development costs incurred during the period.... 9,231 4,652 8,074
Extensions and discoveries, net of related
costs......................................... 5,515 22,723 51,061
Sales of natural gas and oil, net of production
costs......................................... (32,864) (36,156) (34,843)
Accretion of discount........................... 11,863 11,326 12,815
Net change in income taxes...................... 13,082 (272) (24,720)
Purchase of reserves in place................... 44,544 23,146 11,189
Sale of reserves in place....................... -- (1,906) (19)
Production timing and other..................... 396 819 (17,866)
-------- -------- --------
End of year..................................... $ 106,061 $ 118,434 $ 171,459
======== ======== ========
</TABLE>
ESTIMATED NET QUANTITIES OF NATURAL GAS AND OIL RESERVES (UNAUDITED)
The following table sets forth the Company's net proved reserves, including
changes therein, and proved developed reserves (all within the United States) at
the end of each of the three years in the period ended December 31, 1993, 1994
and 1995.
<TABLE>
<CAPTION>
NATURAL GAS CRUDE OIL AND CONDENSATE
(MMCF) (MBBLS)
----------------------------------- --------------------------
1993 1994 1995 1993 1994 1995
--------- --------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year.............. 88,480 118,118 145,945 498 536 636
Revisions of previous
estimates................... (2,841) (1,912) 15,702 (98) (104) 51
Extensions and discoveries..... 4,022 25,867 45,014 3 151 254
Production..................... (22,555) (22,437) (21,077) (101) (102) (100)
Purchase of reserves in
place....................... 51,012 27,949 10,367 234 205 48
Sale of reserves in place...... -- (1,640) (5) -- (50) --
-------- -------- -------- ----- ----- -----
End of year.................... 118,118 145,945 195,946 536 636 889
======== ======== ======== ===== ===== =====
Proved developed reserves:
Beginning of year.............. 70,679 107,909 104,678 433 478 328
End of year.................... 107,909 104,678 162,784 478 328 774
</TABLE>
F-23
<PAGE> 94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
the Board of Directors of
Smith Offshore Exploration Company:
We have audited the accompanying balance sheets of Smith Offshore
Exploration Company (a Delaware corporation) as of December 31, 1994 and 1995,
and the related statements of operations and cash flows for each of the three
years in the period ended December 31, 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.
As discussed in Note 1, the Company has entered into an asset purchase
agreement on July 1, 1996 for the sale of substantially all of the Company's oil
and gas assets to The Houston Exploration Company. If the sale transaction is
consummated, the purchaser's basis in the assets will differ from that reflected
in the Company's historical financial statements at December 31, 1995. The
impact of the sale, and ultimate allocation of net proceeds in connection with
the disposition of the Company's other assets and liabilities including payments
to zero coupon noteholders (see Note 4), on the Company's historical financial
statements could be significant; however, no adjustments have been made in the
accompanying financial statements to reflect these proposed transactions.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Offshore Exploration
Company as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Houston, Texas
July 1, 1996
F-24
<PAGE> 95
SMITH OFFSHORE EXPLORATION COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................ $ 494 $ 785 $ 1,352
Short-term investments................................... 100 100 100
Accounts receivable
Oil and gas sales..................................... 2,748 1,857 1,568
Gas sales imbalance................................... 135 44 6
Affiliates and other.................................. 12 43 0
Inventory................................................ 131 74 74
Prepaid associated costs and well costs.................. 146 -- --
Prepaid expenses and other assets........................ 84 36 8
-------- --------- ---------
Total current assets............................. 3,850 2,939 3,108
-------- --------- ---------
Oil and gas properties, full-cost method
Evaluated properties.................................. 122,610 130,963 131,874
Unevaluated properties................................ 4,766 5,335 5,624
Less: Accumulated depreciation, depletion and
amortization.......................................... (94,540) (101,418) (103,837)
-------- --------- ---------
32,836 34,880 33,661
-------- --------- ---------
Furniture, fixtures and other, net......................... 151 108 99
Other assets, net.......................................... 63 57 46
-------- --------- ---------
TOTAL ASSETS..................................... $ 36,900 $ 37,984 $ 36,914
======== ========= =========
LIABILITIES:
Current portion of long-term debt........................ $ 7,614 $ 7,956 $ 4,578
Accounts payable and accrued liabilities................. 2,558 744 711
Accrued interest payable................................. 58 175 195
-------- --------- ---------
Total current liabilities........................ 10,230 8,875 5,484
-------- --------- ---------
Long-term debt............................................. 7,718 10,569 11,800
Zero coupon notes payable.................................. 80,195 92,184 98,827
-------- --------- ---------
TOTAL LIABILITIES................................ 98,143 111,628 116,111
-------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred Stock (Class A), $0.01 par value; 3,209,375
shares authorized, issued and outstanding............. 32 32 32
Common Stock, $0.01 par value; 4,279,168 shares
authorized; 1,069,792 issued and outstanding.......... 11 11 11
Additional paid-in capital............................... 15,150 15,150 15,150
Accumulated deficit...................................... (76,436) (88,837) (94,390)
-------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY....................... (61,243) (73,644) (79,197)
-------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 36,900 $ 37,984 $ 36,914
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 96
SMITH OFFSHORE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales...................... $26,123 $18,536 $10,372 $ 5,587 $ 5,235
Interest income and other income....... 70..... 89 73 51 27
------- ------- ------- ------- -------
Total Revenues................. 26,193 18,625 10,445 5,638 5,262
------- ------- ------- ------- -------
COSTS AND EXPENSES:
General and administrative............. 569 586 837 339 346
Outside professional services.......... 313 499 501 236 157
Production............................. 2,634 2,654 2,012 1,062 891
Depreciation, depletion and
amortization........................ 20,317 15,618 6,931 4,487 2,438
Impairment of oil and gas properties... 4,000 20,000 -- -- --
Interest............................... 11,477 11,107 12,550 5,831 6,974
Other.................................. 52 46 15 10 8
------- ------- ------- ------- -------
Total costs and expenses....... 39,362 50,510 22,846 11,965 10,814
------- ------- ------- ------- -------
Loss before income taxes ($0 for all
periods) and cumulative effect of
change in accounting principle......... 13,169 31,885 12,401 6,327 5,552
Cumulative effect of change in accounting
principle (SFAS No. 109)............... 716 -- -- -- --
------- ------- ------- ------- -------
Net loss................................. $12,453 $31,885 $12,401 $ 6,327 $ 5,552
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 97
SMITH OFFSHORE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (12,453) $ (31,885) $ (12,401) $ (6,327) $ (5,552)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Interest..................................... 10,817 10,339 11,566 5,355 6,393
Depreciation, depletion and amortization..... 20,317 15,618 6,931 4,487 2,438
Impairment of oil and gas properties......... 4,000 20,000 -- -- --
Cumulative effect of change in accounting
principle (SFAS No. 109)................... (716) -- -- -- --
Decrease (Increase) in accounts receivable... 2,413 1,179 951 571 370
Decrease (Increase) in prepaid expenses and
other assets............................... (23) (4) 10 67 28
-------- -------- -------- ------- -------
Net cash provided by operating activities....... 24,355 15,247 7,057 4,153 3,677
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in prepaid associated costs and well
costs........................................ 597 639 146 49 --
Additions to oil and gas properties............. (14,812) (9,888) (8,351) (5,817) (917)
Increase (Decrease) in amounts owed for oil and
gas property additions....................... 1,530 (2,324) (1,814) (305) (33)
Purchases of furniture, fixtures and other...... (46) (97) (10) (9) (10)
Transfers of inventory.......................... 92 34 95 (2) --
-------- -------- -------- ------- -------
Net cash used in investing activities........ (12,639) (11,636) (9,934) (6,084) (960)
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........ 15,506 5,180 8,268 7,220 51
Repayment of long-term debt..................... (11,500) (10,153) (5,076) (5,076) (2,198)
Repayment of zero coupon notes.................. (16,047) -- -- -- --
Additions of other assets -- debt costs......... -- (56) (24) -- (3)
-------- -------- -------- ------- -------
Net cash (used in) provided by financing
activities................................... (12,041) (5,029) 3,168 2,144 (2,150)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (325) (1,418) 291 213 567
Cash and cash equivalents, beginning of period.... 2,237 1,912 494 494 785
-------- -------- -------- ------- -------
Cash and cash equivalents, end of period.......... $ 1,912 $ 494 $ 785 707 1,352
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 98
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT AGREEMENTS
Organization
Smith Offshore Exploration Company (the "Company") was organized on January
12, 1987, under the laws of the State of Delaware. The Company is active in oil
and gas exploration and development primarily offshore in the Gulf of Mexico
area.
The Exploration Agreement
Pursuant to the terms of an Exploration Agreement, as renewed, extended and
restated (the "Agreement"), the Company agreed to participate with The Houston
Exploration Company ("HOUEX"), formerly Brooklyn Union Exploration Company,
Inc., in the exploration, development and production of oil and gas in the Gulf
of Mexico area. The Agreement provides for HOUEX to be the operator of the
properties. Under the terms of the Agreement, the Company committed to a maximum
of $60,000,000 to be expended for exploration activities over a four-year period
ended December 31, 1990, and a secondary term of two years ended December 31,
1992. The Company now continues to participate in certain exploration and
development activities with HOUEX pursuant to the terms of joint operating
agreements.
The Company pays its proportionate share of costs and expenses. Pursuant to
a letter agreement with HOUEX effective March 1, 1992, the Company and a former
affiliate, Smith Offshore Exploration Company II ("SOXCO II"), paid $375,000 of
HOUEX's general and administrative expenses during the first six months of 1995
and $750,000 during 1994 and 1993. The terms of the letter agreement terminated
on June 30, 1995. Such amounts are allocated between the Company and SOXCO II
based on relative capital and production expenditures during each month. The
Company paid or accrued approximately $219,000, $462,000 and $693,000 as
reimbursement for the Company's share of HOUEX's general and administrative
expenses during the years ended December 31, 1995, 1994 and 1993. The Company
paid or accrued $799,000, $7,779,000 and $8,746,000 for prospect acquisition,
evaluation and drilling costs billed by HOUEX during the six months ended June
30, 1996 and the years ended December 31, 1995 and 1994, respectively.
In addition, the Company paid HOUEX fees (termed "Associated Costs") of
$6,000,000 prior to 1992. Pursuant to the terms of the Agreement, no additional
Associated Costs are due HOUEX.
The lease interests included in the exploration venture are burdened by a
2% net profits interest on a prospect-by-prospect basis and an overriding
royalty of 4% of the net revenue interest pursuant to agreements between HOUEX
and several individuals. These burdens are shared by the Company in proportion
to its interest in the particular leases.
Agreement Negotiated to Sell Oil and Gas Assets to HOUEX
On April 30, 1996, the Company and HOUEX entered into a non-binding letter
of intent setting forth the general terms pursuant to which HOUEX would acquire
substantially all of the Company's oil and gas assets. The Definitive Asset
Purchase Agreement (the "Agreement") was entered into on July 1, 1996 and has
been approved by both companies' boards of directors and respective
stockholders. The purchase will take place contemporaneously with an initial
public offering of HOUEX's common stock. The effective date of the transaction
will be January 1, 1996 (the "Effective Date").
The Company will receive a purchase price ranging from a minimum of
approximately $44.3 million to a maximum of approximately $53.1 million with the
ultimate amount within that range
F-28
<PAGE> 99
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
depending upon the amount of probable reserves that are reclassified to proved
by December 31, 1997.
Consideration for the sale of its oil and gas assets will be paid to the
Company on the following basis:
Cash -- The Company will receive approximately $23.7 million of cash
at closing. It will use a substantial portion of such cash proceeds to
retire all outstanding debt (other than zero coupon notes "ZCN") on the
closing date of the HOUEX transaction (the "Closing").
Stock Issued at Closing -- The Company will receive shares of common
stock of HOUEX (valued at the IPO price) equal to approximately
$11,803,000.
Stock Issued on 1/31/97 and 1/31/98 -- The Company will receive shares
of common stock of HOUEX (valued at the fair market value of the stock on
those dates) equal to a minimum of approximately $8.8 million and a maximum
of approximately $17.6 million (depending upon the amount of probable
reserves transferred to proved as of December 31, 1996 and December 31,
1997) (the "Deferred Purchase Price").
HOUEX stock received by the Company will be unregistered and will
constitute "restricted stock" under the federal securities laws. The Company's
investors will have demand registration rights (once at HOUEX's expense [other
than underwriting discounts and sales commissions] and up to two additional
times at the expense of the investors making such demand), as well as unlimited
"piggyback" registration rights.
The cash portion of the consideration to be paid to the Company at closing
will be adjusted as follows:
- HOUEX will be reimbursed for revenues the Company received for production
after the Effective Date,
- the Company will be reimbursed for capital expenditures, lease operating
expenses and production taxes it incurred after the Effective Date, and
- the Company will be reimbursed by HOUEX for interest it paid or accrued
on bank debt and investor loans after the Effective Date.
Pursuant to the terms of the Agreement, the Company will retain the
following assets:
- cash and short-term investments,
- accounts receivable for oil and gas sales as of December 31, 1995,
- all other accounts receivable (except any receivable attributable to gas
imbalances),
- prepaid expenses (other than any prepayments to HOUEX), and
- furniture, fixtures and equipment.
The Company will retain all liabilities not specifically assumed by HOUEX,
including, without limitation, the following liabilities:
- accounts payable and accrued liabilities as of December 31, 1995,
- ZCN,
F-29
<PAGE> 100
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
- bank debt and investor loans (the Company will retire all debt except ZCN
at closing of the transaction),
- liabilities for federal or state income taxes or franchise taxes,
- liabilities to Smith Management Company or to any third parties for
services rendered,
- severance pay for employees,
- liabilities with respect to operations and events prior to the Effective
Date, and
- liabilities with respect to any breaches or failures of its
representations and warranties to HOUEX (subject to a $100,000
deductible).
The Company and HOUEX would both be bound by the terms of this Agreement
until September 30, 1996. During the term of the Agreement, neither company (nor
its stockholders) may initiate, solicit or negotiate a proposal or offer from
any third person to buy its assets. HOUEX may terminate the Agreement if it
elects not to proceed with the initial public offering because the proposed
initial offering price of its stock values HOUEX at less than $1.15 per Mcfe of
proved reserves. Either party may terminate the Agreement if the closing has not
occurred on or before September 30, 1996.
The sale of assets to HOUEX would be a taxable transaction. The Company
estimates that its tax liability related to the sale would be approximately
$560,000 to $735,000 depending upon the amount of the Deferred Purchase Price.
The president of the Company, Mr. Lester Smith, has exercised the right
(described in Footnote 6) to sell the reserves attributable to his net profits
interest ("NPI") under the same economic terms as the Company. Mr. Smith will
sell his NPI to the Company, which will then include it in the assets sold to
HOUEX. The agreement between Mr. Smith and the Company provides that the Company
will pay for the NPI by allocating a portion of the purchase price and Deferred
Purchase Price to Mr. Smith based on proved and probable reserves assigned by
independent engineering firms to Mr. Smith's NPI. The sale will be conditioned
on the closing of the HOUEX transaction.
It is currently estimated that Mr. Smith's share of the initial purchase
price is $300,000 and that his share of the Deferred Purchase Price is $100,000
to $200,000. The purchase price and Deferred Purchase Price amounts stated in
this footnote for the Company are inclusive of the estimated portion of the
purchase price and Deferred Purchase Price attributable to Mr. Smith's NPI.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The financial statements as of the six months ended June 30, 1995 and 1996
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such statements include all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows. Interim period results
are not necessarily indicative of the results to be achieved for an entire year.
F-30
<PAGE> 101
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
Short-Term Investments
Short-term investments consist of certificates of deposit and are stated at
cost, which approximates market value.
Prepaid Associated Costs and Well Costs
Associated Costs are allocated to oil and gas properties based on the ratio
of exploration and development expenditures incurred by the Company to total
exploration and development expenditures expected to be incurred. During 1994,
such costs which had not yet been allocated to oil and gas properties are
considered prepaid. During 1995, all such costs were allocated to oil and gas
properties.
Inventory
Inventory consists primarily of tubular goods used in the Company's
operations and is stated at the lower of cost or market value, with cost
determined on a weighted average basis.
Interest
Interest that relates to the costs of unevaluated oil and gas properties on
which exploration or development activities are in progress is capitalized. The
Company capitalized interest of approximately $335,000, $674,000, $226,000 and
$674,000 during the six months ended June 30, 1996 and the years ended December
31, 1995, 1994 and 1993, respectively.
HOUEX's General and Administrative Expenses
The Company capitalizes that portion of HOUEX's general and administrative
expenses which relates to exploration and development activities and expenses
the portion which relates to the operation of producing wells. During the years
ended December 31, 1995, 1994 and 1993, the Company capitalized approximately
$109,000, $231,000 and $347,000, respectively, of HOUEX's general and
administrative expenses. In addition, approximately $110,000, $231,000 and
$346,000 of such costs were charged to production expense during the years ended
December 31, 1995, 1994 and 1993, respectively. No amounts were paid to HOUEX
during 1996 as the agreement to reimburse general and administrative expenses
terminated in June 1995.
Gas Sales Imbalance
The Company records gas sales using the entitlement method. The entitlement
method requires revenue recognition of the Company's share of gas production
from properties in which gas sales are disproportionately allocated to owners
because of marketing or other contractual arrangements. The Company's net
imbalance is recorded as either a receivable or a payable in the accompanying
balance sheets.
F-31
<PAGE> 102
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
Oil and Gas Properties
The Company follows the full-cost method of accounting for its oil and gas
properties. This method provides for capitalizing all productive and
nonproductive costs incurred in connection with the acquisition, exploration and
development of oil and gas reserves. Such costs include lease acquisition,
geological and geophysical services, delay rentals, drilling, completing and
equipping oil and gas wells and platform fabrication and installation, as well
as interest, Associated Costs and direct general and administrative expenses.
Depreciation, depletion and amortization of oil and gas properties are
provided using the unit-of-production method whereby property costs are
amortized based on the ratio of current year production to total estimated
future production from proved oil and gas reserves. Capitalized costs associated
with the acquisition and exploration of unevaluated properties and major
properties under development are not currently amortized. Amortization of costs
associated with these properties will commence when the properties are
evaluated.
Under the full-cost method, a valuation provision is to be made if the
unamortized costs of oil and gas properties, less related deferred taxes, exceed
the limitation on capitalized costs (the "ceiling limitation"). The ceiling
limitation is the sum of: (1) the present value of future net revenues from
estimated production of proved oil and gas reserves, computed using a discount
factor of 10%; (2) the cost of unevaluated properties; less (3) any related tax
effects. During the years ended December 31, 1994 and 1993, the Company recorded
an impairment of $20,000,000 and $4,000,000, respectively, as a result of this
ceiling limitation. No such impairment was required during the six months ended
June 30, 1996 and the year ended December 31, 1995.
Future abandonment, dismantlement and site restoration costs include costs
to dismantle, relocate and dispose of the Company's offshore production
platforms, gathering systems, wells and related structures. The Company relies
on HOUEX to provide estimates of its future abandonment, dismantlement and site
restoration costs for each of its properties. While such estimates have been
considered in the standardized measure of future cash flows and in the
determination of depreciation, depletion and amortization of oil and gas
properties, the amount has never been significant and, accordingly, has been
recorded in the accompanying financial statements through additional
depreciation, depletion and amortization.
Furniture, Fixtures and Other
Provisions for depreciation of furniture, fixtures and other property are
computed on a straight-line basis over their estimated useful lives of five
years.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which
supersedes SFAS No. 96, and changes the criteria for recognition and measurement
of deferred tax assets and various other requirements of the previous standard.
As a result of such adoption, the Company recognized a cumulative benefit of
$716,000 during 1993. Under the provisions of SFAS No. 109, the Company had a
deferred tax asset of $12,993,000 attributable to regular net operating loss
("NOL") carryforwards as of December 31, 1995. Since it is unlikely that any of
the deferred tax asset will be realized, a valuation allowance of the entire
amount has been recorded.
At December 31, 1995, the Company had NOL carryforwards of approximately
$107,244,000 and alternative minimum net operating loss carryforwards of
approximately $72,429,000, all of
F-32
<PAGE> 103
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
which are available to reduce future federal income tax liabilities. Such
carryforwards expire during the years 2002 through 2010. The difference between
tax NOL carryforwards and the accumulated deficit at December 31, 1995 is due
primarily to the previous deduction for tax purposes of certain oil and gas
exploration and development costs which were capitalized for financial reporting
purposes.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
is effective for financial statements for fiscal years beginning after December
15, 1995. SFAS No. 121 will not have an impact on the financial position or
results of operations of the Company.
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 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.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and long-term debt. The carrying amounts
of cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value due to the highly liquid nature of these short-term
instruments. The fair value of long-term debt was determined based upon interest
rates currently available to the Company for borrowings with similar terms. The
fair value of long-term debt approximates the carrying amount as of December 31,
1995.
The fair value of ZCN cannot be determined at this time pending the outcome
of the proposed sale of oil and gas assets to HOUEX as discussed in Note 1. As
further discussed in Note 4, the board of directors (which includes majority
representation of zero coupon noteholders) has agreed to work with the officers
of the Company to develop a plan of liquidation (including ZCN) if the proposed
transaction is consummated. In the event the proposed sale is not consummated,
the board of directors and officers have agreed to renegotiate and extend the
terms of payment to the zero coupon noteholders. In either event, the fair value
of the ZCN is substantially less than the carrying amount as of June 30, 1996.
Reference is made to Note 4 regarding the terms, carrying amount, effective
interest rates and maturities of the ZCN.
(3) PREFERRED STOCK
The preferred shareholders have preference in liquidation over the holders
of common stock to the extent of $7.50 per share. Each preferred shareholder has
the option to convert each preferred share into one share of common stock on or
after January 15, 1992. Preferred shareholders are not entitled to vote.
Preferred shareholders are entitled to dividends as if they had converted their
shares to common stock when, if ever, common stock dividends are declared;
however, no dividends are expected to be paid on either the preferred stock or
common stock until substantially all of the preferred stock is converted. Under
the renegotiated subscription agreements, preferred shareholders are entitled to
receive a dollar for dollar dividend for each dollar of exploration money spent
over the original $48,140,625 exploration budget. The dividends will be paid
after all debt and zero coupon notes are retired but before any dividends are
paid to common shareholders.
F-33
<PAGE> 104
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
In addition to providing funding for exploration activities, subscribers
agreed to guarantee bank borrowings of or loan to the Company a maximum of
$96,000,000 as additional funds are required for development activities.
Pursuant to the terms of the renegotiated subscription agreements, this
commitment has now been reduced from $96,000,000 to $60,000,000.
(4) ZERO COUPON NOTES PAYABLE
In order to fund a portion of its exploration commitment under the
Agreement, the Company issued ZCN and $.01 par value preferred stock to
investors for an aggregate consideration of $48,140,625. The ZCN and preferred
stock were issued in four stages during the period March 1987 through September
1990 pursuant to the terms of Subscription Agreements between the Company and
investors. ZCN are subordinate to the Company's bank debt and were to mature six
years from the date of their issuance (on varying maturity dates from March 1993
through September 1996) at a combined maturity amount of $96,281,250.
By virtue of the intended repayment of ZCN at a maturity value equal to two
times the investors' original cash outlay (i.e., two times the cash outlay of
$48,140,625, or $96,281,250), investors were to receive a 12.25% preferred
return on their investment. For accounting and tax purposes, 68% of the proceeds
received from investors was allocated to ZCN and 32% was allocated to preferred
stock. This allocation resulted in an effective annual rate of interest on the
ZCN of 18% per annum. Thus, interest was accrued at 18% per annum on the portion
of the proceeds recorded as ZCN and such interest was added to the face amount
of the notes.
In March 1993, the Company renegotiated the terms of its ZCN. This
renegotiation was necessary because the Company made the decision to not produce
its oil and gas properties at full capacity when gas prices were below $1.75 per
MCF, in order to preserve the Company's gas reserves for production in periods
of higher gas prices. Under the terms of the renegotiated ZCN, 50% of the first
ZCN due in March 1993 was paid upon receipt of executed amendments from
investors. The maturity date of the remaining portion of the first ZCN was
extended three years and the maturity dates of the other ZCN were extended 1 1/2
to 3 years. Interest will accrue on the original maturity value of the ZCN at an
effective rate of 12.25% per annum from the date of original maturity until the
notes are paid off. However, the Company may prepay the ZCN at any time without
penalty.
The revised maturity dates and amounts of ZCN are as follows:
<TABLE>
<CAPTION>
MATURITY DATE OF ZCN MATURITY AMOUNT AMOUNT ACCRUED AT
----------------------------------------- ----------------------------------- -----------------------------------
ORIGINAL REVISED ORIGINAL REVISED 6/30/96 12/31/95
---------------------- ----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
March 16, 1993
(50% Paid).......... -- $ 16,046,875 $ 16,046,875 $ -- $ --
March 16, 1993
(50%)............... March 16, 1996 16,046,875 23,130,480 23,964,161 22,558,615
January 15, 1994...... January 15, 1997 32,093,750 46,260,949 43,287,510 40,748,677
July 1, 1996.......... March 15, 1998 16,046,875 19,753,553 16,030,699 14,660,751
September 4, 1996..... March 15, 1998 16,046,875 19,336,948 15,544,542 14,216,140
----------- ------------ ----------- -----------
$ 96,281,250 $ 124,528,805 $ 98,826,912 $ 92,184,183
=========== ============ =========== ===========
</TABLE>
ZCN due on March 16, 1996 have not been paid because any payment on ZCN
prior to retirement of all bank debt would cause the Company to be in default of
the Development and Exploration Credit Agreements. Interest, however, is being
accreted on these ZCN at a rate of 12.25%. By the terms of the ZCN, the Company
cannot make payments on ZCN if such payment
F-34
<PAGE> 105
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
would cause the Company to be in default of senior indebtedness. The Company is
currently dedicating all free cash flow to reduction of debt and projects that
it will have retired all debt (except ZCN) by early 1998.
On May 21, 1996, the board of directors of the Company (which includes
majority representation of zero coupon noteholders) agreed to develop with the
officers of the Company a Plan of Liquidation of SOXCO that will be acceptable
to the zero coupon noteholders if the proposed Sale of Assets to HOUEX is
consummated (see Note 1). In the event that the transaction with HOUEX is not
consummated, the board of directors has agreed to work with the officers of the
Company to renegotiate and extend the terms of payment to the zero coupon
noteholders after repayment of all bank debt and investor loans. Accordingly,
all ZCN are reflected as long-term at June 30, 1996 at the accrued amounts
summarized above. However, considering present circumstances, including the
proposed sale of assets, the ultimate payment to zero coupon noteholders will be
substantially less than the amount reflected in the accompanying financial
statements.
During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994, and 1993 interest of approximately $6,643,000, $11,989,000,
$10,461,000 and $11,322,000, respectively, was accreted on the ZCN.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Development Credit Agreement.......... $ 2,820,000 $ 3,760,000 $ 7,520,000
Preferred Shareholders Development
Loans............................... 658,000 1,317,000 2,632,000
Exploration Credit Agreement.......... 11,800,000 12,400,000 5,180,000
Preferred Shareholders Loans.......... 1,100,000 1,048,000 --
------------ ----------- -----------
16,378,000 18,525,000 15,332,000
Less: Current Portion of Long-term
Debt................................ (4,578,000) (7,956,000) (7,614,000)
------------ ----------- -----------
Long-term Debt........................ $ 11,800,000 $ 10,569,000 $ 7,718,000
============ =========== ===========
</TABLE>
The current portion of long-term debt at December 31, 1995 and June 30,
1996 includes a portion from each of the above mentioned loans.
Maturities of long-term debt by calendar year are as follows at December
31, 1995:
<TABLE>
<S> <C>
1997.......................................... $ 7,469,000
1998.......................................... 3,100,000
----------
$ 10,569,000
==========
</TABLE>
Development Credit Agreement
As of June 30, 1996, $2,820,000 was outstanding under a $30,068,836 line of
credit agreement, which was used to fund development expenditures (the
"Development Credit Agreement"). As of December 31, 1995 and 1994, the Company
had $3,760,000 and $7,520,000, respectively, outstanding under the Development
Credit Agreement. The Development Credit Agreement, amended in
F-35
<PAGE> 106
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
August 1992 and amended a second time in October 1995, is guaranteed by certain
preferred shareholders. The debt converted to a term loan on January 1, 1994.
Under the original loan terms, principal was due in eight equal quarterly
payments which began April 1, 1994. Six of eight payments were made prior to
October 1995. Under the second amendment, the debt will be paid in four
quarterly installments which will begin April 1, 1996.
Interest rates on borrowings are based on whichever of the following
methods, as defined in the Development Credit Agreement, the Company elects at
the time of borrowing: 3/4% above the Eurodollar rate, 7/8% above the
certificate of deposit rate, or the alternate base rate. Upon conversion to a
term loan on January 1, 1994, interest rates increased by 1/8%. Interest rates
are adjusted every 30 to 180 days, and interest is payable every 30 to 90 days,
depending upon certain factors. During the six months ended June 30, 1996 and
the years ended December 31, 1995, 1994 and 1993, the weighted average interest
rate was 6.92% and 5.94%, 4.17% and 3.61%, respectively. Also during the six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
the Company accrued interest of approximately $105,000, $308,000, $522,000 and
$535,000, respectively, on the borrowings under the Development Credit
Agreement, with approximately $133,000, $307,000, $493,000 and $572,000,
respectively, paid.
Commitment fees under the Development Credit Agreement were 3/8% per annum
on the average unutilized commitment until the debt converted to a term loan.
Commitment fees incurred during the year ended December 31, 1993, were
approximately $59,000. None were incurred during the year ended December 31,
1994 as the debt converted to a term loan on January 1, 1994.
The Development Credit Agreement includes covenants which, among other
things, restrict payment of cash dividends on common stock and require the
Company to maintain stated net worth amounts in addition to a specific liquidity
ratio. As of June 30, 1996 and December 31, 1995, the Company was in compliance
with all covenants.
Preferred Shareholders Development Loans
As of June 30, 1996, the Company had $658,000 outstanding under loan
agreements with certain preferred shareholders not electing to guarantee the
Development Credit Agreement. As of December 31, 1995 and 1994, the Company had
$1,317,000 and $2,632,000, respectively, outstanding under the agreements. The
loan agreements were amended in October 1995. The total amount available under
these loan agreements as of December 31, 1995 was $1,317,000. The loans bear
interest at 3/4% above a certain bank's six-month Eurodollar rate, as
determined each August 1 and February 1. Upon conversion of the Development
Credit Agreement to a term loan on January 1, 1994, interest rates increased by
1/8%. Interest is paid in quarterly installments. Under the original loan
terms, principal was due in eight equal quarterly payments which began April 1,
1994. Six of eight payments were made prior to October 1995. Under the amended
terms, principal will be paid in four quarterly installments which will begin
April 1, 1996. The quarterly payment due April 1, 1996 of $330,000 was paid on
June 30, 1996. The weighted average interest rate for the six months ended June
30, 1996 and the years ending December 31, 1995, 1994 and 1993, was 6.21%,
6.86%, 5.10% and 4.20%, respectively. The Company accrued interest on these
loans of approximately $36,000, $125,000, $215,000 and $221,000 and paid
interest of approximately $61,000, $120,000, $205,000 and $213,000 during the
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993, respectively.
F-36
<PAGE> 107
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
Exploration Credit Agreement
On April 29, 1994 the Company entered into a $25,000,000 collateral based
line of credit agreement with a current borrowing base of $11,800,000 (beginning
February 1996) which will be used to fund the remaining exploration activity
under the Agreement and other general corporate activities (the "Exploration
Credit Agreement"). The borrowing base was reduced in February 1996 from the
base of $12,400,000 at December 31, 1995. A repayment of principal in the amount
of $600,000 was made at that time. The Exploration Credit Agreement has been
written to allow the Company to increase its borrowing base up to $25,000,000 as
additional reserves are added as collateral. As of June 30, 1996, $11,800,000
was outstanding under this agreement. As of December 31, 1995 and 1994,
$12,400,000 and $5,180,000 were outstanding. Under the existing loan terms, the
debt will convert to a term loan on May 29, 1997 to be paid in eight equal
quarterly installments beginning August 1, 1997. Effective August 31, 1996, the
borrowing base of the Exploration Credit Agreement will be reduced to $9,200,000
until redetermination by the bank is made.
Prior to May 29, 1996, interest rates on borrowings were based on whichever
of the following methods, as defined in the Exploration Credit Agreement, the
Company elected at the time of borrowing: 1 1/2% above the Eurodollar rate,
1 5/8% above the certificate of deposit rate, or prime rate. After May 29, 1996,
interest is as follows: 3% above the Eurodollar rate, 3 1/8% above the
certificate of deposit rate, or 1/2% above the prime rate. After the debt
converts to a term loan on May 29, 1997, interest rates are increased by 1/8%.
Interest rates are adjusted every 30 to 180 days, and interest is payable every
month during the revolving period and every quarter during the term period.
During the six months ended June 30, 1996 and the years ended December 31, 1995
and 1994, the weighted average interest rates were 7.49%, 7.43% and 5.48%. Also
during the six months ended June 30, 1996 and the years ended December 31, 1995
and 1994, the Company accrued interest of approximately $437,000, $719,000 and
$73,000 on the borrowings under the Exploration Credit Agreement with payments
of approximately $443,000, $643,000 and $71,000.
Commitment fees under the Exploration Credit Agreement are 1/2% per annum
on the average daily unused portion of the Borrowing Base until the debt
converts to a term loan. Commitment fees incurred during the years ended
December 31, 1995 and 1994 were approximately $18,000 and $36,000. None were
incurred during the six months ended June 30, 1996 as the Exploration Credit
Agreement was drawn down to the maximum.
The Exploration Credit Agreement includes covenants which, among other
things, restrict payments of cash dividends on common stock and require the
Company to maintain stated net worth amounts in addition to a specific liquidity
ratio. As of June 30, 1996 and December 31, 1995, the Company was in compliance
with all covenants.
Preferred Shareholder Loans
In September 1995, the Company entered into loan agreements with all
preferred shareholders totalling $2,500,000. As of June 30, 1996 and December
31, 1995, the Company had $1,100,000 and $1,048,000, respectively, outstanding
under the loan agreements. The loans bear interest at 12.25%. Principal and
interest will be paid in full on September 14, 1996. The Company accrued
interest on these loans of approximately $66,000, and $33,000, respectively, and
paid no interest during the six months ended June 30, 1996 and the year ended
December 31, 1995.
F-37
<PAGE> 108
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
(6) RELATED-PARTY TRANSACTIONS
The Company has entered into a management agreement with an affiliated
company. The management agreement provides that the Company will reimburse the
affiliate for general and administrative expenses incurred by the affiliate on
the Company's behalf. During the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993, pursuant to the management agreement,
the Company paid or accrued approximately $346,000, $837,000, $586,000 and
$569,000, respectively, for general and administrative expenses incurred by the
affiliate on the Company's behalf. In addition, the Company paid the affiliate
$63,000, $154,000, $171,000 and $134,000 for exploration and development
services which have been capitalized as part of the full-cost pool during the
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993, respectively.
As part of the Company's employment agreement with its president, each
prospect acquired by the Company or in which the Company participates is
burdened by a 1.25% net profits interest on a prospect-by-prospect basis,
proportionately reduced to the interest of the Company.
The president has exercised his right to sell the reserves attributable to
the net profits interest under the same economic terms as the Company would be
selling its reserves to HOUEX. See further discussion in Note 1.
During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, the Company paid or accrued approximately $20,000, $81,000,
$80,000 and $65,000, respectively, related to outside professional services
provided pursuant to consulting agreements with an individual who serves as a
director of the Company and as a director of affiliated companies. An additional
$15,000, $23,000 and $15,000 have been capitalized as part of the full-cost pool
during the years ended December 31, 1995, 1994 and 1993, respectively. No costs
were capitalized for the six months ended June 30, 1996.
(7) MAJOR CUSTOMERS
The Company markets its oil and gas production to numerous purchasers under
short-term contracts. During 1995, H&N Gas Limited, Enron Gas Marketing, Inc.
and Dow Hydrocarbons & Resources, Inc. accounted for 42%, 12% and 11%,
respectively, of oil and gas revenues of the Company. During 1994, H&N Gas
Limited, Transco Energy Marketing Company, Enron Gas Marketing, Inc. and Dow
Hydrocarbons & Resources, Inc., accounted for 19%, 13%, 12%, and 10%,
respectively, of oil and gas revenues. During 1993, Transco Energy Marketing
Company, American Central Marketing and Enron Gas Marketing, Inc. accounted for
19%, 12% and 11%, respectively, of oil and gas revenues. The Company believes
that the loss of any single customer would not have a material adverse effect on
the results of operations of the Company.
(8) SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCING ACTIVITIES
(UNAUDITED)
Oil and Gas Reserves and Related Financial Data
Information with respect to the Company's oil and gas producing activities
is presented in the following tables. Reserve quantities as well as certain
information regarding future production and discounted cash flows were
determined by independent petroleum consultants; Ryder Scott Company, Huddleston
& Co., Inc. and Netherland, Sewell & Associates, Inc.
The Company cautions that there are many uncertainties inherent in
estimating proved reserve quantities, and in projecting future production rates
and the timing of future development expendi-
F-38
<PAGE> 109
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
tures. In addition, reserve estimates of new discoveries are more imprecise than
those of properties with a production history. Accordingly, these estimates are
subject to change as additional information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, 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
developed oil and gas reserves are those reserves expected to be recovered
through existing wells and existing equipment and operating methods.
Capitalized Costs Related to Oil and Gas Producing Activities
The following table sets forth information concerning capitalized costs at
December 31, 1995, 1994 and 1993 related to the Company's oil and gas operations
(in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Capitalized costs:
Evaluated properties..................................... $ 130,963 $ 122,610
Unevaluated properties................................... 5,335 4,766
--------- --------
136,298 127,376
Less -- Accumulated depreciation, depletion and
amortization............................................. (101,418) (94,540)
--------- --------
Net capitalized costs...................................... $ 34,880 $ 32,836
========= ========
</TABLE>
Costs Incurred on Oil and Gas Producing Activities
The following table includes all costs incurred in the years ended December
31, 1995, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Acquisition -- Unproved properties................. $ -- $ 1,017 $ --
Exploration costs.................................. 872 6,168 6,043
Development costs.................................. 8,050 2,893 9,244
------ ------- -------
Total costs incurred............................... $ 8,922 $ 10,078 $ 15,287
====== ======= =======
</TABLE>
F-39
<PAGE> 110
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
Estimated Quantities of Proved Oil and Gas Reserves
Estimates prepared by the Company's independent engineers of proved
reserves and proved developed reserves owned at year end and changes in proved
reserves since December 31, 1992 are shown in the following tables:
<TABLE>
<CAPTION>
OIL NATURAL
NATURAL AND GAS
GAS CONDENSATE LIQUIDS
(MMCF) (MBBLS) (MBBLS)
-------- ---- -----
<S> <C> <C> <C>
Proved reserves:
December 31, 1992....................................... 49,991 214 117
Revisions of previous estimates...................... (2,611) (70) (117)
Extensions and discoveries........................... 5,533 56 --
Production........................................... (12,476) (38) --
------- --- ----
December 31, 1993....................................... 40,437 162 --
Revisions of previous estimates...................... (363) 1 --
Extensions and discoveries........................... 1,790 2 --
Production........................................... (9,554) (31) --
------- --- ----
December 31, 1994....................................... 32,310 134 --
Revisions of previous estimates...................... 1,652 115 --
Extensions and discoveries........................... 2,440 73 --
Production........................................... (6,295) (26) --
------- --- ----
December 31, 1995....................................... 30,107 296 --
======= === ====
Proved developed reserves:
December 31, 1992....................................... 44,630 184 85
------- --- ----
December 31, 1993....................................... 34,651 75 --
------- --- ----
December 31, 1994....................................... 28,752 81 --
------- --- ----
December 31, 1995....................................... 28,690 291 --
------- --- ----
</TABLE>
Results of Operations from Producing Activities
The following table sets forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1995, 1994 and
1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Revenues from oil and gas producing activities... $ 10,373 $ 18,536 $ 26,123
Production costs................................. 2,012 2,654 2,634
Depreciation, depletion and amortization......... 6,877 35,550 24,196
------- -------- -------
Total expenses......................... 8,889 38,204 26,830
------- -------- -------
Income tax....................................... -- -- --
Results of operations from producing
activities..................................... $ 1,484 $ (19,668) $ (707)
======= ======== =======
</TABLE>
Standardized Measure
The following disclosure concerning standardized measure of future net cash
flows from proved oil and gas reserves is presented in accordance with Statement
of Financial Accounting
F-40
<PAGE> 111
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND JUNE 30, 1996
Standards (SFAS) No. 69, "Disclosures about Oil and Gas Producing Activities".
As prescribed by this statement, the amounts shown are based on prices and costs
at the end of each period discounted at 10% and are not adjusted in anticipation
of increases due to inflation or other factors. At December 31, 1995, the
standardized measure reflects an average oil price of $17.99 per barrel and an
average gas price of $2.20 per MCF. Future income tax estimates are calculated
by applying the appropriate statutory income tax rate to the estimated future
undiscounted pretax net cash flows from proved oil and gas properties and
considering estimates of permanent differences, net operating loss carryforwards
and tax credits.
The above assumptions used to compute the standardized measure are those
specifically required by SFAS No. 69 and, as such, do not reflect the Company's
expectations of actual revenues to be derived from those reserves, and are not
necessarily indicative of the fair value of the Company's oil and gas reserves.
The following table reflects the standardized measure of discounted future
net cash flows relating to the Company's interest in proved oil and gas reserves
as of December 31, 1995, 1994 and 1993 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Future cash inflows........................... $ 71,693 $ 54,217 $ 90,266
Future costs:
Production.................................. (9,036) (10,027) (11,730)
Development and abandonment costs........... (4,680) (6,493) (6,004)
-------- -------- --------
Future net inflows before income tax.......... 57,977 37,697 72,532
Future income taxes........................... (968) (504) (2,377)
-------- -------- --------
Future net cash flows......................... 57,009 37,193 70,155
10% annual discount factor.................... (14,522) (9,228) (15,334)
-------- -------- --------
Standardized Measure at end of year........... $ 42,487 $ 27,965 $ 54,821
======== ======== ========
</TABLE>
The change in the standardized measure of discounted future net cash flows
related to the proved oil and gas reserves for the years ended December 31,
1995, 1994, and 1993 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Standardized Measure at beginning of year....... $ 27,965 $ 54,821 $ 71,345
Oil and gas sales, net of production costs...... (8,361) (15,882) (23,489)
Net change in oil and gas sales prices, net of
production costs.............................. 12,085 (15,920) (4,802)
Extensions and discoveries, net of future
production and development costs.............. 5,253 2,310 7,667
Changes in estimated future development costs... 771 (1,586) (1,296)
Previously estimated development and abandonment
costs incurred................................ 906 1,647 4,956
Revisions of quantity estimates................. 3,411 (367) (5,713)
Accretion of discount........................... 2,838 5,643 7,777
Net change in income taxes...................... (338) 1,197 4,816
Changes in production rates (timing) and
other......................................... (2,043) (3,898) (6,440)
------- -------- --------
Standardized Measure at end of year............. $ 42,487 $ 27,965 $ 54,821
======= ======== ========
</TABLE>
F-41
<PAGE> 112
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
The Houston Exploration Company
We have audited the accompanying Historical Summaries of the interests in
the oil and gas revenues and direct operating expenses of the properties to be
acquired by The Houston Exploration Company (an indirect wholly-owned subsidiary
of The Brooklyn Union Gas Company) from TransTexas Gas Corporation for each of
the three years in the period ended December 31, 1995 ("Historical Summaries").
These Historical Summaries are the responsibility of TransTexas Gas
Corporation's management. Our responsibility is to express an opinion on the
Historical Summaries 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 Historical Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summaries. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Historical
Summaries. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Historical Summaries were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the registration statement on Form S-1 of The
Houston Exploration Company) and are not intended to be a complete financial
presentation of TransTexas Gas Corporation's interests in the properties
described above.
In our opinion, the Historical Summaries referred to above present fairly,
in all material respects, the interests in the oil and gas revenues and direct
operating expenses of the properties to be acquired by The Houston Exploration
Company from TransTexas Gas Corporation for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
July 2, 1996
F-42
<PAGE> 113
HISTORICAL SUMMARIES OF THE INTERESTS IN THE
OIL AND GAS REVENUES AND DIRECT OPERATING EXPENSES
OF THE PROPERTIES TO BE ACQUIRED BY THE HOUSTON EXPLORATION COMPANY
FROM TRANSTEXAS GAS CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1993 1994 1995 1996 1995
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Oil and gas revenues..................... $27,728 $34,119 $26,800 $15,335 $14,105
Direct operating expenses................ 3,562 4,258 4,542 2,743 2,547
------- ------- ------- ------
Revenues in excess of direct operating
expenses............................... $24,166 $29,861 $22,258 $12,592 $11,558
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE> 114
NOTES TO THE HISTORICAL SUMMARIES OF THE INTERESTS IN THE OIL AND GAS REVENUES
AND DIRECT OPERATING EXPENSES OF THE PROPERTIES TO BE ACQUIRED BY THE HOUSTON
EXPLORATION COMPANY FROM TRANSTEXAS GAS CORPORATION
1. OPERATIONS, ORGANIZATION AND BASIS OF PRESENTATION
The accompanying Historical Summaries represent the interests in the
natural gas and oil revenues and direct operating expenses of the natural gas
and oil producing properties to be acquired by The Houston Exploration Company
("Houston Exploration"), an indirect wholly-owned subsidiary of The Brooklyn
Union Gas Company ("Brooklyn Union"), from TransTexas Gas Corporation
("TransTexas") effective May 1, 1996. The oil and gas producing properties to be
acquired are located primarily in South Texas. These properties are referred to
herein as the "properties." The Historical Summaries may not be representative
of future operations.
The accompanying Historical Summaries were prepared from the historical
accounting records of TransTexas (accrual basis, full cost method of accounting
for oil and gas activities, in accordance with generally accepted accounting
principles).
The agreement for Purchase and Sale of Oil and Gas Properties by and
between The Houston Exploration Company, TransTexas Gas Corporation and
TransTexas Transmission Corporation (the "Agreement") for $62,205,000 is dated
June 21, 1996. The scheduled closing date set forth in the Agreement is July 2,
1996.
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. Historically no
allocation of general and administrative, litigation, interest or federal income
tax expense was made to the properties, and depreciation, depletion and
amortization was computed based on TransTexas' basis in the properties.
Accordingly, the Historical Summaries are presented in lieu of the financial
statements required under Rule 3-05 of Securities and Exchange Commission
Regulation S-X.
The Historical Summaries as of the six months ended June 30, 1995 and 1996
have been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such Historical Summaries
include all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of the
Company's revenues and expenses of the properties to be acquired by Houston
Exploration. Interim period results are not necessarily indicative of the
results to be achieved for an entire year.
2. COMMITMENT AND CONTINGENCIES
The properties listed in the Agreement are subject to two judgment liens
imposed on substantially all of TransTexas' properties in the aggregate amount
of $20 million. TransTexas has appealed the judgments to which such liens
relate, and has posted bonds to ensure payment of such judgments pending the
completion of such appeals. One such bond, in the approximate amount of $18
million, is collateralized by an irrevocable letter of credit, and the other
bond is collateralized by cash. As a result of such arrangements, TransTexas
believes that such judgements are adequately collateralized.
F-44
<PAGE> 115
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
ESTIMATED NET QUANTITIES OF PROVED AND PROVED DEVELOPED OIL AND GAS RESERVES
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can be
expected to be recovered through existing wells with existing equipment and
operating methods.
The following tables present the estimated net proved and proved developed
oil and gas reserves, estimated by Netherland, Sewell & Associates, Inc.,
independent reserve engineers, attributable to the properties at December 31,
1993, 1994 and 1995, along with a summary of changes in the quantities of net
proved reserves during 1993, 1994 and 1995.
<TABLE>
<CAPTION>
GAS (MILLIONS OF CUBIC FEET)
-------------------------------
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Proved Reserves:
Beginning of period....................................... 108,253 106,800 111,630
Revisions of previous estimates........................... (2,299) 3,099 21,560
Extensions and discoveries................................ 15,477 23,357 4,751
Production................................................ (14,631) (21,626) (19,545)
------- ------- -------
End of period............................................. 106,800 111,630 118,396
======== ======== ========
Proved Developed Reserves:
End of period............................................. 54,182 73,596 56,329
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
OIL (THOUSANDS OF BARRELS)
------------------------------
DECEMBER 31,
------------------------------
1993 1994 1995
------ ----- -----
<S> <C> <C> <C>
Proved Reserves:
Beginning of period........................................ 44.4 47.5 34.1
Revisions of previous estimates............................ 7.6 (12.6) 21.4
Extensions and discoveries................................. .8 4.4 0
Production................................................. (5.3) (5.2) (4.4)
------ ----- -----
End of period.............................................. 47.5 34.1 51.1
====== ===== =====
Proved Developed Reserves:
End of period.............................................. 28.8 32.3 33.2
====== ===== =====
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES
The following tables set forth the computation of the standardized measure
of discounted future net cash flows (before income taxes) relating to proved
reserves, estimated by TransTexas for 1993, 1994 and 1995. Future cash inflows
represent expected revenues from production of year-end quantities of proved
reserves based on December 31, 1993, 1994, and 1995 prices and any fixed and
determinable future escalation provided by contractual arrangements in existence
at year-end. Escalation based on inflation and supply and demand are not
considered. Estimated future production and development costs related to future
production of year-end reserves are based on year-end costs. A discount rate of
10% is applied to the annual future net cash flows.
The methodology and assumptions used in calculating the standardized
measure are those required by Statement of Financial Accounting Standards No.
69. This data is not intended to be representative of the fair market value of
the properties' proved reserves. The valuation of revenues
F-45
<PAGE> 116
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) -- (CONTINUED)
and costs do not necessarily reflect the amounts to be received or expended. In
addition to the valuations used, numerous other factors are considered in
evaluating known and prospective oil and gas reserves.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows....................................... $199,966 $156,926 $210,844
Future production and development costs................... (72,960) (63,744) (90,997)
-------- -------- --------
Future net cash flows..................................... 127,006 93,182 119,847
10% annual discount to reflect timing of net cash flows... (32,884) (23,728) (39,287)
-------- -------- --------
Standardized measure (before income taxes) of discounted
future net cash flows relating to proved reserves....... $ 94,122 $ 69,454 $ 80,560
========= ========= =========
</TABLE>
SUMMARY OF CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES
The primary elements of changes in the standardized measure (before income
taxes) of discounted future net cash flows relating to proved reserves for the
years 1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Standardized measure (before income taxes),
beginning of period..................................... $ 95,358 $ 94,122 $ 69,454
Increase (decrease) in discounted future net cash flows:
Sales and transfers of oil and gas produced, net of
production costs................................... (24,166) (29,861) (22,258)
Revisions to estimates of proved reserves:
Prices, including production costs................. 4,049 (36,143) 20,185
Production and development costs................... (17,795) (7,451) (17,406)
Quantities......................................... (2,568) 2,643 17,548
Extensions, discoveries and improved recovery less
related costs...................................... 14,543 15,315 3,778
Development costs incurred during the period......... 15,165 21,417 2,314
Accretion of discount................................ 9,536 9,412 6,945
-------- -------- --------
Standardized measure (before income taxes), end of
period.................................................. $ 94,122 $ 69,454 $ 80,560
========= ========= =========
</TABLE>
F-46
<PAGE> 117
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters, for whom Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette
Securities Corporation and PaineWebber Incorporated are acting as
representatives, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
---------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co...................................................
Donaldson, Lufkin & Jenrette Securities Corporation...................
PaineWebber Incorporated..............................................
---------
Total....................................................... 6,200,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 930,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 6,200,000 shares of Common
Stock offered.
The Company, the Company's executive officers and directors, Brooklyn Union
and Soxco have agreed, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date of
this Prospectus, not to offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to employee stock option
plans existing on, or on the conversion or exchange of convertible or
exchangeable securities outstanding on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible or
exchangeable into securities which are substantially similar to the shares of
Common Stock, without the prior written consent of the representatives of the
Underwriters. See "Shares Eligible for Future Sale."
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be negotiated
between the Company and the representa-
U-1
<PAGE> 118
tives of the Underwriters. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, will be current and historical natural gas and oil prices,
current and prospective conditions in the supply and demand for natural gas and
oil, reserve and production quantities for the Company's natural gas and oil
properties, the history of, and prospects for, the industry in which the Company
operates, the price earnings multiples of publicly traded common stocks of
comparable companies, the cash flow and earnings of the Company and comparable
companies in recent periods and the Company's business potential and cash flow
and earnings prospects.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1993.
U-2
<PAGE> 119
[RYDER SCOTT COMPANY LETTERHEAD]
April 15, 1996
Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Gentlemen:
Pursuant to your request, we present below our estimates of the net proved
reserves attributable to the interest of Houston Exploration Company (referred
to herein as the Company) as of December 31, 1995. The reserve estimates
utilized in this report were mechanically updated from our September 30, 1995
report which was dated October 17, 1995. At your request, we have revised
product pricing for all properties and production start dates for undeveloped
properties where applicable. The Company's reserves are located in the states
of Louisiana, Texas and in the federal waters offshore Louisiana and Texas.
The estimated reserve volumes and future income amounts presented in this
report are related to hydrocarbon prices. December 1995 hydrocarbon prices
were used in the preparation of this report as required by Securities and
Exchange Commission (SEC) and Financial Accounting Standards Bulletin No. 69
(FASB 69) guidelines; however, actual future prices may vary significantly from
December 1995 prices. Therefore, volumes of reserves actually recovered and
amounts of income actually received may differ significantly from the estimated
quantities presented in this report.
<TABLE>
<CAPTION>
Proved Net Reserves
Mechanically Adjusted from
September 30, 1995 to
December 31, 1995
-------------------------------------
Liquid, Barrels Gas, MMCF
------------------ ------------
<S> <C> <C>
Developed and Undeveloped 263,133 61,872
Developed 162,483 43,349
</TABLE>
The "Liquid" reserves shown above consist of condensate. All hydrocarbon
liquid reserves are expressed in standard 42 gallon barrels. All gas volumes
are sales gas expressed in MMCF at the pressure and temperature bases of the
area where the gas reserves are located.
The proved reserves presented in this report comply with the SEC's
Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent Commission
Staff Accounting Bulletins, and are based on the following definitions and
criteria:
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing conditions. Reservoirs are considered
proved if economic producibility is supported by actual production or
formation tests. In certain instances, proved reserves are assigned on the
basis of a combination of core analysis and electrical and other type logs
which indicate the reservoirs are analogous to reservoirs in the same
field which are producing or have demonstrated the ability to produce on a
formation test. The area of a reservoir considered proved includes (1)
that portion delineated by drilling and defined by fluid contacts, if any,
and (2) the adjoining portions not yet drilled that can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of data on fluid contacts, the
A-1
<PAGE> 120
Houston Exploration Company
April 15, 1996
Page 2
lowest known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir. Proved reserves are estimates of hydrocarbons to
be recovered from a given date forward. They may be revised as hydrocarbons are
produced and additional data become available. Proved natural gas reserves are
comprised of non-associated, associated, and dissolved gas. An appropriate
reduction in gas reserves has been made for the expected removal of natural gas
liquids, for lease and plant fuel, and the exclusion of non-hydrocarbon gases if
they occur in significant quantities and are removed prior to sale. Reserves
that can be produced economically through the application of improved recovery
techniques are included in the proved classification when these qualifications
are met: (1) successful testing by a pilot project or the operation of an
installed program in the reservoir provides support for the engineering analysis
on which the project or program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery in its original sense. Improved recovery also
includes the enhanced recovery methods of thermal, chemical flooding, and the
use of miscible and immiscible displacement fluids. Estimates of proved reserves
do not include crude oil, natural gas, or natural gas liquids being held in
underground storage. Depending on the status of development, these proved
reserves are further subdivided into:
(i) "developed reserves" which are those proved reserves reasonably
expected to be recovered through existing wells with existing
equipment and operating methods, including (a) "developed producing
reserves" which are those proved developed reserves reasonably
expected to be produced from existing completion intervals now open
for production in existing wells, and (b) "developed non-producing
reserves" which are those proved developed reserves which exist behind
the casing of existing wells which are reasonably expected to be
produced through these wells in the predictable future where the cost
of making such hydrocarbons available for production should be
relatively small compared to the cost of a new well; and
(ii) "undeveloped reserves" which are those proved reserves reasonably
expected to be recovered from new wells on undrilled acreage, from
existing wells where a relatively large expenditure is required, and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has
been proved effective by actual tests in the area in the same
reservoir. Reserves from undrilled acreage are limited to those
drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units
are included only where it can be demonstrated with reasonable
certainty that there is continuity of production from the existing
productive formation.
Because of the direct relationship between volumes of proved undeveloped
reserves and development plans, we include in the proved undeveloped category
only reserves assigned to undeveloped locations that we have been assured will
definitely be drilled and reserves assigned to the undeveloped portions of
secondary or tertiary projects which we have been assured will definitely be
developed.
The Company has interests in certain tracts which have substantial
additional hydrocarbon quantities which cannot be classified as proved and
consequently are not included herein. The Company has active exploratory and
development drilling programs which may result in the reclassification of
significant additional volumes to the proved category. At your request, we have
not reviewed production or performance data since the September 30, 1995 report.
We have utilized the latest product prices and costs supplied by Houston
Exploration and have revised reserves in accordance with the new economic data
where applicable.
A-2
<PAGE> 121
Houston Exploration Company
April 15, 1996
Page 3
In accordance with the requirements of FASB 69, our estimates of future
cash inflows, future costs, and future net cash inflows before income tax as of
December 31, 1995 from this report are presented below.
<TABLE>
<CAPTION>
As of
December 31, 1995
------------------------
<S> <C>
Future Cash Inflows $134,406,042
Future Costs
Production $ 16,085,017
Development 12,328,376
------------
Total Costs $ 28,413,393
Future Net Cash Inflows
Before Income Tax $105,992,649
Present Value at 10%
Before Income Tax $ 78,676,747
</TABLE>
The future cash inflows are gross revenues before any deductions. The
production costs were based on current data and include production taxes, ad
valorem taxes, and certain other items such as transportation costs in addition
to the operating costs directly applicable to the individual leases or wells.
The development costs were based on current data and include dismantlement and
abandonment costs net of salvage for properties where such costs are
relatively significant.
The Company furnished us with gas prices in effect at December 31, 1995
and with its forecasts of future gas prices which take into account SEC
guidelines, current market prices, contract prices, and fixed and determinable
price escalations where applicable. In accordance with SEC guidelines, the
future gas prices used in this report make no allowances for future gas price
increases which may occur as a result of inflation nor do they account for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat higher or lower than December gas prices. For gas sold
under contract, the contract gas price including fixed and determinable
escalations exclusive of inflation adjustments, was used until the contract
expires and then was adjusted to the current market price for the area and held
at this adjusted price to depletion of the reserves.
The Company furnished us with liquid prices in effect at December 31, 1995
and these prices were held constant to depletion of the properties. In
accordance with SEC guidelines, changes in liquid prices subsequent to December
31, 1995 were not considered in this report.
Operating costs for the leases and wells in this report were based on the
operating expense reports of the Company and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. Development costs were
furnished to us by the Company and are based on authorizations for expenditure
for the proposed work or actual costs for similar projects. The current
operating and development costs were held constant throughout the life of the
properties. The estimated net cost of abandonment after salvage was included
for properties where abandonment costs net of salvage are significant. The
estimates of the net abandonment costs furnished by the Company were accepted
without independent verification. No deduction was made for indirect costs
such as general administration and overhead expenses, loan repayments, interest
expenses, and exploration and development prepayments. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist.
A-3
<PAGE> 122
Houston Exploration Company
April 15, 1996
Page 4
The estimates of reserves presented herein are based upon a detailed
study of the properties in which Houston Exploration Company owns an interest;
however, we have not made any field examination of the properties. No
consideration was given in this report to potential environmental liabilities
which may exist nor were any costs included for potential liability to restore
and clean up damages, if any, caused by past operating practices. Houston
Exploration Company has informed us that they have furnished us all of the
accounts, records, geological and engineering data and reports, and other data
required for this investigation. The ownership interests, prices, and other
factual data furnished by Houston Exploration Company were accepted without
independent verification. The reserve estimates presented in this report were
as of September 30, 1995, mechanically adjusted to December 31, 1995 and are
based upon production data available through August 1995. This report was based
upon economic data available through December 1995. We have been informed by
Houston Exploration that there have been no significant changes in the status
or performance of the properties included in this report which would affect the
estimate of reserves.
The reserves included in this report are estimates only and should not
be construed as being exact quantities. They may not be actually recovered, and
if recovered, the revenues therefrom and the actual costs related thereto could
be more or less than the estimated amounts. Moreover, estimates of reserves may
increase or decrease as a result of future operations.
In general, we estimate that future gas production rates will continue
to be the same as the average rate for the latest available 12 months of actual
production until such time that the well or wells are incapable of producing at
this rate. The well or wells were then projected to decline at their decreasing
delivery capacity rate. Our general policy on estimates of future production
rates is adjusted when necessary to reflect actual gas market conditions in
specific cases. The future production rates from wells now on production may be
more or less than estimated because of changes in market demand or allowables
set by regulatory bodies. Wells or locations which are not currently producing
may start producing earlier or later than anticipated in our estimates of their
future production rates.
While it may reasonably be anticipated that the future prices received
for the sale of production and the operating costs and other costs relating to
such production may also increase or decrease from existing levels, such
changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
Neither we nor any or our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future cash inflows for the
subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ DOUGLAS L. McBRIDE, P.E.
Douglas L. McBride, P.E.
Vice President
A-4
<PAGE> 123
[RYDER SCOTT COMPANY PETROLEUM ENGINEERS LETTERHEAD]
April 15, 1996
Smith Offshore Exploration Company
811 Dallas, Suite 800
Houston, Texas 77052
Gentlemen:
Pursuant to your request, we present below our estimates of the net
proved reserves attributable to the interest of Smith Offshore Exploration
Company (referred to herein as the Company) as of December 31, 1995. The
reserve estimates utilized in this report were mechanically updated from our
September 30, 1995 report which was dated October 17, 1995. At your request,
we have revised product pricing for all properties and production start dates
for undeveloped properties where applicable. The Company's reserves are located
in the states of Louisiana, Texas and in the federal waters offshore Louisiana
and Texas.
The estimated reserve volumes and future income amounts presented in
this report are related to hydrocarbon prices. December 1995 hydrocarbon prices
were used in the preparation of this report as required by Securities and
Exchange Commission (SEC) and Financial Accounting Standards Bulletin No. 69
(FASB 69) guidelines; however, actual future prices may vary significantly from
December 1995 prices. Therefore, volumes of reserves actually recovered and
amounts of income actually received may differ significantly from the estimated
quantities presented in this report.
<TABLE>
<CAPTION>
Proved Net Reserves
Mechanically Adjusted from
September 30, 1995 to
December 31, 1995
-----------------------------------
Liquid, Barrels Gas, MMCF
--------------- ---------
<S> <C> <C>
Developed and Undeveloped 61,726 12,309
Developed 61,706 11,921
</TABLE>
The "Liquid" reserves shown above consist of condensate. All
hydrocarbon liquid reserves are expressed in standard 42 gallon barrels. All
gas volumes are sales gas expressed in MMCF at the pressure and temperature
bases of the area where the gas reserves are located.
The proved reserves presented in this report comply with the SEC's
Regulation S-X Part 210.4-10 Sec.(a) as clarified by subsequent Commission
Staff Accounting Bulletins, and are based on the following definitions
and criteria:
Proved reserves of crude oil, condensate, natural gas, and
natural gas liquids are estimated quantities that geological and
engineering data demonstrate with reasonable certainty to be recoverable
in the future from known reservoirs under existing conditions.
Reservoirs are considered proved if economic producibility is supported
by actual production of formation tests. In certain instances, proved
reserves are assigned on the basis of a combination of core analysis and
electrical and other type logs which indicate the reservoirs are
analogous to reservoirs in the same field which are producing or have
demonstrated the ability to produce on a formation test. The area of a
reservoir considered proved includes (1) that portion delineated by
drilling and defined by fluid contacts, if any, and (2) the adjoining
portions not yet drilled that can be reasonably judged as economically
productive on the basis of available geological and engineering data. In
the absence of data on fluid contacts, the
A-5
<PAGE> 124
Smith Offshore Exploration Company
April 15, 1996
Page 2
lowest known structural occurrence of hydrocarbons controls the lower provided
limit of the reservoir. Proved reserves are estimates of hydrocarbons to be
recovered from a given date forward. They may be revised as hydrocarbons are
produced and additional data become available. Proved natural gas reserves are
comprised of non-associated, associated, and dissolved gas. An appropriate
reduction in gas reserves has been made for the expected removal of natural gas
liquids, for lease and plant fuel, and the exclusion of non-hydrocarbon gases
if they occur in significant quantities and are removed prior to sale. Reserves
that can be produced economically through the application of improved recovery
techniques are included in the proved classification when these qualifications
are met: (1) successful testing by a pilot project or the operation of an
installed program in the reservoir provides support for the engineering
analysis on which the project or program was based, and (2) it is reasonably
certain the project will proceed. Improved recovery includes all methods for
supplementing natural reservoir forces and energy, or otherwise increasing
ultimate recovery from a reservoir, including (1) pressure maintenance, (2)
cycling, and (3) secondary recovery in its original sense. Improved recovery
also includes the enhanced recovery methods of thermal, chemical flooding, and
the use of miscible and immiscible displacement fluids. Estimates of proved
reserves do not include crude oil, natural gas, or natural gas liquids being
held in underground storage. Depending on the status of development, these
proved reserves are further subdivided into:
(i) "developed reserves" which are those proved reserves reasonably
expected to be recovered through existing wells with existing equipment
and operating methods, including (a) "developed producing reserves"
which are those proved developed reserves reasonably expected to be
produced from existing completion intervals now open for production in
existing wells, and (b) "developed non-producing reserves" which are
those proved developed reserves which exist behind the casing of
existing wells which are reasonably expected to be produced through
these wells in the predictable future where the cost of making such
hydrocarbons available for production should be relatively small
compared to the cost of a new well; and
(ii) "undeveloped reserves" which are those proved reserves reasonably
expected to be recovered from new wells on undrilled acreage, from
existing wells where a relatively large expenditure is required, and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has
been proved effective by actual tests in the area in the same
reservoir. Reserves from undrilled acreage are limited to those
drilling units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other undrilled units
are included only where it can be demonstrated with reasonable
certainty that there is continuity of production from the existing
productive formation.
Because of the direct relationship between volumes of proved
undeveloped reserves and development plans, we include in the proved
undeveloped category only reserves assigned to undeveloped locations that we
have been assured will definitely be drilled and reserves assigned to the
undeveloped portions of secondary or tertiary projects which we have been
assured will definitely be developed.
The Company has interest in certain tracts which have substantial
additional hydrocarbon quantities which cannot be classified as proved and
consequently are not included herein. The Company has active exploratory and
development drilling programs which may result in the reclassification of
significant additional volumes to the proved category. At your request, we have
not reviewed production or performance data since the September 30, 1995
report. We have utilized the latest product prices and costs supplied by Smith
Offshore Exploration and have revised reserves in accordance with the new
economic data where applicable.
A-6
<PAGE> 125
Smith Offshore Exploration Company
April 15, 1996
Page 3
In accordance with the requirements of FASB 69, our estimates of future
cash inflows, future costs, and future net cash inflows before income tax as
December 31, 1995 from this report are presented below.
<TABLE>
<CAPTION>
As of
December 31, 1995
----------------------
<S> <C>
Future Cash Inflows $27,789,074
Future Costs
Production $ 4,518,578
Development 2,732,715
-----------
Total Costs $ 7,251,293
Future Net Cash Inflows
Before Income Tax $20,537,781
Present Value at 10%
Before Income Tax $16,165,172
</TABLE>
The future cash inflows are gross revenues before any deductions. The
production costs were based on current data and include production taxes, ad
valorem taxes, and certain other items such as transportation costs in addition
to the operating costs directly applicable to the individual leases or wells.
The development costs were based on current data and include dismantlement and
abandonment costs net of salvage for properties where such costs are relatively
significant.
The Company furnished us with gas prices in effect at December 31, 1995
and with its forecasts of future gas prices which take into account SEC
guidelines, current market prices, contract prices, and fixed and determinable
price escalations where applicable. In accordance with SEC guidelines, the
future gas prices used in this report make no allowances for future gas price
increases which may occur as a result of inflation nor do they account for
seasonal variations in gas prices which may cause future yearly average gas
prices to be somewhat higher or lower than December gas prices. For gas sold
under contract, the contract gas price including fixed and determinable
escalations exclusive of inflation adjustments, was used until the contract
expires and then was adjusted to the current market price for the area and held
at this adjusted price to depletion of the reserves.
The Company furnished us with liquid prices in effect at December 31, 1995
and these prices were held constant to depletion of the properties. In
accordance with SEC guidelines, changes in liquid prices subsequent to December
31, 1995 were not considered in this report.
Operating costs for the leases and wells in this report were based on the
operating expense reports of the Company and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. Development costs were
furnished to us by the Company and are based on authorizations for expenditure
for the proposed work or actual costs for similar projects. The current
operating and development costs were held constant throughout the life of the
properties. The estimated net cost of abandonment after salvage was included
for properties where abandonment costs net of salvage are significant. The
estimates of the net abandonment costs furnished by the Company were accepted
without independent verification. No deduction was made for indirect costs
such as general administration and overhead expenses, loan repayments, interest
expenses, and exploration and development prepayments. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist.
A-7
<PAGE> 126
Smith Offshore Exploration Company
April 15, 1996
Page 4
The estimates of reserves presented herein are based upon a detailed
study of the properties in which Smith Offshore Exploration Company owns an
interest; however, we have not made any field examination of the properties. No
consideration was given in this report to potential environmental liabilities
which may exist nor were any costs included for potential liability to restore
and clean up damages, if any, caused by past operating practices. Smith
Offshore Exploration Company has informed us that they have furnished us all of
the accounts, records, geological and engineering data and reports, and other
data required for this investigation. The ownership interests, prices, and
other factual data furnished by Smith Offshore Exploration Company were
accepted without independent verification. The reserve estimates presented in
this report were as of September 30, 1995, mechanically adjusted to December
31, 1995 and are based upon production data available through August 1995. This
report was based upon economic data available through December 1995. We have
been informed by Smith Offshore Exploration that there have been no significant
changes in the status or performance of the properties included in this report
which would affect the estimate of reserves.
The reserves included in this report are estimates only and should not
be construed as being exact quantities. They may or may not be actually
recovered, and if recovered, the revenues therefrom and the actual costs
related thereto could be more or less than the estimated amounts. Moreover,
estimates of reserves may increase or decrease as a result of future operations.
In general, we estimate that future gas production rates will continue
to be the same as the average rate for the latest available 12 months of actual
production until such time that the well or wells are incapable of producing at
this rate. The well or wells were then projected to decline at their decreasing
delivery capacity rate. Our general policy on estimates of future gas
production rates is adjusted when necessary to reflect actual gas market
conditions in specific cases. The future production rates from wells now on
production may be more or less than estimated because of changes in market
demand or allowables set by regulatory bodies. Wells or locations which are not
currently producing may start producing earlier or later than anticipated in
our estimates of their future production rates.
While it may reasonably the anticipated that the future prices received
for the sale of production and the operating costs and other costs relating to
such production may also increase or decrease from existing levels, such
changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future cash inflows for the
subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ DOUGLAS L. McBRIDE, P.E.
Douglas L. McBride, P.E.
Vice President
A-8
<PAGE> 127
[NETHERLAND, SEWELL & ASSOCIATES, INC. LETTERHEAD]
May 22, 1996
Mr. James G. Floyd
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Dear Mr. Floyd:
In accordance with your request, we have estimated the proved reserves
and future revenue, as of December 31, 1995, to the combined interests of The
Houston Exploration Company and Smith Offshore Exploration Company (the
Companies) in the Vermilion 203, West Cameron 76, and Mustang Island 858
Fields, located in federal waters offshore Louisiana and Texas. Our estimates
have been prepared using constant prices and costs and conform to the
guidelines of The Securities and Exchange Commission (SEC).
As presented in the following table, we estimate the net reserves and
future net revenue to the Companies' combined interests, as of December 31,
1995, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
----------------------- ---------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ------------------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 17,951 4,592,247 $ 9,934,000 $ 7,847,800
Non-Producing 594,425 32,619,997 71,705,100 53,032,100
Proved Undeveloped 11,482 2,296,334 4,617,100 3,074,500
---------- ---------- ----------- -------------
Total Proved 623,858 39,508,578 $86,256,200 $63,954,400
</TABLE>
The oil reserves shown include condensate only. Oil volumes are
expressed in barrels which are equivalent to 42 United States gallons. Gas
volumes are expressed in thousands of standard cubic feet (MCF) at the contract
temperature and pressure bases.
The estimated reserves and future revenue shown herein are for proved
developed producing, proved developed non-producing, and proved undeveloped
reserves. In accordance with SEC guidelines, our estimates do not include any
value for probable or possible reserves which may exist for these properties,
nor do they include any value which could be attributed to interests in
undeveloped acreage beyond those tracts for which undeveloped reserves have
been estimated.
The future net revenue shown herein is the future gross revenue to the
Companies' combined interests after deducting future capital costs, operating
expenses, any applicable payments to net profits interests, and abandonment
costs; but before consideration of federal income taxes. In accordance with
SEC
A-9
<PAGE> 128
guidelines, the future net revenue has been discounted at an annual rate of 10
percent to determine its "present worth." The present worth is shown to
indicate the effect of time on the value of money and should not be construed
as being the fair market value of the properties.
For the purposes of these estimates, a field inspection of the
properties has not been performed nor has the mechanical operation or condition
of the wells and their related facilities been examined. We have not
investigated possible environmental liability related to the properties;
therefore, our estimates do not include any costs which may be incurred due to
such possible liability. Our estimates of future revenue include The Houston
Exploration Company's estimates of the costs to abandon the wells, platforms,
and production facilities. Netherland, Sewell & Associates, Inc. does not
typically include salvage value in abandonment cost estimates. However, as
requested, The Houston Exploration Company's abandonment cost estimates, which
include a substantial salvage value, have been used in our future revenue
estimates. Abandonment costs are included with other capital investments.
The oil and gas prices used are those prices in effect for each
property in December 1995 and are held constant in accordance with SEC
guidelines.
Lease and well operating costs are based on operating expense records
of the Companies. These costs include the per-well overhead expenses allowed
under joint operating agreements along with costs estimated to be incurred at
and below the district and field levels. Headquarters general and
administrative overhead expenses of the Companies are not included. Lease and
well operating costs are held constant in accordance with SEC guidelines.
Capital costs are included as required for workovers, new development wells,
and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
Companies' combined interests. Therefore, our estimates of reserves and future
revenue do not include adjustments for the settlement of any such imbalances;
our projections are based on the Companies receiving their net revenue interest
shares of estimated future gross gas production.
The reserves included herein are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. A substantial portion of these reserves are for behind
pipe zones and undeveloped locations. Therefore, these reserves are based on
estimates of reservoir volumes and recovery efficiencies along with analogies
to similar production. As such reserve estimates are usually subject to
greater revision than those based on substantial production and pressure data,
it may be necessary to revise these estimates up or down in the future as
additional performance data become available. The sales rates, prices received
for the reserves, and costs incurred in recovering such reserves may vary from
assumptions included herein due to governmental policies and uncertainties of
supply and demand. Also, estimates of reserves may increase or decrease as a
result of future operations.
A-10
<PAGE> 129
In evaluating the information at our disposal concerning these
estimates, we have excluded from our consideration all matters as to which
legal or accounting, rather than engineering and geological, interpretation may
be controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological
data; therefore, our conclusions necessarily represent only informed
professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained
from The Houston Exploration Company, Smith Offshore Exploration Company, and
the nonconfidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/S/ DANNY D. SIMMONS
MKH:ELM
A-11
<PAGE> 130
[HUDDLESTON & CO., INC. LETTERHEAD]
December 20, 1995
The Houston Exploration Company
Attention: Mr. George Kelly, Jr.
1331 Lamar Street, Suite 1065
Houston, Texas 77010
Re: Future Reserves and Revenues
Matagorda Blocks 650, 671, and 672
Current Price Case
As of December 31, 1995
Gentlemen:
Pursuant to your request, we have estimated the future oil and gas reserves and
projected revenues for the subject properties operated by The Houston
Exploration Company (THEC). These properties are located in federal waters off
Matagorda County, Texas.
Our conclusions, as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
Net to Appraised Interest - $(Thousands)
----------------------------------------
Proved Developed
--------------------------- Total
Current Price Case Producing Nonproducing Proved
- ------------------ --------- ------------ ------
<S> <C> <C>
Oil/Cond., bbl 2,759 3,325 6,084
Gas, MMcf 1,679.0 2,084.7 3,763.7
Future Gross Revenue, $ 3,475 4,314 7,788
Operating Expenses, $ 719 665 1,383
Net Profit Expenses, $ 96 110 205
Other Costs, $ 0 612 612
Future Net Revenue (FNR), $ 2,661 2,927 5,588
FNR, Disc. at 10%, $ 2,341 1,819 4,160
</TABLE>
<TABLE>
<CAPTION>
Projected Reserves and Revenues - Estimated Revenues, $
<S> <C> <C> <C>
1996 1,407 0 1,407
1997 717 59 776
1998 341 258 599
Thereafter 195 2,610 2,806
Total 2,661 2,927 5,588
</TABLE>
<TABLE>
<CAPTION>
Estimated Production -Annualized
<S> <C> <C> <C>
Oil/Cond., bbl 1,359 0 1,359
Gas, MMcf 819.8 0.0 819.8
</TABLE>
Columns may not add to equal totals because of computer rounding.
A-12
<PAGE> 131
The Houston Exploration Company
December 20, 1995
Page Two
SEC REPORTING REQUIREMENTS
Securities and Exchange Commission (SEC) Regulation S-K, Item 102 and
Regulation S-X, Rule 4-10 and Financial Accounting Standards Board (FASB)
Statement No. 69 require oil and gas reserve information to be reported by
publicly held companies as supplemental financial data. These regulations and
standards provide for estimates of Proved reserves and revenues discounted at
10% based on oil and gas prices in effect on the "as of" date of the report.
The Society of Petroleum Engineers (SPE) requires reserves to be economically
recoverable with prices and costs in effect on the "as of" date of the report
without further escalation. In addition, the SPE has issued Standards
Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information
which sets requirements for the qualifications and independence of reserve
estimators and auditors and accepted methods to be used for estimating future
reserves.
The estimated Proved reserves and associated revenues contained herein have
been prepared in accordance with our understanding of all applicable SEC, FASB,
and SPE regulations and requirements.
RESERVE ESTIMATES
The reserve estimates for the subject properties were based on volumetric
calculations, extrapolation of BHP/Z versus cumulative production and
extrapolation of production history. Reserve estimates with limited or no
production history are typically subject to much greater revision than those
estimates derived from substantial performance history.
Delivery schedules were based on data furnished by THEC. At the request of
THEC, the wells were scheduled at their maximum effective delivery rates.
PROJECTIONS
The projections have been prepared on a calendar year basis for this report.
PRODUCT PRICES
As we understand SEC and FASB requirements, oil and gas prices utilized for
public reporting purposes should be based on those being received on the
effective date of the report without further escalations or reductions. The
projections shown herein have been based on product prices actually received
during December 1995 and have been adjusted to reflect transportation charges
and Btu adjustments. These prices have been held constant over the life of the
properties.
The projections are based on a current oil price of $17.35 per barrel. Gas
prices were projected at $1.9625 per MMBtu and have been adjusted for a healing
value of 1.040 Mcf per MMBtu per Mcf and a transportation charge of $0.16 per
MMcf has been subtracted from the reported net price. There prices were
specified by THEC and have been accepted as represented without review.
Huddleston & Co., Inc.
A-13
<PAGE> 132
The Houston Exploration Company
December 20,1995
Page Three
A comparison of the projected product prices, weighted as a composite for all
reserve categories, is as follows:
<TABLE>
<CAPTION>
Constant Product Prices
---------------------------
Oil/Cond. Gas
$/bbl $/Mcf
--------- ------
<S> <C> <C>
1996 17.35 2.041
Maximum 17.35 2.041
Average Over Life 17.35 2.041
</TABLE>
OPERATING COSTS
Operating expenses, shown as dollars per well per month, were supplied by THEC
and were computed by using platform expenses divided by the number of
completions for the specific platform. THEC has reported approximately no
change in platform expenses from the prior year. No severance or ad valorem
taxes were included because the wells are located in federal waters and are not
subject to these taxes. THEC has requested that the net profits interests
associated with these properties be shown as an expense item and be subtracted
from the gross revenues. The net profits interests (NPI) used in this report
are 2% of those interests that were originally owned by THIEC and a
reversionary back-in NPI of 20% applied to those interests purchased by THEC
from Wisconsin Gas and Electric Company (WEXCO) in 1993. THEC has reported to
us that the reversionary interest change will occur by December 3l, 1995. Other
expenses include remedial and workover costs and were based on estimates
furnished by THEC. The operating expenses and costs were held constant over the
life of the properties. Operating expenses equal 17.8% of the total future
gross revenues for the current price case.
The reserve projections are terminated for the current price case when the
wells cease to be economical.
VALUES NOT CONSIDERED
We have attempted to account for all deductions from gross revenues except for
the following:
1. Federal income tax
2. Depreciation, depletion and/or amortization,)if any (non-cash item)
3. General administrative costs allocated to the properties by THEC
4. Salvage values or costs to plug and abandon the wells
5. Platform abandonment costs
REPORT QUALIFICATIONS
Estimates of future reserves are based on predictions of recoverable
hydrocarbons, rate of production, proration by state and federal agencies,
product prices that are subject to ever-changing regulations, operating costs,
and direct taxes. Any unusual combination of these many factors could result in
actual future receipts considerably less or more than those estimated herein.
THE ESTIMATED FUTURE NET REVENUES AND PRESENT WORTH OF FUTURE NET REVENUES ARE
NOT REPRESENTED TO BE MARKET VALUES FOR THE SUBJECT PROPERTIES.
Huddleston & Co., Inc.
A-14
<PAGE> 133
The Houston Exploration Company
December 20, 1995
Page Four
Platform abandonment costs have not been included in the projections shown
herein at the request of THEC; however, these costs may have a material impact
on projected revenues on both a discounted and undiscounted basis. We have made
no attempt to estimate the magnitude of these expenses or the affect on future
revenues.
DATA SOURCES
Quantum and character of ownership and all other factual data furnished by THEC
were accepted as correct. We retain in our files production histories and
comprehensive files for certain significant properties. We did not inspect the
properties or conduct independent well tests.
Respectfully submitted,
/s/ ERLE E. KELLOGG
Erie E. Kellogg, P.E.
EEK:ek
Huddleston & Co., Inc.
A-15
<PAGE> 134
[HUDDLESTON & CO. INC. LETTERHEAD]
March 28, 1996
Smith Offshore Exploration Company
811 Dallas, Suite 800
Houston, Texas 77002
Attention: Mr. Lester H. Smith
Re: Estimated Future Reserves and Revenues
Matagorda Island Blocks 650, 671, and 672
As of December 31, 1995
Gentlemen:
Pursuant to your request, we have estimated future reserves and projected
revenues for certain properties owned by Smith Offshore Exploration Company
(SOXCO) and operated by The Houston Exploration Company (THEC). The properties
are located on Matagorda Island Blocks 650, 671, and 672 in federal waters
offshore Texas.
Our conclusions, as of December 31, 1995, are as follows:
Net to Appraised Interest - $(Thousands)
----------------------------------------------
Proved Proved
Developed Developed Total
Current Price Case Producing Nonproducing Proved
- ------------------ --------- ------------ ------
Oil/Cond., bbl 3,066 3,695 6,761
Gas, MMcf 1,865.5 2,316.6 4,182.1
Future Gross Revenue, $ 3,990 4,953 8,943
Operating Expenses, $ 798 738 1,537
Net Profit Expenses, $ 104 115 219
Other Costs, $ 0 680 680
Future Net Revenue (FNR), $ 3,088 3,420 6,507
FNR, Discounted at 10%, $ 2,741 2,153 4,894
Projected Reserves and Revenues
- -------------------------------
Estimated Revenues by Year, $
- -----------------------------
1996 1,628 0 1,628
1997 833 71 904
1998 397 302 699
1999 181 664 845
Thereafter 49 2,383 2,432
Total 3,088 3,420 6,507
Estimated Production - Annual 1996
- ----------------------------------
Oil/Cond., bbl 1,511 0 1,511
Gas, MMcf 910.9 0.0 910.9
Columns may not add to equal totals due to computer rounding.
A-16
<PAGE> 135
Smith Offshore Exploration Company
March 28, 1996
Page Two
REPORT PREPARATION
Securities and Exchange Commission (SEC) Regulation S-K, Item 102 and S-X,
Rule 4-10 and Financial Accounting Standards Board (FASB) Statement No. 69
require oil and gas reserve information to be reported by publicly held
entities as supplemental financial data. These regulations and standards
provide for estimates of Proved reserves and revenues discounted at 10% based
on oil and gas prices being received on the effective date of the report. The
SEC has re-stated that product prices in effect on the "as of" date should be
reported even when the actual product prices are in a widely fluctuating
market.
The Society of Petroleum Engineers (SPE) requires reserves to be economically
recoverable with prices and costs in effect on the "as of" date of the report
without future escalations. In addition the SPE has issued Standards Pertaining
to the Estimating and Auditing of Oil and Gas Reserve Information which sets
standards for the qualifications and independence of reserve estimators and
auditors and accepted methods for estimating future reserves.
The estimated reserves and revenues shown herein have been prepared in
accordance with our understanding of all applicable SEC, SPE, and FASB
regulations and requirements.
RESERVE ESTIMATES
Reserve estimates for the producing properties were assigned primarily on the
basis of the extrapolation of pressure data where there was sufficient data to
suggest a decline trend and this method was applicable to the subject
reservoir. The estimates were further supported by volumetric calculations and
consideration of production data. In general, production from these properties
had been subject to significant proration throughout the early portion of the
productive lives of the properties.
Nonproducing reserves were necessarily based on volumetric calculations and
analogy to nearby completions in comparable producing horizons. Reserve
estimates for water drive gas reservoirs, reservoirs lacking sustained,
stabilized production histories, and nonproducing completions will be subject
to much greater revision than those based on the extrapolation of established
production and pressure histories.
The projected reserves and schedules of future production have been prepared
with consideration for historical production rates. The properties have
historically been subject to considerable proration due to a number of factors
which may include pipeline restrictions, market conditions, and/or corporate
policy. In general, production rates have been held at current levels until the
deliverability declines to current production levels and have been declined
thereafter at rates consistent with our estimates of recoverable reserves.
RESERVE RECONCILIATION
We have provided herein our interpretation and reconciliation of reserves and
values from December 31, 1994, to December 31, 1995. All entries in the
reconciliation, except for revisions, are developed directly, i.e., starting
balance, additions, sales, and ending balance. Total revisions are determined
by the sum of the direct entries. In our opinion, the breakout of line items
within the revisions category (accretion, price and other) can only be
approximations due to the interrelation of these factors.
A-17
<PAGE> 136
Smith Offshore Exploration Company
March 28, 1996
Page Three
PROJECTIONS
The attached reserve and revenue projections are on a calendar year basis with
the first time period being January 1, 1996, through December 31, 1996.
PRODUCT PRICES
SEC and FASB requirements specify the use of product prices in effect on the
"as of" date of the report without escalation or reductions for public
reporting purposes. We have utilized product prices specified by SOXCO which
have been represented to be those received for products sold during December
1995. These prices have been adjusted to reflect heating value and
transportation charges and were held constant over the life of properties.
The projections were based on oil and gas prices of $17.70 per barrel and $2.11
per Mcf, respectively. The Btu content was projected at 1.040 MMBtu per Mcf for
all wells and has been included in the gas price. Transportation charges of
$0.16 per Mcf have been netted from the gas price. The product prices shown
herein were accepted as represented by SOXCO without further review.
A comparison of the average product prices, weighted as a composite for all
properties is as follows:
Oil/Cond. Gas
CURRENT PRODUCT PRICES $/bbl $/MMcf
- ---------------------- --------- ------
1996 17.70 2,109.90
Maximum 17.70 2,100.00
Average Over Life 17.70 2,109.90
OPERATING COSTS
Operating expenses, shown as dollars per well per month, were supplied by THEC
and were assigned to the individual completions on the basis of the total
operating costs divided by the number of completions attributable to the
platform. The operating costs for a compressor have been included for specific
wells. The properties included herein are not subject to severance or ad valorem
taxes since the properties are located in federal waters. We have included as
an operating expense item certain "net profits" interests. Drilling and
remedial costs were based on estimates provided by THEC. All operating expenses
and capital costs were held constant over the life of the properties. Operating
expenses were equal to 17.2% of gross revenues for the current price case.
FACTORS NOT INCLUDED
Values were not assigned to nonproducing acreage or to the salvage of surface
and subsurface equipment. No consideration has been included for the costs to
abandon either the production platforms or the wellbores.
General office overhead, federal income taxes, and allowances for depletion,
depreciation and amortization have not been deducted from future revenues.
A-18
<PAGE> 137
Smith Offshore Exploration Company
March 28, 1996
Page Four
Report Qualifications
- ---------------------
THE ESTIMATED FUTURE REVENUES AND PRESENT VALUE OF THESE REVENUES ARE NOT
REPRESENTED TO BE MARKET VALUE.
Initial production rates, product prices, operating expenses, capital costs,
and schedules of future development operations were specified by THEC.
Variation in the level of expenditures, the timing of future operations and
production or changes in actual prices may result in actual results or
operations being materially higher or lower than those shown herein.
Platform abandonment costs were excluded at the request of SOXCO. Inclusion of
these costs may have a material impact on future revenues on both a discounted
and undiscounted basis. We have made no attempt to quantify the potential
impact of these expenses.
Quantum and character of ownership and all other factual data furnished by
SOXCO were accepted as represented. We have generally tested the validity of
these data and believe the information is correct. We express no opinion and
make no representations as to legal or accounting interpretations provided by
THEC and SOXCO. We retain in our files plotted production histories and
comprehensive files for certain significant properties.
We did not conduct independent well tests or inspect the properties and do not
believe it necessary for the purpose of this study.
Respectfully submitted,
/s/ ERLE E. KELLOGG, P.E.
Erle E. Kellogg, P.E.
A-19
<PAGE> 138
[MILLER AND LENTS, LTD. LETTERHEAD]
January 16, 1996
Fuel Resources Inc.
1330 Post Oak Boulevard, Suite 2000
Houston, TX 77056
Attention: Mr. Charles W. Adcock
Re: Reserves Future Net Revenue
As of December 31, 1995
SEC Case
Gentlemen:
At your request, we estimated the proved reserves and the projected future
net revenue attributable to the net interests of Fuel Resources Inc. (FRI) and
Fuel Resources Production and Development, Inc. (FRPD) as of December 31, 1995,
using constant prices and costs. The results of our estimates are presented
below:
Reserves and Future Net Revenue as of December 31, 1995
-------------------------------------------------------
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
---------------------------- ------------------------------------
Crude and Discounted at
Condensate, Gas, Undiscounted, 10% Per Year,
Reserve Category MBbls. MMcf M$ M$
- --------------------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Proved Producing 139.1 80,473.3 145,081.9 81,482.5
Proved Nonproducing 76.2 10,572.1 15,026.4 6,381.5
Proved Undeveloped 8.4 13,371.6 17,796.8 8,257.4
----- --------- --------- --------
Total Proved 223.7 104,417.0 177,905.1 96,121.4
</TABLE>
Proved reserves were estimated in accordance with the definitions
contained in the Securities and Exchange Commission Regulation S-X, Rule
4-10(a) as shown on Attachment 1.
A-20
<PAGE> 139
MILLER AND LENTS, LTD.
Fuel Resources Inc. January 16, 1996
Attention: Mr. Charles W. Adcock Page 2
Section 1 of the attachments includes the projections of production and
future net revenue and the one-line summary reports (1) for the total of all
properties within FRI and FRPD summarized by reserve category and (2) for each
of the corporations summarized by state and reserve category. The economic
projections and one-line summary reports included in Section 2 are summarized
by program and reserve category. Section 2 are summarized by program and
reserve category. Section 3 includes one-line summaries showing the economic
results for the fields and for the individual wells sorted by present worth.
Section 4 includes forecasts of revenues estimated to result from gas gathering
systems owned and operated by FRI and FRPD. Section 5 consists of three
volumes, presented as exhibits to this report, and includes the individual well
economic forecasts and production graphs arranged by program, reserve category,
and lease. The one-line summary reports behind each program tab in Section 5
serve as an index to the properties within each program.
The prices used to estimate future net revenue were provided by FRI and
were represented as the prices being received for oil and gas at fiscal
year-end, December 31, 1995. The present worth of future net revenue was
computed by employing a discount rate of 10 percent per annum. Estimates of
future net revenue and the present worth of future net revenue are not intended
and should not be interpreted to represent fair market values for the estimated
reserves.
With the exceptions of changes due to significant drilling activity
during the last quarter of 1995, the projections of production for this report
were taken from our report, "Reserves and Future Net Revenue as of September
30, 1995," dated October 12, 1995.
Reserve estimates were based on decline curve projections, material
balance calculations, analogous well performance, and volumetric estimates.
Reserve estimates from analogies and volumetric calculations are often less
certain than reserve estimates based on well performance obtained over a period
during which a substantial portion of the reserves were produced. No provisions
for the possible consequences, if any, to projected volumes and future net
revenues for the purposes of production balancing are included in this
evaluation.
In conducting this evaluation, we relied upon production histories,
lease ownership, pricing and cost data, tax credit qualification percentages,
Btu content, and other engineering and geological data supplied by FRI. To a
lesser extent, data existing in the Miller and Lents, Ltd., files and those
data which are of public record were used. The Appendix lists the instructed
reserve study assumptions employed in our evaluation.
The "Section 29 Tax Credit" and "Overhead Reimbursement" were
calculated as instructed and are shown in separate columns on the economic
output report pages. The Section 29 Tax Credits were not considered in
determining the economic limit of the individual properties.
Future net revenue as used herein is defined as the total revenue
attributable to the evaluated working interests, inclusive of the tax credit
and fee revenues, less royalties, severance and ad valorem taxes, operating
expenses, and future capital expenditures. Future costs of abandoning
facilities and wells and of the restoration of producing properties to satisfy
environmental standards are not deducted from total revenue as such estimates
are beyond the scope of this assignment.
A-21
<PAGE> 140
MILLER AND LENTS, LTD.
Fuel Resources Inc. January 16, 1996
Attention: Mr. Charles W. Adcock Page 3
At your request, we included an estimate of the revenues resulting from
the operation of certain gas gathering and transportation systems. The
revenues from these systems are not included with the revenues attributed to
the reserves reported above. The results of these estimates as of December 31,
1995, are shown below:
<TABLE>
<CAPTION>
Future Net Revenue
---------------------------------------------
Discounted at
Undiscounted, 10 Percent per year,
Gathering System M$ M$
---------------- ------------- --------------------
<S> <C> <C>
Bailey 8.3 6.6
CDPS 846.0 468.0
SUGS 506.1 263.4
------- -----
Total 1,360.5 738.0
</TABLE>
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on
accepted standards of professional investigation but are subject to those
generally recognized uncertainties associated with interpretation of
geological, geophysical, and engineering information. Government policies and
market conditions different from those employed in this study may cause the
total quantity of oil or gas to be recovered, actual production rates, prices
received, or operating and capital costs to vary from those presented in this
report.
If you have any questions regarding the above, or if we can be of further
assistance, please call.
Yours very truly,
MILLER AND LENTS, LTD.
By /s/ KAREN F. LOVING
--------------------------
Karen F. Loving
KFL/mk
A-22
<PAGE> 141
Appendix
FUEL RESOURCES INC.
DECEMBER 1995 RESERVE STUDY ASSUMPTIONS - SEC PRICE CASE
================================================================================
GAS PRICING o Wellhead prices per MMBtu net of gathering,
extraction, compression charges, and applicable
basis adjustment, as provided by Fuel Resources
Inc. (FRI)
o No escalation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OIL PRICING o $17.00 per barrel, no escalation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 29 TAX CREDITS o Qualification percentages for Devonian Shale and
tight sands as specified by FRI
o Devonian Shale tax credit rate $1.01/MMBtu
o Tight gas tax credit rate $0.517/MMBtu
o Tax credit expires on December 31, 2002
o Credits adjusted in revenue forecast to Before
Federal Income Tax equivalent, as instructed by
FRI: i.e., divided by [1.0 - (corporate tax rate,
fraction)]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEASE OPERATING EXPENSES o Operating expenses without escalation as provided
by FRI
o For West Virginia properties, "non-billable"
operating expenses, as provided by FRI, applied
against FRPD's net interest
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING FEES o As specified by FRI, overhead reimbursement from
non-operating working interest owners is treated
as revenue in forecasts of future net revenue.
This revenue source is designated as "OVERHD
REIMBMT" in the economic projections.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAXES o Severance tax as applicable for each property
o Ad valorem tax of 4 percent of revenues to the
net interest for West Virginia properties,
$0.01/Mcf for Arkansas, and 2 percent for all
others
================================================================================
A-23
<PAGE> 142
July 1, 1996
Mr. James G. Floyd
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Dear Mr. Floyd:
In accordance with your request, we have prepared an alternative-date
sensitivity to our report dated April 26, 1996, regarding The Houston
Exploration Company (Houston Exploration) proposed acquisition interest in
certain oil and gas properties located in Webb and Zapata Counties, Texas. It
is our understanding that this interest is being considered for purchase from
TransTexas Gas Corporation (TransTexas) by Houston Exploration. For this
sensitivity, economic projections have been "rolled back" 1 month to a revised
December 31, 1995 as of date with gas and condensate prices adjusted to reflect
this revised date. This sensitivity is based on constant prices and costs and
conforms to the guidelines of the Securities and Exchange Commission (SEC).
As presented in the accompanying summary projections, Tables I through
IV, we estimate the net reserves and future net revenue to the proposed Houston
Exploration interest, as of December 31, 1995, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------------------------ -----------------------------------
Condensate Gas Present Worth
Category (Barrels) (MCF) Total at 10%
- ------------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 18,864 39,866,340 $ 48,596,800 $39,688,900
Non-Producing 12,683 13,645,713 14,289,400 5,616,700
Proved Undeveloped 16,979 58,964,040 50,946,800 31,226,500
---------- ----------- ------------ -----------
Total Proved 48,526 112,476,093 $113,833,000 $76,532,100
</TABLE>
Gas volumes are expressed in thousands of standard cubic feet (MCF) at
the contract temperature and pressure bases. Condensate volumes are expressed
in barrels which are equivalent to 42 United States gallons.
This sensitivity includes summary projections of reserves and revenue
for each reserve category. For the purposes of this sensitivity, the term
"lease" refers to a single economic projection.
The estimated reserves and future revenue shown in this sensitivity
are for proved developed producing, proved developed non-producing, and proved
undeveloped reserves. In accordance with SEC guidelines, our estimates do not
A-24
<PAGE> 143
include any value for probable or possible reserves which may exist for these
properties. This sensitivity does not include any value which could be
attributed to interests in undeveloped acreage beyond those tracts for which
undeveloped reserves have been estimated.
Future gross revenue to the proposed Houston Exploration interest is
prior to deducting state production taxes and ad valorem taxes. Future net
revenue is after deducting these taxes, future capital costs, and operating
expenses, but before consideration of federal income taxes. In accordance with
SEC guidelines, the future net revenue has been discounted at an annual rate of
10 percent to determine its "present worth." The present worth is shown to
indicate the effect of time on the value of money and should not be construed
as being the fair market value of the properties.
For the purposes of this sensitivity, a field inspection of the
properties has not been performed nor has the mechanical operation or condition
of the wells and their related facilities been examined. We have not
investigated possible environmental liability related to the properties;
therefore, our estimates do not include any costs which may be incurred due to
such possible liability. Also, our estimates do not include any salvage value
for the lease and well equipment nor the cost of abandoning the properties.
Gas and condensate prices used in this sensitivity have been provided
by Houston Exploration and are based on actual prices received in December
1995. These prices are held constant in accordance with SEC guidelines.
Lease and well operating costs are based on operating expense records
of TransTexas. These costs include only those direct costs estimated to be
incurred at and below the district and field levels. As requested, these costs
do not include the per-well overhead charges allowed under joint operating
agreements nor do they include the headquarters general and administrative
overhead expenses of TransTexas. Lease and well operating costs are held
constant in accordance with SEC guidelines. Capital costs are included as
required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value
imbalances which may have resulted from overdelivery or underdelivery to the
proposed Houston Exploration interest. Therefore, our estimates of reserves
and future revenue do not include adjustments for the settlement of any such
imbalances; our projections are based on Houston Exploration receiving its
proposed net revenue interest share of estimated future gross gas production.
The reserves included in this sensitivity are estimates only and
should not be construed as exact quantities. They may or may not be recovered;
if recovered, the revenues therefrom and the costs related thereto could be
more or less than the estimated amounts. The sales rates, prices received for
the reserves, and costs incurred in recovering such reserves may vary from
assumptions included in this sensitivity due to governmental policies and
uncertainties of supply and demand. Also, estimates of reserves may increase
or decrease as a result of future operations.
A-25
<PAGE> 144
In evaluating the information at our disposal concerning this
sensitivity, we have excluded from our consideration all matters as to which
legal or accounting, rather than engineering and geological, interpretation may
be controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological
data; herefore, our conclusions necessarily represent only informed
professional judgments.
The titles to the properties have not been examined by Netherland,
Sewell & Associates, Inc., nor has the actual degree or type of interest owned
been independently confirmed. The data used in our estimates were obtained
from TransTexas Gas Corporation, The Houston Exploration Company, and the
non-confidential files of Netherland, Sewell & Associates, Inc. and were
accepted as accurate. We are independent petroleum engineers, geologists, and
geophysicists; we do not own an interest in these properties and are not
employed on a contingent basis. Basic geologic and field performance data
together with our engineering work sheets are maintained on file in our office.
Very truly yours,
/s/ CLARENCE NETHERLAND
Clarence Netherland
DDS:MLJ
A-26
<PAGE> 145
==============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
The Company............................. 14
TransTexas Acquisition.................. 14
Soxco Acquisition....................... 15
Use of Proceeds......................... 15
Dividend Policy......................... 16
Dilution................................ 16
Capitalization.......................... 18
Selected Historical Financial Data...... 19
Pro Forma Combined Financial
Information........................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................ 33
Management.............................. 52
Related Party Transactions.............. 57
Security Ownership of Certain Beneficial
Owners and Management................. 61
Description of Capital Stock............ 62
Shares Eligible for Future Sale......... 64
Legal Matters........................... 65
Experts................................. 65
Available Information................... 66
Glossary of Oil and Gas Terms........... 67
Index to Financial Statements........... F-1
Underwriting............................ U-1
Reports of Independent Petroleum
Engineers............................. A-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
==============================================================================
==============================================================================
6,200,000 SHARES
THE HOUSTON
EXPLORATION COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[HOUSTON EXPLORATION COMPANY LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS
==============================================================================
<PAGE> 146
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
<TABLE>
<S> <C>
SEC Registration Fee............................................................ $ 44,414
NASD Filing Fee................................................................. 13,380
NYSE Listing Fee................................................................ 161,600
Accounting Fees and Expenses.................................................... 600,000
Legal Fees and Expenses......................................................... 438,000
Printing Expenses............................................................... 175,000
Blue Sky Qualification Fees and Expenses........................................ 10,000
Transfer Agent's Fees........................................................... 25,000
Miscellaneous................................................................... 32,606
-----------
TOTAL................................................................. $ 1,500,000
===========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to 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.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person 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 for the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expense which the Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defenses of
any action, suit or proceeding referred to in subsections (a) and (b) of Section
145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; that indemnification provided for by Section
145 shall, unless otherwise provided when authorized or ratified, continue
II-1
<PAGE> 147
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of such person's heirs, executors and administrators;
and empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction from
which the director derived an improper personal benefit.
Section 3.07 of the Company's Certificate of Incorporation states that:
(a) No person who is or was a director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.
(b) If the DGCL is hereafter amended to authorize corporate action
further limiting or eliminating the personal liability of directors, then
the personal liability of the directors to the Corporation or its
stockholders shall be limited or eliminated to the full extent permitted by
the DGCL, as so amended from time to time. Any repeal or modification of
this Section 3.07 shall be prospective only, and shall not adversely affect
any limitation on the personal liability of a director of the Corporation
or its stockholders arising from an act or omission occurring prior to the
time of such repeal or modification.
In addition, Article VI of the Company's Certificate of Incorporation and
Article VIII of the Company's Bylaws further provides that the Company shall
indemnify its officers and, directors to the fullest extent permitted by law.
The Company has entered into indemnification agreements with each of its
directors and executive officers.
Under Section 8 of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued an aggregate of 2,710,380 shares of Common Stock to THEC
Holdings Corp. in May 1996 and an aggregate of 3,485,365 shares of Common Stock
to THEC Holdings Corp. in August 1996, pursuant to exemptions from the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
under Section 4(2) of the Act. The issuances in question related to the initial
issuance of shares to THEC Holdings Corp., additional shares issued to THEC
Holdings Corp. in consideration for the contribution of the Company's onshore
properties and additional shares issued to THEC Holdings Corp. in consideration
for subsequent contributions of capital.
II-2
<PAGE> 148
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Certificate of Incorporation.
3.2 -- Restated Bylaws.
*4.1 -- Specimen Common Stock Certificate.
**5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
+10.1 -- Gas Sales Agreement dated as of April 1, 1995 between The Houston
Exploration Company and PennUnion Energy Services, L.L.C.
+10.2 -- Gas Sales Agreement dated as of April 1, 1995 between Fuel Resources,
Inc. and PennUnion Energy Services, L.L.C.
*10.3 -- Confidentiality and Non-Competition Agreement dated as of March 21,
1995 among PennUnion Energy Services, L.L.C., Bring Gas Services
Corp., The Brooklyn Union Gas Company, Fuel Resources, Inc., Fuel
Resources Production and Development, Inc., The Houston Exploration
Company, Gas Energy, Inc., Pennzoil Gas Marketing Company, Pennzoil
Exploration and Development Company, and Pennzoil Company.
*10.4 -- Swap Agreement dated September 22, 1994 between Enron Risk Management
Services Corp. and The Houston Exploration Company.
*10.5 -- Swap Agreement dated February 21, 1995 between Chemical Bank and The
Houston Exploration Company.
*10.6 -- Swap Agreement dated March 2, 1995 between Chemical Bank and The
Houston Exploration Company.
*10.7 -- Swap Agreement dated February 5, 1992 between Chemical Bank and Fuel
Resources Inc.
10.8 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and James G. Floyd.
10.9 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and Randall J. Fleming.
10.10 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and Thomas W. Powers.
10.11 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and James F. Westmoreland.
10.12 -- 1996 Stock Option Plan.
10.13 -- Registration Rights Agreement dated as of July 2, 1996 between The
Houston Exploration Company and THEC Holdings Corp.
10.14 -- Asset Purchase Agreement dated as of July 1, 1996 between The Houston
Exploration Company and Smith Offshore Exploration Company.
*10.15 -- Form of Registration Rights Agreement between The Houston Exploration
Company and Smith Offshore Exploration Company.
*10.16 -- Credit Agreement dated as of July 2, 1996 among The Houston
Exploration Company and Texas Commerce Bank National Association as
Administrative Agent and the other Banks Signatory thereto.
</TABLE>
II-3
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
10.17 -- Purchase and Sale Agreement dated as of June 21, 1996, among The
Houston Exploration Company, TransTexas Gas Corporation and
TransTexas Transmission Corporation.
*10.18 -- Gas Exchange Agreement dated as of July 2, 1996 between The Houston
Exploration Company and TransTexas Gas Corporation.
*10.19 -- Agreement for Filing Consolidated Federal Income Tax Returns and for
Allocation of Consolidated Federal Income Tax Liabilities and
Benefits dated September 1, 1994 among The Brooklyn Union Gas Company
and its subsidiaries.
10.20 -- Contribution Agreement dated as of February 26, 1996 between The
Houston Exploration Company and Fuel Resources, Inc.
10.21 -- Indemnification Agreement dated as of July , 1996 between The
Houston Exploration Company and THEC Holdings Corp.
10.22 -- Form of Registration Rights Agreement dated as of July , 1996
between The Houston Exploration Company and James G. Floyd.
10.23 -- Supplemental Executive Pension Plan.
10.24 -- Form of Deed of Trust, Assignment of Production, Security Agreement
and Financing Statement between The Houston Exploration Company and
James G. Floyd.
10.25 -- Form of Contribution Agreement between James G. Floyd and The Houston
Exploration Company.
**23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP
*23.3 -- Consent of Ryder Scott Company
*23.4 -- Consent of Netherland, Sewell and Associates, Inc.
*23.5 -- Consent of Huddleston & Co., Inc.
*23.6 -- Consent of Miller and Lents, Ltd.
23.7 -- Consent of Coopers & Lybrand L.L.P.
*24.1 -- Powers of Attorney (included in Part II of the initial filing of this
Registration Statement).
*24.2 -- Power of Attorney of Lester H. Smith.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidentiality request. The omitted
information has been filed separately with the Securities and Exchange
Commission.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 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
II-4
<PAGE> 150
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 Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes:
(1) 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 403A 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 declares effective.
(2) 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 thereof.
(3) To provide to the underwriter 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.
II-5
<PAGE> 151
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Houston, State of Texas, on August 26,
1996.
THE HOUSTON EXPLORATION COMPANY
By: /s/ JAMES G. FLOYD
------------------------------------
James G. Floyd
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ JAMES G. FLOYD President, Chief Executive August 26, 1996
- --------------------------------------------- Officer and Director
James G. Floyd (Principal Executive
Officer)
/s/ JAMES F. WESTMORELAND Vice President, Chief August 26, 1996
- --------------------------------------------- Accounting Officer,
James F. Westmoreland Comptroller and Secretary
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ ROBERT B. CATELL* Chairman of the Board of August 26, 1996
- --------------------------------------------- Directors
Robert B. Catell
/s/ CRAIG G. MATTHEWS* Director August 26, 1996
- ---------------------------------------------
Craig G. Matthews
/s/ RUSSELL D. GORDY* Director August 26, 1996
- ---------------------------------------------
Russell D. Gordy
/s/ GORDON F. AHALT* Director August 26, 1996
- ---------------------------------------------
Gordon F. Ahalt
/s/ JAMES Q. RIORDAN* Director August 26, 1996
- ---------------------------------------------
James Q. Riordan
/s/ LESTER H. SMITH* Director August 26, 1996
- ---------------------------------------------
Lester H. Smith
*By: /s/ JAMES G. FLOYD
- ---------------------------------------------
James G. Floyd
Attorney-in-fact
</TABLE>
II-6
<PAGE> 152
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
*1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Certificate of Incorporation.
3.2 -- Restated Bylaws.
*4.1 -- Specimen Common Stock Certificate.
**5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of the
securities being registered.
+10.1 -- Gas Sales Agreement dated as of April 1, 1995 between The Houston
Exploration Company and PennUnion Energy Services, L.L.C.
+10.2 -- Gas Sales Agreement dated as of April 1, 1995 between Fuel Resources,
Inc. and PennUnion Energy Services, L.L.C.
*10.3 -- Confidentiality and Non-Competition Agreement dated as of March 21,
1995 among PennUnion Energy Services, L.L.C., Bring Gas Services
Corp., The Brooklyn Union Gas Company, Fuel Resources, Inc., Fuel
Resources Production and Development, Inc., The Houston Exploration
Company, Gas Energy, Inc., Pennzoil Gas Marketing Company, Pennzoil
Exploration and Development Company, and Pennzoil Company.
*10.4 -- Swap Agreement dated September 22, 1994 between Enron Risk Management
Services Corp. and The Houston Exploration Company.
*10.5 -- Swap Agreement dated February 21, 1995 between Chemical Bank and The
Houston Exploration Company.
*10.6 -- Swap Agreement dated March 2, 1995 between Chemical Bank and The
Houston Exploration Company.
*10.7 -- Swap Agreement dated February 5, 1992 between Chemical Bank and Fuel
Resources Inc.
10.8 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and James G. Floyd.
10.9 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and Randall J. Fleming.
10.10 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and Thomas W. Powers.
10.11 -- Employment Agreement dated July 2, 1996 between The Houston
Exploration Company and James F. Westmoreland.
10.12 -- 1996 Stock Option Plan.
10.13 -- Registration Rights Agreement dated as of July 2, 1996 between The
Houston Exploration Company and THEC Holdings Corp.
10.14 -- Asset Purchase Agreement dated as of July 1, 1996 between The Houston
Exploration Company and Smith Offshore Exploration Company.
*10.15 -- Form of Registration Rights Agreement between The Houston Exploration
Company and Smith Offshore Exploration Company.
*10.16 -- Credit Agreement dated as of July 2, 1996 among The Houston
Exploration Company and Texas Commerce Bank National Association as
Administrative Agent and the other Banks Signatory thereto.
10.17 -- Purchase and Sale Agreement dated as of June 21, 1996, among The
Houston Exploration Company, TransTexas Gas Corporation and
TransTexas Transmission Corporation.
*10.18 -- Gas Exchange Agreement dated as of July 2, 1996 between The Houston
Exploration Company and TransTexas Gas Corporation.
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<S> <C>
*10.19 -- Agreement for Filing Consolidated Federal Income Tax Returns and for
Allocation of Consolidated Federal Income Tax Liabilities and
Benefits dated September 1, 1994 among The Brooklyn Union Gas Company
and its subsidiaries.
10.20 -- Indemnification Agreement dated as of July , 1996 between The
Houston Exploration Company and THEC Holdings Corp.
10.21 -- Contribution Agreement dated as of February 26, 1996 between The
Houston Exploration Company and Fuel Resources, Inc.
10.22 -- Form Registrant Rights Agreement dated as of July , 1996 between
The Houston Exploration Company and James G. Floyd
10.23 -- Supplemental Executive Pension Plan.
10.24 -- Form of Deed of Trust, Assignment of Production, Security Agreement
and Financing Statement between The Houston Exploration Company and
James G. Floyd.
10.25 -- Form Contribution Agreement between James G. Floyd and The Houston
Exploration Company.
**23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP
*23.3 -- Consent of Ryder Scott Company
*23.4 -- Consent of Netherland, Sewell and Associates, Inc.
*23.5 -- Consent of Huddleston & Co., Inc.
*23.6 -- Consent of Miller and Lents, Ltd.
23.7 -- Consent of Coopers & Lybrand L.L.P.
*24.1 -- Powers of Attorney (included in Part II of the initial filing of this
Registration Statement).
*24.2 -- Power of Attorney of Lester H. Smith.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested. The copy filed as an exhibit omits
the information subject to the confidentiality request. The omitted
information has been filed separately with the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
THE HOUSTON EXPLORATION COMPANY
THE HOUSTON EXPLORATION COMPANY (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware ("DGCL"), hereby certifies as follows
pursuant to Sections 242 and 245 of the DGCL:
FIRST: The name of the Corporation is "The Houston Exploration
Company."
SECOND: The Corporation was originally incorporated under the name of
"Brooklyn Union Exploration Company, Inc."
THIRD: The original Certificate of Incorporation of the Corporation was
filed in the Office of the Secretary of State of the State of
Delaware (the "Secretary of State") on December 16, 1985.
FOURTH: The Corporation filed amendments to its Certificate of
Incorporation with the Secretary of State on August 1, 1994 and
August 25, 1995.
FIFTH: The sole stockholder of the Corporation is THEC Holdings Corp.
(the "Sole Stockholder"), a Delaware corporation.
SIXTH: The board of directors of the Corporation, in accordance with
Sections 242 and 245 of the DGCL, (i) adopted and approved this
Restated Certificate of Incorporation (including the amendments
to the Corporation's Certificate of Incorporation effected
hereby) and (ii) proposed that the Sole Stockholder adopt and
approve this Restated Certificate of Incorporation (including
the amendments to the Corporation's Certificate of Incorporation
effected hereby).
SEVENTH: The board of directors of the Sole Stockholder, in accordance
with Sections 242 and 245 of the DGCL, approved and adopted on
behalf of the Sole Stockholder this Restated Certificate of
Incorporation (including the amendments to the Corporation's
Certificate of Incorporation effected hereby).
EIGHTH: The Sole Stockholder, in accordance with Section 228 of the
DGCL, approved and adopted this Restated Certificate of
Incorporation (including the amendments to the Corporation's
Certificate of Incorporation effected hereby).
<PAGE> 2
NINTH: This Restated Certificate of Incorporation shall become
effective upon its filing with the Secretary of State.
TENTH: Effective immediately upon the filing of this Restated
Certificate of Incorporation in the office of the Secretary of
State, each outstanding share of previously existing Common
Stock shall be and hereby is converted into and reclassified as
3.13 shares of Common Stock. Certificates representing
reclassified shares are hereby canceled and upon presentation of
the canceled certificates to the Corporation, the holders
thereof shall be entitled to receive certificate(s) representing
the new shares into which such canceled shares have been
converted.
ELEVENTH: The Certificate of Incorporation of the Corporation is hereby
amended and restated to read in its entirety as follows:
ARTICLE I
Name, Registration and Purpose
Section 1.01. Name. The name of the Corporation is "The
Houston Exploration Company."
Section 1.02. Registered Office and Registered Agent. The
registered office of the Corporation in the State of Delaware is located at
Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County
of New Castle. The name of the registered agent of the Corporation at such
address is The Corporation Trust Company.
Section 1.03. Purpose. The purpose for which the Corporation
is organized is to engage in any lawful acts and activities for which
corporations may be organized under the General Corporation Law of the State of
Delaware ("DGCL"), and the Corporation shall have the power to perform all
lawful acts and activities.
ARTICLE II
Capitalization
Section 2.01. Authorized Capital. (a) The total number of
shares of stock that the Corporation shall have the authority to issue is
55,000,000 shares of capital stock, consisting of (i) 5,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"), and (ii)
50,000,000 shares of common stock, par value $0.01 per share (the "Common
Stock").
-2-
<PAGE> 3
(b) Subject to the provisions of this Certificate of
Incorporation and the Preferred Stock Designation (as defined below) creating
any series of Preferred Stock, the Corporation may issue shares of its capital
stock from time to time for such consideration (not less than the par value
thereof) as may be fixed by the Board of Directors of the Corporation (the
"Board of Directors"), which is expressly authorized to fix the same in its
absolute discretion subject to the foregoing conditions. Shares so issued for
which the consideration shall have been paid or delivered to the Corporation
shall be deemed fully paid stock and shall not be liable to any further call or
assessment thereon, and the holders of such shares shall not be liable for any
further payments in respect of such shares.
(c) The right to cumulate votes for the election of
directors as provided in Section 214 of the DGCL shall not be granted and is
hereby expressly denied.
Section 2.02. Preferred Stock. (a) The Preferred Stock may
be issued from time to time in one or more series. Authority is hereby
expressly granted to and vested in the Board of Directors to authorize from
time to time the issuance of Preferred Stock in one or more series. With
respect to each series of Preferred Stock authorized by it, the Board of
Directors shall be authorized to establish by resolution or resolutions, and by
filing a certificate pursuant to applicable law of the State of Delaware (the
"Preferred Stock Designation"), the following to the fullest extent now or
hereafter permitted by the DGCL:
(1) the designation of such series;
(2) the number of shares to constitute such series;
(3) whether such series is to have voting rights (full,
special or limited) or is to be without voting rights;
(4) if such series is to have voting rights, whether or not
such series is to be entitled to vote as a separate class either alone or
together with the holders of the Common Stock or one or more other series
of Preferred Stock;
(5) the preferences and relative, participating, optional,
conversion or other special rights (if any) of such series and the
qualifications, limitations or restrictions (if any) with respect to such
series;
(6) the redemption rights and price(s), if any, of such
series, and whether or not the shares of such series shall be subject to
the operation of retirement or sinking funds to be applied to the
purchase or redemption of such shares for retirement and, if such
retirement or sinking funds or funds are to be established, the periodic
amount thereof and the terms and provisions relative to the operation
thereof;
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<PAGE> 4
(7) the dividend rights and preferences (if any) of such
series, including, without limitation, (i) the rates of dividends payable
thereon, (ii) the conditions upon which and the time when such dividends
are payable, (iii) whether or not such dividends shall be cumulative or
noncumulative and, if cumulative, the date or dates from which such
dividends shall accumulate and (iv) whether or not the payment of such
dividends shall be preferred to the payment of dividends payable on the
Common Stock or any other series of Preferred Stock;
(8) the preferences (if any), and the amounts thereof, which
the holders of such series shall be entitled to receive upon the
voluntary or involuntary liquidation, dissolution or winding-up of, or
upon any distribution of the assets of, the Corporation;
(9) whether or not the shares of such series, at the option
of the Corporation or the holders thereof or upon the happening of any
specified event, shall be convertible into or exchangeable for (i) shares
of Common Stock, (ii) shares of any other series of Preferred Stock or
(iii) any other stock or securities of the Corporation;
(10) if such series is to be convertible or exchangeable, the
price or prices or ratio or ratios or rate or rates at which such
conversion or exchange may be made and the terms and conditions (if any)
upon which such price or prices or ratio or ratios or rate or rates may
be adjusted; and
(11) such other rights, powers and preferences with respect
to such series as may to the Board of Directors seem advisable.
Any series of Preferred Stock may vary from any other series of Preferred Stock
in any or all of the foregoing respects and in any other manner.
(b) The Board of Directors may, with respect to any existing
series of Preferred Stock but subject to the Preferred Stock Designation
creating such series, (i) increase the number of shares of Preferred Stock
designated for such series by a resolution adding to such series authorized and
unissued shares of Preferred Stock not designated for any other series and (ii)
decrease the number of shares of Preferred Stock designated for such series by
a resolution subtracting from such series shares of Preferred Stock designated
for such series (but not below the number of shares of such series then
outstanding), and the shares so subtracted shall become authorized, unissued
and undesignated shares of Preferred Stock.
(c) No vote of the holders of the Common Stock or the
Preferred Stock shall, unless otherwise expressly provided in a Preferred Stock
Designation creating any series of Preferred Stock, be a prerequisite to the
issuance of any shares of any series of the Preferred Stock authorized by and
complying with the conditions of this Certificate of Incorporation. Shares of
any series of Preferred Stock that have been authorized for issuance pursuant
to this Certificate of Incorporation and that have been issued and reacquired
in any manner by the Corporation (including upon conversion or exchange
thereof) shall be restored to the status of authorized and unissued shares of
Preferred Stock
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and may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors and a Preferred Stock
Designation as set forth above.
Section 2.03. Common Stock. (a) The holders of shares of
the Common Stock shall be entitled to vote upon all matters submitted to a vote
of the common stockholders of the Corporation and shall be entitled to one vote
for each share of the Common Stock held.
(b) Subject to the prior rights and preferences (if any)
applicable to shares of Preferred Stock of any series, the holders of shares of
the Common Stock shall be entitled to receive such dividends (payable in cash,
stock or otherwise) as may be declared thereon by the Board of Directors at any
time and from time to time out of any funds of the Corporation legally
available therefor.
(c) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, after payment or provision for
payment of the debts and other liabilities of the Corporation and subject to
the preferential or other rights (if any) of the holders of shares of the
Preferred Stock in respect thereof, the holders of shares of the Common Stock
shall be entitled to receive all the remaining assets of the Corporation
available for distribution to its stockholders, ratably in proportion to the
number of shares of the Common Stock held by them. For purposes of this
paragraph (c), a liquidation, dissolution or winding-up of the Corporation
shall not be deemed to be occasioned by or to include (i) any consolidation or
merger of the Corporation with or into another corporation or other entity or
(ii) a sale, lease, exchange or conveyance of all or a part of the assets of
the Corporation.
Section 2.04. Stock Options, Warrants, etc. Unless otherwise
expressly prohibited in the Preferred Stock Designation creating any series of
Preferred Stock, the Corporation shall have authority to create and issue
warrants, rights and options entitling the holders thereof to purchase from the
Corporation shares of the Corporation's capital stock of any class or series or
other securities of the Corporation for such consideration and to such persons,
firms or corporations as the Board of Directors, in its sole discretion, may
determine, setting aside from the authorized but unissued stock of the
Corporation the requisite number of shares for issuance upon the exercise of
such warrants, rights or options. Such warrants, rights and options shall be
evidenced by one or more instruments approved by the Board of Directors. The
Board of Directors shall be empowered to set the exercise price, duration, time
for exercise and other terms of such warrants, rights or options; provided,
however, that the consideration to be received for any shares of capital stock
subject thereto shall not be less than the par value thereof.
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ARTICLE III
Directors
Section 3.01. Number and Term. The number of directors of the
Corporation shall from time to time be fixed exclusively by the Board of
Directors in accordance with, and subject to the limitations set forth in, the
bylaws of the Corporation (the "Bylaws"); provided, however, that the Board of
Directors shall at all times consist of a minimum of three and a maximum of
fifteen members, subject, however, to increases above fifteen members as may be
required in order to permit the holders of any series of Preferred Stock to
exercise their right (if any) to elect additional directors under specified
circumstances. No decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Anything in this Certificate of
Incorporation or the Bylaws to the contrary notwithstanding, each director
shall hold office until his successor is elected and qualified or until his
earlier death, resignation or removal.
Section 3.02. Classification. The Board of Directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively, all as nearly equal in number as possible, with each director
then in office receiving the classification to be determined with respect to
such director by the Board of Directors. The initial term of office of Class I
directors shall expire at the annual meeting of the Corporation's stockholders
in 1997. The initial term of office of Class II directors shall expire at the
annual meeting of stockholders in 1998. The initial term of office of Class
III directors shall expire at the annual meeting of stockholders in 1999. Each
director elected at an annual meeting of stockholders to succeed a director
whose term is then expiring shall hold office until the third annual meeting of
stockholders after his election or until his successor is elected and qualified
or until his earlier death, resignation or removal. Increases and decreases in
the number of directors shall be apportioned among the classes of directors so
that all classes will be as nearly equal in number as possible.
Section 3.03. Nomination and Election. (a) Nominations of
persons for election or reelection to the Board of Directors may be made by or
at the direction of the Board of Directors. The Bylaws may set forth
procedures for the nomination of persons for election or reelection to the
Board of Directors and only persons who are nominated in accordance with such
procedures (if any) shall be eligible for election or reelection as directors
of the Corporation; provided, however, that such procedures shall not infringe
upon (i) the right of the Board of Directors to nominate persons for election
or reelection to the Board of Directors or (ii) the rights of the holders of
any class or series of Preferred Stock, voting separately by class or series,
to elect additional directors under specified circumstances.
(b) Each director shall be elected in accordance with this
Certificate of Incorporation, the Bylaws and applicable law. Election of
directors by the Corporation's stockholders need not be by written ballot
unless the Bylaws so provide.
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Section 3.04. Removal. No director of any class may be removed
before the expiration of his term of office except for cause and then only by
the affirmative vote of the holders of not less than a majority in voting power
of all the outstanding shares of capital stock of the Corporation entitled to
vote generally in an election of directors, voting together as a single class.
The Board of Directors may not remove any director, and no recommendation by
the Board of Directors that a director be removed may be made to the
Corporation's stockholders unless such recommendation is set forth in a
resolution adopted by the affirmative vote of not less than two-thirds of the
whole Board of Directors.
Section 3.05. Vacancies. (a) In case any vacancy shall occur
on the Board of Directors because of death, resignation or removal, such
vacancy may be filled only by a majority (or such higher percentage as may be
specified in the Bylaws) of the directors remaining in office (though less than
a quorum), and the director so appointed shall serve for the unexpired term of
his predecessor or until his successor is elected and qualified or until his
earlier death, resignation or removal. If there are no directors then in
office, an election of directors may be held in the manner provided by
applicable law.
(b) Any newly-created directorship resulting from any
increase in the number of directors may be filled only by a majority (or such
higher percentage as may be specified in the Bylaws) of the directors then in
office (though less than a quorum), and the director so appointed shall be
assigned to such class of directors as such majority of directors shall
determine; provided, however, that newly-created directorships shall be
apportioned among the classes of directors so that all classes will be as
nearly equal in number as possible. Each director so appointed shall hold
office for the remaining term of the class to which he is assigned or until his
successor is elected and qualified or until his earlier death, resignation or
removal.
(c) Except as expressly provided in this Certificate of
Incorporation or as otherwise provided by applicable law, stockholders of the
Corporation shall not have the right to fill vacancies on the Board of
Directors, including newly-created directorships.
Section 3.06. Subject to Rights of Holders of Preferred Stock.
Notwithstanding the foregoing provisions of this Article III, if the Preferred
Stock Designation creating any series of Preferred Stock entitles the holders
of such Preferred Stock, voting separately by class or series, to elect
additional directors under specified circumstances, then all provisions of such
Preferred Stock Designation relating to the nomination, election, term of
office, removal, filling of vacancies and other features of such directorships
shall, as to such directorships, govern and control over any conflicting
provisions of this Article III, and such directors so elected need not be
divided into classes pursuant to this Article III unless expressly provided by
the provisions of such Preferred Stock Designation.
Section 3.07. Limitation of Personal Liability. (a) No person
who is or was a director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the
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<PAGE> 8
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
(b) If the DGCL is hereafter amended to authorize corporate
action further limiting or eliminating the personal liability of directors,
then the personal liability of the directors to the Corporation or its
stockholders shall be limited or eliminated to the full extent permitted by the
DGCL, as so amended from time to time.
ARTICLE IV
Amendment of Bylaws
The Board of Directors is expressly authorized and empowered to
adopt, alter, amend or repeal the Bylaws. Stockholders of the Corporation
shall have the power to alter, amend, expand or repeal the Bylaws but only by
the affirmative vote of the holders of not less than 66-2/3% in voting power of
all outstanding shares of capital stock of the Corporation entitled to vote
generally at an election of directors, voting together as a single class.
ARTICLE V
Actions and Meetings of Stockholders
Section 5.01. No Action by Written Consent. No action shall
be taken by the stockholders of the Corporation except at an annual or special
meeting of stockholders. Stockholders of the Corporation may not act by
written consent in lieu of a meeting.
Section 5.02. Meetings. (a) Meetings of the stockholders of
the Corporation (whether annual or special) may only be called by the Board of
Directors or by such officer or officers of the Corporation as the Board of
Directors may from time to time authorize to call meetings of the stockholders
of the Corporation. Stockholders of the Corporation shall not be entitled to
call any meeting of stockholders or to require the Board of Directors or any
officer or officers of the Corporation to call a meeting of stockholders except
as otherwise expressly provided in the Bylaws or in the Preferred Stock
Designation creating any series of Preferred Stock.
(b) Stockholders of the Corporation shall not be entitled to
propose business for consideration at any meeting of stockholders except as
otherwise expressly provided in the Bylaws or in the Preferred Stock
Designation creating any series of Preferred Stock.
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<PAGE> 9
(c) Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice or waivers
of notice of such meeting. The person presiding at a meeting of stockholders
may determine whether business has been properly brought before the meeting
and, if the facts so warrant, such person may refuse to transact any business
at such meeting which has not been properly brought before such meeting.
Section 5.03. Appoint and Remove Officers, etc. The
stockholders of the Corporation shall have no right or power to appoint or
remove officers of the Corporation nor to abrogate the power of the Board of
Directors to elect and remove officers of the Corporation. The stockholders of
the Corporation shall have no power to appoint or remove directors as members
of committees of the Board of Directors nor to abrogate the power of the Board
of Directors to establish one or more such committees or the power of any such
committee to exercise the powers and authority of the Board of Directors.
ARTICLE VI
Indemnification of Directors and Officers
The Corporation shall indemnify, to the fullest extent permitted
by applicable law and pursuant to the Bylaws, each person who is or was a
director or officer of the Corporation, and may indemnify each employee and
agent of the Corporation and all other persons whom the Corporation is
authorized to indemnify under the provisions of the DGCL.
ARTICLE VII
Election to be Governed by Section 203 of the DGCL
The Corporation hereby elects to be governed by Section 203 of
the DGCL; provided, however, that the provisions of this Article VII shall not
apply to restrict a business combination between the Corporation and an
interested stockholder (as defined in Section 203 of the DGCL) of the
Corporation if either (i) such business combination was approved by the Board
of Directors prior to the time that such stockholder became an interested
stockholder or (ii) such stockholder became an interested stockholder as a
result of, and at or prior to the effective time of, a transaction which was
approved by the Board of Directors prior to the time that such stockholder
became an interested stockholder.
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ARTICLE VIII
Amendment of Certificate of Incorporation
The Corporation reserves the right to amend, alter, change or
repeal any provisions contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by applicable law, and all rights conferred
upon stockholders, directors or any other persons by or pursuant to this
Certificate of Incorporation are granted subject to this reservation.
Notwithstanding the foregoing or any other provision of this Certificate of
Incorporation or any provision of law that might otherwise permit a lesser or
no vote, the provisions of this Article VIII and of Articles III, IV and V may
not be repealed or amended in any respect, and no provision inconsistent with
any such provision or imposing cumulative voting in the election of directors
may be added to this Certificate of Incorporation, unless such action is
approved by the affirmative vote of the holders of not less than 66-2/3% in
voting power of all outstanding shares of capital stock of the Corporation
entitled to vote generally at an election of directors, voting together as a
single class; provided, however, that any amendment or repeal of Section 3.07
or Article VI of this Certificate of Incorporation shall not adversely affect
any right or protection existing thereunder in respect of any act or omission
occurring prior to such amendment or repeal and, provided further, that no
Preferred Stock Designation shall be amended after the issuance of any shares
of the Series of Preferred Stock created thereby, except in accordance with the
terms of such Preferred Stock Designation and the requirements of applicable
law.
ARTICLE IX
Voting Requirements Not Exclusive
The voting requirements contained in this Certificate of
Incorporation shall be in addition to the voting requirements imposed by law or
by the Preferred Stock Designation creating any series of Preferred Stock.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation
has been executed for and on behalf and in the name of the Corporation by its
officers thereunto duly authorized on _________, 1996.
________________________________________
James G. Floyd, President
Attest:
___________________________________________________
James F. Westmoreland, Secretary
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EXHIBIT 3.2
RESTATED BYLAWS
OF
THE HOUSTON EXPLORATION COMPANY
PREAMBLE
These Bylaws are subject to, and governed by, the General
Corporation Law of the State of Delaware ("DGCL") and the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"). In the event of a direct conflict between the provisions of
these Bylaws and the mandatory provisions of the DGCL or the provisions of the
Certificate of Incorporation, such provisions of the DGCL and the Certificate
of Incorporation, as the case may be, will be controlling.
ARTICLE I
Offices
Section 1.1. Registered Office and Agent. The registered office
and registered agent of the Corporation shall be as designated from time to
time by the appropriate filing by the Corporation in the office of the
Secretary of State of the State of Delaware.
Section 1.2. Other Offices. The Corporation may also have
offices at such other places, both within and without the State of Delaware, as
the Board of Directors of the Corporation (the "Board of Directors") may from
time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
Section 2.1. Annual Meetings. An annual meeting of the
Corporation's stockholders (the "Stockholders") shall be held each calendar
year for the purposes of (i) electing directors as provided in Article III and
(ii) transacting such other business as may properly be brought before the
meeting. Each annual meeting shall be held on such date (no later than 13
months after the date of the last annual meeting of Stockholders) and at such
time as shall be designated by the Board of Directors and stated in the notice
or waivers of notice of such meeting.
<PAGE> 2
Section 2.2. Special Meetings. Special meetings of the
Stockholders, for any purpose or purposes, may be called at any time by the
Chairman of the Board (if any) or the Chief Executive Officer and shall be
called by the Secretary at the written request, or by resolution adopted by the
affirmative vote, of a majority of the Board of Directors, which request or
resolution shall fix the date, time and place, and state the purpose or
purposes, of the proposed meeting. Except as provided by applicable law, these
Bylaws, the Certificate of Incorporation or the resolutions of the Board of
Directors creating any class or series of preferred stock of the Corporation,
Stockholders shall not be entitled to call a special meeting of Stockholders or
to require the Board of Directors or any officer to call such a meeting or to
propose business at such a meeting. Business transacted at any special meeting
of Stockholders shall be limited to the purposes stated in the notice or
waivers of notice of such meeting.
Section 2.3. Place of Meetings. Any meeting of Stockholders may
be held within or without the State of Delaware and shall be held at the
principal executive office of the Corporation unless another place shall be
designated in the notice or waivers of notice of such meeting.
Section 2.4. Notice of Meetings. (a) Written notice of each
meeting of Stockholders shall be delivered to each Stockholder of record
entitled to vote thereat, which notice shall (i) state the place, date and time
of the meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called and (ii) be given not less than 10 nor more
than 60 days before the date of the meeting.
(b) Each notice of a meeting of Stockholders shall be given as
provided in Section 8.9, except that if no address appears on the Corporation's
books or stock transfer records with respect to any Stockholder, notice to such
Stockholder shall be deemed to have been given if sent by first-class mail or
telecommunication to the Corporation's principal executive office or if
published at least once in a newspaper of general circulation in the county
where such principal executive office is located.
(c) If any notice addressed to a Stockholder at the address of
such Stockholder appearing on the books of a Corporation is returned to the
Corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the Stockholder
at such address, all further notices to such Stockholder at such address shall
be deemed to have been duly given without further mailing if the same shall be
available to such Stockholder upon written demand of such Stockholder at the
principal executive office of the Corporation for a period of one year from the
date of the giving of such notice.
Section 2.5. Voting List. At least 10 days before each meeting
of Stockholders, the Secretary or other officer or agent of the Corporation who
has charge of the Corporation's stock ledger shall prepare a complete list of
the Stockholders entitled to vote at such meeting, arranged in alphabetical
order and showing, with respect to each Stockholder, his address and the number
of shares registered in his name. Such list shall be open to the examination
of any Stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days prior
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to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice or waivers of notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept open at the time and place of the
meeting during the whole time thereof, and may be inspected by any Stockholder
who is present. The stock ledger of the Corporation shall be the only
evidence as to who are the Stockholders entitled to examine any list required
by this Section 2.5 or to vote at any meeting of Stockholders.
Section 2.6. Quorum and Adjournment. The holders of a majority of
the outstanding shares entitled to vote on a matter, present in person or by
proxy, shall constitute a quorum at any meeting of Stockholders, except as
otherwise provided by applicable law, the Certificate of Incorporation or these
Bylaws. If a quorum is present at any meeting of Stockholders, such quorum
shall not be broken by the withdrawal of enough Stockholders to leave less than
a quorum and the remaining Stockholders may continue to transact business until
adjournment. If a quorum shall not be present at any meeting of Stockholders,
the holders of a majority of the voting stock represented at such meeting or,
if no Stockholder entitled to vote is present at such meeting, any officer of
the Corporation may adjourn such meeting from time to time until a quorum shall
be present. Notwithstanding anything in these Bylaws to the contrary, the
chairman of any meeting of Stockholders shall have the right, acting in his
sole discretion, to adjourn such meeting from time to time.
Section 2.7. Adjourned Meetings. When a meeting of Stockholders
is adjourned to another time or place, unless otherwise provided by these
Bylaws, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken;
provided, however, if an adjournment is for more than 30 days or if after an
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each Stockholder entitled to vote
thereat. At any adjourned meeting at which a quorum shall be present in person
or by proxy, the Stockholders entitled to vote thereat may transact any
business which might have been transacted at the meeting as originally noticed.
Section 2.8. Voting. (a) When a quorum is present at any
meeting of Stockholders (including any adjournment thereof), the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote
thereat who are present in person or by proxy shall decide any question brought
before such meeting unless the question is one upon which, by express provision
of applicable law, the Certificate of Incorporation or these Bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Except as otherwise provided in the
Certificate of Incorporation or by applicable law, (i) no Stockholder shall
have any right of cumulative voting and (ii) each outstanding share, regardless
of class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of Stockholders. Where a separate vote by class is required, the
affirmative vote of the majority of the shares of such class present in person
or represented by proxy at the meeting shall be act of such class unless
otherwise provided in the Certificate of Incorporation.
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(b) Shares standing in the name of another corporation (whether
domestic or foreign) may be voted by such officer, agent or proxy as the bylaws
of such corporation may prescribe or, the absence of such provision, as the
board of directors of such corporation may determine. Shares standing in the
name of a deceased person may be voted by the executor or administrator of such
deceased person, either in person or by proxy. Shares standing in the name of
guardian, conservator or trustee may be voted by such fiduciary, either in
person or by proxy, but no fiduciary shall be entitled to vote shares held in
such fiduciary capacity without a transfer of such shares into the name of such
fiduciary. Shares standing in the name of a receiver may be voted by such
receiver. A Stockholder whose shares are pledged shall be entitled to vote
such shares, unless in the transfer by the pledgor on the books of the
Corporation he has expressly empowered the pledgee to vote thereon, in which
case only the pledgee (or his proxy) may represent the stock and vote thereon.
(c) If shares or other securities having voting power stand of
record in the name of two or more persons (whether fiduciaries, members of a
partnership, joint tenants, tenants in common, tenants by the entirety or
otherwise) or if two or more persons have the same fiduciary relationship
respecting the same shares, unless the Secretary is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing
them or creating the relationship wherein it is so provided, their acts with
respect to voting shall have the following effect:
(i) if only one votes, his act binds all;
(ii) if more than one votes, the act of the majority so voting
binds all; and
(iii) if more than one votes but the vote is evenly split on any
particular matter, each fraction may vote the securities in question
proportionately or any person voting the shares or a beneficiary (if any)
may apply to the Delaware Court of Chancery or such other court as may
have jurisdiction to appoint an additional person to act with the person
so voting the shares, which shall then be voted as determined by a
majority such persons and the person so appointed by the court.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purpose of the paragraph (c) shall
be a majority or even-split in interest.
(d) All elections of directors shall be by written ballot.
Section 2.9. Proxies. (a) At any meeting of Stockholders, each
Stockholder having the right to vote thereat may be represented and vote either
in person or by proxy executed in writing by such Stockholder or by his duly
authorized attorney-in-fact. Each such proxy shall be filed with the Secretary
of the Corporation at or before the beginning of each meeting at which such
proxy is to be voted. Unless otherwise provided therein, no proxy shall be
valid after three years from the date of its execution. Each proxy shall be
revocable unless expressly provided therein to be irrevocable and coupled with
an interest sufficient in law to support an irrevocable power or unless
otherwise made irrevocable by applicable law.
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(b) A proxy shall be deemed signed if the Stockholder's name is
placed on the proxy (whether by manual signature, telegraphic transmission or
otherwise) by the Stockholder or his attorney-in-fact. In the event any proxy
shall designate two or more persons to act as proxies, a majority of such
persons present at the meeting (or, if only one shall be present, then that
one) shall have and may exercise all the powers conferred by the proxy upon all
the persons so designated unless the proxy shall otherwise provide.
(c) Except as otherwise provided by applicable law, by the
Certificate of Incorporation or by these Bylaws, the Board of Directors may, in
advance of any meeting of Stockholders, prescribe additional regulations
concerning the manner of execution and filing of proxies (and the validation of
same) which may be voted at such meeting.
Section 2.10. Record Date. For the purpose of determining the
Stockholders entitled to notice of or to vote at any meeting of Stockholders
(or any adjournment thereof) or to receive payment of any dividend or other
distribution or allotment of any rights or to exercise any rights in respect of
any change, conversion or exchange of stock or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date on which the resolution fixing the record date is
adopted by the Board of Directors or be more than 60 nor less than 10 days
prior to the date of such meeting nor more than 60 days prior to any other
action. If no record date is fixed, (i) the record date for determining
Stockholders entitled to notice of or to vote at a meeting of Stockholders
shall be at the close of business on the day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held and (ii) the record date
for determining Stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of Stockholders of record entitled to notice
of or to vote at a meeting of Stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 2.11. Conduct of Meetings; Agenda. (a) Meetings of the
Stockholders shall be presided over by the officer of the Corporation whose
duties under these Bylaws require him to do so; provided, however, if no such
officer of the Corporation shall be present at any meeting of Stockholders,
such meeting shall be presided over by a chairman to be chosen by a majority of
the Stockholders entitled to vote at the meeting who are present in person or
by proxy. At each meeting of Stockholders, the officer of the Corporation
whose duties under these Bylaws require him to do so shall act as secretary of
the meeting; provided, however, if no such officer of the Corporation shall be
present at any meeting of Stockholders, the chairman of such meeting shall
appoint a secretary. The order of business at each meeting of Stockholders
shall be as determined by the chairman of the meeting, including such
regulation of the manner of voting and the conduct of discussion as seems to
him in order.
(b) The Board of Directors may, in advance of any meeting of
Stockholders, adopt an agenda for such meeting, adherence to which the chairman
of the meeting may enforce.
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Section 2.12. Inspectors of Election. (a) Before any meeting of
Stockholders, the Board of Directors may, and if required by law shall, appoint
one or more persons to act as inspectors of election at such meeting or any
adjournment thereof. If any person appointed as inspector fails to appear or
fails or refuses to act, the chairman of the meeting may, and if required by
law or requested by any Stockholder entitled to vote or his proxy shall,
appoint a substitute inspector. If no inspectors are appointed by the Board of
Directors, the chairman of the meeting may, and if required by law or requested
by any Stockholder entitled to vote or his proxy shall, appoint one or more
inspectors at the meeting. Notwithstanding the foregoing, inspectors shall be
appointed consistent with Section 231 of the DGCL.
(b) Inspectors may include individuals who serve the
Corporation in other capacities (including as officers, employees, agents or
representatives); provided, however, that no director or candidate for the
office of director shall act as an inspector. Inspectors need not be
Stockholders.
(c) The inspectors shall (i) determine the number of shares of
capital stock of the Corporation outstanding and the voting power of each, the
number of shares represented at the meeting, the existence of a quorum and the
validity and effect of proxies and (ii) receive votes or ballots, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes and ballots, determine the results and do
such acts as are proper to conduct the election or vote with fairness to all
Stockholders. On request of the chairman of the meeting, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. The inspectors
shall have such other duties as may be prescribed by Section 231 of the DGCL.
Section 2.13. Procedures for Bringing Business before Annual
Meetings. (a) Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at an annual meeting of Stockholders except in
accordance with the procedures hereinafter set forth in this Section 2.13;
provided, however, that nothing in this Section 2.13 shall be deemed to
preclude discussion by any Stockholder of any business properly brought before
any annual meeting of Stockholders in accordance with such procedures.
(b) At any annual meeting of Stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be (i) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (ii) otherwise properly brought before the meeting
by or at the direction of the Board of Directors or (iii) properly brought
before the meeting by a Stockholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
Stockholder, the Stockholder must have given timely notice thereof in writing
to the Secretary. To be timely, a Stockholder's notice must be delivered to or
mailed and received at the principal executive office of the Corporation not
less than 120 days nor more than 150 days in advance of the first anniversary
of the date of the Corporation's proxy statement released to Stockholders in
connection with the previous year's annual meeting of Stockholders; provided,
however, that if no annual meeting was held in the previous year or the date
of the annual meeting
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of Stockholders has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, the notice
must be received by the Corporation at least 80 days prior to the date the
Corporation intends to distribute its proxy statement with respect to such
meeting. Any meeting of Stockholders which is adjourned and will reconvene
within 30 days after the meeting date as originally noticed shall, for purposes
of any Stockholder's notice contemplated by this paragraph (b), be deemed to be
a continuation of the original meeting, and no business may be brought before
such adjourned meeting by any Stockholder unless timely notice of such business
was given to the Secretary of the Corporation for the meeting as originally
noticed.
(c) Each notice given by a Stockholder as contemplated by
paragraph (b) above shall set forth, as to each matter the Stockholder proposes
to bring before the annual meeting, (i) the nature of the proposed business
with reasonable particularity, including the exact text of any proposal to be
presented for adoption and any supporting statement, which proposal and
supporting statement shall not in the aggregate exceed 500 words, and his
reasons for conducting such business at the annual meeting, (ii) any material
interest of the Stockholder in such business, (iii) the name, principal
occupation and record address of the Stockholder, (iv) the class and number of
shares of the Corporation which are held of record or beneficially owned by the
Stockholder, (v) the dates upon which the Stockholder acquired such shares of
stock and documentary support for any claims of beneficial ownership and (vi)
such other matters as may be required by the Certificate of Incorporation.
(d) The foregoing right of a Stockholder to propose business for
consideration at an annual meeting of Stockholders shall be subject to such
conditions, restrictions and limitations as may be imposed by the Certificate
of Incorporation.
(e) The chairman of an annual meeting of Stockholders shall
determine whether business has been properly brought before the meeting and, if
the facts so warrant, may refuse to transact any business at such meeting which
has not been properly brought before the meeting.
(f) Notwithstanding any other provision of these Bylaws, the
Corporation shall be under no obligation to include any Stockholder proposal in
its proxy statement material or otherwise present any such proposal to
Stockholders at a meeting of Stockholders if the Board of Directors reasonably
believes that the proponents thereof have not complied with Sections 13 and 14
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, and the Corporation shall not be required
to include in its proxy statement material to Stockholders any Stockholder
proposal not required to be included in its proxy statement to Stockholders in
accordance with such Act, rules or regulations.
(g) Reference is made to Section 3.4 for procedures relating to
the nomination of any person for election or reelection as a director of the
Corporation.
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Section 2.14. Action without Meeting. No action shall be taken by
Stockholders except at an annual or special meeting of Stockholders.
Stockholders may not act by written consent in lieu of a meeting.
ARTICLE III
Board of Directors -- Powers, Number, Classification,
Nominations, Resignations, Removal, Vacancies and Compensation
Section 3.1. Management. The business and property of the
Corporation shall be managed by and under the direction of the Board of
Directors, which may exercise all the powers of the Corporation and do all such
lawful acts and things as are not by law, by the Certificate of Incorporation
or by these Bylaws directed or required to be exercised or done by the
Stockholders.
Section 3.2. Number and Qualification. The Board of Directors
shall consist of a minimum of three and a maximum of 15 directors, subject,
however, to increases above 15 members as may be required in order to permit
the holders of any class or series of preferred stock of the Corporation to
exercise theire right (if any) to elect additional directors under specified
circumstances. The Board of Directors shall have sole authority to determine
the number of directors, within the limits set forth above, and may increase or
decrease the exact number of directors from time to time by resolution duly
adopted by the affirmative vote of a majority of the entire Board of Directors.
Such increases and decreases shall be apportioned among the classes of
directors so that all classes will be as nearly equal in number as possible.
The directors need not be Stockholders nor residents of the State of Delaware.
Each director must have attained 21 years of age.
Section 3.3. Classification; Election; Term of Office. (a) The
Board of Directors shall be divided into three classes designated Class I,
Class II and Class III, respectively, all as nearly equal in number as
possible. The initial term of office of Class I directors shall expire at the
annual meeting of Stockholders in 1997. The initial term of office of Class II
directors shall expire at the annual meeting of Stockholders in 1998. The
initial term of office of Class III directors shall expire at the annual
meeting of Stockholders in 1999. Each director shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal.
(b) Each director elected at an annual meeting of Stockholders
to succeed a director whose term is then expiring shall hold his office until
the third annual meeting of Stockholders after his election and until his
successor is elected and qualified. Directors shall be elected only at annual
meetings of Stockholders, except as otherwise provided in these Bylaws and
except that if any such annual meeting is not held or if any director to be
elected thereat is not elected, such director may be elected at any special
meeting of Stockholders held for that purpose.
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(c) No decrease in the number of directors constituting the
whole Board of Directors shall have the effect of shortening the term of any
incumbent director.
Section 3.4. Nominations. (a) Notwithstanding anything in
these Bylaws to the contrary, only persons who are nominated in accordance with
the procedures hereinafter set forth in this Section 3.4 shall be eligible for
election as directors of the Corporation.
(b) Nominations of persons for election to the Board of
Directors at a meeting of Stockholders may be made only (i) by or at the
direction of the Board of Directors or (ii) by any Stockholder entitled to vote
for the election of directors at the meeting who satisfies the eligibility
requirements (if any) set forth in the Certificate of Incorporation and who
complies with the notice procedures set forth in this Section 3.4 and in the
Certificate of Incorporation. Nominations by Stockholders shall be made
pursuant to timely notice in writing to the Secretary. To be timely, a
Stockholder's notice shall be delivered to or mailed and received at the
principal executive office of the Corporation not less than 120 days nor more
than 150 days in advance of the first anniversary of the date of the
Corporation's proxy statement released to Stockholders in connection with the
previous year's annual meeting of Stockholders; provided, however, that if no
annual meeting was held in the previous year or the date of the annual meeting
of Stockholders has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, the notice
must be received by the Corporation at least 80 days prior to the date the
Corporation intends to distribute its proxy statement with respect to such
meeting. Any meeting of Stockholders which is adjourned and will reconvene
within 30 days after the meeting date as originally noticed shall, for purposes
of any notice contemplated by this paragraph (b), be deemed to be a
continuation of the original meeting and no nominations by a Stockholder of
persons to be elected directors of the Corporation may be made at any such
reconvened meeting other than pursuant to a notice that was timely for the
meeting on the date originally noticed.
(c) Each notice given by a Stockholder as contemplated by paragraph
(b) above shall set forth the following information, in addition to any other
information or matters required by the Certificate of Incorporation:
(i) as to each person whom the Stockholder proposes to nominate
for election or re-election as a director, (A) the exact name of such
person, (B) such person's age, principal occupation, business address and
telephone number and residence address and telephone number, (C) the
number of shares (if any) of each class of stock of the Corporation owned
directly or indirectly by such person and (D) all other information
relating to such person that is required to be disclosed in solicitations
of proxies for election of directors pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended, or any successor
regulation thereto (including such person's notarized written acceptance
of such nomination, consent to being named in the proxy statement as a
nominee and statement of intention to serve as a director if elected);
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(ii) as to the Stockholder giving the notice, (A) his name and
address, as they appear on the Corporation's books, (B) his principal
occupation, business address and telephone number and residence address
and telephone number, (C) the class and number of shares of the
Corporation which are held of record or beneficially owned by him and (D)
the dates upon which he acquired such shares of stock and documentary
support for any claims of beneficial ownership; and
(iii) a description of all arrangements or understandings between
the Stockholder giving the notice and each nominee and any other person
or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by such Stockholder.
At the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a Stockholder's notice
of nomination which pertains to the nominee.
(d) The foregoing right of a Stockholder to nominate a person
for election or reelection to the Board of Directors shall be subject to such
conditions, restrictions and limitations as may be imposed by the Certificate
of Incorporation.
Section 3.5. Resignations. Any director may resign at any time
by giving written notice to the Board of Directors or the Secretary. Such
resignation shall take effect at the date of receipt of such notice or at any
later time specified therein. Acceptance of such resignation shall not be
necessary to make it effective.
Section 3.6. Removal. No director of any class may be removed
before the expiration of his term of office except for cause and then only by
the affirmative vote of the holders of not less than a majority of all
outstanding shares of the Corporation entitled to vote generally in an election
of directors, voting together as a single class. The Board of Directors may
not remove any director, and no recommendation by the Board of Directors that a
director be removed may be made to the Stockholders unless such recommendation
is set forth in a resolution adopted by the affirmative vote of not less than
66-2/3% of the whole Board of Directors.
Section 3.7. Vacancies. (a) In case any vacancy shall occur on
the Board of Directors because of death, resignation or removal, such vacancy
may be filled by a majority of the directors remaining in office (though less
than a quorum), and the director so appointed shall serve for the unexpired
term of his predecessor or until his successor is elected and qualified or
until his earlier death, resignation or removal. If there are no directors
then in office, an election of directors may be held in the manner provided by
applicable law.
(b) Any newly-created directorship resulting from any increase
in the number of directors constituting the whole Board of Directors may be
filled by a majority of the directors then in office (though less than a
quorum), and the director so appointed shall be assigned to such class of
directors as such majority directors shall determine; provided, however, that
newly-created
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directorships shall be apportioned among the classes of directors so that all
classes will be as nearly equal in number as possible. Each director so
appointed shall hold office for the remaining term of the class to which he is
assigned or until his successor is elected and qualified or until his earlier
death, resignation or removal.
(c) Except as expressly provided in these Bylaws or the
Certificate of Incorporation or as otherwise provided by law, Stockholders
shall not have any right to fill vacancies on the Board of Directors, including
newly-created directorships.
(d) If, as a result of a disaster or emergency (as determined in
good faith by the then remaining directors), it becomes impossible to ascertain
whether or not vacancies exist on the Board of Directors and a person is or
persons are elected by the directors, who in good faith believe themselves to
be a majority of the remaining directors, to fill a vacancy or vacancies that
such remaining directors in good faith believe exists, then the acts of such
person or persons who are so elected as directors shall be valid and binding
upon the Corporation and the Stockholders, although it may subsequently develop
that at the time of the election (i) there was in fact no vacancy or vacancies
existing on the Board of Directors or (ii) the directors who so elected such
person or persons did not in fact constitute a majority of the remaining
directors.
Section 3.8. Subject to Rights of Holders of Preferred Stock.
Notwithstanding the foregoing provisions of this Article III, if the
resolutions of the Board of Directors creating any class or series of preferred
stock of the Corporation entitle the holders of such preferred stock, voting
separately by class or series, to elect additional directors under specified
circumstances, then all provisions of such resolutions relating to the
nomination, election, term of office, removal, filling of vacancies and other
features of such directorships shall, as to such directorships, govern and
control over any conflicting provisions of this Article III, and such directors
so elected need not be divided into classes pursuant to this Article III unless
expressly provided by the provisions of such resolutions.
Section 3.9. Compensation. The Board of Directors shall have the
authority to fix, and from time to time to change, the compensation of
directors. Each director shall be entitled to reimbursement from the
Corporation for his reasonable expenses incurred in attending meetings of the
Board of Directors (or any committee thereof) and meetings of the Stockholders.
Nothing contained in these Bylaws shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
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ARTICLE IV
Board of Directors -- Meetings and Actions
Section 4.1. Place of Meetings. The directors may hold their
meetings and have one or more offices, and keep the books of the Corporation,
in such place or places, within or without the State of Delaware, as the Board
of Directors may from time to time determine.
Section 4.2. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place, within or without
the State of Delaware, as shall from time to time be determined by the Board of
Directors. Except as otherwise provided by applicable law, any business may be
transacted at any regular meeting of the Board of Directors.
Section 4.3. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board (if any) or the Chief
Executive Officer on not less than notice 24 hours' notice to each director,
specifying the time, place and purpose of the meeting. Special meetings shall
be called by the Secretary on like notice at the written request of any two
directors, which request shall state the purpose of the meeting.
Section 4.4. Quorum; Voting. (a) At all meetings of the Board
of Directors, a majority of the whole Board of Directors shall be necessary and
sufficient to constitute a quorum for the transaction of business. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time (without notice other
than announcement at the meeting) until a quorum shall be present. A meeting
of the Board of Directors at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors; provided,
however, that no action of the remaining directors shall constitute the act of
the Board of Directors unless the action is approved by at least a majority of
the required quorum for the meeting or such greater number of directors as
shall be required by applicable law, by the Certificate of Incorporation or by
these Bylaws.
(b) The act of a majority of the directors present at any
meeting of the Board of Directors at which there is a quorum shall be the act
of the Board of Directors unless by express provision of law, the Certificate
of Incorporation or these Bylaws a different vote is required, in which case
such express provision shall govern and control.
Section 4.5. Conduct of Meetings. At meetings of the Board of
Directors, business shall be transacted in such order as shall be determined by
the chairman of the meeting unless the Board of Directors shall otherwise
determine the order of business. The Board of Directors shall keep regular
minutes of its proceedings which shall be placed in the minute book of the
Corporation.
Section 4.6. Presumption of Assent. A director who is present at
a meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to such action unless his dissent
shall be entered in the minutes of the meeting or unless he shall file
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his written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward any dissent by
certified or registered mail to the Secretary immediately after the adjournment
of the meeting. Such right to dissent shall not apply to any director who
voted in favor of such action.
Section 4.7. Action without Meeting. Unless otherwise provided
in the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if all directors consent thereto in writing. All such
written consents shall be filed with the minutes of proceedings of the Board of
Directors.
Section 4.8. Telephonic Meetings. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, members of the Board of
Directors may participate in a meeting of the Board of Directors by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
ARTICLE V
Committees of the Board of Directors
Section 5.1. Executive Committee. (a) The Board of Directors
may, by resolution adopted by the affirmative vote of a majority of the whole
Board of Directors, designate an Executive Committee which, during the
intervals between meetings of the Board of Directors and subject to Section
5.11, shall have and may exercise, in such manner as it shall deem to be in the
best interests of the Corporation, all of the powers of the Board of Directors
in the management or direction of the business and affairs of the Corporation,
except as reserved to the Board of Directors or as delegated by the Board of
Directors to another committee of the Board of Directors or as may be
prohibited by law. The Executive Committee shall consist of not less than two
directors, the exact number to be determined from time to time by the
affirmative vote of a majority of the whole Board of Directors. None of the
members of the Executive Committee need be an officer of the Corporation.
(b) Meetings of the Executive Committee may be called at any
time by the Chairman of the Board on not less than one day's notice to each
member given verbally or in writing, which notice shall specify the time, place
and purpose of the meeting.
Section 5.2. Other Committees. The Board of Directors may, by
resolution adopted by a majority of the whole Board of Directors, establish
additional standing or special committees of the Board of Directors, each of
which shall consist of two or more directors (the exact number to be determined
from time to time by the Board of Directors) and, subject to Section 5.11,
shall have such powers and functions as may be delegated to it by the Board of
Directors. No member of any such additional committee need be an officer of
the Corporation.
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Section 5.3. Term. Each member of a committee of the Board of
Directors shall serve as such until the earliest of (i) his death, (ii) the
expiration of his term as a director, (iii) his resignation as a member of such
committee or as a director and (iv) his removal as a member of such committee
or as a director.
Section 5.4. Committee Changes; Removal. The Board of Directors
shall have the power at any time to fill vacancies in, to change the membership
of and to abolish any committee of the Board of Directors; provided, however,
that no such action shall be taken in respect of the Executive Committee unless
approved by a majority of the whole Board of Directors.
Section 5.5. Alternate Members. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. If
no alternate members have been so appointed or each such alternate committee
member is absent or disqualified, the committee member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any absent or disqualified
member.
Section 5.6. Rules and Procedures. (a) The Board of Directors
may, by resolution adopted by a majority of the whole Board of Directors,
designate one member of each committee as chairman of such committee. If a
chairman is not so designated for any committee, the members thereof shall
designate a chairman.
(b) Each committee shall adopt its own rules (not inconsistent
with these Bylaws or with any specific direction as to the conduct of its
affairs as shall have been given by the Board of Directors) governing the time,
place and method of holding its meetings and the conduct of its proceedings and
shall meet as provided by such rules.
(c) If a committee is comprised of an odd number of members, a
quorum shall consist of a majority of that number. If a committee is comprised
of an even number of members, a quorum shall consist of one-half of that
number. If a committee is comprised of two members, a quorum shall consist of
both members.
(d) Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when requested.
(e) Unless otherwise provided by these Bylaws or by the rules
adopted by any committee, notice of the time and place of each meeting of such
committee shall be given to each member of such committee as provided in these
Bylaws with respect to notices of special meetings of the Board of Directors.
Section 5.7. Presumption of Assent. A member of a committee of
the Board of Directors who is present at a meeting of such committee at which
action on any corporate matter is taken shall
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be presumed to have assented to such action unless his dissent shall be entered
in the minutes of the meeting or unless he shall file his written dissent to
such action with the person acting as secretary of the meeting before the
adjournment thereof or shall forward any dissent by certified or registered
mail to the Secretary of the Corporation immediately after the adjournment of
the meeting. Such right to dissent shall not apply to any member who voted in
favor of such action.
Section 5.8. Action without Meeting. Unless otherwise provided
in the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting if all members of such committee consent thereto
in writing. All such written consents shall be filed with the minutes of
proceedings of such committee.
Section 5.9. Telephonic Meetings. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, members of any committee of
the Board of Directors may participate in a meeting of such committee by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
Section 5.10. Resignations. Any committee member may resign at
any time by giving written notice to the Board of Directors or the Secretary.
Such resignation shall take effect at the date of receipt of such notice or at
any later time specified therein. Acceptance of such resignation shall not be
necessary to make it effective.
Section 5.11. Limitations on Authority. Unless otherwise
provided in the Certificate of Incorporation, no committee of the Board of
Directors shall have the power or authority to (i) authorize an amendment to
the Certificate of Incorporation, (ii) adopt an agreement of merger or
consolidation, recommend to the Stockholders the sale, lease or exchange of all
or substantially all of the Corporation's property and assets, (iii) recommend
to the Stockholders a dissolution of the Corporation or a revocation of a
dissolution, (iv) amend these Bylaws, (v) declare a dividend or other
distribution on, or authorize the issuance, purchase or redemption of,
securities of the Corporation, (vi) elect any officer of the Corporation or
(vii) approve any material transaction between the Corporation and one or more
of its directors, officers or employees or between the Corporation and any
corporation, partnership, association or other organization in which one or
more of its directors, officers or employees are directors or officers or have
a financial interest; provided, however, that the Executive Committee may, to
the extent authorized in the resolution or resolutions providing for the
issuance of shares of preferred stock adopted by the Board of Directors as
provided in the Certificate of Incorporation, fix the designations and any of
the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
of stock of the Corporation or fix the number of shares of any series of stock
or authorize the decrease or increase of the shares of any such series.
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ARTICLE VI
Officers
Section 6.1. Number; Titles; Qualification; Term of Office. (a)
The officers of the Corporation shall be a Chief Executive Officer, a
President, a Secretary and a Treasurer. The Board of Directors from time to
time may also elect such other officers (including, without limitation, a
Chairman of the Board and one or more Vice Presidents) as the Board of
Directors deems appropriate or necessary. Each officer shall hold office until
his successor shall have been duly elected and shall have qualified or until
his earlier death, resignation or removal. Any two or more offices may be held
by the same person, but no officer shall execute any instrument in more than
one capacity if such instrument is required by law or any act of the
Corporation to be executed or countersigned by two or more officers. None of
the officers need be a Stockholder or a resident of the State of Delaware. No
officer (other than the Chairman of the Board, if any) need be a director.
(b) The Board of Directors may delegate to the Chairman of the
Board (if any) and/or the Chief Executive Officer the power to appoint one or
more employees of the Corporation as divisional or departmental vice presidents
and fix their duties as such appointees. However, no such divisional or
departmental vice presidents shall be considered an officer of the Corporation,
the officers of the Corporation being limited to those officers elected by the
Board of Directors.
Section 6.2. Election. At the first meeting of the Board of
Directors after each annual meeting of Stockholders at which a quorum shall be
present, the Board of Directors shall elect the officers of the Corporation.
Section 6.3 Removal. Any officer may be removed, either with or
without cause, by the Board of Directors; provided, however, that (i) the
Chairman of the Board (if any) and the Chief Executive Officer may be removed
only by the affirmative vote of a majority of the whole Board of Directors and
(ii) the removal of any officer shall be without prejudice to the contract
rights, if any, of such officer. Election or appointment of an officer shall
not of itself create contract rights.
Section 6.4. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors, the Chairman of the Board (if
any) or the Chief Executive Officer. Any such resignation shall take effect on
receipt of such notice or at any later time specified therein. Unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective. Any such resignation is without prejudice to
the rights, if any, of the Corporation under any contract to which the officer
is a party.
Section 6.5. Vacancies. If a vacancy shall occur in any office
because of death, resignation, removal, disqualification or any other cause,
the Board of Directors may elect or appoint a successor to fill such vacancy
for the remainder of the term.
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Section 6.6. Salaries. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors or pursuant to its
direction, and no officer shall be prevented from receiving such salary by
reason of the fact that he is also a director of the Corporation.
Section 6.7. Chairman of the Board. The Chairman of the Board
(if any) shall have all powers and shall perform all duties incident to the
office of Chairman of the Board and such other powers and duties as may be
prescribed by the Board of Directors or these Bylaws. The Chairman of the
Board, if present, shall preside at all meetings of the Board of Directors and
of the Stockholders. During the time of any vacancy in the office of Chief
Executive Officer or in the event of the absence or disability of the Chief
Executive Officer, the Chairman of the Board shall have the duties and powers
of the Chief Executive Officer unless otherwise determined by the Board of
Directors. In no event shall any third party having dealings with the
Corporation be bound to inquire as to any facts required by the terms of this
Section 6.7 for the exercise by the Chairman of the Board of the powers of the
Chief Executive Officer.
Section 6.8. Chief Executive Officer. (a) The Chief Executive
Officer shall be the chief executive officer of the Corporation and, subject to
the supervision, direction and control of the Board of Directors, shall have
general supervision, direction and control of the business and officers of the
Corporation with all such powers as may be reasonably incident to such
responsibilities. He shall have the general powers and duties of management
usually vested in the chief executive officer of a corporation.
(b) During the time of any vacancy in the office of Chairman
of the Board or in the event of the absence or disability of the Chairman of
the Board, the Chief Executive Officer shall have the duties and powers of the
Chairman of the Board unless otherwise determined by the Board of Directors.
During the time of any vacancy in the office of President or in the event of
the absence or disability of the President, the Chief Executive Officer shall
have the duties and powers of the President unless otherwise determined by the
Board of Directors. In no event shall any third party having any dealings with
the Corporation be bound to inquire as to any facts required by the terms of
this Section 6.8 for the exercise by the Chief Executive Officer of the powers
the Chairman of the Board or the President.
Section 6.9. President. (a) The President shall be the chief
operating officer of the Corporation and, subject to the supervision, direction
and control of the Chief Executive Officer and the Board of Directors, shall
manage the day-to-day operations of the Corporation. He shall have the general
powers and duties of management usually vested in the chief operating officer
of a corporation and such other powers and duties as may be assigned to him by
the Board of Directors, the Chief Executive Officer or these Bylaws.
(b) During the time of any vacancy in the offices of the
Chairman of the Board and Chief Executive Officer or in the event of the
absence or disability of the Chairman of the Board and the Chief Executive
Officer, the President shall have the duties and powers of the Chief Executive
Officer unless otherwise determined by the Board of Directors. In no event
shall any third party
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having any dealings with the Corporation be bound to inquire as to any facts
required by the terms of this Section 6.9 for the exercise by the President of
the powers the the Chief Executive Officer.
Section 6.10. Vice Presidents. In the absence or disability of
the President, the Vice Presidents, if any, in order of their rank as fixed by
the Board of Directors, or if not ranked, the Vice President designated by the
President, shall perform all the duties of the President as chief operating
officer of the Corporation, and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the President as chief operating
officer of the Corporation. In no event shall any third party having dealings
with the Corporation be bound to inquire as to any facts required by the terms
of this Section 6.10 for the exercise by any Vice President of the powers of
the President as chief operating officer of the Corporation. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be assigned to them by the Board of Directors, the Chief
Executive Officer or the President.
Section 6.11. Treasurer. The Treasurer shall (i) have custody of
the Corporation's funds and securities, (ii) keep full and accurate account of
receipts and disbursements, (iii) deposit all monies and valuable effects in
the name and to the credit of the Corporation in such depository or
depositories as may be designated by the Board of Directors and (iv) perform
such other duties as may be prescribed by the Board of Directors or the Chief
Executive Officer.
Section 6.12. Assistant Treasurers. Each Assistant Treasurer
shall have such powers and duties as may be assigned to him by the Board of
Directors, the Chief Executive Officer or the President. In case of the
absence or disability of the Treasurer, the Assistant Treasurer designated by
the President (or, in the absence of such designation, the Treasurer) shall
perform the duties and exercise the powers of the Treasurer during the period
of such absence or disability. In no event shall any third party having
dealings with the Corporation be bound to inquire as to any facts required by
the terms of this Section 6.12 for the exercise by any Assistant Treasurer of
the powers of the Treasurer under these Bylaws.
Section 6.13. Secretary. (a) The Secretary shall keep or cause
to be kept, at the principal office of the Corporation or such other place as
the Board of Directors may order, a book of minutes of all meetings and actions
of the Board of Directors, committees of the Board of Directors and
Stockholders, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at meetings of the Board of Directors and committees thereof, the
number of shares present or represented at Stockholders' meetings and the
proceedings thereof.
(b) The Secretary shall keep, or cause to be kept, at the
principal office of the Corporation or at the office of the Corporation's
transfer agent or registrar, a share register, or a duplicate share register,
showing the names of all Stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same and the number and date of cancellation of every certificate
surrendered for cancellation.
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(c) The Secretary shall give, or cause to be given, notice of
all meetings of the Stockholders and of the Board of Directors required by
these Bylaws or by law to be given, and he shall keep the seal of the
Corporation, if one be adopted, in safe custody, and shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors, the Chairman of the Board (if any), the Chief Executive Officer, the
President or these Bylaws.
(d) The Secretary may affix the seal of the Corporation, if one
be adopted, to contracts of the Corporation.
Section 6.14. Assistant Secretaries. Each Assistant Secretary
shall have such powers and duties as may be assigned to him by the Board of
Directors, the Chairman of the Board (if any), the Chief Executive Officer or
the President. In case of the absence or disability of the Secretary, the
Assistant Secretary designated by the President (or, in the absence of such
designation, the Secretary) shall perform the duties and exercise the powers of
the Secretary during the period of such absence or disability. In no event
shall any third party having dealings with the Corporation be bound to inquire
as to any facts required by the terms of this Section 6.14 for the exercise by
any Assistant Secretary of the powers of the Secretary under these Bylaws.
ARTICLE VII
Stock
Section 7.1. Certificates. Certificates for shares of stock of
the Corporation shall be in such form as shall be approved by the Board of
Directors. The certificates shall be signed (i) by the Chairman of the Board
(if any), the President or a Vice President and (ii) by the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer.
Section 7.2. Signatures on Certificates. Any or all of the
signatures on the certificates may be a facsimile and the seal of the
Corporation (or a facsimile thereof), if one has been adopted, may be affixed
thereto. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon, a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, such certificate may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 7.3. Legends. The Board of Directors shall have the
power and authority to provide that certificates representing shares of stock
of the Corporation bear such legends and statements (including, without
limitation, statements relating to the powers, designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions of the shares represented by such certificates) as
the Board of Directors deems appropriate in connection with the requirements of
federal or state securities laws or other applicable laws.
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Section 7.4. Lost, Stolen or Destroyed Certificates. The Board
of Directors, the Secretary and the Treasurer each may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, in each case upon the making of an affidavit of that fact by the
owner of such certificate, or his legal representative. When authorizing such
issue of a new certificate or certificates, the Board of Directors, the
Secretary or the Treasurer, as the case may be, may, in its or his discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as the Board of Directors,
the Secretary or the Treasurer, as the case may be, shall require and/or to
furnish the Corporation a bond in such form and substance and with such surety
as the Board of Directors, the Secretary or the Treasurer, as the case may be,
may direct as indemnity against any claim, or expense resulting from any claim,
that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 7.5. Transfers of Shares. Shares of stock of the
Corporation shall be transferable only on the books of the Corporation by the
holders thereof in person or by their duly authorized attorneys or legal
representatives. Upon surrender to the Corporation, or the transfer agent of
the Corporation, of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation or its transfer agent shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon
the Corporation's books.
Section 7.6. Registered Stockholders. The Corporation shall be
entitled to treat the holder of record of any share of stock of the Corporation
as the holder in fact thereof and, accordingly, shall not be bound to recognize
any equitable or other claim or interest in such share on the part of any other
person, whether or not the Corporation shall have express or other notice
thereof, except as expressly provided by the laws of the State of Delaware.
Section 7.7. Regulations. The Board of Directors shall have the
power and authority to make all such rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the replacement of
certificates for shares of stock of the Corporation. The Board of Directors
may (i) appoint and remove transfer agents and registrars of transfers and (ii)
require all stock certificates to bear the signature of any such transfer agent
and/or any such registrar of transfers.
Section 7.8. Stock Options, Warrants, etc. Unless otherwise
expressly prohibited in the resolutions of the Board of Directors creating any
class or series of preferred stock of the Corporation, the Board of Directors
shall have the power and authority to create and issue (whether or not in
connection with the issue and sale of any stock or other securities of the
Corporation) warrants, rights or options entitling the holders thereof to
purchase from the Corporation any shares of capital stock of the Corporation of
any class or series or any other securities of the Corporation for such
consideration and to such persons, firms or corporations as the Board of
Directors, in its sole discretion, may determine, setting aside from the
authorized but unissued stock of the Corporation
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the requisite number of shares for issuance upon the exercise of such warrants,
rights or options. Such warrants, rights and options shall be evidenced by one
or more instruments approved by the Board of Directors. The Board of Directors
shall be empowered to set the exercise price, duration, time for exercise and
other terms of such warrants, rights and operations; provided, however, that
the consideration to be received for any shares of capital stock subject
thereto shall not be less than the par value thereof.
ARTICLE VIII
Indemnification
Section 8.1. Third Party Actions. The Corporation (i) shall, to
the maximum extent permitted from time to time under the laws of the State of
Delaware, indemnify every person who is or was a party or is or was 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 such person is or was a director or officer of the Corporation or any of
its direct or indirect subsidiaries or is or was serving at the request of the
Corporation or any of its direct or indirect subsidiaries as a director,
officer or fiduciary of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, and (ii) may, to the maximum extent
permitted from time to time under the laws of the State of Delaware, indemnify
every person who is or was a party or is or was 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 such person is or was
an employee or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation or any of
its direct or indirect subsidiaries as an employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including counsel fees), judgments, fines and
amounts paid or owed in settlement, actually and reasonably incurred by such
person or rendered or levied against such person in connection with such
action, suit or proceeding, if such person acted in good faith and in a manner
such person 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. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not, in itself, create a
presumption that the person did not act in good faith and in a manner which
such person reasonably believed to be in or not opposed to the best interests
of the Corporation or, with respect to any criminal action or proceeding, that
the person had reasonable cause to believe that his conduct was unlawful. Any
person seeking indemnification under this Section 8.1 shall be deemed to have
met the standard of conduct required for such indemnification unless the
contrary is established.
Section 8.2. Actions By or in the Right of the Corporation. The
Corporation (i) shall, to the maximum extent permitted from time to time under
the laws of the State of Delaware, indemnify every person who is or was a
party or who is or was threatened to be made a party to any
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<PAGE> 22
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 such
person is or was a director or officer of the Corporation or any of its direct
or indirect subsidiaries or is or was serving at the request of the Corporation
or any of its direct or indirect subsidiaries as a director, officer or
fiduciary of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, and (ii) may, to the maximum extent permitted
from time to time under the laws of the State of Delaware, indemnify every
person who is or was a party or who is or was 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 such
person is or was an employee or agent of the Corporation or any of its direct
or indirect subsidiaries or is or was serving at the request of the Corporation
or any of its direct or indirect subsidiaries as an employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against expenses (including counsel fees) actually and
reasonably incurred by such person in connection with the defense or
settlement or such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation; provided, however, that no indemnification shall
be made with respect to 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, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnification.
Section 8.3. Expenses. Expenses incurred by a director or
officer of the Corporation or any of its direct or indirect subsidiaries in
defending a civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation as authorized in this Article
VIII. Such expenses incurred by other employees and agents of the Corporation
and other persons eligible for indemnification under this Article VIII may be
paid upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
Section 8.4. Non-exclusivity. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article VIII
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any provision
of law, the Certificate of Incorporation, the certificate of incorporation or
bylaws or other governing documents of any direct or indirect subsidiary of the
Corporation, under any agreement, vote of stockholders or disinterested
directors or under any policy or policies of insurance maintained by the
Corporation on behalf of any person or otherwise, both as to action in his
official capacity and as to action in another capacity while holding any of the
positions or having any of the relationships referred to in this Article VIII.
Section 8.5. Enforceability. The provisions of this Article VIII
(i) are for the benefit of, and may be enforced directly by, each director or
officer of the Corporation the same as if set forth in their entirety in a
written instrument executed and delivered by the Corporation and such director
or officer and (ii) constitute a continuing offer to all present and future
directors and officers of the
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Corporation. The Corporation, by its adoption of these Bylaws, (A)
acknowledges and agrees that each present and future director and officer of
the Corporation has relied upon and will continue to rely upon the provisions
of this Article VIII in becoming, and serving as, a director or officer of the
Corporation or, if requested by the Corporation, a director, officer or
fiduciary or the like of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, (B) waives reliance upon, and
all notices of acceptance of, such provisions by such directors and officers
and (C) acknowledges and agrees that no present or future director or officer
of the Corporation shall be prejudiced in his right to enforce directly the
provisions of this Article VIII in accordance with their terms by any act or
failure to act on the part of the Corporation.
Section 8.6. Survival. The provisions of this Article VIII shall
continue as to any person who has ceased to be a director or officer of the
Corporation and shall inure to the benefit of the estate, executors,
administrators, heirs, legatees and devisees of any person entitled to
indemnification under this Article VIII.
Section 8.7. Amendment. No amendment, modification or repeal of
this Article VIII or any provision hereof shall in any manner terminate,
reduce or impair the right of any past, present or future director or officer
of the Corporation to be indemnified by the Corporation, nor the obligation of
the Corporation to indemnify any such director or officer, under and in
accordance with the provisions of this Article VIII as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising,
in whole or in part, from a state of facts extant on the date of, or relating
to matters occurring prior to, such amendment, modification or repeal,
regardless of when such claims may arise or be asserted.
Section 8.8. Definitions. For purposes of this Article VIII, (i)
reference to any person shall include the estate, executors, administrators,
heirs, legatees and devisees of such person, (ii) "employee benefit plan" and
"fiduciary" shall be deemed to include, but not be limited to, the meaning set
forth, respectively, in sections 3(3) and 21(A) of the Employee Retirement
Income Security Act of 1974, as amended, (iii) references to the judgments,
fines and amounts paid or owed in settlement or rendered or levied shall be
deemed to encompass and include excise taxes required to be paid pursuant to
applicable law in respect of any transaction involving an employee benefit plan
and (iv) references to the Corporation shall be deemed to include any
predecessor corporation or entity and any constituent corporation or entity
absorbed in a merger, consolidation or other reorganization of or by the
Corporation which, if its separate existence had continued, would have had
power and authority to indemnify its directors, officers, employees, agents and
fiduciaries so that any person who was a director, officer, employee, agent or
fiduciary of such predecessor or constituent corporation or entity, or served
at the request of such predecessor or constituent corporation or entity as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall stand in the same position under the provisions of this Article VIII with
respect to the Corporation as such person would have with respect to such
predecessor or constituent corporation or entity if its separate existence had
continued.
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ARTICLE IX
Notices and Waivers
Section 9.1. Methods of Giving Notices. Whenever, by applicable
law, the Certificate of Incorporation or these Bylaws, notice is required to be
given to any Stockholder, any director or any member of a committee of the
Board of Directors and no provision is made as to how such notice shall be
given, personal notice shall not be required and such notice may be given (i)
in writing, by mail, postage prepaid, addressed to such Stockholder, director
or committee member at his address as it appears on the books or (in the case
of a Stockholder) the stock transfer records of the Corporation or (ii) by any
other method permitted by law (including, but not limited to, overnight courier
service, telegram, telex or telecopier). Any notice required or permitted to
be given by mail shall be deemed to be delivered and given at the time when the
same is deposited in the United States mail as aforesaid. Any notice required
or permitted to be given by overnight courier service shall be deemed to be
delivered and given one business day after delivery to such service with all
charges prepaid and addressed as aforesaid. Any notice required or permitted
to be given by telegram, telex or telecopy shall be deemed to be delivered and
given at the time transmitted with all charges prepaid and addressed as
aforesaid.
Section 9.2. Waiver of Notice. Whenever any notice is required
to be given to any Stockholder, director or member of a committee of the Board
of Directors by applicable law, the Certificate of Incorporation or these
Bylaws, a waiver thereof in writing signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be
equivalent to the giving of such notice. Attendance of a Stockholder (whether
in person or by proxy), director or committee member at a meeting shall
constitute a waiver of notice of such meeting, except where such person attends
for the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE X
Miscellaneous Provisions
Section 10.1. Dividends. Subject to applicable law and the
provisions of the Certificate of Incorporation, dividends may be declared by
the Board of Directors at any meeting and may be paid in cash, in property or
in shares of the Corporation's capital stock. Any such declaration shall be at
the discretion of the Board of Directors. A director shall be fully protected
in relying in good faith upon the books of account of the Corporation or
statements prepared by any of its officers as to the value and amount of the
assets, liabilities or net profits of the Corporation or any other facts
pertinent to the existence and amount of surplus or other funds from which
dividends might properly be declared.
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Section 10.2. Reserves. There may be created by the Board of
Directors, out of funds of the Corporation legally available therefor, such
reserve or reserves as the Board of Directors from time to time, in its
absolute discretion, considers proper to provide for contingencies, to equalize
dividends or to repair or maintain any property of the Corporation, or for such
other purpose as the Board of Directors shall consider beneficial to the
Corporation, and the Board of Directors may thereafter modify or abolish any
such reserve in its absolute discretion.
Section 10.3. Checks. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the Corporation shall be signed by such officer or officers or
by such employees or agents of the Corporation as may be designated from time
to time by the Board of Directors.
Section 10.4. Corporate Contracts and Instruments. Subject
always to the specific directions of the Board of Directors, the Chairman of
the Board (if any), the President, any Vice President, the Secretary or the
Treasurer may enter into contracts and execute instruments in the name and on
behalf of the Corporation. The Board of Directors and, subject to the specific
directions of the Board of Directors, the Chairman of the Board (if any) or the
President may authorize one or more officers, employees or agents of the
Corporation to enter into any contract or execute any instrument in the name of
and on behalf of the Corporation, and such authority may be general or confined
to specific instances.
Section 10.5 Attestation. With respect to any deed, deed of
trust, mortgage or other instrument executed by the Corporation through its
duly authorized officer or officers, the attestation to such execution by the
Secretary or an Assistant Secretary of the Corporation shall not be necessary
to constitute such deed, deed of trust, mortgage or other instrument a valid
and binding obligation of the Corporation unless the resolutions, if any, of
the Board of Directors authorizing such execution expressly state that such
attestation is necessary.
Section 10.6. Fiscal Year. The fiscal year of the Corporation
shall be January 1 through December 31, unless otherwise fixed by the Board of
Directors.
Section 10.7. Seal. The seal of the Corporation shall be such as
from time to time may be approved by the Board of Directors.
Section 10.8. Invalid Provisions. If any part of these Bylaws
shall be invalid or inoperative for any reason, the remaining parts, so far as
is possible and reasonable, shall remain valid and operative.
Section 10.9. Headings. The headings used in these Bylaws have
been inserted for administrative convenience only and shall not limit or
otherwise affect any of the provisions of these Bylaws.
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<PAGE> 26
Section 10.10. References to Gender/Number. Whenever in these
Bylaws the singular number is used, the same shall include the plural where
appropriate. Words of any gender used in these Bylaws shall include the other
gender where appropriate.
Section 10.11. Amendments. These Bylaws may be altered, amended
or repealed or new bylaws may be adopted by the affirmative vote of a majority
of the whole Board of Directors; provided, however, that no such action shall
be taken at any special meeting of the Board of Directors unless notice of such
action is contained in the notice of such special meeting. These Bylaws may
not be altered, amended or rescinded, nor may new bylaws be adopted, by the
Stockholders except by the affirmative vote of not less than 66-2/3% of all
outstanding shares of the Corporation entitled to vote at an election of
directors, voting together as a single class. Each alteration, amendment or
repeal of these Bylaws shall be subject in all respects to Section 8.7.
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of July
2, 1996 by and between THE HOUSTON EXPLORATION COMPANY, a Delaware corporation
(the "Company"), and JAMES G. FLOYD (the "Executive").
WITNESSETH:
WHEREAS, the Executive has been providing services to the
Company and the Company has been compensating the Executive; and
WHEREAS, the Company desires to continue to employ the
Executive upon the terms and conditions and in the capacities set forth herein;
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT AND TERM OF EMPLOYMENT. Subject to the
terms and conditions of this Agreement, the Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company as President
and Chief Executive Officer for a term (the "Term of Employment") beginning on
the Effective Date (defined below) and ending on the Expiration Date (defined
below). As used herein, "Effective Date" means the closing date of the
offering of shares of Common Stock of the Company registered under the
Securities Act of 1933 (as amended) pursuant to a Registration Statement on
Form S-1 (Reg. No. 333-4437). As used in this Agreement, "Expiration Date"
means the third anniversary of the Effective Date, provided that on the first
anniversary of the Effective Date and on each subsequent anniversary of the
Effective Date (such first anniversary date and each such subsequent
anniversary date being referred to as a "Renewal Date"), the Expiration Date
shall be automatically extended one additional year unless, not less than 90
days prior to the relevant Renewal Date, (i) either party shall have given
written notice to the other that no such automatic extension shall occur after
the date of such notice or (ii) either party shall have given a Notice of
Termination to the other pursuant to Section 7 hereof. Notwithstanding the
foregoing, if either party gives a valid Notice of Termination pursuant to
Section 7 hereof, the Term of Employment shall not extend beyond the
termination date specified in such Notice of Termination.
2. SCOPE OF EMPLOYMENT. (a) During the Term of
Employment, the Executive agrees to (i) serve as President and Chief Executive
Officer of the Company and shall have and may exercise all the powers, duties
and functions as are normal and customary to such
<PAGE> 2
positions and that are consistent with the responsibilities set forth with
respect to such positions in the Company's by-laws and (ii) perform such other
duties not inconsistent with his position as are assigned to him, from time to
time, by the Board of Directors of the Company (the "Board"). During the Term
of Employment, the Executive shall (i) report directly and exclusively to the
Board and (ii) devote substantially all of his business time, attention, skill
and efforts to the faithful performance of his duties hereunder. Subject to
Section 6, the foregoing shall not be construed to prevent the Executive from
making investments in businesses or enterprises so long as such investments do
not require any services on the part of the Executive in the operation of such
business or enterprises of a nature or magnitude that would interfere
materially with the performance of his duties hereunder.
(b) During the Term of Employment, all other officers of
the Company shall report directly to the Executive.
(c) The Company agrees to use its reasonable best efforts
to cause the Executive to be elected or appointed, or re-elected or
re-appointed, as a director of the Company at all times during the Term of
Employment. During the Term of Employment, the Executive agrees to serve, if
elected, as an officer or director of any subsidiary or affiliate of the
Company so long as such service is commensurate with the Employee's duties and
responsibilities to the Company.
(d) The Executive's place of employment hereunder shall be
at the Company's principal executive offices in the greater Houston, Texas
metropolitan area. Moreover, the Company agrees that it will provide immunity
and indemnity for the Executive to the fullest extent allowed by law, that if
necessary it will amend its certificate of incorporation and by-laws to so
provide, and that it will obtain errors and omissions insurance in the amount
of no less than $10,000,000 naming the Executive as an additional insured.
3. COMPENSATION. During the Term of Employment, in
consideration of the Executive's services hereunder, including, without
limitation, service as an officer or director of the Company or of any
subsidiary or affiliate thereof, and in consideration of the Executive's
covenants regarding confidentiality in Section 5 hereof and noncompetition in
Section 6 hereof, the Executive shall receive a salary at the rate of $340,000
per year (payable at such regular intervals as other employees of the Company
are compensated in accordance with the Company's employment practices), which
amount shall be subject to review annually by the Board and may be adjusted at
its discretion, provided that such salary may not be reduced at any time. In
addition, the Executive shall be entitled to participate in such bonus,
incentive compensation or other programs as are created or approved by the
Board from time to time including, without limitation, those set forth on
Exhibit A hereto.
4. ADDITIONAL COMPENSATION AND BENEFITS. (a) As
additional compensation for the Executive's services under this Agreement, the
Executive's covenants regarding confidentiality in Section 5 hereof and
noncompetition in Section 6 hereof, during the Term of
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Employment, the Company agrees to provide the Executive with the non-cash
benefits being provided to him on the date of this Agreement (or the equivalent
of such benefits) and, without duplication, any other noncash benefits provided
by the Company to its other officers and key employees as they may exist from
time to time. Such benefits shall include leave or vacation time (not less
than six weeks per year), medical and dental insurance, life insurance and
other health care benefits, retirement and disability benefits as may hereafter
be provided by the Company in accordance with its policies as well as any stock
option plan or similar employee benefit program for which key executives are or
shall become eligible. The Executive's participation in each employee benefit
plan or program provided to officers or other senior executives of the Company
in general shall be at least as favorable to the Executive as the most highly
benefited employee thereunder.
(b) The Executive is authorized to incur reasonable
business expenses for promoting the business and reputation of the Company,
including (without limitation) reasonable expenditures for travel, lodging,
club memberships, meals and client, patron, customer and/or business associate
entertainment. The Company shall reimburse within 30 days the Executive for
reasonable expenses incurred by the Executive in furtherance of the Company's
business, provided that such expenses are incurred in accordance with the
Company's policies and upon presentation of documentation in accordance with
expense reimbursement policies of the Company as they may exist from time to
time, and submission to the Company of adequate documentation in accordance
with federal income tax regulations and administrative pronouncements.
(c) During the Term of Employment, the Company shall pay
to the Executive an automobile allowance of $700 per month. The Board shall
review the amount of such monthly allowance at least annually and may increase
the same at any time as the Board deems appropriate.
5. CONFIDENTIALITY AND OTHER MATTERS.
(a) Confidentiality. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all maps, data, reports,
including results of exploration, drilling, drill cores, cuttings, and other
samples, and other information relating to the business of the Company which
comes into the possession of the Executive during the Term of Employment (such
information being collectively referred to herein as the "Confidential
Information"). During the Term of Employment and after termination of the
Executive's employment hereunder, the Executive agrees: (i) to take all such
precautions as may be reasonably necessary to prevent the disclosure to any
third party of any of the Confidential Information; (ii) not to use for the
Executive's own benefit any of the Confidential Information; and (iii) not to
aid any other person or entity in the use of the Confidential Information in
competition with the Company, provided that nothing in this Agreement shall
prohibit the Executive from disclosing or using any Confidential Information
(A) in the performance of his duties hereunder, (B) as required by applicable
law, (C) in connection with the enforcement of his rights under this Agreement
or any
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other agreement with the Company, (D) in connection with the defense or
settlement of any claim, suit or action brought or threatened against the
Executive by or in the right of the Company or (E) with the prior written
consent of the Board. Notwithstanding any provision contained herein to the
contrary, the term "Confidential Information" shall not be deemed to include
any general knowledge, skills or experience acquired by the Executive or any
knowledge or information known or available to the public in general. The
Executive further agrees that, if requested by the Company in writing at any
time within 90 days after termination of his employment for any reason, he will
surrender to the Company all Confidential Information, and any copies thereof,
in his possession and agrees that all such materials, and copies thereof, are
at all times the property of the Company. Notwithstanding the foregoing, the
Executive shall be permitted to retain copies of, or have access to, all such
Confidential Information relating to any disagreement, dispute or litigation
(pending or threatened) involving the Executive.
(b) Definitions: Remedies. For purposes of this Section
5, the "Company" shall be defined as the Company and its affiliated companies
including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns. In the event of a breach
or threatened breach by the Executive of the provisions of this Section 5, the
Company shall be entitled to an injunction restraining the Executive from
violating such provisions without the necessity of posting a bond therefor.
Nothing herein shall be construed as prohibiting the Company from pursuing any
other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that the provisions of this Section 5 shall
survive the earlier termination of the Executive's employment with the Company,
as the continuation of this covenant is necessary for the protection of the
Company.
6. NONCOMPETITION.
(a) Noncompetition Activities. The Executive acknowledges
that the nature of the employment under this Agreement is such as will bring
the Executive in personal contact with patrons or customers of the Company and
will enable him to acquire valuable information as to the nature and character
of the business of the Company, thereby enabling him, by engaging in a
competing business in his own behalf, or for another, to take advantage of such
knowledge and thereby gain an unfair advantage. Accordingly, the Executive
covenants and agrees that he will not, without the prior written consent of the
Company during the Term of Employment and for the period of one year
thereafter, engage directly or indirectly for himself, or as an agent,
representative, officer, director or employee of others, in the exploration for
or production of hydrocarbons in waters offshore from the States of Texas and
Louisiana, provided that the foregoing restriction shall not apply at any time
if the Executive's employment is terminated during the Term of Employment by
the Executive for Good Reason (defined in Section 7 hereof) or by the Company
for any reason other than Cause (defined in Section 7 hereof) and, provided
further, that nothing in this Agreement shall prohibit the Executive from
acquiring or holding any issue of stock or securities of any entity registered
under Section 12 of the Securities and Exchange Act of 1934 (as amended),
listed on a national securities exchange or quoted on the automated quotation
system of the National Association of Securities
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Dealers, Inc. so long as the Executive is not deemed to be an "affiliate" of
such entity as such term is used in paragraphs (c) and (d) of Rule 145 under
the Securities Act of 1933 (as amended).
(b) Scope. In the event that the provisions of this
Section 6 should ever be deemed to exceed the time, geographic or activity
related limitations permitted by applicable law, then such provisions shall be
reformed to the maximum time, geographic or activity related limitations
permitted by applicable law. In the event of a breach or threatened breach by
the Executive of the provisions of this Section 6, the Company shall be
entitled to an injunction restraining the Executive from violating such
provisions without the necessity of posting a bond therefor. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
available to it at law or in equity. Except as specifically set forth herein,
the parties agree that this Section 6 shall remain in effect for its full term
notwithstanding the earlier termination of the Executive's employment with the
Company, as the continuation of this covenant is necessary for the protection
of the Company. For purposes of this Section 6, the "Company" shall be defined
as the Company and its affiliated companies, including (without limitation) its
successors and assigns and its subsidiaries and each of their respective
successors and assigns.
7. TERMINATION.
(a) General. The Executive's employment hereunder shall
automatically terminate on the earlier of his death or the Expiration Date.
The Executive may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination
(defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive's employment hereunder for any reason
by delivering a Notice of Termination to the Executive, provided that in no
event shall the Company be entitled to terminate the Executive's employment
prior to the Expiration Date unless the Board shall duly adopt, by the
affirmative vote of a least a majority of the entire membership of the Board, a
resolution authorizing such termination and stating whether such termination is
for Cause (defined below). The giving of a notice pursuant to clause (i) of
the proviso contained in the penultimate sentence of Section 1 hereof shall not
be deemed a termination of the Executive's employment by the party giving such
notice. As used in this Agreement, "Notice of Termination" means a notice in
writing purporting to terminate the Executive's employment in accordance with
this Section 7, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a
termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the
reason for such termination and the facts and circumstances claimed to provide
a basis for such termination.
(b) Automatic Termination on Expiration Date. In the
event the Executive's employment hereunder shall automatically terminate on the
Expiration Date for any reason other than death, the Executive shall only be
entitled to receive (i) all unpaid compensation accrued
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as of the termination date pursuant to Section 3 hereof, (ii) all unused
vacation time accrued by the Executive as of the termination date, (iii) all
amounts owing to the Executive under Sections 4(b) and 4(c) hereof and (iv)
those benefits under Section 4 which are required under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or other laws. The amounts
described in clauses (i), (ii) and (iii) of the foregoing sentence shall be
paid to the Executive in a lump sum payment promptly after the Expiration Date.
(c) Termination by Company for Cause. If the Company
terminates the Executive's employment for Cause, the Executive shall only be
entitled to receive the compensation and other payments described in paragraph
(b) above, such compensation and other payments to be paid as if the
Executive's employment had automatically terminated without the giving of any
Notice of Termination. As used in this Agreement, "Cause" shall mean (i) any
material failure of the Executive to perform his duties specified in Section 2
of this Agreement (other than any such failure resulting from the Executive's
incapacity due to illness or other disability) after written notice of such
failure has been given to the Executive by the Board and such failure shall
have continued for 30 days after receipt of such notice, (ii) gross or willful
negligence or intentional wrongdoing or misconduct, (iii) a material breach by
the Executive of Section 5 or 6 of this Agreement, or (iv) conviction of the
Executive of a felony offense involving moral turpitude, any of which has or
have a material adverse effect on the Executive's ability to perform the duties
of his position or on the financial condition or profitability of the Company.
(d) Death or Disability. To provide for the event the
Executive's employment is automatically terminated on account of his death or
is terminated by either the Company or the Executive on account of Disability
(defined below), the Company shall purchase and provide for the Executive life
insurance in the amount of one times annual salary and shall purchase and
provide for the Executive supplemental executive long-term disability benefits
(to the extent necessary to provide the total benefits described herein, net of
the Company's existing group long-term disability plan) to provide salary
replacement in the amount of 60% of annual salary at the date of disability (to
continue until at least age 65, or for life if reasonably practicable). As
used herein, "Disability" means any physical or mental condition of the
Executive that (i) prevents the Executive from being able to perform the
services required under this Agreement, (ii) has continued for at least 180
consecutive days during any 12-month period and (iii) is reasonably expected to
continue. The Company's obligation to provide to the Executive long-term
disability benefits hereunder shall be defined by the long-term disability
benefits contract it is able to procure from an unrelated third party. For
that purpose, the definition of disability shall be as stated in the contract.
The Company and the Executive recognize that the definition of Disability
hereunder may differ from the contract definition and the benefits payable
shall be those as stated in the contract. The Company, however, agrees to
obtain a contract with a definition of disability as similar as possible to the
definition stated hereunder. Moreover, the Company and the Executive agree
that for purposes of the other provisions of this Agreement, the definition of
Disability as stated herein shall control.
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(e) Termination by Company Without Cause or by the
Executive with Good Reason. If either the Company terminates the Executive's
employment for any reason other than for Cause or on account of Disability or
the Executive terminates his employment for Good Reason (as hereinafter
defined), the Company shall:
(i) pay to the Executive, within 30 days after the
date of such termination, a lump sum cash payment equal to 2.99
times the Executive's then current annual rate of total
compensation;
(ii) pay the Executive any accrued but unpaid
compensation as of the date of the termination of employment;
and
(iii) continue until the first anniversary of the
termination of the Executive's employment, or such longer
period as any plan, program or policy or ERISA or other laws
may provide, benefits to the Executive as set forth in Section
7(f) below.
As used in this Agreement, "Good Reason" shall mean: (A) the failure by the
Company to elect or re-elect or to appoint or re-appoint the Executive to the
office of President and Chief Executive Officer of the Company without Cause;
(B) a material change in the powers, duties, responsibilities or functions of
the Executive as described in Section 2 hereof, including (without limitation)
any change which would alter the Executive's reporting responsibilities or
cause the Executive's position with the Company to be of less dignity,
responsibility, importance or scope than the positions (and attributes thereof)
of President and Chief Executive Officer, (C) the failure of the Executive to
be elected or appointed, or re-elected or re-appointed, as a director of the
Company without Cause, (D) without the Executive's prior written consent, the
relocation of the Company's principal executive offices outside the greater
Houston, Texas metropolitan area or requiring the Executive to be based other
than at such principal executive offices, (E) the failure of the Company to
obtain any assumption agreement required by Section 16 hereof, (F) the failure
by the Company to pay the Executive within ten days after a written demand
therefor any installment of any previous award of or deferred compensation, if
any, under any employee benefit plan or any deferred compensation program in
effect in which the Executive may have participated, (G) any other material
breach of this Agreement by the Company, or (H) the occurrence of a Change of
Control if, within three years thereafter, the Company shall:
(1) fail to continue in effect (x) any material
benefit or compensation plan in which the Executive is
participating immediately prior to such Change of Control or
(y) a plan providing the Executive with substantially similar
benefits;
(2) take any action that would materially
adversely affect the Executive's participation in or reduce the
Executive's benefits under any of the plans referred to in
clause (i) above, but excluding any such action by the Company
that is required by law;
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(3) amend, modify or repeal any provision of its
certificate of incorporation or bylaws that was in effect
immediately prior to such Change of Control, if such amendment,
modification or repeal would materially adversely affect the
Executive's rights to indemnification by the Company; or
(4) violate or breach any obligation of the
Company in effect immediately prior to such Change of Control
(regardless whether such obligation shall be set forth in the
bylaws of the Company or elsewhere) to indemnify the Executive
against any claim, loss, expense or liability sustained or
incurred by the Executive by reason, in whole or in part, of
the fact that the Executive is or was an officer, director or
employee of the Company or any subsidiary or affiliate of the
Company.
As used in this Agreement, a "Change of Control" shall mean:
(i) the acquisition after the Effective Date by
any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended) (a "Person") of beneficial ownership of 20% or more of
either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors
(the "Outstanding Voting Securities"), provided that for
purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (D) any acquisition
by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) hereof; or
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided
that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual was a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
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(iii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company (a "Corporate Transaction") in each case, unless,
following such Corporate Transaction, (A) (1) all or
substantially all of the persons who were the beneficial owners
of the Outstanding Common Stock immediately prior to such
Corporate Transaction beneficially own, directly or indirectly,
more than 60 percent of the then outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction, and (2) all or substantially all of the persons
who were the beneficial owners of the Outstanding Voting
Securities immediately prior to such Corporate Transaction
beneficially own, directly or indirectly, more than 60 percent
of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership of the Outstanding Common Stock
and the Outstanding Voting Securities immediately prior to such
Corporate Transaction, as the case may be, (B) no Person
(excluding (1) any corporation resulting from such Corporate
Transaction or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Corporate
Transaction and (2) any Person approved by the Incumbent Board)
beneficially owns, directly or indirectly, 20 percent or more
of the then outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the
combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership
existed prior to such Corporate Transaction and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction were
members of the Incumbent Board at the time of the execution of
the initial agreement or of the action of the Board providing
for such Corporate Transaction.
(f) Insurance and Other Special Benefits. To the extent
the Executive is eligible thereunder, for a period of 12 months following
termination pursuant to Section 7(e) hereof, the Executive shall continue to be
provided life insurance policies provided to the Executive on the date hereof
or such successor policies in effect at the time of the Executive's
termination, and shall also continue to be covered for the applicable period by
each other insurance, health or other benefit program, plan or policy
(excluding long-term disability) by which he was covered at the time of the
Executive's termination. In the event the Executive is ineligible to continue
to be so covered under the terms of any such life insurance, health or other
benefit program, plan or policy, the Company shall provide to the Executive
through other sources such benefits (excluding long-term disability), including
such additional benefits, as may be necessary to make the benefits applicable
to the Executive substantially equivalent to those in effect immediately prior
to such termination, provided that if during such period the Executive
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should enter into the employ of another company or firm which provides to the
Executive substantially similar benefit coverage, the Executive's participation
in the comparable benefits provided by the Company, either directly or through
such other sources, shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of any of the
Executive's coverage under any plan or program of the Company or any of its
subsidiaries or any successor plan or program thereto to which the Executive is
entitled under the terms of such plan or program, whether at the end of the
aforementioned 12-month period or at any other time. Upon termination of the
Executive's employment under Section 7(d) or 7(e) hereof, any vesting, lapse of
time or similar requirement under any stock option plan, restricted stock plan
or other employee benefit or deferred compensation plan or program in which the
Executive may participate shall be accelerated to the date of such termination
and any conditions to the Executive's entitlement to any benefits under any of
such plans or programs shall be deemed to have been satisfied.
(g) Certain Additional Payments by the Company. Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the
benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Subject to
the provisions of this Section 7(g), all determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by Arthur Andersen L.L.P. or such other
accounting firm which at the time audits the financial statements of the
Company (the "Accounting Firm") at the sole expense of the Company, which shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the date of termination of the Executive's
employment under this Agreement, if applicable, or such earlier time as is
requested by the Company. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, the Accounting Firm shall furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal income tax return. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments, which will not have been made by the Company should have
been made (an "Underpayment"), consistent with the calculations required to be
made hereunder. If the Company exhausts its remedies pursuant hereto and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any
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such Underpayment shall be promptly paid by the Company to or for the benefit
of the Executive.
The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days after the Executive
knows of such claim and shall apprise the Company of the nature of such claim
and the date on which such claim is requested to be paid. The Executive shall
not pay such claim prior to the expiration of the 30-day period following the
date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is
due). If the Company notifies the Executive in writing prior to the expiration
of such period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including (without limitation) accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions hereof the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine, provided that if the Company directs the Executive to pay such claim
and sue for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax,
including interest or penalties with respect thereto, imposed with respect to
such advance or with respect to any imputed income with
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respect to such advance, and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
If, after the receipt by the Executive of an amount advanced by
the Company pursuant hereto, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements hereof) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant hereto, a determination is made that
the Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(h) Either party may, within 15 days after receipt of a
Notice of Termination from the other party, provide notice to the other party
that a dispute exists concerning the termination, in which event the dispute
shall be resolved in accordance with Section 9 hereof. Notwithstanding the
pendency of any such dispute and notwithstanding any provision of this
Agreement to the contrary, the Company will (i) continue to pay the Executive
the annual base salary described in Section 3 hereof and (ii) continue the
Executive as a participant in all compensation and benefit plans in which the
Executive was participating when the relevant Notice of Termination was given,
until the dispute is finally resolved or, with respect to a Notice of
Termination given by the Executive, the date of termination specified in such
Notice of Termination if earlier, but, in each case, not past the Expiration
Date. If (i) the Company gives a Notice of Termination to the Executive, (ii)
the Executive disputes the termination as contemplated by this paragraph (h)
and (iii) such dispute is finally in favor of the Company in accordance with
Section 9 hereof, the Executive shall be required to refund to the Company any
amounts paid to the Executive under this paragraph (h) but only if, and then
only to the extent, the Executive is not otherwise entitled to receive such
amounts under this Agreement.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future participation in
any benefit, bonus, incentive or other plan or program provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies
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at or subsequent to the date of termination of the Executive's employment under
this Agreement shall be payable in accordance with such plan or program.
9. RESOLUTION OF DISPUTES.
(a) Negotiation. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between the Executive and an executive officer of the Company who
has authority to settle the controversy. Any party may give the other party
written notice of any dispute not resolved in the normal course of business.
Within 10 days after the effective date of such notice, the Executive and an
executive officer of the Company shall meet at a mutually acceptable time and
place within the Houston, Texas metropolitan area, and thereafter as often as
they reasonably deem necessary, to exchange relevant information and to attempt
to resolve the dispute. If the matter has not been resolved within 30 days of
the disputing party's notice, or if the parties fail to meet within 10 days,
either party may initiate arbitration of the controversy or claim as provided
hereinafter. If a negotiator intends to be accompanied at a meeting by an
attorney, the other negotiator shall be given at least three business days'
notice of such intention and may also be accompanied by an attorney. All
negotiations pursuant to this Section 9(a) shall be treated as compromise and
settlement negotiations for the purposes of the federal and state rules of
evidence and procedure.
(b) Arbitration. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by non-binding means as provided in Section 9(a) within 60 days
of the initiation of such procedure, shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources,
Inc. ("CPR") Rules for Non-Administered Arbitration of Business Disputes by
three independent and impartial arbitrators, of whom each party shall appoint
one, provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. Any such
arbitration shall take place in Harris County, Texas. Any arbitrator not
appointed by a party shall be appointed from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act and any
judgment upon the award decided upon by the arbitrators may be entered by any
court having jurisdiction thereof. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement.
10. EXPENSES. The Company shall promptly pay or reimburse
the Executive for all costs and expenses, including, without limitation, court
costs and attorneys' fees, incurred by the Executive as a result of any claim,
action or proceeding (including, without limitation a claim action or
proceeding by the Executive against the Company) arising out of, or challenging
the validity or enforceability of, this Agreement or any provision hereof.
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11. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Texas.
Venue and jurisdiction of any act on relating to this agreement shall lie in
Harris County, Texas.
12. NOTICE. Any notice, payment, demand or communication
required or permitted to be given by this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally or
if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
furnished in writing by such party for whom the communication is intended. Any
such notice shall be deemed to be given on the date so delivered.
13. SEVERABILITY. In the event any provisions hereof
shall he modified or held ineffective by any court, such adjudication shall not
invalidate or render ineffective the balance of the provisions hereof.
14. ENTIRE AGREEMENT. The Company and the Executive have
heretofore entered into an Employment Agreement dated December 16, 1985, as
amended effective November 1, 1991 (the "Prior Agreement"). The Prior
Agreement shall continue in full force and effect until the Effective Date,
after which it will be superseded by this Agreement, provided that nothing in
this Agreement shall be deemed to discharge or otherwise prejudice the
Executive's right to receive, or the Company's obligation to pay or provide,
any of the benefits accrued under the Prior Agreement as of the Effective Date.
Subject to the foregoing, this Agreement constitutes the sole agreement between
the parties with respect to the employment of the Executive by the Company and
supersedes any and all other agreements, oral or written, between the parties.
15. AMENDMENT AND WAIVER. This Agreement may not be
modified or amended except by a writing signed by the parties. Any waiver or
breach of any of the terms of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions, or any other terms or conditions,
nor shall any failure to enforce any provisions hereof operate as a waiver of
such provision or any other provision hereof.
16. ASSIGNMENT. This Agreement is a personal employment
contract and the rights and interests of the Executive hereunder may not be
sold, transferred, assigned or pledged. The Company may assign its rights
under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of
its assets or (ii) any entity, which at the time of such assignment, controls,
is under common control with, or is controlled by the Company, provided that
the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
reasonably acceptable to the Executive, to expressly assume and agree to
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perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if not such succession had taken place.
17. SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Executive and his heirs, executors, administrators
and legal representatives. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns.
18. SECTION HEADINGS. The section headings in this
Agreement have been inserted for convenience and shall not be used for
interpretive purposes or to otherwise construe this Agreement.
19. NO MITIGATION OR SET-OFF. The provisions of this
Agreement are not intended to, nor shall they be construed to, require that the
Executive mitigate the amount of any payment provided for in this Agreement by
seeking or accepting other employment, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by the
Executive as a result of his employment by another employer or otherwise. The
Company's obligations to make the payments to the Executive required under this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set off, counterclaim, recoupment, defense or other claim,
right or action that the Company may have against the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above and intend that this Agreement
have the effect of a sealed instrument.
----------------------------------------
James G. Floyd
THE HOUSTON EXPLORATION COMPANY
By:
-------------------------------------
Name: Robert B. Catell
Title: Chairman of the Board
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<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of July
2, 1996 by and between THE HOUSTON EXPLORATION COMPANY, a Delaware corporation
(the "Company"), and RANDALL J. FLEMING, (the "Executive").
WITNESSETH:
WHEREAS, the Executive has been providing services to the
Company and the Company has been compensating the Executive; and
WHEREAS, the Company desires to continue to employ the
Executive upon the terms and conditions and in the capacities set forth herein;
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT AND TERM OF EMPLOYMENT. Subject to the
terms and conditions of this Agreement, the Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company as Senior Vice
President- Exploration and Production for a term (the "Term of Employment")
beginning on the Effective Date (defined below) and ending on the Expiration
Date (defined below). As used herein, "Effective Date" means the closing date
of the offering of shares of Common Stock of the Company registered under the
Securities Act of 1933 (as amended) pursuant to a Registration Statement on
Form S-1 (Reg. No. 333-4437). As used in this Agreement, "Expiration Date"
means the third anniversary of the Effective Date, provided that on the first
anniversary of the Effective Date and on each subsequent anniversary of the
Effective Date (such first anniversary date and each such subsequent
anniversary date being referred to as a "Renewal Date"), the Expiration Date
shall be automatically extended one additional year unless, not less than 90
days prior to the relevant Renewal Date, (i) either party shall have given
written notice to the other that no such automatic extension shall occur after
the date of such notice or (ii) either party shall have given a Notice of
Termination to the other pursuant to Section 7 hereof. Notwithstanding the
foregoing, if either party gives a valid Notice of Termination pursuant to
Section 7 hereof, the Term of Employment shall not extend beyond the
termination date specified in such Notice of Termination.
2. SCOPE OF EMPLOYMENT. (a) During the Term of
Employment, the Executive agrees to (i) serve as Senior Vice
President-Exploration and Production of the Company and shall have and may
exercise all the powers, duties and functions as are normal and customary to
such positions and that are consistent with the responsibilities set forth with
<PAGE> 2
respect to such positions in the Company's by-laws and (ii) perform such other
duties not inconsistent with his position as are assigned to him, from time to
time, by the Board of Directors of the Company (the "Board"). During the Term
of Employment, the Executive shall devote substantially all of his business
time, attention, skill and efforts to the faithful performance of his duties
hereunder. Subject to Section 6, the foregoing shall not be construed to
prevent the Executive from making investments in businesses or enterprises so
long as such investments do not require any services on the part of the
Executive in the operation of such business or enterprises of a nature or
magnitude that would interfere materially with the performance of his duties
hereunder.
(b) During the Term of Employment, the Executive agrees to
serve, if elected, as an officer or director of any subsidiary or affiliate of
the Company so long as such service is commensurate with the Employee's duties
and responsibilities to the Company.
(c) The Executive's place of employment hereunder shall be
at the Company's principal executive offices in the greater Houston, Texas
metropolitan area. Moreover, the Company agrees that it will provide immunity
and indemnity for the Executive to the fullest extent allowed by law, that if
necessary it will amend its certificate of incorporation and by-laws to so
provide, and that it will obtain errors and omissions insurance in the amount
of no less than $10,000,000 naming the Executive as an additional insured.
3. COMPENSATION. During the Term of Employment, in
consideration of the Executive's services hereunder, including, without
limitation, service as an officer or director of the Company or of any
subsidiary or affiliate thereof, and in consideration of the Executive's
covenants regarding confidentiality in Section 5 hereof and noncompetition in
Section 6 hereof, the Executive shall receive a salary at the rate of $220,000
per year (payable at such regular intervals as other employees of the Company
are compensated in accordance with the Company's employment practices), which
amount shall be subject to review annually by the Board and may be adjusted at
its discretion, provided that such salary may not be reduced at any time. In
addition, the Executive shall be entitled to participate in such bonus,
incentive compensation or other programs as are created or approved by the
Board from time to time including, without limitation, those set forth on
Exhibit A hereto.
4. ADDITIONAL COMPENSATION AND BENEFITS. (a) As
additional compensation for the Executive's services under this Agreement, the
Executive's covenants regarding confidentiality in Section 5 hereof and
noncompetition in Section 6 hereof, during the Term of Employment, the Company
agrees to provide the Executive with the non-cash benefits being provided to
him on the date of this Agreement (or the equivalent of such benefits) and,
without duplication, any other noncash benefits provided by the Company to its
other officers and key employees as they may exist from time to time. Such
benefits shall include leave or vacation time (not less than five weeks),
medical and dental insurance, life insurance and other health care benefits,
retirement and disability benefits as may hereafter be provided by the Company
in accordance with its policies as well as any stock option plan or similar
employee benefit
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<PAGE> 3
program for which key executives are or shall become eligible. The Executive's
participation in each employee benefit plan or program provided to officers or
other senior executives of the Company in general shall be at least as
favorable to the Executive as the most highly benefited employee thereunder.
(b) The Executive is authorized to incur reasonable
business expenses for promoting the business and reputation of the Company,
including (without limitation) reasonable expenditures for travel, lodging,
club memberships, meals and client, patron, customer and/or business associate
entertainment. The Company shall reimburse within 30 days the Executive for
reasonable expenses incurred by the Executive in furtherance of the Company's
business, provided that such expenses are incurred in accordance with the
Company's policies and upon presentation of documentation in accordance with
expense reimbursement policies of the Company as they may exist from time to
time, and submission to the Company of adequate documentation in accordance
with federal income tax regulations and administrative pronouncements.
(c) During the Term of Employment, the Company shall pay
to the Executive an automobile allowance of $700 per month. The Board shall
review the amount of such monthly allowance at least annually and may increase
the same at any time as the Board deems appropriate.
5. CONFIDENTIALITY AND OTHER MATTERS.
(a) Confidentiality. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all maps, data, reports,
including results of exploration, drilling, drill cores, cuttings, and other
samples, and other information relating to the business of the Company which
comes into the possession of the Executive during the Term of Employment (such
information being collectively referred to herein as the "Confidential
Information"). During the Term of Employment and after termination of the
Executive's employment hereunder, the Executive agrees: (i) to take all such
precautions as may be reasonably necessary to prevent the disclosure to any
third party of any of the Confidential Information; (ii) not to use for the
Executive's own benefit any of the Confidential Information; and (iii) not to
aid any other person or entity in the use of the Confidential Information in
competition with the Company, provided that nothing in this Agreement shall
prohibit the Executive from disclosing or using any Confidential Information
(A) in the performance of his duties hereunder, (B) as required by applicable
law, (C) in connection with the enforcement of his rights under this Agreement
or any other agreement with the Company, (D) in connection with the defense or
settlement of any claim, suit or action brought or threatened against the
Executive by or in the right of the Company or (E) with the prior written
consent of the Board. Notwithstanding any provision contained herein to the
contrary, the term "Confidential Information" shall not be deemed to include
any general knowledge, skills or experience acquired by the Executive or any
knowledge or information known or available to the public in general. The
Executive further agrees that, if requested by the Company in writing at any
time within 90 days after termination of his
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<PAGE> 4
employment for any reason, he will surrender to the Company all Confidential
Information, and any copies thereof, in his possession and agrees that all such
materials, and copies thereof, are at all times the property of the Company.
Notwithstanding the foregoing, the Executive shall be permitted to retain
copies of, or have access to, all such Confidential Information relating to any
disagreement, dispute or litigation (pending or threatened) involving the
Executive.
(b) Definitions: Remedies. For purposes of this Section
5, the "Company" shall be defined as the Company and its affiliated companies
including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns. In the event of a breach
or threatened breach by the Executive of the provisions of this Section 5, the
Company shall be entitled to an injunction restraining the Executive from
violating such provisions without the necessity of posting a bond therefor.
Nothing herein shall be construed as prohibiting the Company from pursuing any
other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that the provisions of this Section 5 shall
survive the earlier termination of the Executive's employment with the Company,
as the continuation of this covenant is necessary for the protection of the
Company.
6. NONCOMPETITION.
(a) Noncompetition Activities. The Executive acknowledges
that the nature of the employment under this Agreement is such as will bring
the Executive in personal contact with patrons or customers of the Company and
will enable him to acquire valuable information as to the nature and character
of the business of the Company, thereby enabling him, by engaging in a
competing business in his own behalf, or for another, to take advantage of such
knowledge and thereby gain an unfair advantage. Accordingly, the Executive
covenants and agrees that he will not, without the prior written consent of the
Company during the Term of Employment and for the period of one year
thereafter, engage directly or indirectly for himself, or as an agent,
representative, officer, director or employee of others, in the exploration for
or production of hydrocarbons in waters offshore from the States of Texas and
Louisiana, provided that the foregoing restriction shall not apply at any time
if the Executive's employment is terminated during the Term of Employment by
the Executive for Good Reason (defined in Section 7 hereof) or by the Company
for any reason other than Cause (defined in Section 7 hereof) and, provided
further, that nothing in this Agreement shall prohibit the Executive from
acquiring or holding any issue of stock or securities of any entity registered
under Section 12 of the Securities and Exchange Act of 1934 (as amended),
listed on a national securities exchange or quoted on the automated quotation
system of the National Association of Securities Dealers, Inc. so long as the
Executive is not deemed to be an "affiliate" of such entity as such term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933 (as
amended).
(b) Scope. In the event that the provisions of this
Section 6 should ever be deemed to exceed the time, geographic or activity
related limitations permitted by applicable law, then such provisions shall be
reformed to the maximum time, geographic or activity related
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<PAGE> 5
limitations permitted by applicable law. In the event of a breach or
threatened breach by the Executive of the provisions of this Section 6, the
Company shall be entitled to an injunction restraining the Executive from
violating such provisions without the necessity of posting a bond therefor.
Nothing herein shall be construed as prohibiting the Company from pursuing any
other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that this Section 6 shall remain in effect for
its full term notwithstanding the earlier termination of the Executive's
employment with the Company, as the continuation of this covenant is necessary
for the protection of the Company. For purposes of this Section 6, the
"Company" shall be defined as the Company and its affiliated companies,
including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns.
7. TERMINATION.
(a) General. The Executive's employment hereunder shall
automatically terminate on the earlier of his death or the Expiration Date.
The Executive may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination
(defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive's employment hereunder for any reason
by delivering a Notice of Termination to the Executive, provided that in no
event shall the Company be entitled to terminate the Executive's employment
prior to the Expiration Date unless the Board shall duly adopt, by the
affirmative vote of a least a majority of the entire membership of the Board, a
resolution authorizing such termination and stating whether such termination is
for Cause (defined below). The giving of a notice pursuant to clause (i) of
the proviso contained in the penultimate sentence of Section 1 hereof shall not
be deemed a termination of the Executive's employment by the party giving such
notice. As used in this Agreement, "Notice of Termination" means a notice in
writing purporting to terminate the Executive's employment in accordance with
this Section 7, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a
termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the
reason for such termination and the facts and circumstances claimed to provide
a basis for such termination.
(b) Automatic Termination on Expiration Date. In the
event the Executive's employment hereunder shall automatically terminate on the
Expiration Date for any reason other than death, the Executive shall only be
entitled to receive (i) all unpaid compensation accrued as of the termination
date pursuant to Section 3 hereof, (ii) all unused vacation time accrued by the
Executive as of the termination date, (iii) all amounts owing to the Executive
under Sections 4(b) and 4(c) hereof and (iv) those benefits under Section 4
which are required under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or other laws. The amounts described in clauses (i),
(ii) and (iii) of the foregoing sentence shall be paid to the Executive in lump
sum payment promptly after the Expiration Date.
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<PAGE> 6
(c) Termination by Company for Cause. If the Company
terminates the Executive's employment for Cause, the Executive shall only be
entitled to receive the compensation and other payments described in paragraph
(b) above, such compensation and other payments to be paid as if the
Executive's employment had automatically terminated without the giving of any
Notice of Termination. As used in this Agreement, "Cause" shall mean (i) any
material failure of the Executive to perform his duties specified in Section 2
of this Agreement (other than any such failure resulting from the Executive's
incapacity due to illness or other disability) after written notice of such
failure has been given to the Executive by the Board and such failure shall
have continued for 30 days after receipt of such notice, (ii) gross or willful
negligence or intentional wrongdoing or misconduct, (iii) a material breach by
the Executive of Section 5 or 6 of this Agreement, or (iv) conviction of the
Executive of a felony offense involving moral turpitude, any of which has or
have a material adverse effect on the Executive's ability to perform the duties
of his position or on the financial condition or profitability of the Company.
(d) Death or Disability. To provide for the event the
Executive's employment is automatically terminated on account of his death or
is terminated by either the Company or the Executive on account of Disability
(defined below), the Company shall purchase and provide for the Executive life
insurance in the amount of one times annual salary and shall purchase and
provide for the Executive supplemental executive long-term disability benefits
(to the extent necessary to provide the total benefits described herein, net of
the Company's existing group long-term disability plan) to provide salary
replacement in the amount of 60% of annual salary at the date of disability (to
continue until at least age 65, or for life if reasonably practicable). As
used herein, "Disability" means any physical or mental condition of the
Executive that (i) prevents the Executive from being able to perform the
services required under this Agreement, (ii) has continued for at least 180
consecutive days during any 12-month period and (iii) is reasonably expected to
continue. The Company's obligation to provide to the Executive long-term
disability benefits hereunder shall be defined by the long-term disability
benefits contract it is able to procure from an unrelated third party. For
that purpose, the definition of disability shall be as stated in the contract.
The Company and the Executive recognize that the definition of Disability
hereunder may differ from the contract definition and the benefits payable
shall be those as stated in the contract. The Company, however, agrees to
obtain a contract with a definition of disability as similar as possible to the
definition stated hereunder. Moreover, the Company and the Executive agree
that for purposes of the other provisions of this Agreement, the definition of
Disability as stated herein shall control.
(e) Termination by Company Without Cause or by the
Executive with Good Reason. If either the Company terminates the Executive's
employment for any reason other than for Cause or on account of Disability or
the Executive terminates his employment for Good Reason (as hereinafter
defined), the Company shall:
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<PAGE> 7
(i) pay to the Executive, within 30 days after the
date of such termination, a lump sum cash payment equal to 2.99
times the Executive's then current annual rate of total
compensation;
(ii) pay the Executive any accrued but unpaid
compensation as of the date of the termination of employment;
and
(iii) continue until the first anniversary of the
termination of the Executive's employment, or such longer
period as any plan, program or policy or ERISA or other laws
may provide, benefits to the Executive as set forth in Section
7(f) below.
As used in this Agreement, "Good Reason" shall mean: (A) the failure by the
Company to elect or re-elect or to appoint or re-appoint the Executive to the
office described in Section 2 hereof without Cause; (B) a material change in
the powers, duties, responsibilities or functions of the Executive as described
in Section 2 hereof, including (without limitation) any change which would
alter the Executive's reporting responsibilities or cause the Executive's
position with the Company to be of less dignity, responsibility, importance or
scope than the positions (and attributes thereof) described in Section 2
hereof, (C) without the Executive's prior written consent, the relocation of
the Company's principal executive offices outside the greater Houston, Texas
metropolitan area or requiring the Executive to be based other than at such
principal executive offices, (D) the failure of the Company to obtain any
assumption agreement required by Section 16 hereof, (E) the failure by the
Company to pay the Executive within ten days after a written demand therefor
any installment of any previous award of or deferred compensation, if any,
under any employee benefit plan or any deferred compensation program in effect
in which the Executive may have participated, (F) any other material breach of
this Agreement by the Company, or (G) the occurrence of a Change of Control if,
within three years thereafter, the Company shall:
(1) fail to continue in effect (x) any material
benefit or compensation plan in which the Executive is
participating immediately prior to such Change of Control or
(y) a plan providing the Executive with substantially similar
benefits;
(2) take any action that would materially
adversely affect the Executive's participation in or reduce the
Executive's benefits under any of the plans referred to in
clause (i) above, but excluding any such action by the Company
that is required by law;
(3) amend, modify or repeal any provision of its
certificate of incorporation or bylaws that was in effect
immediately prior to such Change of Control, if such amendment,
modification or repeal would materially adversely affect the
Executive's rights to indemnification by the Company; or
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(4) violate or breach any obligation of the
Company in effect immediately prior to such Change of Control
(regardless whether such obligation shall be set forth in the
bylaws of the Company or elsewhere) to indemnify the Executive
against any claim, loss, expense or liability sustained or
incurred by the Executive by reason, in whole or in part, of
the fact that the Executive is or was an officer, director or
employee of the Company or any subsidiary or affiliate of the
Company.
As used in this Agreement, a "Change of Control" shall mean:
(i) the acquisition after the Effective Date by
any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended) (a "Person") of beneficial ownership of 20% or more of
either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors
(the "Outstanding Voting Securities"), provided that for
purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (D) any acquisition
by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) hereof; or
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided
that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual was a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(iii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company (a "Corporate Transaction") in each case, unless,
following such Corporate Transaction, (A) (1) all or
substantially all of the persons who were the beneficial owners
of the Outstanding Common Stock immediately prior to such
Corporate Transaction beneficially own, directly or indirectly,
more than 60
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percent of the then outstanding shares of common stock of the
corporation resulting from such Corporate Transaction, and (2)
all or substantially all of the persons who were the beneficial
owners of the Outstanding Voting Securities immediately prior
to such Corporate Transaction beneficially own, directly or
indirectly, more than 60 percent of the combined voting power
of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation
resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership of the
Outstanding Common Stock and the Outstanding Voting Securities
immediately prior to such Corporate Transaction, as the case
may be, (B) no Person (excluding (1) any corporation resulting
from such Corporate Transaction or any employee benefit plan
(or related trust) of the Company or such corporation resulting
from such Corporate Transaction and (2) any Person approved by
the Incumbent Board) beneficially owns, directly or indirectly,
20 percent or more of the then outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the then
outstanding voting securities of such corporation except to the
extent that such ownership existed prior to such Corporate
Transaction and (C) at least a majority of the members of the
board of directors of the corporation resulting from such
Corporate Transaction were members of the Incumbent Board at
the time of the execution of the initial agreement or of the
action of the Board providing for such Corporate Transaction.
(f) Insurance and Other Special Benefits. To the extent
the Executive is eligible thereunder, for a period of 12 months following
termination pursuant to Section 7(e) hereof, the Executive shall continue to be
provided life insurance policies provided to the Executive on the date hereof
or such successor policies in effect at the time of the Executive's
termination, and shall also continue to be covered for the applicable period by
each other insurance, health or other benefit program, plan or policy
(excluding long-term disability) by which he was covered at the time of the
Executive's termination. In the event the Executive is ineligible to continue
to be so covered under the terms of any such life insurance, health or other
benefit program, plan or policy, the Company shall provide to the Executive
through other sources such benefits (excluding long-term disability), including
such additional benefits, as may be necessary to make the benefits applicable
to the Executive substantially equivalent to those in effect immediately prior
to such termination, provided that if during such period the Executive should
enter into the employ of another company or firm which provides to the
Executive substantially similar benefit coverage, the Executive's participation
in the comparable benefits provided by the Company, either directly or through
such other sources, shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of any of the
Executive's coverage under any plan or program of the Company or any of its
subsidiaries or any successor plan or program thereto to which the Executive is
entitled under the terms of
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such plan or program, whether at the end of the aforementioned 12-month period
or at any other time. Upon termination of the Executive's employment under
Section 7(d) or 7(e) hereof, any vesting, lapse of time or similar requirement
under any stock option plan, restricted stock plan or other employee benefit or
deferred compensation plan or program in which the Executive may participate
shall be accelerated to the date of such termination and any conditions to the
Executive's entitlement to any benefits under any of such plans or programs
shall be deemed to have been satisfied.
(g) Certain Additional Payments by the Company. Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the
benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any Excise Tax
imposed upon the Gross-Up Payment, the Employee retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Subject to
the provisions of this Section 7(g), all determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by Arthur Andersen L.L.P. or such other
accounting firm which at the time audits the financial statements of the
Company (the "Accounting Firm") at the sole expense of the Company, which shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the date of termination of the Executive's
employment under this Agreement, if applicable, or such earlier time as is
requested by the Company. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, the Accounting Firm shall furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal income tax return. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments, which will not have been made by the Company should have
been made (an "Underpayment"), consistent with the calculations required to be
made hereunder. If the Company exhausts its remedies pursuant hereto and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Executive.
The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days after the Executive
knows of such claim and shall apprise the Company of the nature of
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<PAGE> 11
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including (without limitation) accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions hereof the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine, provided that if the Company directs the Executive to pay such claim
and sue for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax,
including interest or penalties with respect thereto, imposed with respect to
such advance or with respect to any imputed income with respect to such
advance, and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
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<PAGE> 12
If, after the receipt by the Executive of an amount advanced by
the Company pursuant hereto, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements hereof) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant hereto, a determination is made that
the Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(h) Either party may, within 15 days after receipt of a
Notice of Termination from the other party, provide notice to the other party
that a dispute exists concerning the termination, in which event the dispute
shall be resolved in accordance with Section 9 hereof. Notwithstanding the
pendency of any such dispute and notwithstanding any provision of this
Agreement to the contrary, the Company will (i) continue to pay the Executive
the annual base salary described in Section 3 hereof and (ii) continue the
Executive as a participant in all compensation and benefit plans in which the
Executive was participating when the relevant Notice of Termination was given,
until the dispute is finally resolved or, with respect to a Notice of
Termination given by the Executive, the date of termination specified in such
Notice of Termination if earlier, but, in each case, not past the Expiration
Date. If (i) the Company gives a Notice of Termination to the Executive, (ii)
the Executive disputes the termination as contemplated by this paragraph (h)
and (iii) such dispute is finally in favor of the Company in accordance with
Section 9 hereof, the Executive shall be required to refund to the Company any
amounts paid to the Executive under this paragraph (h) but only if, and then
only to the extent, the Executive is not otherwise entitled to receive such
amounts under this Agreement.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future participation in
any benefit, bonus, incentive or other plan or program provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies at or subsequent to the date of
termination of the Executive's employment under this Agreement shall be payable
in accordance with such plan or program.
9. RESOLUTION OF DISPUTES.
(a) Negotiation. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between the Executive and an executive officer of the Company who
has authority to settle the controversy. Any party may
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<PAGE> 13
give the other party written notice of any dispute not resolved in the normal
course of business. Within 10 days after the effective date of such notice,
the Executive and an executive officer of the Company shall meet at a mutually
acceptable time and place within the Houston, Texas metropolitan area, and
thereafter as often as they reasonably deem necessary, to exchange relevant
information and to attempt to resolve the dispute. If the matter has not been
resolved within 30 days of the disputing party's notice, or if the parties fail
to meet within 10 days, either party may initiate arbitration of the
controversy or claim as provided hereinafter. If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator shall be given at
least three business days' notice of such intention and may also be accompanied
by an attorney. All negotiations pursuant to this Section 9(a) shall be
treated as compromise and settlement negotiations for the purposes of the
federal and state rules of evidence and procedure.
(b) Arbitration. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by non-binding means as provided in Section 9(a) within 60 days
of the initiation of such procedure, shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources,
Inc. ("CPR") Rules for Non-Administered Arbitration of Business Disputes by
three independent and impartial arbitrators, of whom each party shall appoint
one, provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. Any such
arbitration shall take place in Harris County, Texas. Any arbitrator not
appointed by a party shall be appointed from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act and any
judgment upon the award decided upon by the arbitrators may be entered by any
court having jurisdiction thereof. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement.
10. EXPENSES. The Company shall promptly pay or reimburse
the Executive for all costs and expenses, including, without limitation, court
costs and attorneys' fees, incurred by the Executive as a result of any claim,
action or proceeding (including, without limitation a claim action or
proceeding by the Executive against the Company) arising out of, or challenging
the validity or enforceability of, this Agreement or any provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Texas.
Venue and jurisdiction of any act on relating to this agreement shall lie in
Harris County, Texas.
12. NOTICE. Any notice, payment, demand or communication
required or permitted to be given by this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally or
if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
furnished in
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<PAGE> 14
writing by such party for whom the communication is intended. Any such notice
shall be deemed to be given on the date so delivered.
13. SEVERABILITY. In the event any provisions hereof
shall he modified or held ineffective by any court, such adjudication shall not
invalidate or render ineffective the balance of the provisions hereof.
14. ENTIRE AGREEMENT. The Executive has participated in
the overriding royalty plan (the "Royalty Plan") provided by the Employment
Agreement between James G. Floyd and the Company dated December 16, 1985, as
amended effective November 1, 1991. The Royalty Plan shall continue in full
force and effect until the Effective Date, after which it will be superseded by
this Agreement, provided that nothing in this Agreement shall be deemed to
discharge or otherwise prejudice the Executive's right to receive, or the
Company's obligation to pay or provide, any of the benefits accrued under the
Royalty Plan as of the Effective Date. Subject to the foregoing, this
Agreement constitutes the sole agreement between the parties with respect to
the employment of the Executive by the Company and supersedes any and all other
agreements, oral or written, between the parties.
15. AMENDMENT AND WAIVER. This Agreement may not be
modified or amended except by a writing signed by the parties. Any waiver or
breach of any of the terms of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions, or any other terms or conditions,
nor shall any failure to enforce any provisions hereof operate as a waiver of
such provision or any other provision hereof.
16. ASSIGNMENT. This Agreement is a personal employment
contract and the rights and interests of the Executive hereunder may not be
sold, transferred, assigned or pledged. The Company may assign its rights
under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of
its assets or (ii) any entity, which at the time of such assignment, controls,
is under common control with, or is controlled by the Company, provided that
the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
reasonably acceptable to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if not such succession had taken place.
17. SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Executive and his heirs, executors, administrators
and legal representatives. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns.
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<PAGE> 15
18. SECTION HEADINGS. The section headings in this
Agreement have been inserted for convenience and shall not be used for
interpretive purposes or to otherwise construe this Agreement.
19. NO MITIGATION OR SET-OFF. The provisions of this
Agreement are not intended to, nor shall they be construed to, require that the
Executive mitigate the amount of any payment provided for in this Agreement by
seeking or accepting other employment, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by the
Executive as a result of his employment by another employer or otherwise. The
Company's obligations to make the payments to the Executive required under this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set off, counterclaim, recoupment, defense or other claim,
right or action that the Company may have against the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above and intend that this Agreement
have the effect of a sealed instrument.
---------------------------------------
Randall J. Fleming
THE HOUSTON EXPLORATION COMPANY
By:
------------------------------------
Name: James G. Floyd
Title: President
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<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of July
2, 1996 by and between THE HOUSTON EXPLORATION COMPANY, a Delaware corporation
(the "Company"), and THOMAS W. POWERS, (the "Executive").
WITNESSETH:
WHEREAS, the Executive has been providing services to the
Company and the Company has been compensating the Executive; and
WHEREAS, the Company desires to continue to employ the
Executive upon the terms and conditions and in the capacities set forth herein;
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT AND TERM OF EMPLOYMENT. Subject to the
terms and conditions of this Agreement, the Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company as Senior Vice
President-Business Development and Finance and Treasurer for a term (the "Term
of Employment") beginning on the Effective Date (defined below) and ending on
the Expiration Date (defined below). As used herein, "Effective Date" means
the closing date of the offering of shares of Common Stock of the Company
registered under the Securities Act of 1933 (as amended) pursuant to a
Registration Statement on Form S-1 (Reg. No. 333-4437). As used in this
Agreement, "Expiration Date" means the third anniversary of the Effective Date,
provided that on the first anniversary of the Effective Date and on each
subsequent anniversary of the Effective Date (such first anniversary date and
each such subsequent anniversary date being referred to as a "Renewal Date"),
the Expiration Date shall be automatically extended one additional year unless,
not less than 90 days prior to the relevant Renewal Date, (i) either party
shall have given written notice to the other that no such automatic extension
shall occur after the date of such notice or (ii) either party shall have given
a Notice of Termination to the other pursuant to Section 7 hereof.
Notwithstanding the foregoing, if either party gives a valid Notice of
Termination pursuant to Section 7 hereof, the Term of Employment shall not
extend beyond the termination date specified in such Notice of Termination.
2. SCOPE OF EMPLOYMENT. (a) During the Term of
Employment, the Executive agrees to (i) serve as Senior Vice President-Business
Development and Finance and Treasurer of the Company and shall have and may
exercise all the powers, duties and functions
<PAGE> 2
as are normal and customary to such positions and that are consistent with the
responsibilities set forth with respect to such positions in the Company's
by-laws and (ii) perform such other duties not inconsistent with his position
as are assigned to him, from time to time, by the Board of Directors of the
Company (the "Board"). During the Term of Employment, the Executive shall
devote substantially all of his business time, attention, skill and efforts to
the faithful performance of his duties hereunder. Subject to Section 6, the
foregoing shall not be construed to prevent the Executive from making
investments in businesses or enterprises so long as such investments do not
require any services on the part of the Executive in the operation of such
business or enterprises of a nature or magnitude that would interfere
materially with the performance of his duties hereunder.
(b) During the Term of Employment, the Executive agrees to
serve, if elected, as an officer or director of any subsidiary or affiliate of
the Company so long as such service is commensurate with the Employee's duties
and responsibilities to the Company.
(c) The Executive's place of employment hereunder shall be
at the Company's principal executive offices in the greater Houston, Texas
metropolitan area. Moreover, the Company agrees that it will provide immunity
and indemnity for the Executive to the fullest extent allowed by law, that if
necessary it will amend its certificate of incorporation and by-laws to so
provide, and that it will obtain errors and omissions insurance in the amount
of no less than $10,000,000 naming the Executive as an additional insured.
3. COMPENSATION. During the Term of Employment, in
consideration of the Executive's services hereunder, including, without
limitation, service as an officer or director of the Company or of any
subsidiary or affiliate thereof, and in consideration of the Executive's
covenants regarding confidentiality in Section 5 hereof and noncompetition in
Section 6 hereof, the Executive shall receive a salary at the rate of $140,000
per year (payable at such regular intervals as other employees of the Company
are compensated in accordance with the Company's employment practices), which
amount shall be subject to review annually by the Board and may be adjusted at
its discretion, provided that such salary may not be reduced at any time. In
addition, the Executive shall be entitled to participate in such bonus,
incentive compensation or other programs as are created or approved by the
Board from time to time including, without limitation, those set forth on
Exhibit A hereto.
4. ADDITIONAL COMPENSATION AND BENEFITS. (a) As
additional compensation for the Executive's services under this Agreement, the
Executive's covenants regarding confidentiality in Section 5 hereof and
noncompetition in Section 6 hereof, during the Term of Employment, the Company
agrees to provide the Executive with the non-cash benefits being provided to
him on the date of this Agreement (or the equivalent of such benefits) and,
without duplication, any other noncash benefits provided by the Company to its
other officers and key employees as they may exist from time to time. Such
benefits shall include leave or vacation time (not less than five weeks),
medical and dental insurance, life insurance and other health care benefits,
retirement and disability benefits as may hereafter be provided by the Company
<PAGE> 3
in accordance with its policies as well as any stock option plan or similar
employee benefit program for which key executives are or shall become eligible.
The Executive's participation in each employee benefit plan or program provided
to officers or other senior executives of the Company in general shall be at
least as favorable to the Executive as the most highly benefited employee
thereunder.
(b) The Executive is authorized to incur reasonable
business expenses for promoting the business and reputation of the Company,
including (without limitation) reasonable expenditures for travel, lodging,
club memberships, meals and client, patron, customer and/or business associate
entertainment. The Company shall reimburse within 30 days the Executive for
reasonable expenses incurred by the Executive in furtherance of the Company's
business, provided that such expenses are incurred in accordance with the
Company's policies and upon presentation of documentation in accordance with
expense reimbursement policies of the Company as they may exist from time to
time, and submission to the Company of adequate documentation in accordance
with federal income tax regulations and administrative pronouncements.
(c) During the Term of Employment, the Company shall pay
to the Executive an automobile allowance of $700 per month. The Board shall
review the amount of such monthly allowance at least annually and may increase
the same at any time as the Board deems appropriate.
5. CONFIDENTIALITY AND OTHER MATTERS.
(a) Confidentiality. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all maps, data, reports,
including results of exploration, drilling, drill cores, cuttings, and other
samples, and other information relating to the business of the Company which
comes into the possession of the Executive during the Term of Employment (such
information being collectively referred to herein as the "Confidential
Information"). During the Term of Employment and after termination of the
Executive's employment hereunder, the Executive agrees: (i) to take all such
precautions as may be reasonably necessary to prevent the disclosure to any
third party of any of the Confidential Information; (ii) not to use for the
Executive's own benefit any of the Confidential Information; and (iii) not to
aid any other person or entity in the use of the Confidential Information in
competition with the Company, provided that nothing in this Agreement shall
prohibit the Executive from disclosing or using any Confidential Information
(A) in the performance of his duties hereunder, (B) as required by applicable
law, (C) in connection with the enforcement of his rights under this Agreement
or any other agreement with the Company, (D) in connection with the defense or
settlement of any claim, suit or action brought or threatened against the
Executive by or in the right of the Company or (E) with the prior written
consent of the Board. Notwithstanding any provision contained herein to the
contrary, the term "Confidential Information" shall not be deemed to include
any general knowledge, skills or experience acquired by the Executive or any
knowledge or information known or available to the public in general. The
Executive further agrees that,
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<PAGE> 4
if requested by the Company in writing at any time within 90 days after
termination of his employment for any reason, he will surrender to the Company
all Confidential Information, and any copies thereof, in his possession and
agrees that all such materials, and copies thereof, are at all times the
property of the Company. Notwithstanding the foregoing, the Executive shall be
permitted to retain copies of, or have access to, all such Confidential
Information relating to any disagreement, dispute or litigation (pending or
threatened) involving the Executive.
(b) Definitions: Remedies. For purposes of this Section
5, the "Company" shall be defined as the Company and its affiliated companies
including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns. In the event of a breach
or threatened breach by the Executive of the provisions of this Section 5, the
Company shall be entitled to an injunction restraining the Executive from
violating such provisions without the necessity of posting a bond therefor.
Nothing herein shall be construed as prohibiting the Company from pursuing any
other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that the provisions of this Section 5 shall
survive the earlier termination of the Executive's employment with the Company,
as the continuation of this covenant is necessary for the protection of the
Company.
6. NONCOMPETITION.
(a) Noncompetition Activities. The Executive acknowledges
that the nature of the employment under this Agreement is such as will bring
the Executive in personal contact with patrons or customers of the Company and
will enable him to acquire valuable information as to the nature and character
of the business of the Company, thereby enabling him, by engaging in a
competing business in his own behalf, or for another, to take advantage of such
knowledge and thereby gain an unfair advantage. Accordingly, the Executive
covenants and agrees that he will not, without the prior written consent of the
Company during the Term of Employment and for the period of one year
thereafter, engage directly or indirectly for himself, or as an agent,
representative, officer, director or employee of others, in the exploration for
or production of hydrocarbons in waters offshore from the States of Texas and
Louisiana, provided that the foregoing restriction shall not apply at any time
if the Executive's employment is terminated during the Term of Employment by
the Executive for Good Reason (defined in Section 7 hereof) or by the Company
for any reason other than Cause (defined in Section 7 hereof) and, provided
further, that nothing in this Agreement shall prohibit the Executive from
acquiring or holding any issue of stock or securities of any entity registered
under Section 12 of the Securities and Exchange Act of 1934 (as amended),
listed on a national securities exchange or quoted on the automated quotation
system of the National Association of Securities Dealers, Inc. so long as the
Executive is not deemed to be an "affiliate" of such entity as such term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933 (as
amended).
(b) Scope. In the event that the provisions of this
Section 6 should ever be deemed to exceed the time, geographic or activity
related limitations permitted by applicable
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<PAGE> 5
law, then such provisions shall be reformed to the maximum time, geographic or
activity related limitations permitted by applicable law. In the event of a
breach or threatened breach by the Executive of the provisions of this Section
6, the Company shall be entitled to an injunction restraining the Executive
from violating such provisions without the necessity of posting a bond
therefor. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it at law or in equity. Except as
specifically set forth herein, the parties agree that this Section 6 shall
remain in effect for its full term notwithstanding the earlier termination of
the Executive's employment with the Company, as the continuation of this
covenant is necessary for the protection of the Company. For purposes of this
Section 6, the "Company" shall be defined as the Company and its affiliated
companies, including (without limitation) its successors and assigns and its
subsidiaries and each of their respective successors and assigns.
7. TERMINATION.
(a) General. The Executive's employment hereunder shall
automatically terminate on the earlier of his death or the Expiration Date.
The Executive may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination
(defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive's employment hereunder for any reason
by delivering a Notice of Termination to the Executive, provided that in no
event shall the Company be entitled to terminate the Executive's employment
prior to the Expiration Date unless the Board shall duly adopt, by the
affirmative vote of a least a majority of the entire membership of the Board, a
resolution authorizing such termination and stating whether such termination is
for Cause (defined below). The giving of a notice pursuant to clause (i) of
the proviso contained in the penultimate sentence of Section l hereof shall not
be deemed a termination of the Executive's employment by the party giving such
notice. As used in this Agreement, "Notice of Termination" means a notice in
writing purporting to terminate the Executive's employment in accordance with
this Section 7, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a
termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the
reason for such termination and the facts and circumstances claimed to provide
a basis for such termination.
(b) Automatic Termination on Expiration Date. In the
event the Executive's employment hereunder shall automatically terminate on the
Expiration Date for any reason other than death, the Executive shall only be
entitled to receive (i) all unpaid compensation accrued as of the termination
date pursuant to Section 3 hereof, (ii) all unused vacation time accrued by the
Executive as of the termination date, (iii) all amounts owing to the Executive
under Sections 4(b) and 4(c) hereof and (iv) those benefits under Section 4
which are required under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or other laws. The amounts described in clauses (i),
(ii) and (iii) of the foregoing sentence shall be paid to the Executive in lump
sum payment promptly after the Expiration Date.
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<PAGE> 6
(c) Termination by Company for Cause. If the Company
terminates the Executive's employment for Cause, the Executive shall only be
entitled to receive the compensation and other payments described in paragraph
(b) above, such compensation and other payments to be paid as if the
Executive's employment had automatically terminated without the giving of any
Notice of Termination. As used in this Agreement, "Cause" shall mean (i) any
material failure of the Executive to perform his duties specified in Section 2
of this Agreement (other than any such failure resulting from the Executive's
incapacity due to illness or other disability) after written notice of such
failure has been given to the Executive by the Board and such failure shall
have continued for 30 days after receipt of such notice, (ii) gross or willful
misconduct or intentional wrongdoing or misconduct, (iii) a material breach by
the Executive of Section 5 or 6 of this Agreement, or (iv) conviction of the
Executive of a felony offense involving moral turpitude, any of which has or
have a material adverse effect on the Executive's ability to perform the duties
of his position or on the financial condition or profitability of the Company.
(d) Death or Disability. In the event the Executive's
employment is automatically terminated on account of his death or is terminated
by either the Company or the Executive on account of Disability (defined
below), the Company shall purchase and provide for the Executive life insurance
in the amount of one times annual salary and shall purchase and provide for the
Executive supplemental executive long-term disability benefits (to the extent
necessary to provide the total benefits described herein, net of the Company's
existing group long-term disability plan) to provide salary replacement in the
amount of 60% of annual salary at the date of disability (to continue until at
least age 65, or for life if reasonably practicable). As used herein,
"Disability" means any physical or mental condition of the Executive that (i)
prevents the Executive from being able to perform the services required under
this Agreement, (ii) has continued for at least 180 consecutive days during any
12-month period and (iii) is reasonably expected to continue. The Company's
obligation to provide to the Executive long-term disability benefits hereunder
shall be defined by the long-term disability benefits contract it is able to
procure from an unrelated third party. For that purpose, the definition of
disability shall be as stated in the contract. The Company and the Executive
recognize that the definition of Disability hereunder may differ from the
contract definition and the benefits payable shall be those as stated in the
contract. The Company, however, agrees to obtain a contract with a definition
of disability as similar as possible to the definition stated hereunder.
Moreover, the Company and the Executive agree that for purposes of the other
provisions of this Agreement, the definition of Disability as stated herein
shall control.
(e) Termination by Company Without Cause or by the
Executive with Good Reason. If either the Company terminates the Executive's
employment for any reason other than for Cause or on account of Disability or
the Executive terminates his employment for Good Reason (as hereinafter
defined), the Company shall:
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(i) pay to the Executive, within 30 days after the
date of such termination, a lump sum cash payment equal to 2.99
times the Executive's then current annual rate of total
compensation;
(ii) pay the Executive any accrued but unpaid
compensation as of the date of the termination of employment;
and
(iii) continue until the first anniversary of the
termination of the Executive's employment, or such longer
period as any plan, program or policy or ERISA or other laws
may provide, benefits to the Executive as set forth in Section
7(f) below.
As used in this Agreement, "Good Reason" shall mean: (A) the failure by the
Company to elect or re-elect or to appoint or re-appoint the Executive to the
office described in Section 2 hereof without Cause; (B) a material change in
the powers, duties, responsibilities or functions of the Executive as described
in Section 2 hereof, including (without limitation) any change which would
alter the Executive's reporting responsibilities or cause the Executive's
position with the Company to be of less dignity, responsibility, importance or
scope than the positions (and attributes thereof) described in Section 2
hereof, (C) without the Executive's prior written consent, the relocation of
the Company's principal executive offices outside the greater Houston, Texas
metropolitan area or requiring the Executive to be based other than at such
principal executive offices, (D) the failure of the Company to obtain any
assumption agreement required by Section 16 hereof, (E) the failure by the
Company to pay the Executive within ten days after a written demand therefor
any installment of any previous award of or deferred compensation, if any,
under any employee benefit plan or any deferred compensation program in effect
in which the Executive may have participated, (F) any other material breach of
this Agreement by the Company, or (G) the occurrence of a Change of Control if,
within three years thereafter, the Company shall:
(1) fail to continue in effect (x) any material
benefit or compensation plan in which the Executive is
participating immediately prior to such Change of Control or
(y) a plan providing the Executive with substantially similar
benefits;
(2) take any action that would materially
adversely affect the Executive's participation in or reduce the
Executive's benefits under any of the plans referred to in
clause (i) above, but excluding any such action by the Company
that is required by law;
(3) amend, modify or repeal any provision of its
certificate of incorporation or bylaws that was in effect
immediately prior to such Change of Control, if such amendment,
modification or repeal would materially adversely affect the
Executive's rights to indemnification by the Company; or
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(4) violate or breach any obligation of the
Company in effect immediately prior to such Change of Control
(regardless whether such obligation shall be set forth in the
bylaws of the Company or elsewhere) to indemnify the Executive
against any claim, loss, expense or liability sustained or
incurred by the Executive by reason, in whole or in part, of
the fact that the Executive is or was an officer, director or
employee of the Company or any subsidiary or affiliate of the
Company.
As used in this Agreement, a "Change of Control" shall mean:
(i) the acquisition after the Effective Date by
any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended) (a "Person") of beneficial ownership of 20% or more of
either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors
(the "Outstanding Voting Securities"), provided that for
purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (D) any acquisition
by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) hereof; or
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided
that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least
a majority of thedirectors then comprising the Incumbent Board
shall be considered as though such individual was a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(iii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company (a "Corporate Transaction") in each case, unless,
following such Corporate Transaction, (A) (1) all or
substantially all of the persons who were the beneficial owners
of the Outstanding Common Stock immediately prior to such
Corporate Transaction beneficially own, directly or indirectly,
more than 60 percent of the then outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction, and (2) all or substantially all of the persons
who were the beneficial owners of the Outstanding Voting
Securities immediately prior to such Corporate Transaction
beneficially own, directly or indirectly, more than 60
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percent of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership of the Outstanding Common Stock
and the Outstanding Voting Securities immediately prior to such
Corporate Transaction, as the case may be, (B) no Person
(excluding (1) any corporation resulting from such Corporate
Transaction or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Corporate
Transaction and (2) any Person approved by the Incumbent Board)
beneficially owns, directly or indirectly, 20 percent or more
of the then outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the
combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership
existed prior to such Corporate Transaction and (C) at least a
majority of the members of the board of directors of
thecorporation resulting from such Corporate Transaction were
members of the Incumbent Board at the time of the execution of
the initial agreement or of the action of the Board providing
for such Corporate Transaction.
(f) Insurance and Other Special Benefits. To the extent
the Executive is eligible thereunder, for a period of 12 months following
termination pursuant to Section 7(e) hereof, the Executive shall continue to be
provided life insurance policies provided to the Executive on the date hereof
or such successor policies in effect at the time of the Executive's
termination, and shall also continue to be covered for the applicable period by
each other insurance, health or other benefit program, plan or policy
(excluding long-term disability) by which he was covered at the time of the
Executive's termination. In the event the Executive is ineligible to continue
to be so covered under the terms of any such life insurance, health or other
benefit program, plan or policy, the Company shall provide to the Executive
through other sources such benefits (excluding long-term disability), including
such additional benefits, as may be necessary to make the benefits applicable
to the Executive substantially equivalent to those in effect immediately prior
to such termination, provided that if during such period the Executive should
enter into the employ of another company or firm which provides to the
Executive substantially similar benefit coverage, the Executive's participation
in the comparable benefits provided by the Company, either directly or through
such other sources, shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of any of the
Executive's coverage under any plan or program of the Company or any of its
subsidiaries or any successor plan or program thereto to which the Executive is
entitled under the terms of
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<PAGE> 10
such plan or program, whether at the end of the aforementioned 12-month period
or at any other time. Upon termination of the Executive's employment under
Section 7(d) or 7(e) hereof, any vesting, lapse of time or similar requirement
under any stock option plan, restricted stock plan or other employee benefit or
deferred compensation plan or program in which the Executive may participate
shall be accelerated to the date of such termination and any conditions to the
Executive's entitlement to any benefits under any of such plans or programs
shall be deemed to have been satisfied.
(g) Certain Additional Payments by the Company. Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the
benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Subject to
the provisions of this Section 7(g), all determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by Arthur Andersen L.L.P. or such other
accounting firm which at the time audits the financial statements of the
Company (the "Accounting Firm") at the sole expense of the Company, which shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the date of termination of the Executive's
employment under this Agreement, if applicable, or such earlier time as is
requested by the Company. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, the Accounting Firm shall furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal income tax return. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments, which will not have been made by the Company should have
been made (an "Underpayment"), consistent with the calculations required to be
made hereunder. If the Company exhausts its remedies pursuant hereto and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Executive.
The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days after the Executive
knows of such claim and shall apprise the Company of the nature of
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<PAGE> 11
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including (without limitation) accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions hereof the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine, provided that if the Company directs the Executive to pay such claim
and sue for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax,
including interest or penalties with respect thereto, imposed with respect to
such advance or with respect to any imputed income with respect to such
advance, and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
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<PAGE> 12
If, after the receipt by the Executive of an amount advanced by
the Company pursuant hereto, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements hereof) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant hereto, a determination is made that
the Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(h) Either party may, within 15 days after receipt of a
Notice of Termination from the other party, provide notice to the other party
that a dispute exists concerning the termination, in which event the dispute
shall be resolved in accordance with Section 9 hereof. Notwithstanding the
pendency of any such dispute and notwithstanding any provision of this
Agreement to the contrary, the Company will (i) continue to pay the Executive
the annual base salary described in Section 3 hereof and (ii) continue the
Executive as a participant in all compensation and benefit plans in which the
Executive was participating when the relevant Notice of Termination was given,
until the dispute is finally resolved or, with respect to a Notice of
Termination given by the Executive, the date of termination specified in such
Notice of Termination if earlier, but, in each case, not past the Expiration
Date. If (i) the Company gives a Notice of Termination to the Executive, (ii)
the Executive disputes the termination as contemplated by this paragraph (h)
and (iii) such dispute is finally in favor of the Company in accordance with
Section 9 hereof, the Executive shall be required to refund to the Company any
amounts paid to the Executive under this paragraph (h) but only if, and then
only to the extent, the Executive is not otherwise entitled to receive such
amounts under this Agreement.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future participation in
any benefit, bonus, incentive or other plan or program provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies at or subsequent to the date of
termination of the Executive's employment under this Agreement shall be payable
in accordance with such plan or program.
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9. RESOLUTION OF DISPUTES.
(a) Negotiation. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between the Executive and an executive officer of the Company who
has authority to settle the controversy. Any party may give the other party
written notice of any dispute not resolved in the normal course of business.
Within 10 days after the effective date of such notice, the Executive and an
executive officer of the Company shall meet at a mutually acceptable time and
place within the Houston, Texas metropolitan area, and thereafter as often as
they reasonably deem necessary, to exchange relevant information and to attempt
to resolve the dispute. If the matter has not been resolved within 30 days of
the disputing party's notice, or if the parties fail to meet within 10 days,
either party may initiate arbitration of the controversy or claim as provided
hereinafter. If a negotiator intends to be accompanied at a meeting by an
attorney, the other negotiator shall be given at least three business days'
notice of such intention and may also be accompanied by an attorney. All
negotiations pursuant to this Section 9(a) shall be treated as compromise and
settlement negotiations for the purposes of the federal and state rules of
evidence and procedure.
(b) Arbitration. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by non-binding means as provided in Section 9(a) within 60 days
of the initiation of such procedure, shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources,
Inc. ("CPR") Rules for Non-Administered Arbitration of Business Disputes by
three independent and impartial arbitrators, of whom each party shall appoint
one, provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. Any such
arbitration shall take place in Harris County, Texas. Any arbitrator not
appointed by a party shall be appointed from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act and any
judgment upon the award decided upon by the arbitrators may be entered by any
court having jurisdiction thereof. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement.
10. EXPENSES. The Company shall promptly pay or reimburse
the Executive for all costs and expenses, including, without limitation, court
costs and attorneys' fees, incurred by the Executive as a result of any claim,
action or proceeding (including, without limitation a claim action or
proceeding by the Executive against the Company) arising out of, or challenging
the validity or enforceability of, this Agreement or any provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Texas.
Venue and jurisdiction of any act on relating to this agreement shall lie in
Harris County, Texas.
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12. NOTICE. Any notice, payment, demand or communication
required or permitted to be given by this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally or
if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
furnished in writing by such party for whom the communication is intended. Any
such notice shall be deemed to be given on the date so delivered.
13. SEVERABILITY. In the event any provisions hereof
shall he modified or held ineffective by any court, such adjudication shall not
invalidate or render ineffective the balance of the provisions hereof.
14. ENTIRE AGREEMENT. This Agreement constitutes the sole
agreement between the parties with respect to the employment of the Executive
by the Company and supersedes any and all other agreements, oral or written,
between the parties.
15. AMENDMENT AND WAIVER. This Agreement may not be
modified or amended except by a writing signed by the parties. Any waiver or
breach of any of the terms of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions, or any other terms or conditions,
nor shall any failure to enforce any provisions hereof operate as a waiver of
such provision or any other provision hereof.
16. ASSIGNMENT. This Agreement is a personal employment
contract and the rights and interests of the Executive hereunder may not be
sold, transferred, assigned or pledged. The Company may assign its rights
under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of
its assets or (ii) any entity, which at the time of such assignment, controls,
is under common control with, or is controlled by the Company, provided that
the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
reasonably acceptable to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if not such succession had taken place.
17. SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Executive and his heirs, executors, administrators
and legal representatives. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns.
18. SECTION HEADINGS. The section headings in this
Agreement have been inserted for convenience and shall not be used for
interpretive purposes or to otherwise construe this Agreement.
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<PAGE> 15
19. NO MITIGATION OR SET-OFF. The provisions of this
Agreement are not intended to, nor shall they be construed to, require that the
Executive mitigate the amount of any payment provided for in this Agreement by
seeking or accepting other employment, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by the
Executive as a result of his employment by another employer or otherwise. The
Company's obligations to make the payments to the Executive required under this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set off, counterclaim, recoupment, defense or other claim,
right or action that the Company may have against the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above and intend that this Agreement
have the effect of a sealed instrument.
---------------------------------------
Thomas W. Powers
THE HOUSTON EXPLORATION COMPANY
By:
-------------------------------------
Name: James G. Floyd
Title: President
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<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of July
2, 1996 by and between THE HOUSTON EXPLORATION COMPANY, a Delaware corporation
(the "Company"), and JAMES F. WESTMORELAND, (the "Executive").
WITNESSETH:
WHEREAS, the Executive has been providing services to the
Company and the Company has been compensating the Executive; and
WHEREAS, the Company desires to continue to employ the
Executive upon the terms and conditions and in the capacities set forth herein;
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT AND TERM OF EMPLOYMENT. Subject to the
terms and conditions of this Agreement, the Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company as Vice
President, Chief Accounting Officer, Comptroller and Secretary for a term (the
"Term of Employment") beginning on the Effective Date (defined below) and
ending on the Expiration Date (defined below). As used herein, "Effective
Date" means the closing date of the offering of shares of Common Stock of the
Company registered under the Securities Act of 1933 (as amended) pursuant to a
Registration Statement on Form S-1 (Reg. No. 333-4437). As used in this
Agreement, "Expiration Date" means the third anniversary of the Effective Date,
provided that on the first anniversary of the Effective Date and on each
subsequent anniversary of the Effective Date (such first anniversary date and
each such subsequent anniversary date being referred to as a "Renewal Date"),
the Expiration Date shall be automatically extended one additional year unless,
not less than 90 days prior to the relevant Renewal Date, (i) either party
shall have given written notice to the other that no such automatic extension
shall occur after the date of such notice or (ii) either party shall have given
a Notice of Termination to the other pursuant to Section 7 hereof.
Notwithstanding the foregoing, if either party gives a valid Notice of
Termination pursuant to Section 7 hereof, the Term of Employment shall not
extend beyond the termination date specified in such Notice of Termination.
2. SCOPE OF EMPLOYMENT. (a) During the Term of
Employment, the Executive agrees to (i) serve as Vice President, Chief
Accounting Officer, Comptroller and Secretary of the Company and shall have and
may exercise all the powers, duties and functions
<PAGE> 2
as are normal and customary to such positions and that are consistent with the
responsibilities set forth with respect to such positions in the Company's
by-laws and (ii) perform such other duties not inconsistent with his position
as are assigned to him, from time to time, by the Board of Directors of the
Company (the "Board"). During the Term of Employment, the Executive shall
devote substantially all of his business time, attention, skill and efforts to
the faithful performance of his duties hereunder. Subject to Section 6, the
foregoing shall not be construed to prevent the Executive from making
investments in businesses or enterprises so long as such investments do not
require any services on the part of the Executive in the operation of such
business or enterprises of a nature or magnitude that would interfere
materially with the performance of his duties hereunder.
(b) During the Term of Employment, the Executive agrees to
serve, if elected, as an officer or director of any subsidiary or affiliate of
the Company so long as such service is commensurate with the Employee's duties
and responsibilities to the Company.
(c) The Executive's place of employment hereunder shall be
at the Company's principal executive offices in the greater Houston, Texas
metropolitan area. Moreover, the Company agrees that it will provide immunity
and indemnity for the Executive to the fullest extent allowed by law, that if
necessary it will amend its certificate of incorporation and by-laws to so
provide, and that it will obtain errors and omissions insurance in the amount
of no less than $10,000,000 naming the Executive as an additional insured.
3. COMPENSATION. During the Term of Employment, in
consideration of the Executive's services hereunder, including, without
limitation, service as an officer or director of the Company or of any
subsidiary or affiliate thereof, and in consideration of the Executive's
covenants regarding confidentiality in Section 5 hereof and noncompetition in
Section 6 hereof, the Executive shall receive a salary at the rate of $130,000
per year (payable at such regular intervals as other employees of the Company
are compensated in accordance with the Company's employment practices), which
amount shall be subject to review annually by the Board and may be adjusted at
its discretion, provided that such salary may not be reduced at any time. In
addition, the Executive shall be entitled to participate in such bonus,
incentive compensation or other programs as are created or approved by the
Board from time to time including, without limitation, those set forth on
Exhibit A hereto.
4. ADDITIONAL COMPENSATION AND BENEFITS. (a) As
additional compensation for the Executive's services under this Agreement, the
Executive's covenants regarding confidentiality in Section 5 hereof and
noncompetition in Section 6 hereof, during the Term of Employment, the Company
agrees to provide the Executive with the non-cash benefits being provided to
him on the date of this Agreement (or the equivalent of such benefits) and,
without duplication, any other noncash benefits provided by the Company to its
other officers and key employees as they may exist from time to time. Such
benefits shall include leave or vacation time (not less than five weeks),
medical and dental insurance, life insurance and other health care benefits,
retirement and disability benefits as may hereafter be provided by the Company
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<PAGE> 3
in accordance with its policies as well as any stock option plan or similar
employee benefit program for which key executives are or shall become eligible.
The Executive's participation in each employee benefit plan or program provided
to officers or other senior executives of the Company in general shall be at
least as favorable to the Executive as the most highly benefited employee
thereunder.
(b) The Executive is authorized to incur reasonable
business expenses for promoting the business and reputation of the Company,
including (without limitation) reasonable expenditures for travel, lodging,
club memberships, meals and client, patron, customer and/or business associate
entertainment. The Company shall reimburse within 30 days the Executive for
reasonable expenses incurred by the Executive in furtherance of the Company's
business, provided that such expenses are incurred in accordance with the
Company's policies and upon presentation of documentation in accordance with
expense reimbursement policies of the Company as they may exist from time to
time, and submission to the Company of adequate documentation in accordance
with federal income tax regulations and administrative pronouncements.
(c) During the Term of Employment, the Company shall pay
to the Executive an automobile allowance of $700 per month. The Board shall
review the amount of such monthly allowance at least annually and may increase
the same at any time as the Board deems appropriate.
5. CONFIDENTIALITY AND OTHER MATTERS.
(a) Confidentiality. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all maps, data, reports,
including results of exploration, drilling, drill cores, cuttings, and other
samples, and other information relating to the business of the Company which
comes into the possession of the Executive during the Term of Employment (such
information being collectively referred to herein as the "Confidential
Information"). During the Term of Employment and after termination of the
Executive's employment hereunder, the Executive agrees: (i) to take all such
precautions as may be reasonably necessary to prevent the disclosure to any
third party of any of the Confidential Information; (ii) not to use for the
Executive's own benefit any of the Confidential Information; and (iii) not to
aid any other person or entity in the use of the Confidential Information in
competition with the Company, provided that nothing in this Agreement shall
prohibit the Executive from disclosing or using any Confidential Information
(A) in the performance of his duties hereunder, (B) as required by applicable
law, (C) in connection with the enforcement of his rights under this Agreement
or any other agreement with the Company, (D) in connection with the defense or
settlement of any claim, suit or action brought or threatened against the
Executive by or in the right of the Company or (E) with the prior written
consent of the Board. Notwithstanding any provision contained herein to the
contrary, the term "Confidential Information" shall not be deemed to include
any general knowledge, skills or experience acquired by the Executive or any
knowledge or information known or available to the public in general. The
Executive further agrees that,
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if requested by the Company in writing at any time within 90 days after
termination of his employment for any reason, he will surrender to the Company
all Confidential Information, and any copies thereof, in his possession and
agrees that all such materials, and copies thereof, are at all times the
property of the Company. Notwithstanding the foregoing, the Executive shall be
permitted to retain copies of, or have access to, all such Confidential
Information relating to any disagreement, dispute or litigation (pending or
threatened) involving the Executive.
(b) Definitions: Remedies. For purposes of this Section
5, the "Company" shall be defined as the Company and its affiliated companies
including (without limitation) its successors and assigns and its subsidiaries
and each of their respective successors and assigns. In the event of a breach
or threatened breach by the Executive of the provisions of this Section 5, the
Company shall be entitled to an injunction restraining the Executive from
violating such provisions without the necessity of posting a bond therefor.
Nothing herein shall be construed as prohibiting the Company from pursuing any
other remedies available to it at law or in equity. Except as specifically set
forth herein, the parties agree that the provisions of this Section 5 shall
survive the earlier termination of the Executive's employment with the Company,
as the continuation of this covenant is necessary for the protection of the
Company.
6. NONCOMPETITION.
(a) Noncompetition Activities. The Executive acknowledges
that the nature of the employment under this Agreement is such as will bring
the Executive in personal contact with patrons or customers of the Company and
will enable him to acquire valuable information as to the nature and character
of the business of the Company, thereby enabling him, by engaging in a
competing business in his own behalf, or for another, to take advantage of such
knowledge and thereby gain an unfair advantage. Accordingly, the Executive
covenants and agrees that he will not, without the prior written consent of the
Company during the Term of Employment and for the period of one year
thereafter, engage directly or indirectly for himself, or as an agent,
representative, officer, director or employee of others, in the exploration for
or production of hydrocarbons in waters offshore from the States of Texas and
Louisiana, provided that the foregoing restriction shall not apply at any time
if the Executive's employment is terminated during the Term of Employment by
the Executive for Good Reason (defined in Section 7 hereof) or by the Company
for any reason other than Cause (defined in Section 7 hereof) and, provided
further, that nothing in this Agreement shall prohibit the Executive from
acquiring or holding any issue of stock or securities of any entity registered
under Section 12 of the Securities and Exchange Act of 1934 (as amended),
listed on a national securities exchange or quoted on the automated quotation
system of the National Association of Securities Dealers, Inc. so long as the
Executive is not deemed to be an "affiliate" of such entity as such term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933 (as
amended).
(b) Scope. In the event that the provisions of this
Section 6 should ever be deemed to exceed the time, geographic or activity
related limitations permitted by applicable
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law, then such provisions shall be reformed to the maximum time, geographic or
activity related limitations permitted by applicable law. In the event of a
breach or threatened breach by the Executive of the provisions of this Section
6, the Company shall be entitled to an injunction restraining the Executive
from violating such provisions without the necessity of posting a bond
therefor. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it at law or in equity. Except as
specifically set forth herein, the parties agree that this Section 6 shall
remain in effect for its full term notwithstanding the earlier termination of
the Executive's employment with the Company, as the continuation of this
covenant is necessary for the protection of the Company. For purposes of this
Section 6, the "Company" shall be defined as the Company and its affiliated
companies, including (without limitation) its successors and assigns and its
subsidiaries and each of their respective successors and assigns.
7. TERMINATION.
(a) General. The Executive's employment hereunder shall
automatically terminate on the earlier of his death or the Expiration Date.
The Executive may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination
(defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive's employment hereunder for any reason
by delivering a Notice of Termination to the Executive, provided that in no
event shall the Company be entitled to terminate the Executive's employment
prior to the Expiration Date unless the Board shall duly adopt, by the
affirmative vote of a least a majority of the entire membership of the Board, a
resolution authorizing such termination and stating whether such termination is
for Cause (defined below). The giving of a notice pursuant to clause (i) of
the proviso contained in the penultimate sentence of Section l hereof shall not
be deemed a termination of the Executive's employment by the party giving such
notice. As used in this Agreement, "Notice of Termination" means a notice in
writing purporting to terminate the Executive's employment in accordance with
this Section 7, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a
termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the
reason for such termination and the facts and circumstances claimed to provide
a basis for such termination.
(b) Automatic Termination on Expiration Date. In the
event the Executive's employment hereunder shall automatically terminate on the
Expiration Date for any reason other than death, the Executive shall only be
entitled to receive (i) all unpaid compensation accrued as of the termination
date pursuant to Section 3 hereof, (ii) all unused vacation time accrued by the
Executive as of the termination date, (iii) all amounts owing to the Executive
under Sections 4(b) and 4(c) hereof and (iv) those benefits under Section 4
which are required under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or other laws. The amounts described in clauses (i),
(ii) and (iii) of the foregoing sentence shall be paid to the Executive in a
lump sum payment promptly after the Expiration Date.
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(c) Termination by Company for Cause. If the Company
terminates the Executive's employment for Cause, the Executive shall only be
entitled to receive the compensation and other payments described in paragraph
(b) above, such compensation and other payments to be paid as if the
Executive's employment had automatically terminated without the giving of any
Notice of Termination. As used in this Agreement, "Cause" shall mean (i) any
material failure of the Executive to perform his duties specified in Section 2
of this Agreement (other than any such failure resulting from the Executive's
incapacity due to illness or other disability) after written notice of such
failure has been given to the Executive by the Board and such failure shall
have continued for 30 days after receipt of such notice, (ii) gross or willful
negligence or intentional wrongdoing or misconduct, (iii) a material breach by
the Executive of Section 5 or 6 of this Agreement, or (iv) conviction of the
Executive of a felony offense involving moral turpitude, any of which has or
have a material adverse effect on the Executive's ability to perform the duties
of his position or on the financial condition or profitability of the Company.
(d) Death or Disability. To provide for the event the
Executive's employment is automatically terminated on account of his death or
is terminated by either the Company or the Executive on account of Disability
(defined below), the Company shall purchase and provide for the Executive life
insurance in the amount of one times annual salary and shall purchase and
provide for the Executive supplemental executive long-term disability benefits
(to the extent necessary to provide the total benefits described herein, net of
the Company's existing group long-term disability plan) to provide salary
replacement in the amount of 60% of annual salary at the date of disability (to
continue until at least age 65, or for life if reasonably practicable). As
used herein, "Disability" means any physical or mental condition of the
Executive that (i) prevents the Executive from being able to perform the
services required under this Agreement, (ii) has continued for at least 180
consecutive days during any 12-month period and (iii) is reasonably expected to
continue. The Company's obligation to provide to the Executive long-term
disability benefits hereunder shall be defined by the long-term disability
benefits contract it is able to procure from an unrelated third party. For
that purpose, the definition of disability shall be as stated in the contract.
The Company and the Executive recognize that the definition of Disability
hereunder may differ from the contract definition and the benefits payable
shall be those as stated in the contract. The Company, however, agrees to
obtain a contract with a definition of disability as similar as possible to the
definition stated hereunder. Moreover, the Company and the Executive agree
that for purposes of the other provisions of this Agreement, the definition of
Disability as stated herein shall control.
(e) Termination by Company Without Cause or by the
Executive with Good Reason. If either the Company terminates the Executive's
employment for any reason other than for Cause or on account of Disability or
the Executive terminates his employment for Good Reason (as hereinafter
defined), the Company shall:
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(i) pay to the Executive, within 30 days after the
date of such termination, a lump sum cash payment equal to 2.99
times the Executive's then current annual rate of total
compensation;
(ii) pay the Executive any accrued but unpaid
compensation as of the date of the termination of employment;
and
(iii) continue until the first anniversary of the
termination of the Executive's employment, or such longer
period as any plan, program or policy or ERISA or other laws
may provide, benefits to the Executive as set forth in Section
7(f) below.
As used in this Agreement, "Good Reason" shall mean: (A) the failure by the
Company to elect or re-elect or to appoint or re-appoint the Executive to the
office described in Section 2 hereof without Cause; (B) a material change in
the powers, duties, responsibilities or functions of the Executive as described
in Section 2 hereof, including (without limitation) any change which would
alter the Executive's reporting responsibilities or cause the Executive's
position with the Company to be of less dignity, responsibility, importance or
scope than the positions (and attributes thereof) described in Section 2
hereof, (C) without the Executive's prior written consent, the relocation of
the Company's principal executive offices outside the greater Houston, Texas
metropolitan area or requiring the Executive to be based other than at such
principal executive offices, (D) the failure of the Company to obtain any
assumption agreement required by Section 16 hereof, (E) the failure by the
Company to pay the Executive within ten days after a written demand therefor
any installment of any previous award of or deferred compensation, if any,
under any employee benefit plan or any deferred compensation program in effect
in which the Executive may have participated, (F) any other material breach of
this Agreement by the Company, or (G) the occurrence of a Change of Control if,
within three years thereafter, the Company shall:
(1) fail to continue in effect (x) any material
benefit or compensation plan in which the Executive is
participating immediately prior to such Change of Control or
(y) a plan providing the Executive with substantially similar
benefits;
(2) take any action that would materially
adversely affect the Executive's participation in or reduce the
Executive's benefits under any of the plans referred to in
clause (i) above, but excluding any such action by the Company
that is required by law;
(3) amend, modify or repeal any provision of its
certificate of incorporation or bylaws that was in effect
immediately prior to such Change of Control, if such amendment,
modification or repeal would materially adversely affect the
Executive's rights to indemnification by the Company; or
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(4) violate or breach any obligation of the
Company in effect immediately prior to such Change of Control
(regardless whether such obligation shall be set forth in the
bylaws of the Company or elsewhere) to indemnify the Executive
against any claim, loss, expense or liability sustained or
incurred by the Executive by reason, in whole or in part, of
the fact that the Executive is or was an officer, director or
employee of the Company or any subsidiary or affiliate of the
Company.
As used in this Agreement, a "Change of Control" shall mean:
(i) the acquisition after the Effective Date by
any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended) (a "Person") of beneficial ownership of 20% or more of
either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors
(the "Outstanding Voting Securities"), provided that for
purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company,
(C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (D) any acquisition
by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) hereof; or
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board, provided
that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board
shall be considered as though such individual was a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(iii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company (a "Corporate Transaction") in each case, unless,
following such Corporate Transaction, (A) (1) all or
substantially all of the persons who were the beneficial owners
of the Outstanding Common Stock immediately prior to such
Corporate Transaction beneficially own, directly or indirectly,
more than 60 percent of the then outstanding shares of common
stock of the corporation resulting from such Corporate
Transaction, and (2) all or substantially all of the persons
who were the beneficial owners of the Outstanding Voting
Securities immediately prior to such Corporate Transaction
beneficially own, directly or indirectly, more than 60
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percent of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which
as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership of the Outstanding Common Stock
and the Outstanding Voting Securities immediately prior to such
Corporate Transaction, as the case may be, (B) no Person
(excluding (1) any corporation resulting from such Corporate
Transaction or any employee benefit plan (or related trust) of
the Company or such corporation resulting from such Corporate
Transaction and (2) any Person approved by the Incumbent Board)
beneficially owns, directly or indirectly, 20 percent or more
of the then outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the
combined voting power of the then outstanding voting securities
of such corporation except to the extent that such ownership
existed prior to such Corporate Transaction and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction were
members of the Incumbent Board at the time of the execution of
the initial agreement or of the action of the Board providing
for such Corporate Transaction.
(f) Insurance and Other Special Benefits. To the extent
the Executive is eligible thereunder, for a period of 12 months following
termination pursuant to Section 7(e) hereof, the Executive shall continue to be
provided life insurance policies provided to the Executive on the date hereof
or such successor policies in effect at the time of the Executive's
termination, and shall also continue to be covered for the applicable period by
each other insurance, health or other benefit program, plan or policy
(excluding long-term disability) by which he was covered at the time of the
Executive's termination. In the event the Executive is ineligible to continue
to be so covered under the terms of any such life insurance, health or other
benefit program, plan or policy, the Company shall provide to the Executive
through other sources such benefits (excluding long-term disability), including
such additional benefits, as may be necessary to make the benefits applicable
to the Executive substantially equivalent to those in effect immediately prior
to such termination, provided that if during such period the Executive should
enter into the employ of another company or firm which provides to the
Executive substantially similar benefit coverage, the Executive's participation
in the comparable benefits provided by the Company, either directly or through
such other sources, shall cease. Nothing contained in this paragraph shall be
deemed to require or permit termination or restriction of any of the
Executive's coverage under any plan or program of the Company or any of its
subsidiaries or any successor plan or program thereto to which the Executive is
entitled under the terms of
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such plan or program, whether at the end of the aforementioned 12-month period
or at any other time. Upon termination of the Executive's employment under
Section 7(d) or 7(e) hereof, any vesting, lapse of time or similar requirement
under any stock option plan, restricted stock plan or other employee benefit or
deferred compensation plan or program in which the Executive may participate
shall be accelerated to the date of such termination and any conditions to the
Executive's entitlement to any benefits under any of such plans or programs
shall be deemed to have been satisfied.
(g) Certain Additional Payments by the Company. Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the
benefit of the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Subject to
the provisions of this Section 7(g), all determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by Arthur Andersen L.L.P. or such other
accounting firm which at the time audits the financial statements of the
Company (the "Accounting Firm") at the sole expense of the Company, which shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the date of termination of the Executive's
employment under this Agreement, if applicable, or such earlier time as is
requested by the Company. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, the Accounting Firm shall furnish the Executive
with an opinion that he has substantial authority not to report any Excise Tax
on his federal income tax return. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments, which will not have been made by the Company should have
been made (an "Underpayment"), consistent with the calculations required to be
made hereunder. If the Company exhausts its remedies pursuant hereto and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Executive.
The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than ten business days after the Executive
knows of such claim and shall apprise the Company of the nature of
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such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Company notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including (without limitation) accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions hereof the
Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine, provided that if the Company directs the Executive to pay such claim
and sue for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income tax,
including interest or penalties with respect thereto, imposed with respect to
such advance or with respect to any imputed income with respect to such
advance, and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest, as the case
may be, any other issue raised by the Internal Revenue Service or any other
taxing authority.
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If, after the receipt by the Executive of an amount advanced by
the Company pursuant hereto, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements hereof) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant hereto, a determination is made that
the Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(h) Either party may, within 15 days after receipt of a
Notice of Termination from the other party, provide notice to the other party
that a dispute exists concerning the termination, in which event the dispute
shall be resolved in accordance with Section 9 hereof. Notwithstanding the
pendency of any such dispute and notwithstanding any provision of this
Agreement to the contrary, the Company will (i) continue to pay the Executive
the annual base salary described in Section 3 hereof and (ii) continue the
Executive as a participant in all compensation and benefit plans in which the
Executive was participating when the relevant Notice of Termination was given,
until the dispute is finally resolved or, with respect to a Notice of
Termination given by the Executive, the date of termination specified in such
Notice of Termination if earlier, but, in each case, not past the Expiration
Date. If (i) the Company gives a Notice of Termination to the Executive, (ii)
the Executive disputes the termination as contemplated by this paragraph (h)
and (iii) such dispute is finally in favor of the Company in accordance with
Section 9 hereof, the Executive shall be required to refund to the Company any
amounts paid to the Executive under this paragraph (h) but only if, and then
only to the extent, the Executive is not otherwise entitled to receive such
amounts under this Agreement.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future participation in
any benefit, bonus, incentive or other plan or program provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies at or subsequent to the date of
termination of the Executive's employment under this Agreement shall be payable
in accordance with such plan or program.
9. RESOLUTION OF DISPUTES.
(a) Negotiation. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between the Executive and an executive officer of the Company who
has authority to settle the controversy. Any party may
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give the other party written notice of any dispute not resolved in the normal
course of business. Within 10 days after the effective date of such notice,
the Executive and an executive officer of the Company shall meet at a mutually
acceptable time and place within the Houston, Texas metropolitan area, and
thereafter as often as they reasonably deem necessary, to exchange relevant
information and to attempt to resolve the dispute. If the matter has not been
resolved within 30 days of the disputing party's notice, or if the parties fail
to meet within 10 days, either party may initiate arbitration of the
controversy or claim as provided hereinafter. If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator shall be given at
least three business days' notice of such intention and may also be accompanied
by an attorney. All negotiations pursuant to this Section 9(a) shall be
treated as compromise and settlement negotiations for the purposes of the
federal and state rules of evidence and procedure.
(b) Arbitration. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by non-binding means as provided in Section 9(a) within 60 days
of the initiation of such procedure, shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources,
Inc. ("CPR") Rules for Non-Administered Arbitration of Business Disputes by
three independent and impartial arbitrators, of whom each party shall appoint
one, provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. Any such
arbitration shall take place in Harris County, Texas. Any arbitrator not
appointed by a party shall be appointed from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act and any
judgment upon the award decided upon by the arbitrators may be entered by any
court having jurisdiction thereof. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement.
10. EXPENSES. The Company shall promptly pay or reimburse
the Executive for all costs and expenses, including, without limitation, court
costs and attorneys' fees, incurred by the Executive as a result of any claim,
action or proceeding (including, without limitation a claim action or
proceeding by the Executive against the Company) arising out of, or challenging
the validity or enforceability of, this Agreement or any provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Texas.
Venue and jurisdiction of any act on relating to this agreement shall lie in
Harris County, Texas.
12. NOTICE. Any notice, payment, demand or communication
required or permitted to be given by this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally or
if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
furnished in
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writing by such party for whom the communication is intended. Any such notice
shall be deemed to be given on the date so delivered.
13. SEVERABILITY. In the event any provisions hereof
shall he modified or held ineffective by any court, such adjudication shall not
invalidate or render ineffective the balance of the provisions hereof.
14. ENTIRE AGREEMENT. The Company and the Executive have
heretofore entered into an Employment Agreement between James G. Floyd and the
Company dated December 16, 1985, as amended effective November 1, 1991 (the
"Prior Agreement"). The Prior Agreement shall continue in full force and
effect until the Effective Date, after which it will be superseded by this
Agreement, provided that nothing in this Agreement shall be deemed to discharge
or otherwise prejudice the Executive's right to receive, or the Company's
obligation to pay or provide, any of the benefits accrued under the Prior
Agreement as of the Effective Date. Subject to the foregoing, this Agreement
constitutes the sole agreement between the parties with respect to the
employment of the Executive by the Company and supersedes any and all other
agreements, oral or written, between the parties.
15. AMENDMENT AND WAIVER. This Agreement may not be
modified or amended except by a writing signed by the parties. Any waiver or
breach of any of the terms of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions, or any other terms or conditions,
nor shall any failure to enforce any provisions hereof operate as a waiver of
such provision or any other provision hereof.
16. ASSIGNMENT. This Agreement is a personal employment
contract and the rights and interests of the Executive hereunder may not be
sold, transferred, assigned or pledged. The Company may assign its rights
under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of
its assets or (ii) any entity, which at the time of such assignment, controls,
is under common control with, or is controlled by the Company, provided that
the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
reasonably acceptable to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if not such succession had taken place.
17. SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Executive and his heirs, executors, administrators
and legal representatives. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns.
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<PAGE> 15
18. SECTION HEADINGS. The section headings in this
Agreement have been inserted for convenience and shall not be used for
interpretive purposes or to otherwise construe this Agreement.
19. NO MITIGATION OR SET-OFF. The provisions of this
Agreement are not intended to, nor shall they be construed to, require that the
Executive mitigate the amount of any payment provided for in this Agreement by
seeking or accepting other employment, nor shall the amount of any payment
provided for in this Agreement be reduced by any compensation earned by the
Executive as a result of his employment by another employer or otherwise. The
Company's obligations to make the payments to the Executive required under this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set off, counterclaim, recoupment, defense or other claim,
right or action that the Company may have against the Executive.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above and intend that this Agreement
have the effect of a sealed instrument.
-------------------------------
James F. Westmoreland
THE HOUSTON EXPLORATION COMPANY
By:
----------------------------
Name: James G. Floyd
Title: President
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<PAGE> 1
EXHIBIT 10.12
THE HOUSTON EXPLORATION COMPANY
1996 STOCK OPTION PLAN
<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
1996 STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section
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<S> <C>
ARTICLE I - PLAN
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1
Effective Date of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2
ARTICLE II - DEFINITIONS
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6
Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7
Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8
Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
Incentive Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.10
Non-Employee Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.11
Nonqualified Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12
Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.13
Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.14
Optionee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.15
Outside Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18
10% Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.19
ARTICLE III - ELIGIBILITY
ARTICLE IV - GENERAL PROVISIONS RELATING TO OPTIONS
Authority to Grant Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Dedicated Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Non-Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3
Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Changes in the Company's Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5
Changes of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6
ARTICLE V - OPTIONS
Type of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1
Option Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Duration of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3
Amount Exercisable--Incentive Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4
Exercise of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5
Substitution Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6
No Rights as Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7
ARTICLE VI - ADMINISTRATION
ARTICLE VII - AMENDMENT OR TERMINATION OF PLAN
ARTICLE VIII - MISCELLANEOUS
No Establishment of a Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1
No Employment Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2
Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3
Written Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4
Indemnification of the Committee and the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 8.5
Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6
Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7
Other Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8
Other Options or Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9
Arbitration of Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11
</TABLE>
- ii -
<PAGE> 4
ARTICLE I
PLAN
1.1 PURPOSE. This Plan is a plan for key employees, consultants
and advisors of the Company and its Affiliates and is intended to advance the
best interests of the Company, its Affiliates, and its stockholders by
providing those persons who have substantial responsibility for the management
and growth of the Company and its Affiliates with additional incentives and an
opportunity to obtain or increase their proprietary interest in the Company,
thereby encouraging them to continue in the employ of the Company or any of its
Affiliates.
1.2 EFFECTIVE DATE OF PLAN. This Plan is effective May 9, 1996,
if within one year of that date it shall have been approved by at least a
majority vote of stockholders voting in person or by proxy at a duly held
stockholders' meeting, or if the provisions of the corporate charter, by-laws
or applicable state law prescribes a greater degree of stockholder approval for
this action, the approval by the holders of that percentage, at a duly held
meeting of stockholders. No Incentive Option or Nonqualified Option shall be
granted pursuant to this Plan after May 8, 2006.
ARTICLE II
DEFINITIONS
The words and phrases defined in this Article shall have the meaning
set out in these definitions throughout this Plan, unless the context in which
any such word or phrase appears reasonably requires a broader, narrower, or
different meaning.
2.1 "AFFILIATE" means any parent corporation and any subsidiary
corporation. The term "parent corporation" means any corporation (other than
the Company) in an unbroken chain of corporations ending with the Company if,
at the time of the action or transaction, each of the corporations other than
the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain.
The term "subsidiary corporation" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if, at
the time of the action or transaction, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in the chain.
2.2 "BOARD OF DIRECTORS" means the board of directors of the
Company.
2.3 "CHANGE OF CONTROL" means:
(i) the acquisition after the closing date of the
offering of shares of Stock registered under the Security Act of 1933,
as amended, pursuant to a Registration Statement on Form S-1 (Reg. No.
333-4437) (the "Effective Date") by any individual, entity or group
(within the meaning of Section 13(d)(3) or
- 1 -
<PAGE> 5
14(d)(2) of the Securities Exchange Act of 1934, as amended) (a
"Person") of beneficial ownership of 20% or more of either (i) the
then outstanding shares of common stock of the Company (the
"Outstanding Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"), provided that for purposes of this subsection (i), the
following acquisitions shall not constitute a Change of Control: (A)
any acquisition directly from the Company, (B) any acquisition by the
Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C)
of subsection (iii) hereof; or
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the Effective Date whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual was a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(iii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other disposition
of all or substantially all of the assets of the Company (a "Corporate
Transaction") in each case, unless, following such Corporate
Transaction, (A) (I) all or substantially all of the persons who were
the beneficial owners of the Outstanding Common Stock immediately
prior to such Corporate Transaction beneficially own, directly or
indirectly, more than 60 percent of the then outstanding shares of
common stock of the corporation resulting from such Corporate
Transaction, and (2) all or substantially all of the persons who were
the beneficial owners of the Outstanding Voting Securities immediately
prior to such Corporate Transaction beneficially own, directly or
indirectly, more than 60 percent of the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership
of the Outstanding Common Stock and the Outstanding Voting Securities
immediately prior to such Corporate Transaction, as the case may be,
(B) no Person (excluding (l) any corporation resulting from such
Corporate Transaction or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Corporate
Transaction and (2) any Person approved by the Incumbent Board)
beneficially owns, directly or indirectly, 20 percent or more of the
then outstanding shares of common stock of the corporation resulting
from such Corporate Transaction or the combined voting
- 2 -
<PAGE> 6
power of the then outstanding voting securities of such corporation
except to the extent that such ownership existed prior to such
Corporate Transaction and (C) at least a majority of the members of
the board of directors of the corporation resulting from such
Corporate Transaction were members of the Incumbent Board at the time
of the execution of the initial agreement or of the action of the
Board providing for such Corporate Transaction.
2.4 "CODE" means the Internal Revenue Code of 1986, as amended.
2.5 "COMMITTEE" means the Compensation Committee of the Board of
Directors or such other committee designated by the Board of Directors. The
Committee shall be comprised solely of at least two members who are Outside
Directors.
2.6 "COMPANY" means The Houston Exploration Company.
2.7 "DISABILITY" means a physical or mental infirmity which, in
the opinion of a physician selected by the Committee, shall prevent the
Employee from earning a reasonable livelihood with the Company or any Affiliate
and which can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12 months and which:
(a) was not contracted, suffered or incurred while the Employee was engaged in,
or did not result from having engaged in, a felonious criminal enterprise; (b)
did not result from alcoholism or addiction to narcotics; and (c) did not
result from an injury incurred while a member of the Armed Forces of the United
States for which the Employee receives a military pension.
2.8 "EMPLOYEE" means a person employed by the Company or any
Affiliate to whom an Option is granted.
2.9 "FAIR MARKET VALUE" of the Stock as of any date means (a) the
average of the high and low sale prices of the Stock on that date on the
principal securities exchange on which the Stock is listed; or (b) if the Stock
is not listed on a securities exchange, the average of the high and low sale
prices of the Stock on that date as reported on the NASDAQ National Market
System; or (c) if the Stock is not listed on the NASDAQ National Market System,
the average of the high and low bid quotations for the Stock on that date as
reported by the National Quotation Bureau Incorporated; or (d) if none of the
foregoing is applicable, an amount at the election of the Committee equal to
the (x) the average between the closing bid and ask prices per Share of Stock
on the last preceding date on which those prices were reported or (y) that
amount as determined by the Committee in its sole discretion.
2.10 "INCENTIVE OPTION" means an option granted under this Plan
which is designated as an "Incentive Option" and satisfies the requirements of
Section 422 of the Code.
2.11 "NON-EMPLOYEE DIRECTOR" means a "non-employee director" as
that term is defined in Rule 16b-3 of the Securities Exchange Act of 1934.
- 3 -
<PAGE> 7
2.12 "NONQUALIFIED OPTION" means an option granted under this Plan
other than an Incentive Option.
2.13 "OPTION" means both an Incentive Option and a Nonqualified
Option granted under this Plan to purchase shares of Stock.
2.14 "OPTION AGREEMENT" means the written agreement which sets out
the terms of an Option.
2.15 "OPTIONEE" means a person who is granted an Option under this
Plan.
2.16 "OUTSIDE DIRECTOR" means a member of the Board of Directors
serving on the Committee who satisfies the criteria of Section 162(m) of the
Code.
2.17 "PLAN" means The Houston Exploration Company 1996 Stock Option
Plan, as set out in this document and as it may be amended from time to time.
2.18 "STOCK" means the common stock of the Company, $.01 par value
or, in the event that the outstanding shares of common stock are later changed
into or exchanged for a different class of stock or securities of the Company
or another corporation, that other stock or security.
2.19 "10% STOCKHOLDER" means an individual who, at the time the
Option is granted, owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or of any Affiliate. An
individual shall be considered as owning the stock owned, directly or
indirectly, by or for his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants; and stock owned, directly or
indirectly, by or for a corporation, partnership, estate, or trust, shall be
considered as being owned proportionately by or for its stockholders, partners,
or beneficiaries.
ARTICLE III
ELIGIBILITY
The individuals who shall be eligible to receive Incentive Options
shall be those key employees of the Company or any of its Affiliates as the
Committee shall determine from time to time. The individuals who shall be
eligible to receive Nonqualified Options shall be those Key employees,
consultants and advisors of the Company or any of its Affiliates as the
Committee shall determine from time to time. However, no member of the
Committee shall be eligible to receive any Option or to receive stock, stock
options, or stock appreciation rights under any other plan of the Company or
any of its Affiliates, if to do so would cause the individual not to be an
Outside Director. The Board of Directors may designate one or more individuals
who shall not be eligible to receive any Option under this Plan or under other
similar plans of the Company.
- 4 -
<PAGE> 8
ARTICLE IV
GENERAL PROVISIONS RELATING TO OPTIONS
4.1 AUTHORITY TO GRANT OPTIONS. The Committee may grant to those
individuals, as it shall from time to time determine, Options under the terms
and conditions of this Plan. Subject only to any applicable limitations set
out in this Plan, the number of shares of Stock to be covered by any Option to
be granted to an Employee of the Company or any of its Affiliates shall be as
determined by the Committee.
4.2 DEDICATED SHARES. The total number of shares of Stock with
respect to which Options may be granted under the Plan shall be ten percent of
the shares of Stock outstanding from time to time. The shares may be treasury
shares or authorized but unissued shares. The total number of shares of Stock
with respect to which Incentive Options may be granted under the Plan shall be
1,125,000 shares. The maximum number of shares subject to Options which may be
issued to any Optionee under the Plan during any period of three consecutive
years is 1,125,000 shares. The number of shares stated in this Section 4.2
shall be subject to adjustment in accordance with the provisions of Section
4.5.
In the event that any outstanding Option shall expire or terminate for
any reason or any Option is surrendered, the shares of Stock allocable to the
unexercised portion of that Option may again be subject to an Option under the
Plan.
4.3 NON-TRANSFERABILITY. Options shall not be transferable by the
Optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during the Optionee's lifetime, only by him.
4.4 REQUIREMENTS OF LAW. The Company shall not be required to
sell or issue any Stock under any Option if issuing that Stock would constitute
or result in a violation by the Optionee or the Company of any provision of any
law, statute, or regulation of any governmental authority. Specifically, in
connection with any applicable statute or regulation relating to the
registration of securities, upon exercise of any Option, the Company shall not
be required to issue any Stock unless the Committee has received evidence
satisfactory to it to the effect that the holder of that Option will not
transfer the Stock except in accordance with applicable law, including receipt
of an opinion of counsel satisfactory to the Company to the effect that any
proposed transfer complies with applicable law. The determination by the
Committee on this matter shall be final, binding and conclusive. The Company
may, but shall in no event be obligated to, register any Stock covered by this
Plan pursuant to applicable securities laws of any country or any political
subdivision. In the event the Stock issuable on exercise of an Option is not
registered, the Company may imprint on the certificate evidencing the Stock any
legend that counsel for the Company considers necessary or advisable to comply
with applicable law. The Company shall not be obligated to take any other
affirmative action in order to cause the exercise of an Option and the issuance
of shares thereunder, to comply with any law or regulation of any governmental
authority.
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<PAGE> 9
4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock or its rights, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding, whether of a similar character or
otherwise.
If the Company shall effect a subdivision or consolidation of shares
or other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of the Stock outstanding, without
receiving compensation for it in money, services or property, then (a) the
number, class, and per share price of shares of Stock subject to outstanding
Options under this Plan shall be appropriately adjusted in such a manner as to
entitle an Optionee to receive upon exercise of an Option, for the same
aggregate cash consideration, the equivalent total number and class of shares
he would have received had he exercised his Option in full immediately prior to
the event requiring the adjustment; and (b) the number and class of shares of
Stock then reserved to be issued under the Plan shall be adjusted by
substituting for the total number and class of shares of Stock then reserved,
that number and class of shares of Stock that would have been received by the
owner of an equal number of outstanding shares of each class of Stock as the
result of the event requiring the adjustment.
If the Company is merged or consolidated with another corporation and
the Company is not the surviving corporation, or if the Company is liquidated
or sells or otherwise disposes of substantially all its assets while
unexercised Options remain outstanding under this Plan, (a) subject to the
provisions of clause (c) below, after the effective date of the merger,
consolidation, liquidation, sale or other disposition, as the case may be, each
holder of an outstanding Option shall be entitled, upon exercise of the Option,
to receive, in lieu of shares of Stock, the number and class or classes of
shares of stock or other securities or property to which the holder would have
been entitled if, immediately prior to the merger, consolidation, liquidation,
sale or other disposition, the holder had been the holder of record of a number
of shares of Stock equal to the number of shares as to which the Option shall
be so exercised; (b) the Committee shall waive any limitations set out in or
imposed under this Plan so that all Options, from and after a date prior to the
effective date of the merger, consolidation, liquidation, sale or other
disposition, as the case may be, specified by the Committee, shall be
exercisable in full; and (c) all outstanding Options may be canceled by the
Committee as of the effective date of any merger, consolidation, liquidation,
sale or other disposition, if (i) notice of cancellation shall be given to each
holder of an Option and (ii) each holder of an Option shall have the right to
exercise that Option in full (without regard to any limitations set out in or
imposed under this Plan or the Option Agreement granting that Option) during a
period set by the Committee preceding the effective date of the merger,
consolidation, liquidation, sale or other disposition and, if in the event all
outstanding Options may not be exercised in full under applicable securities
laws without registration of the shares of Stock issuable on exercise of the
Options, the Committee may limit the exercise of the Options to the number of
shares
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<PAGE> 10
of Stock, if any, as may be issued without registration. The method of
choosing which Options may be exercised, and the number of shares of Stock for
which Options may be exercised, shall be solely within the discretion of the
Committee.
The issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services either upon direct sale or upon the exercise of rights
or warrants to subscribe for them, or upon conversion of shares or obligations
of the Company convertible into shares or other securities, shall not affect,
and no adjustment by reason of such issuance shall be made with respect to, the
number, class, or price of shares of Stock then subject to outstanding Options.
4.6 CHANGES OF CONTROL. In the event of a Change of Control, the
Committee may, in its discretion, at the time an Option is granted or any time
thereafter: (i) provide for the acceleration of any time period relating to
the exercise of the Option, (ii) provide for the purchase of the Option upon
the Optionee's request for an amount of cash or other property that could have
been received upon the exercise of the Option had the Option been currently
been exercisable, (iii) adjust the terms of the Option in a manner determined
by the Committee to reflect the Change of Control, (iv) cause the Option to be
assumed, or new rights substituted therefore, by another entity, or (v) make
such other provisions as the Committee may consider equitable and in the best
interest of the Company. Any transaction described in this Section that is
approved by the Committee will be effective only if a committee of the Board of
Directors that is composed solely of two or more Non-Employee Directors
approves of the transaction, unless the transaction would not otherwise subject
the Optionee to potential liability under Section 16(b) of the Securities
Exchange of 1934.
ARTICLE V
OPTIONS
5.1 TYPE OF OPTION. The Committee shall specify whether a given
Option shall constitute an Incentive Option or a Nonqualified Option.
5.2 OPTION PRICE. The price at which Stock may be purchased under
an Incentive Option shall not be less than the greater of: (a) 100% of the
Fair Market Value of the shares of Stock on the date the Option is granted or
(b) the aggregate par value of the shares of Stock on the date the Option is
granted. In the case of any 10% Stockholder, the price at which shares of
Stock may be purchased under an Incentive Option shall not be less than 110% of
the Fair Market Value of the Stock on the date the Incentive Option is granted.
The price at which shares of Stock may be purchased under a
Nonqualified Option shall not be less than the greater of: (a) 100% of the
Fair Market Value of the shares of Stock on the date the Option is granted or
(b) the aggregate par value of the shares of Stock on the date the Option is
granted.
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<PAGE> 11
5.3 DURATION OF OPTIONS. No Option shall be exercisable after the
expiration of 10 years from the date the Option is granted. In the case of a
10% Stockholder, no Incentive Option shall be exercisable after the expiration
of five years from the date the Incentive Option is granted.
5.4 AMOUNT EXERCISABLE. Each Option may be exercised from time to
time, in whole or in part, in the manner and subject to the conditions the
Committee, in its sole discretion, may provide in the Option Agreement, as long
as the Option is valid and outstanding, provided that no Option may be
exercisable within six (6) months of the date of grant. To the extent that the
aggregate Fair Market Value (determined as of the time an Incentive Option is
granted) of the Stock with respect to which Incentive Options first become
exercisable by the Optionee during any calendar year (under this Plan and any
other incentive stock option plan(s) of the Company or any Affiliate) exceeds
$100,000, the Incentive Options shall be treated as Nonqualified Options. In
making this determination, Incentive Options shall be taken into account in the
order in which they were granted.
5.5 EXERCISE OF OPTIONS. Each Option shall be exercised by the
delivery of written notice to the Committee setting forth the number of shares
of Stock with respect to which the Option is to be exercised, together with:
(a) cash, certified check, bank draft, or postal or express money order payable
to the order of the Company for an amount equal to the option price of the
shares, or (b) if approved by a committee of the Board of Directors that is
composed solely of two or more Non-Employee Directors, Stock at its Fair Market
Value on the date of exercise, and/or any other form of payment which is
acceptable to such committee, and specifying the address to which the
certificates for the shares are to be mailed. As promptly as practicable after
receipt of written notification and payment, the Company shall deliver to the
Optionee certificates for the number of shares with respect to which the Option
has been exercised, issued in the Optionee's name. If shares of Stock are used
in payment of the exercise price, the aggregate Fair Market Value of the shares
of Stock tendered must be equal to or less than the aggregate exercise price of
the shares being purchased upon exercise of the Option, and any difference must
be paid by cash, certified check, bank draft, or postal or express money order
payable to the Company. Delivery of the shares shall be deemed effected for
all purposes when a stock transfer agent of the Company shall have deposited
the certificates in the United States mail, addressed to the Optionee, at the
address specified by the Optionee.
Whenever an Option is exercised by exchanging shares of Stock owned by
the Optionee, the Optionee shall deliver to the Company certificates registered
in the name of the Optionee representing a number of shares of Stock legally
and beneficially owned by the Optionee, free of all liens, claims, and
encumbrances of every kind, accompanied by stock powers duly endorsed in blank
by the record holder of the shares represented by the certificates, (with
signature guaranteed by a commercial bank or trust company or by a brokerage
firm having a membership on a registered national stock exchange). The
delivery of certificates upon the exercise of Options is subject to the
condition that the person exercising the Option provide the Company with the
information the Company might reasonably request pertaining to exercise, sale
or other disposition of an Option.
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<PAGE> 12
5.6 SUBSTITUTION OPTIONS. Options may be granted under this Plan
from time to time in substitution for stock options held by employees of other
corporations who are about to become employees of or affiliated with the
Company or any Affiliate as the result of a merger or consolidation of the
employing corporation with the Company or any Affiliate, or the acquisition by
the Company or any Affiliate of the assets of the employing corporation, or the
acquisition by the Company or any Affiliate of stock of the employing
corporation as the result of which it becomes an Affiliate of the Company. The
terms and conditions of the substitute Options granted may vary from the terms
and conditions set out in this Plan to the extent the Committee, at the time of
grant, may deem appropriate to conform, in whole or in part, to the provisions
of the stock options in substitution for which they are granted.
5.7 NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights
as a stockholder with respect to Stock covered by his Option until the date a
stock certificate is issued for the Stock.
ARTICLE VI
ADMINISTRATION
This Plan shall be administered by the Committee. All questions of
interpretation and application of this Plan and Options shall be subject to the
determination of the Committee. A majority of the members of the Committee
shall constitute a quorum. All determinations of the Committee shall be made
by a majority of its members. Any decision or determination reduced to writing
and signed by a majority of the members shall be as effective as if it had been
made by a majority vote at a meeting properly called and held. This Plan shall
be administered in such a manner as to permit the Options granted under it
which are designated to be Incentive Options to qualify as Incentive Options.
In carrying out its authority under this Plan, the Committee shall have full
and final authority and discretion, including but not limited to the following
rights, powers and authorities, to:
(a) determine the persons to whom and the time or times
at which Options will be made,
(b) determine the number of shares and the purchase price
of Stock covered in each Option, subject to the terms of the Plan,
(c) determine the terms, provisions and conditions of
each Option, which need not be identical,
(d) accelerate the time at which any outstanding Option
may be exercise,
(e) define the effect, if any, on an Option of the death,
disability, retirement, or termination of employment of the Optionee,
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<PAGE> 13
(f) prescribe, amend and rescind rules and regulations
relating to administration of this Plan, and
(g) make all other determinations and take all other
actions deemed necessary, appropriate, or advisable for the proper
administration of this Plan.
The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive
and binding on all parties.
ARTICLE VII
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may amend, terminate or suspend
this Plan at any time, in its sole and absolute discretion; provided, however,
that to the extent required to qualify this Plan under Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934, as amended, no
amendment that would (a) materially increase the number of shares of Stock that
may be issued under this Plan, (b) materially modify the requirements as to
eligibility for participation in this Plan, or (c) otherwise materially
increase the benefits accruing to participants under this Plan, shall be made
without the approval of the Company's stockholders; provided further, however,
that to the extent required to maintain the status of any Incentive Option
under the Code, no amendment that would (a) change the aggregate number of
shares of Stock which may be issued under Incentive Options, (b) change the
class of employees eligible to receive Incentive Options, or (c) decrease the
exercise price for Incentive Options below the Fair Market Value of the Stock
at the time it is granted, shall be made without the approval of the Company's
stockholders. Subject to the preceding sentence, the Board shall have the
power to make any changes in this Plan and in the regulations and
administrative provisions under it or in any outstanding Incentive Option as in
the opinion of counsel for the Company may be necessary or appropriate from
time to time to enable any Incentive Option granted under this Plan to continue
to qualify as an incentive stock option or such other stock option as may be
defined under the Code so as to receive preferential Federal income tax
treatment.
ARTICLE VIII
MISCELLANEOUS
8.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set
aside nor shall a trust fund of any kind be established to secure the rights of
any Optionee under this Plan. All Optionees shall at all times rely solely
upon the general credit of the Company for the payment of any benefit which
becomes payable under this Plan.
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<PAGE> 14
8.2 NO EMPLOYMENT OBLIGATION. The granting of any Option shall
not constitute an employment contract, express or implied, nor impose upon the
Company or any Affiliate any obligation to employ or continue to employ any
Optionee. The right of the Company or any Affiliate to terminate the
employment of any person shall not be diminished or affected by reason of the
fact that an Option has been granted to him.
8.3 TAX WITHHOLDING. The Company or any Affiliate shall be
entitled to deduct from other compensation payable to each Optionee any sums
required by federal, state, or local tax law to be withheld with respect to the
grant or exercise of an Option. In the alternative, the Company may require
the Optionee (or other person exercising the Option) to pay the sum directly to
the employer corporation. If the Optionee (or other person exercising the
Option) is required to pay the sum directly, payment in cash or by check of
such sums for taxes shall be delivered within ten days after the date of
exercise or lapse of restrictions. The Company shall have no obligation upon
exercise of any Option until payment has been received, unless withholding (or
offset against a cash payment) as of or prior to the date of exercise is
sufficient to cover all sums due with respect to that exercise. The Company
and its Affiliates shall not be obligated to advise an Optionee of the
existence of the tax or the amount which the employer corporation will be
required to withhold.
8.4 WRITTEN AGREEMENT. Each Option shall be embodied in a written
Option Agreement which shall be subject to the terms and conditions of this
Plan and shall be signed by the Optionee and by a member of the Committee on
behalf of the Committee and the Company. The Option Agreement may contain any
other provisions that the Committee in its discretion shall deem advisable
which are not inconsistent with the terms of this Plan.
8.5 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS.
With respect to administration of this Plan, the Company shall indemnify each
present and future member of the Committee and the Board of Directors against,
and each member of the Committee and the Board of Directors shall be entitled
without further act on his part to indemnity from the Company for, all expenses
(including attorney's fees, the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of litigation, other
than amounts paid to the Company itself) reasonably incurred by him in
connection with or arising out of any action, suit, or proceeding in which he
may be involved by reason of his being or having been a member of the Committee
and/or the Board of Directors, whether or not he continues to be a member of
the Committee and/or the Board of Directors at the time of incurring the
expenses--including, without limitation, matters as to which he shall be
finally adjudged in any action, suit or proceeding to have been found to have
been negligent in the performance of his duty as a member of the Committee of
the Board of Directors. However, this indemnity shall not include any expenses
incurred by any member of the Committee and/or the Board of Directors in
respect of matters as to which he shall be finally adjudged in any action, suit
or proceeding to have been guilty of gross negligence or willful misconduct in
the performance of his duty as a member of the Committee or the Board of
Directors. In addition, no right of indemnification under this Plan shall be
available to or enforceable by any member of the Committee and the Board of
Directors unless, within 60 days after institution of any action, suit or
proceeding, he
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<PAGE> 15
shall have offered the Company, in writing, the opportunity to handle and
defend same at its own expense. This right of indemnification shall inure to
the benefit of the heirs, executors or administrators of each member of the
Committee and the Board of Directors and shall be in addition to all other
rights to which a member of the Committee and the Board of Directors may be
entitled as a matter of law, contract, or otherwise.
8.6 GENDER. If the context requires, words of one gender when
used in this Plan shall include the others and words used in the singular or
plural shall include the other.
8.7 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of this Plan and shall
not be used in construing the terms of this Plan.
8.8 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation or benefit plans
in effect for the Company or any Affiliate, nor shall this Plan preclude the
Company from establishing any other forms of incentive or other compensation
for employees of the Company or any Affiliate.
8.9 OTHER OPTIONS. The grant of an Option shall not confer upon
an Optionee the right to receive any future or other Options under this Plan,
whether or not Options may be granted to similarly situated Optionees, or the
right to receive future Options upon the same terms or conditions as previously
granted.
8.10 ARBITRATION OF DISPUTES. Any controversy arising out of or
relating to the Plan or an Option Agreement shall be resolved by arbitration
conducted pursuant to the arbitration rules of the American Arbitration
Association. The arbitration shall be final and binding on the parties.
8.11 GOVERNING LAW. The provisions of this Plan shall be
construed, administered, and governed under the laws of the State of Texas.
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<PAGE> 1
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of ____________,
1996 (this "Agreement"), is entered into by and among The Houston Exploration
Company, a Delaware corporation (the "Company"), and THEC Holdings Corp., a
Delaware corporation ("THEC Holdings").
W I T N E S S E T H
WHEREAS, the Company is a wholly-owned, indirect subsidiary
of Brooklyn Union;
WHEREAS, the Company has authorized the issuance by the
Company of shares of its Common Stock, par value $0.01 per share ("Common
Stock"), in a public offering pursuant to a Registration Statement on Form S-1
(No. 333-4437), as amended (the "Offering"); and
WHEREAS, the Company has agreed to give Brooklyn Union certain
registration rights with respect to the Common Stock now owned by or issued to
THEC Holdings during the term of this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the meanings set forth below:
(a) "Commercially Reasonable Efforts," when used with respect
to an obligation to be performed or term or provision to be observed
hereunder, shall mean such efforts as a prudent person seeking the benefits
of such performance or action would make, use, apply or exercise to
preserve, protect or advance its rights or interests, provided that such
efforts do not require such person to incur a material financial cost or a
substantial risk of material liability unless such cost or liability (i)
would customarily be incurred in the course of performance or observance of
the relevant obligation, term, or provision, (ii) is caused by or results
from the wrongful act or negligence of the person whose performance or
observance is required hereunder or (iii) is not excessive or unreasonable
in view of the rights or interests to be preserved, protected or advanced.
Such efforts may include, without limitation, (A) the expenditure of such
funds and retention by such person of such accountants, attorneys or other
experts or advisors as may be necessary or appropriate to effect the
relevant action, (B) the undertaking of any special audit or internal
investigation that may be necessary or appropriate to effect the relevant
action and (C) the commencement, termination or
<PAGE> 2
settlement of any action, suit or proceeding involving such person to the
extent necessary or appropriate to effect the relevant action.
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
(c) "Company" shall have the meaning set forth in the initial
paragraph of this Agreement.
(d) "Common Stock" shall have the meaning set forth in the
recitals of this Agreement.
(e) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to
time.
(f) "Holder" shall mean THEC Holdings and any holder of
Registrable Securities to whom the registration rights conferred by this
Agreement have been transferred in compliance with Section 9 hereof.
(g) "Initiating Holders" shall mean any Holder or Holders
who in the aggregate hold not less than 50% of the outstanding Registrable
Securities.
(h) The terms "register," "registered" and "registration"
shall refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act and applicable
rules and regulations thereunder, and the declaration or ordering of the
effectiveness of such registration statement.
(i) "Registrable Securities" shall mean (i) the shares of
Common Stock issued to THEC Holdings, and (ii) any Common Stock issued as
a dividend or other distribution with respect to or in exchange for or in
replacement of such shares, provided, however, that Registrable Securities
shall not include any shares of Common Stock which have previously been
registered under the Securities Act, which have been sold or otherwise
transferred under Rule 144 or which may be sold without restriction
pursuant to Rule 144(k).
(j) "Registration Expenses" shall mean all expenses incurred
in effecting any registration pursuant to this Agreement, including,
without limitation, all registration, qualification, and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and expenses of any regular or special
audits incident to or required by any such registration, but shall not
include Selling Expenses (and shall not include the compensation of regular
employees of the Company, which shall be paid in any event by the Company).
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<PAGE> 3
(k) "Rule 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time
to time, or any similar successor rule that may be promulgated by the
Commission.
(l) "Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time
to time, or any similar successor rule that may be promulgated by the
Commission.
(m) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to
time.
(n) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities
and all fees and disbursements of counsel for any Holder.
2. Demand Registration.
2.1 REQUEST FOR REGISTRATION. (a) If the Company shall
receive from Initiating Holders, at any time or times not earlier than
180 days after the date of this Agreement, a written request that the Company
effect any registration with respect to all or a part of the Registrable
Securities, representing no less than 10% of the Company's then-outstanding
shares of Common Stock, the Company will:
(i) promptly give written notice of the proposed registration
to all other Holders; and
(ii) as soon as practicable, use Commercially Reasonable
Efforts to effect such registration (including, without limitation, filing
a registration statement and any appropriate pre-effective or
post-effective amendments, appropriate qualifications under applicable blue
sky or other state securities laws, and appropriate compliance with the
Securities Act) so as to permit or facilitate the sale and distribution of
all or such portion of the Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of
any Holder or Holders joining in such request as are specified in a written
request received by the Company within 20 days after such written notice
from the Company is effective.
Each request for registration under this Section 2 shall specify the
amount of Registrable Securities proposed to be registered.
(b) The Company shall not be obligated to effect, or to take
any action to effect, any such registration pursuant to this Section 2:
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<PAGE> 4
(i) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the
Company is already subject to service in such jurisdiction and except as
may be required by the Securities Act;
(ii) (A) prior to the expiration of a period of six months
after the Company has initiated any registration pursuant to this Section
2.1, provided that a registration initiated pursuant to this Section 2.1
and subsequently withdrawn by the Holders registering shares therein shall
not be counted as a requested registration pursuant to this clause (ii) if
(X) such withdrawal is based upon material adverse information relating to
the Company that is not known by or available (upon request from the
Company or otherwise) to the Initiating Holders at the time of their
request for registration pursuant to this Section 2.1 or (Y) the Holders
bear the Registration Expenses for such registration;
(iii) during the period starting with the date 60 days prior
to the Company's good faith estimate of the date of filing of, and ending
on a date 180 days after the effective date of, a Company-initiated
registration, provided that the Company is actively employing in good faith
all Commercially Reasonable Efforts to cause such registration statement to
become effective;
(iv) if the Initiating Holders do not request that such
offering be firmly underwritten by underwriters selected by a majority in
interest of the Initiating Holders (subject to the consent of the Company,
which consent will not be unreasonably withheld);
(v) if the Company and the Initiating Holders are unable to
obtain the commitment of the underwriters described in clause (iv) above to
firmly underwrite the offer; or
(vi) if, within 14 days after its receipt of a written
request to effect such registration, the Company causes to be delivered to
the Initiating Holders an opinion of Andrews & Kurth L.L.P. or other
counsel reasonably acceptable to the Initiating Holders to the effect that
the proposed disposition of Registrable Securities by the Initiating
Holders will not require registration or qualification under the Securities
Act, it being specifically understood and agreed that the Initiating
Holders will promptly furnish to the Company and such counsel all
information such counsel may reasonably request in order to enable such
counsel to determine whether it would be able to render such opinion.
2.2 RIGHT TO DEFER REGISTRATION. Subject to the provisions
of Section 2.1(b), the Company shall use Commercially Reasonable Efforts to
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or
requests of the Initiating Holders; provided, however, that if (i) in the good
faith judgment of the Board of Directors of the Company, such registration
would be seriously detrimental to the Company and the Board of Directors of the
Company concludes, as a result, that it is essential to
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<PAGE> 5
defer the filing of such registration statement at such time, and (ii) the
Company shall furnish to such Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company for such
registration statement to be filed in the near future and that it is,
therefore, essential to defer the filing of such registration statement, then
the Company shall have the right to defer such filing for the period during
which such disclosure would be seriously detrimental, provided that (except as
provided in Section 2.1(b)(iii) above) the Company may not defer the filing for
a period of more than 180 days after receipt of the request of the Initiating
Holders, and, provided further, that the Company shall not defer its obligation
in this manner more than once in any twelve-month period.
2.3 UNDERWRITING. (a) The right of any Holder to
registration pursuant to Section 2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
(together with the Company and other holders of securities of the Company
exercising registration rights with respect to such registration) shall enter
into an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by a majority in interest of the
Initiating Holders, subject to the consent of the Company, which consent shall
not be unreasonably withheld.
(b) Notwithstanding any other provision of this Section 2, if
the representative of the underwriters advises the Initiating Holders in
writing that marketing factors require a limitation on the number of shares to
be underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 10 hereof. If a person
who has requested inclusion in such registration as provided above does not
agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or the Initiating
Holders. Any Registrable Securities or other securities excluded or withdrawn
from such underwriting shall also be withdrawn from such registration. If
shares are so withdrawn from the registration and if the number of shares to be
included in such registration was previously reduced as a result of marketing
factors pursuant to this Section 2.3, then the Company shall offer to all
Holders who have retained rights to include securities in the registration the
right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among such Holders requesting additional inclusion in accordance with
Section 10 hereof.
3. Piggyback Registration.
3.1 NOTICE OF REGISTRATION. If the Company shall determine
to register any of its securities either for its own account or the account of
a security holder or holders exercising their respective demand registration
rights (other than pursuant to Section 2 hereof), other than a registration
relating solely to employee benefit plans, a registration relating solely to a
Rule 145 transaction, or a registration on any registration form that does not
permit secondary sales, the Company will:
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<PAGE> 6
(a) promptly give to each Holder written notice thereof; and
(b) use Commercially Reasonable Efforts to include in such
registration (and any related qualification under blue sky laws or other
compliance), except as set forth in Section 3.2 below, and in any
underwriting involved therein, all the Registrable Securities specified in
a written request or requests, made by any Holder within 20 days after the
written notice from the Company described in clause (i) above is given.
Such written request may specify all or a part of a Holder's Registrable
Securities.
3.2 RIGHT TO TERMINATE REGISTRATION. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 3 prior to the effectiveness of such registration whether or not any
Holder has elected to include Registrable Securities in such registration.
3.3 UNDERWRITING. (a) If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to Section 3.1 above. In such event, the right of any
Holder to registration pursuant to this Section 3 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting (together with the Company and such other holders of securities of
the Company exercising registration rights with respect to such registration)
shall enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company or
the security holders initiating such registration, as the case may be.
(b) Notwithstanding any other provision of this Section 3, if
the representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting.
The Company shall so advise all holders of securities requesting registration,
and the amount of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in
Section 10 hereof. If any person does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from
the Company or the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
4. Expenses of Registration. All Registration Expenses in
any registration, qualification or compliance pursuant to Section 2 shall be
borne by the holders of the securities so registered pro rata on the basis of
the number of shares of securities so registered on their behalf. All
Registration Expenses in any registration, qualification or compliance pursuant
to Section 3 shall be borne by the Company. All Selling Expenses relating to
securities so registered shall be borne
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<PAGE> 7
by the holders of such securities pro rata on the basis of the number of shares
of securities so registered on their behalf.
5. Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep each
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense (except, as otherwise provided herein),
the Company will use Commercially Reasonable Efforts to:
(a) keep such registration effective for a period of 120 days
or until the Holder or Holders have completed the distribution described in
the registration statement relating thereto, whichever first occurs;
provided, however, that such 120-day period shall be extended for a period
of time equal to the period after the effectiveness of such registration
that the Holder refrains from selling any securities included in such
registration at the request of an underwriter of Common Stock (or other
securities) of the Company;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement;
(c) furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request;
(d) notify each seller of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
then existing, not misleading, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances then existing,
not misleading;
(e) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
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(f) provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration; and
(g) comply with all applicable rules and regulations of the
Commission, and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at least twelve
months, but not more than eighteen months, beginning with the first month after
the effective date of the Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
In connection with any underwritten offering pursuant to a registration
statement filed pursuant to Section 2 hereof, the Company will enter into an
underwriting agreement reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains customary
underwriting provisions.
6. Indemnification.
(a) The Company will indemnify each Holder, each of its
officers, directors and partners, legal counsel, and accountants and each
person controlling such Holder within the meaning of Section 15 of the
Securities Act, if Registrable Securities of such Holder are included in the
securities with respect to which registration, qualification, or compliance has
been effected pursuant to this Agreement, and each underwriter, if any, and
each person who controls within the meaning of Section 15 of the Securities Act
any underwriter, against all expenses, claims, losses, damages, and liabilities
(or actions, proceedings, or settlements in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular, or other document (including
any related registration statement, notification, or the like) incident to any
such registration, qualification, or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction
required by the Company in connection with any such registration,
qualification, or compliance, and will reimburse each such Holder, each of its
officers, directors, partners, legal counsel, and accountants and each person
controlling such Holder, each such underwriter, and each person who controls
any such underwriter, for any legal and any other expenses reasonably incurred
in connection with investigating and defending or settling any such claim,
loss, damage, liability, or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability, or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such Holder
or underwriter and stated to be specifically for use therein. It is agreed
that the indemnity agreement contained in this Section 6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent has not been unreasonably withheld).
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(b) Each Holder (an "Indemnifying Holder") will, if Registrable
Securities held by the Indemnifying Holder are included in the securities as to
which such registration, qualification, or compliance is being effected,
indemnify the Company, each of its directors, officers, partners, legal
counsel, and accountants and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, each other such Holder (an "Indemnified Holder"), and each of
their officers, directors, and partners, and each person controlling such
Indemnified Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company and such Indemnified Holders, directors, officers,
partners, legal counsel, and accountants, persons, underwriters, or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability, or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular, or other
document in reliance upon and in conformity with written information furnished
to the Company by the Indemnifying Holder and stated to be specifically for use
therein; provided, however, that the obligations of the Indemnifying Holder
hereunder shall not apply to amounts paid in settlement of any such claims,
losses, damages, or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld); and provided further that the liability of an
Indemnifying Holder pursuant to this Section 6(b) in connection with a
registration shall be limited to the net proceeds from the sale of the
Registrable Securities of such Indemnifying Holder pursuant to such
registration.
(c) Each party entitled to indemnification under this Section
6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and, except as provided in the following sentence, shall permit the
Indemnifying Party to assume the defense of such claim or any litigation
resulting therefrom; provided that counsel for the Indemnifying Party, who
shall conduct the defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld); provided further that the Indemnified Party may
participate in such defense at its own expense; and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement, to the
extent such failure is not materially prejudicial. After the Indemnifying Party
assumes the defense of such claim or litigation, the Indemnifying Party shall
not be liable to the Indemnified Party under this Section 6 for any legal or
other expenses subsequently incurred by such Indemnified Party in connection
with the defense thereof, other than reasonable costs of investigation, unless
the named parties to any such proceeding (including any impleaded parties)
include both the Indemnified Party and the Indemnifying Party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. No Indemnifying
Party,
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in the defense of any such claim or litigation, shall, except with the consent
of each Indemnified Party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Each Indemnified Party shall
furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with defense of such claim and litigation resulting
therefrom.
(d) If the indemnification provided for in this Section 6 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred
to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or prevent
such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
7. Information by Holder. Each Holder of Registrable
Securities shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Agreement.
8. Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission that may permit the
sale of the Restricted Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) make and keep public information regarding the Company
available as those terms are understood and defined in Rule 144 under the
Securities Act, at all times from and after 90 days following the effective
date of the first registration under the Securities Act filed by the
Company for an offering of its securities to the general public;
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(b) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act at any time after it has become subject to such reporting
requirements; and
(c) so long as a Holder owns any restricted Registrable
Securities, furnish to the Holder forthwith upon written request a written
statement by the Company as to its compliance with the reporting requirements
of Rule 144 (at any time from and after 90 days following the effective date of
the first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder
to sell any such securities without registration.
9. Transfer or Assignment of Registration Rights. The rights
to cause the Company to register securities granted to Brooklyn Union by the
Company under this Agreement may be transferred or assigned by Brooklyn Union
only to a transferee or assignee of Registrable Securities representing no less
than 10% of the Company's then outstanding shares of Common Stock. Any
transfer or assignment of the registration rights granted under this Agreement
shall be conditioned upon (i) the Company's being given written notice at the
time of or within a reasonable time after said transfer or assignment, stating
the name and address of the transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned and (ii) the assumption in writing by the transferee or assignee of
the obligations of a Holder under this Agreement.
10. Allocation of Registration Opportunities. In any
circumstance in which all of the Registrable Securities requested to be
included in a registration on behalf of the Holders cannot be so included as a
result of limitations of the aggregate number of shares of Registrable
Securities that may be so included, the number of shares of Registrable
Securities that may be so included shall be allocated among the Holders
requesting inclusion of shares pro rata on the basis of the number of shares of
Registrable Securities held by such Holders. The Company shall not limit the
number of Registrable Securities to be included in a registration pursuant to
this Agreement in order to include shares held by stockholders with no
registration rights or, with respect to registrations under Section 2 hereof,
in order to include in such registration securities registered for the
Company's own account or securities other than Registrable Securities.
11. Delay of Registration. No Holder shall have any right to
take any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation
or implementation of this Agreement.
12. Termination of Registration Rights. The right of any
Holder to request registration or inclusion in any registration pursuant to
Section 2 or 3 hereof shall terminate on such
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date as all shares of Registrable Securities held or entitled to be held upon
conversion by such Holder may immediately be sold under Rule 144 during any
90-day period.
13. Miscellaneous.
13.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS BY THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO
THE CONFLICTS OF LAW PRINCIPLES THEREOF.
13.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
13.3 ENTIRE AGREEMENT. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subjects hereof.
13.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand
or by messenger, including Federal Express or similar courier services,
addressed (a) if to a Holder, to such Holder c/o THEC Holdings at One Metrotech
Center, Brooklyn, New York 11201-3850, Attn: President, or at such other address
as such Holder shall have furnished to the Company in writing, or (b) if to the
Company, to 1331 Lamar, Suite 1065, Houston, Texas 77010, Attn: President, or at
such other address as the Company shall have furnished to the Holders. Each
such notice or other communication shall for all purposes of this Agreement be
treated as effective or having been given when delivered if delivered
personally, or, if sent by mail or courier, at the earlier of its receipt or 48
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
13.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which may be executed by less than all of the
Holders, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
13.6 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
such provision in any other jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provisions had never been contained herein.
13.7 TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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13.8 AMENDMENT. Except as expressly provided herein, this
Agreement may be amended only upon the written consent of the Company and the
Holders of at least seventy-five percent (75%) of the Registrable Securities
then subject to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed effective
as of the date first set forth above.
COMPANY:
THE HOUSTON EXPLORATION COMPANY
By:_____________________________________
James G. Floyd, President
THEC HOLDINGS:
THEC HOLDINGS CORP.
By:_____________________________________
Name:___________________________________
Title:__________________________________
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EXHIBIT 10.14
ASSET PURCHASE AGREEMENT
dated as of July 1, 1996
by and between
THE HOUSTON EXPLORATION COMPANY
and
SMITH OFFSHORE EXPLORATION COMPANY
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Table of Contents
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ARTICLE I
DEFINITIONS
ARTICLE II
PURCHASE AND SALE OF ASSETS
Section 2.1 Agreement to Purchase and Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.2 Initial Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.3 Deferred Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III
THE CLOSING
Section 3.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.2 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.3 Determination of Closing Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.4 Conveyancing Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.5 Payment of Initial Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.6 Assumption and Retention of Certain Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.7 Post-Closing Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Section 4.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.4 Authority; Non-Contravention; Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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Section 4.6 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.8 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.9 No Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.10 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.12 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 4.13 Labor Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.14 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.15 Non-competition Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 4.16 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.17 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 4.18 Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
Section 5.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 5.2 Authority; Non-Contravention; Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 5.3 Investment Intent, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 5.4 Fairness of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.6 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.7 No Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.8 Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 5.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.10 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.11 Labor Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.12 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 5.13 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.14 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE VI
CERTAIN COVENANTS
Section 6.1 Conduct of Business by Seller Pending the Closing . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 6.2 Conduct of Business by Buyer Pending the Closing . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 6.3 Acquisition Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.4 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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Section 6.6 Registration Statement; Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.7 Seller Stockholders' Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.8 Agreement to Cooperate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 6.9 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 6.10 Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 6.11 Seller Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 6.12 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 6.13 Delivery and Maintenance of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 6.14 Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 6.15 Amendment of Buyer's Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VII
CLOSING CONDITIONS
Section 7.1 Conditions to Each Party's Obligation to Close . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 7.2 Conditions to Obligation of Seller to Close . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 7.3 Conditions to Obligations of Buyer to Close . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 7.4 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE VIII
TERMINATION
Section 8.1 Termination by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 8.2 Termination by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 8.3 Limitation on Right to Terminate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
Section 9.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 9.2 Indemnification by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 9.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.4 Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.5 Right to Contest and Defend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.6 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 9.7 Right to Participate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 9.8 Payment of Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 9.9 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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ARTICLE X
GENERAL PROVISIONS
Section 10.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 10.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 10.3 Expenses and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 10.4 Taxes and Recording Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 10.5 Post-Closing Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 10.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 10.7 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 10.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 10.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 10.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 10.11 Parties In Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 10.12 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Appendices
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Appendix A - Oil and Gas Properties
Appendix B - Schedule of Interests
Appendix C - Conveyance Assignment and Bill of Sale
Appendix D - Registration Rights Agreement
Schedules
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Schedule 4.2 - Rights to Acquire Capital Stock of Buyer
Schedule 4.6 - Certain Changes of Buyer
Schedule 4.7 - Buyer Litigation
Schedule 4.10 - Buyer Compliance with Agreements, etc.
Schedule 4.11 - Buyer Tax Sharing Agreements
Schedule 4.12 - Buyer Employee Benefit Plans
Schedule 4.14 - Buyer Environmental Matters
Schedule 4.15 - Buyer Non-Competition Agreements
Schedule 4.16 - Buyer Liens
Schedule 5.5 - Seller Litigation
Schedule 5.12 - Seller Environmental Matters
Schedule 5.13 - Seller Liens
Schedule 5.15 - Seller Stockholders
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EXHIBIT 10.14
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT, dated as of July 1, 1996 (the "Agreement"),
is entered into by and between The Houston Exploration Company, a Delaware
corporation ("Buyer"), and Smith Offshore Exploration Company, a Delaware
corporation ("Seller").
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, substantially all of the assets of Seller on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
DEFINITIONS
For purposes of this Agreement, except as expressly provided herein or the
context otherwise requires, the following terms shall have the following
respective meanings:
"Accounting Arbitrator" has the meaning specified in Section 3.7(a).
"Amended Certificate" has the meaning specified in Section 6.16.
"Assets" has the meaning specified in Section 2.1.
"Assumed Liabilities" means (a) the duties, obligations, debts and
liabilities arising from the ownership or operation of the Assets on or
after the Effective Date and (b) the accounts payable of Seller with
respect to any gas balancing agreement, and all liabilities and obligations
of Seller arising out of or attributable to gas imbalances.
"Buyer Financial Statements" has the meaning specified in Section 4.5.
"Buyer Plans" has the meaning specified in Section 4.12(a).
"Buyer Required Statutory Approvals" has the meaning specified in
Section 4.4(c).
"Buyer Common Stock" means the Common Stock, par value $.01 per share,
of Buyer, after giving effect to the stock split contemplated to be
effected prior to the completion of the Initial Public Offering.
"Cash Amount" has the meaning specified in Section 2.2(a).
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"Closing" has the meaning specified in Section 3.1.
"Closing Date" has the meaning specified in Section 3.1.
"Closing Payment" has the meaning specified in Section 3.3.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consents" has the meaning specified in Section 2.2(b).
"Deferred Purchase Price" has the meaning specified in Section 2.3.
"Effective Date" means 7:00 a.m. local time at the location of each of
the Oil and Gas Properties on January 1, 1996.
"Environmental Law" means any Legal Requirement relating to (a) the
protection, preservation or restoration of the environment (including air,
water vapor, surface water, groundwater, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource)
or to human health or safety or (b) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances.
Environmental Laws include (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments
and Reauthorization Act, the Federal Water Pollution Control Act of 1972,
the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976 (including the Hazardous and
Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide
and Rodenticide Act, the Federal Occupational Safety and Health Act of
1970, each as amended, and (ii), when applied in the context of (a) or (b)
in the preceding sentence, any common law or equitable doctrine (including
injunctive relief and tort doctrines such as negligence, nuisance, trespass
and strict liability) that may impose liability or obligations for injuries
or damages due to, or threatened as a result of, the presence of, effects
of or exposure to any Hazardous Substance.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excluded Property Records" has the meaning specified in the
definition of "Property Records."
"First Year New Proved Reserves" means, the sum, for all zones in all
wells to which probable reserves are attributed in the Reserve Report, of
the amounts calculated according to the following formula for each such
zone in each such well: (i) the total proved reserves attributed to such
zone in such well in the Buyer's reserve report dated as of December 31,
1996 (determined using the pricing, cost and other assumptions specified in
the rules and
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regulations of the SEC) plus (ii) production from such zone in such
well during the calendar year 1996 minus (iii) the proved reserves
attributed to such zone in such well in the Reserve Report; provided,
however, that such amount for any zone in any well shall not be less than
zero and shall not exceed the amount of probable reserves attributed to
such zone in such well in the Reserve Report.
"Governmental Authority" means any court or any federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign.
"Hazardous Substance" means any substance presently or hereafter
listed, defined, designated or classified as hazardous, toxic, radioactive,
or dangerous, or otherwise regulated, under any Environmental Law.
Hazardous Substance includes any substance to which exposure is regulated
by any Governmental Authority or any Environmental Law including, without
limitation, any toxic waste, pollutant, contaminant, hazardous substance,
toxic substance, hazardous waste, special waste, industrial substance or
petroleum or any derivative or by- product thereof, radon, radioactive
material, asbestos or asbestos-containing material, urea formaldehyde foam
insulation, lead or polychlorinated biphenyls.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Initial Public Offering" means the initial public offering by Buyer
of a number of shares of Buyer Common Stock that will equal at least 30% of
the outstanding Common Stock (on a fully-diluted basis) immediately after
the completion of such offering.
"Initial Public Offering Price" means the price at which shares of
Buyer Common Stock will be offered to the public in the Initial Public
Offering, such price to be approved by the Board of Directors of Buyer (or
a committee appointed thereby).
"Initial Purchase Price" has the meaning specified in Section 2.2(a).
"IRS" means the Internal Revenue Service.
"Legal Requirement" means any and all applicable (i) federal, state,
local and foreign laws (statutory, judicial, administrative or other),
ordinances and regulations as interpreted by relevant regulatory
authorities, (ii) Orders and (iii) contracts, agreements, franchises,
understandings or other arrangements (excluding Permits) with any
Governmental Authority relating to compliance with the matters described in
(i) or (ii) above.
"Lien" means, with respect to any Property, any mortgage or deed of
trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), lease, judgment, charge, easement,
right-of-way, encumbrance, preference, priority or other
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security or similar agreement or preferential arrangement of any kind
or nature whatsoever on or with respect to such Property (including any
conditional sale or other title retention agreement having substantially
the same economic effect as any of the foregoing).
"Material Adverse Effect" means (a) when used in any representation,
warranty, agreement or covenant of Buyer contained herein, a material
adverse effect on (i) the business, operations, Properties, condition
(financial or other), results of operations or prospects of Buyer or (ii)
the ability of Buyer to perform any of its obligations under this Agreement
and (b) when used in any representation, warranty, agreement or covenant of
Seller contained herein, a material adverse effect on (i) the operation,
value, marketability or use of the Assets or (ii) the ability of Seller to
perform any of its obligations under this Agreement.
"Notice of Disagreement" has the meaning specified in Section 3.7(a).
"Mcfe" means one thousand cubic feet equivalent, converting barrels of
oil, condensate and natural gas liquids to one thousand cubic feet of gas
using a ratio of one barrel of oil, condensate or natural gas liquids to
six thousand cubic feet of gas.
"Oil and Gas Properties" has the meaning specified in Section 2.1(a).
"Order" means any order, writ, injunction, decree, judgment, award or
determination of any Governmental Authority.
"Permits" means all permits, franchises, licenses, authorizations,
consents, approvals, registrations, rights-of-way, orders or other
approvals (i) under any Legal Requirement or (ii) granted by any
Governmental Authority.
"Permitted Encumbrances" means (i) mechanic's and materialmen's liens
not yet due or delinquent and liens for Taxes not yet due or delinquent;
(ii) the terms and conditions of all leases, unit agreements, operating
agreements and other agreements affecting the applicable oil and gas
Properties if the net cumulative effect of such agreements does not operate
to (A) reduce the party's entitlement to production from any oil and gas
Property below the applicable net revenue interest set forth in the
Schedule of Interests attached hereto as Appendix B or (B) increase the
share of expenses borne by the party for such oil and gas Property above
the applicable working interest set forth in the Schedule of Interests
attached hereto as Appendix B; (iii) preferential purchase rights, rights
of first refusal and similar rights, provided that to the extent such
rights apply to Seller's sale of the Oil and Gas Properties to Buyer and
have not expired unexercised or been waived prior to Closing, Seller has
identified such rights to Buyer in writing prior to the Closing Date; (iv)
required third party consents to assignments and similar rights held by
third parties, provided that to the extent such consents (except for
required consents to the assignment of government leases that are
customarily obtained after a sale of oil and gas properties) are required
for Seller's
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sale of the Oil and Gas Properties to Buyer and have not been obtained
prior to Closing, Seller has identified such consents to Buyer in writing
prior to the Closing Date; and (v) such imperfections of title, easements,
rights-of-way, servitudes, permits, surface leases and other encumbrances,
if any, as are not substantial in character, amount or extent and will not
materially detract from the value of or interfere with the use or operation
of the Property subject thereto or affected thereby.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or Governmental Authority.
"Preferential Purchase Rights" has the meaning specified in Section
2.2(b).
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or assets, whether real, personal or mixed
and whether tangible or intangible.
"Property Records" means all of Seller's original records (whether in
Seller's possession or to which Seller has or is entitled to possession)
with respect to or related to the Assets, including (i) all lease files,
gas contracts, operating agreements, deeds and documents of title, (ii) all
records relating to environmental issues, (iii) all financial, accounting,
geological, geophysical and other property records and (iv) all other
contracts, agreements and documents relating to the Assets, but excluding
any data and records subject to transfer restrictions in favor of third
parties which have not been waived or released as of the Closing Date,
computer software, privileged work product (other than title opinions),
records relating to the negotiation and consummation of the sale
contemplated by this Agreement, accounting information and other records
relating primarily to the corporate activities of Seller and not to the Oil
and Gas Properties, and records of the proceedings of Seller's board of
directors and stockholders (the "Excluded Property Records").
"Purchase Shares" has the meaning specified in Section 2.2(a).
"Registration Statement" has the meaning specified in Section 4.8.
"Reserve Report" means Seller's reserve reports as of December 31,
1995 (prepared using the pricing, cost and other assumptions specified in
the rules and regulations of the SEC) prepared (without duplication) by
Ryder Scott Company, Netherland, Sewell & Associates, Inc. and Huddleston &
Co., Inc., independent petroleum engineers.
"Retained Liabilities" means all of the following duties, obligations,
debts and liabilities of Seller:
(a) all duties, obligations, debts and liabilities arising
from the ownership or operation of the Assets before the Effective
Date, other than accounts payable with
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respect to any gas balancing agreements and liabilities and
obligations arising out of or attributable to gas imbalances.
(b) all liabilities and obligations of Seller under this
Agreement and the agreements and documents executed by Seller in
connection with the Transactions;
(c) all liabilities and obligations of Seller under any of
Seller's contracts, agreements, leases, licenses and Permits not
assigned to Buyer at the Closing, including any management contract or
services agreement between Seller and any of its affiliates;
(d) any liability for or obligation related to any salaries,
bonuses, wages or other compensation or any employee benefit of
whatsoever nature (including payments relating to retirement, death,
illness, sick leave, vacations and severance) arising out of service
to or employment by Seller; and
(e) any liability for or obligation related to any Taxes of
Seller;
provided, however, that Retained Liabilities shall not include any
liabilities or obligations attributable to the willful misconduct or gross
negligence of Buyer.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Second Year New Proved Reserves" means,the sum, for all zones in all
wells to which probable reserves are attributed in the Reserve Report, of
the amounts calculated according to the following formula for each such
zone in each such well: (i) the total proved reserves attributed to such
zone in such well in the Buyer's reserve report dated as of December 31,
1997 (determined using the pricing, cost and other assumptions specified in
the rules and regulations of the SEC) plus (ii) production from such zone
in such well during the calendar year 1997 minus (iii) the proved reserves
attributed to such zone in such well in the Buyer's reserve report dated as
of December 31, 1996; provided, however, that (x) such amount for any zone
in any well shall not be less than zero and (y) such amount for any zone in
any well plus the portion of the First Year New Proved Reserves
attributable to such zone in such well shall not exceed the amount of
probable reserves attributed to such zone in such well in the Reserve
Report.
"Seller Asset Value" with respect to any Asset means $1.00 per Mcfe of
proved reserves associated with such Asset in the Reserve Report.
"Seller Required Statutory Approvals" has the meaning specified in
Section 5.2(c).
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"Seller Stockholders' Approval" has the meaning specified in Section
6.7.
"Settlement Statement" has the meaning specified in Section 3.7(a).
"Subsidiary" means, when used with reference to any Person, any
corporation, partnership, joint venture or other entity which such person
or entity directly or indirectly controls, or of which such person or
entity (either acting alone or together with its other subsidiaries) owns,
directly or indirectly, 50% or more of the stock or other voting interests,
the holders of which are entitled to vote for the election of a majority of
the board of directors or any similar governing body of such corporation,
partnership, joint venture or other entity.
"Tax Return" means any return, report or other document or information
required to be supplied to a taxing authority in connection with Taxes.
"Taxes" means all taxes, including, without limitation, income, gross
receipts, excise, property, sales, withholding, social security,
occupation, use, service, service use, license, payroll, franchise,
transfer and recording taxes, fees and charges, windfall profits,
severance, customs, import, export, employment or similar taxes, charges,
fees, levies or other assessments imposed by any Governmental Authority,
whether computed on a separate, consolidated, unitary, combined or any
other basis, and such term shall include any interest, fines, penalties or
additional amounts and any interest in respect of any additions, fines or
penalties attributable or imposed or with respect to any such taxes,
charges, fees, levies or other assessments.
"Transactions" means the sale and purchase of the Assets, the Initial
Public Offering and the other transactions contemplated by this Agreement.
ARTICLE I
PURCHASE AND SALE OF ASSETS
Section 1.1 Agreement to Purchase and Sell. Upon the terms and subject to
the conditions of this Agreement, at the Closing, Seller will sell, convey,
transfer, assign and deliver to Buyer, and Buyer will purchase from Seller,
effective as of the Effective Date, the following (collectively, the "Assets"):
(a) the oil, gas and other mineral properties, record title
interests, operating rights, rights and interests described in Appendix A
hereto and all other properties, rights and interests in oil, gas and other
minerals in place (including fee estates, leaseholds, royalties, overriding
royalties, production payments, net profits interest, carried interests and
other rights) owned by Seller (collectively, the "Oil and Gas Properties");
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(b) all of Seller's right, title and interest in all tenements,
hereditaments, appurtenances, benefits and privileges attributable to each
Oil and Gas Property, including (i) oil, gas and other minerals in, on and
produced from each Oil and Gas Property after the Effective Date; (ii)
rights, privileges, benefits and powers conferred upon the owner of each
Oil and Gas Property with respect to the use and occupation of the surface
of, and the sub-surface depths under, the land covered by such Oil and Gas
Property; (iii) rights with respect to any pooled, communitized or unitized
acreage by virtue of any Oil and Gas Property being a part thereof,
including all production from the pool, communitized area or unit allocated
to such Oil and Gas Property and all interests in any wells within the
pool, communitized area or unit associated with such Oil and Gas Property,
regardless of whether such production comes from within or without such Oil
and Gas Property or whether such unit production comes from wells located
within or without such Oil and Gas Property; (iv) rights in and to all
agreements and contractual rights, easements, rights-of-way, servitudes and
other estates relating to any Oil and Gas Property, including all rights
in, to and under or derived from production sales contracts, operating
agreements, pooling, unitization or communitization agreements, purchase,
exchange and processing agreements, surface leases, farm-out and farm-in
agreements, dryhole and bottomhole contribution agreements, Permits,
options, orders and all other contracts, agreements and instruments
attributable to the production, storage, treatment, transportation,
processing or sale or disposal of oil, gas, minerals, water and other
substances from any Oil and Gas Property (or properties pooled,
communitized or unitized therewith), but excluding all contracts,
agreements, instruments and other rights that are not transferable without
payment or penalty; (v) real, personal and mixed tangible property located
on any Oil and Gas Property or used or held for use in connection with the
operation of any Oil and Gas Property (whether located on or off the Oil
and Gas Properties), including wells, well equipment, casings, tanks, crude
oil, condensate or products in storage or in pipelines (relating to
production after the Effective Date), boilers, buildings, tubing, pumps,
motors, fixtures, machinery and other equipment, pipelines, gathering
systems, power lines, telephone and telegraph lines, roads, field
processing plants and all other property, goods, inventory, improvements
and facilities used or held for use in the operation thereof; (vi)
accounts receivable with respect to any gas balancing agreements, and audit
rights, claims and causes of action arising out of or attributable to gas
imbalances; and (vii) rights and benefits with respect to pre-paid expenses
attributable to advances to Buyer; and
(c) the Property Records;
BUT EXCLUDING (i) all rights to production and proceeds of production
attributable to the Oil and Gas Properties for periods prior to the
Effective Date, including without limitation all oil and gas in storage
tanks or pipelines prior to the Effective Date, all contractual rights to
payment for oil and gas produced and sold prior to the Effective Date and
all accounts receivable (other than contractual rights and accounts
receivable under gas balancing agreements and accounts receivable from
sales of oil and gas produced after the Effective
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Date); (ii) all claims and causes of action (including without limitation
audit adjustment rights) attributable to the Assets for periods prior to
the Effective Date (other than claims and causes of action for gas
imbalances); (iii) all prepaid expenses to parties other than Buyer; (iv)
all furniture, fixtures and equipment related to Seller's Houston, Texas
offices; (v) Seller's cash, cash equivalents and short-term investments;
and (vi) the Excluded Property Records.
Section 1.2 Initial Purchase Price. (a) Subject to the other terms of
this Agreement, a portion of the consideration to be paid by Buyer to Seller for
the Assets (the "Initial Purchase Price") will be (i) cash in the amount of
$23,700,000 (the "Cash Amount") and (ii) that number of shares of Buyer Common
Stock, valued at the Initial Public Offering Price, equal to $11,803,000 (the
"Purchase Shares").
(b) If any preferential purchase rights, rights of first refusal or
similar rights burdening any of the Assets are exercised by any third Person
prior to the Closing ("Preferential Purchase Rights"), the number of Purchase
Shares, valued at the Initial Public Offering Price, shall be reduced by the
Seller Asset Value attributable to the Assets subject to such Preferential
Purchase Rights. If the transfer of any of the Assets requires the consent of
any third Person that has not been obtained prior to the Closing, other than
required consents to the assignment of governmental leases that are customarily
obtained after a sale of oil and gas properties (excluding such governmental
consents, "Consents"), or if any Preferential Purchase Rights have not expired
or been waived prior to the Closing, the number of Purchase Shares, valued at
the Initial Public Offering Price, corresponding to the Seller Asset Value
attributable to the Assets subject to such Preferential Purchase Rights or
Consents shall be placed in escrow at Closing. If all such Preferential
Purchase Rights are waived or expire and all such Consents are obtained within
30 days after Closing, then the Purchase Shares in escrow shall all be promptly
delivered to Seller thereafter. If any Preferential Purchase Rights have not
expired or been waived, or any Consents have not been obtained, within 30 days
after the Closing, Buyer shall have the right, exercisable by written notice to
Seller within ten days thereafter, either (x) to reconvey the Assets then
subject to any Preferential Purchase Rights that have not expired or been waived
or any Consents that have not been obtained, in which case the number of
Purchase Shares in escrow which, valued at the Initial Offering Price, are equal
in value to the Seller Asset Value of such Assets shall be returned to Buyer and
canceled and the remaining Purchase Shares in escrow shall be delivered to
Seller, or (y) to retain such Assets, in which case Buyer shall be deemed to
have released Seller from any claim with respect to such Preferential Purchase
Rights identified by Seller that have not expired or been waived or any Consents
identified by Seller that have not been obtained and all Purchase Shares in
escrow shall be delivered to Seller. A failure by Buyer to deliver the written
notice specified in the preceding sentence within the applicable time period
shall be deemed to be an election under clause (y) of such sentence.
(c) Seller and Buyer shall make the following adjustments to the Initial
Purchase Price, but only to the extent that such adjustments have not been
previously taken into account by the parties hereto. Such adjustments shall
first be made to the Cash Amount of the Initial Purchase Price, and shall be
calculated as follows:
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(i) The Cash Amount shall be reduced by the amount of any (A)
revenues paid to Seller prior to the Closing Date for oil, gas, condensate,
natural gas liquids and other petroleum product sales attributable to
production from the Assets on or after the Effective Date, (B) the amount
of any proceeds received by Seller prior to the Closing Date from the sale,
salvage or other disposition of any portion of the Assets on or after the
Effective Date and (C) any other amounts received by Seller prior to the
Closing Date which are attributable to the ownership and operation of the
Assets on or after the Effective Date. The Cash Amount shall be further
reduced by the amount of any Retained Liabilities in the nature of direct
operating expenses (including without limitation general and administrative
costs paid to parties other than Seller), Taxes (other than income taxes)
and capital expenditures attributable to the ownership and operation of the
Assets prior to the Effective Date that are paid by Buyer prior to the
Closing Date.
(ii) The Cash Amount shall be increased by (A) the amounts of any
revenues paid to Buyer prior to the Closing Date for oil, gas, condensate,
natural gas liquids and other petroleum product sales attributable to
production from the Assets prior to the Effective Date, and (B) any other
amounts received by Buyer prior to the Closing Date which are attributable
to the ownership and operation of the Assets prior to the Effective Date
and (C) all interest accrued (or to accrue) from the Effective Date through
the Closing Date on Seller's outstanding bank loans and direct stockholder
loans (but not its outstanding Zero Coupon Notes). The Cash Amount shall
be further increased by the amount of any direct operating expenses, Taxes
(other than income taxes) and capital expenditures attributable to the
ownership and operation of the Assets after the Effective Date that are
paid by Seller prior to the Closing Date.
Section 2.3 Deferred Purchase Price. In addition to the Initial Purchase
Price, Buyer shall pay Seller for the Assets a deferred purchase price (the
"Deferred Purchase Price"), in two installments payable on January 31, 1997 and
January 31, 1998. The first installment of the Deferred Purchase Price shall be
equal to $1.00 per Mcfe for the First Year New Proved Reserves. The second
installment of the Deferred Purchase Price shall be equal to the greater of (i)
$1.00 per Mcfe for one-half (1/2) of the reserves classified as "probable" in
the Reserve Report less the amount of the first installment of the Deferred
Purchase Price, and (ii) $1.00 per Mcfe for the Second Year New Proved Reserves.
The Deferred Purchase Price shall be payable in Buyer Common Stock, valued at
the "fair market value" of such stock (x) on January 31, 1997 with respect to
the first installment and (y) on January 31, 1998 with respect to the second
installment. The "fair market value" of the Buyer Common Stock on any date shall
be the average of the closing sales prices of such stock for the twenty trading
days ending five trading days prior to such date.
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ARTICLE III
THE CLOSING
Section 3.1 Closing. Subject to Article VII, the consummation of the
purchase and sale of the Assets as contemplated hereby (the "Closing") shall
take place at the offices of Andrews & Kurth L.L.P., Houston, Texas,
concurrently with the closing of the Initial Public Offering, or at such other
time and place as Buyer and Seller may agree in writing. The date on which the
Closing actually occurs is referred to in this Agreement as the "Closing Date".
Section 3.2 Reasonable Efforts. The parties acknowledge that it is their
mutual desire and intent to consummate the Transactions as soon as practicable
after the date hereof. Accordingly, the parties shall use all reasonable
efforts to consummate, as soon as practicable, the Transactions; provided that
the foregoing shall be without prejudice to the rights of the parties hereunder,
including without limitation the rights of the parties under Section 6.6 and
Articles VII and VIII hereof.
Section 3.3 Determination of Closing Payment. Not later than five (5)
business days prior to the Closing Date, Seller and Buyer shall prepare, using
and based upon the best information available to Seller and Buyer, a preliminary
settlement statement estimating the Cash Amount after giving effect to all
purchase price adjustments set forth in Section 2.2(c). The estimate delivered
in accordance with this Section 3.3 shall constitute the amount of cash to be
paid by Buyer to Seller at the Closing (the "Closing Payment").
Section 3.4 Conveyancing Instruments. At the Closing, Seller shall
execute, acknowledge and deliver to Buyer, in addition to the instruments and
documents required by Article VII, (i) a Conveyance, Assignment and Bill of Sale
covering all the Assets in substantially the form to be prepared by Buyer and
which is reasonably acceptable to Seller (and which shall be attached to this
Agreement as Appendix C upon agreement by the parties as to the form thereof)
and (ii) such further deeds, assignments, conveyances and other assurances,
documents and instruments of transfer, conveyance and assignment, consistent
with the terms of this Agreement, as Buyer may reasonably request, it being
understood and agreed that the instruments referred to in the foregoing clauses
(i) and (ii) shall be sufficient to legally vest in Buyer title to the Assets,
free and clear of all Liens except Permitted Encumbrances. In addition, Seller
shall take all other actions, consistent with the terms of this Agreement, that
may be reasonably requested by Buyer for the purpose of assigning, transferring,
granting, conveying and confirming to Buyer, or reducing to Buyer's actual
possession, all of the Assets on the Closing Date. If the Closing occurs but
Seller is unable to obtain a third party consent to transfer any lease, contract
or other interest constituting a part of the Assets and consequently does not
assign, transfer or sublease such Asset to Buyer, and the number of Purchase
Shares is not reduced pursuant to Section 2.2(b) in respect thereof, Seller and
Buyer shall cooperate in good faith to attempt to find a means to make the
benefits of such non-assigned interest available to Buyer and to cause Buyer to
bear the burdens of such non-assigned interest.
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Section 3.5 Payment of Initial Purchase Price. At the Closing, Buyer
shall (a) pay the Closing Payment to Seller, and to the other Persons listed on
Schedule 3.5(a) on behalf of Seller, by wire transfer of immediately available
funds in the amounts set out opposite each such person's name on Schedule
3.5(a), and (b) deliver Seller a certificate issued in the name of Seller
evidencing the Purchase Shares, as adjusted under Section 2.2(b) and (if
applicable) 2.2(c).
Section 3.6 Assumption and Retention of Certain Liabilities. Upon
Closing, Buyer shall assume, pay, perform, fulfill, discharge and be liable for,
the Assumed Liabilities. Seller shall retain, pay, perform, fulfill, discharge
and remain liable for, the Retained Liabilities.
Section 3.7 Post-Closing Settlement. (a) As soon as practicable, and in
any event not later than 90 days after the Closing Date, Seller shall prepare
and deliver to Buyer a final settlement statement (the "Settlement Statement")
setting forth in detail the calculation of the Cash Amount after applying the
adjustments pursuant to Section 2.2(c). All items of income and expense shown
in the Settlement Statement shall be supported by reasonable documentation.
Buyer shall have the right for 90 days after receipt of the Settlement Statement
to audit and take exception to the same. The Settlement Statement shall become
final and binding on both parties on the 90th day following Buyer's receipt
thereof except as to any matters with respect to which Buyer has given Seller
written notice of disagreement prior to such date (a "Notice of Disagreement").
During the 30-day period following delivery of a Notice of Disagreement, the
parties shall seek in good faith to resolve any differences they have with
respect to the matters at issue. At the end of the 30-day period, any matters
that remain in dispute shall be submitted to Price Waterhouse LLP or such other
nationally- recognized independent accounting firm as may be selected by mutual
agreement of Buyer and Seller (the "Accounting Arbitrator") for review and final
determination. The Accounting Arbitrator's determination shall be made within
30 days after submission of the matters in dispute and such determination shall
be final and binding on both parties. Within 30 days after the earlier of (i)
the expiration of Buyer's 90-day review and audit period without delivery of a
Notice of Disagreement or (ii) the date on which the parties or the Accounting
Arbitrator, as applicable, finally determines the disputed matters, (x) Buyer
shall pay to Seller the amount by which the Cash Amount exceeds the Closing
Payment or (y) Seller shall pay to Buyer the amount by which the Closing Payment
exceeds the Cash Amount, as applicable.
(b) Arbitration hearings under this Section 3.7 shall be held at a place
in Houston, Texas acceptable to the arbitrator. The arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association to the extent such rules do not conflict with the terms
hereof. The decision of the arbitrator shall be reduced to writing and binding
on the parties. Judgment upon the award(s) rendered by the arbitrator may be
entered and execution had in any court of competent jurisdiction or application
may be made to such court for a judicial acceptance of the award and an order of
enforcement. Buyer and Seller, respectively, shall bear their own legal fees
and other costs incurred in representing their respective cases. The charges
and expenses of the arbitrator shall be shared equally by Buyer and Seller.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
Section 4.1 Organization and Qualification. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite power and authority to own, lease and operate its
Properties and to carry on its business as it is now being conducted. Buyer is
qualified to do business and is in good standing in each jurisdiction in which
the Properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified and in good standing will not, when taken together with all
other such failures, have a Material Adverse Effect. True, accurate and
complete copies of Buyer's Certificate of Incorporation and By-laws, in each
case as in effect on the date hereof, including all amendments thereto, have
heretofore been delivered to Seller.
Section 4.2 Capitalization. (a) Immediately prior to Closing, the
authorized, issued, and outstanding Buyer Common Stock will consist of
19,412,200 shares of common stock, par value $.01 per share. At Closing all of
the issued and outstanding shares of Buyer Common Stock will be validly issued
and fully paid, nonassessable and free of preemptive rights.
(b) Except as set forth on Schedule 4.2 attached hereto or as contemplated
hereby, there are no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights plan or other
anti-takeover agreement, obligating Buyer to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of the capital stock of Buyer or
obligating Buyer to grant, extend or enter into any such agreement or
commitment. There are no voting trusts, proxies or other agreements or
understandings to which Buyer is a party or is bound with respect to the voting
of any shares of capital stock of Buyer. The shares of Buyer Common Stock
issued to Seller at Closing will be on the Closing Date duly authorized, validly
issued, fully paid and nonassessable and free of preemptive rights.
Section 4.3 Subsidiaries. Buyer has no Subsidiaries.
Section 4.4 Authority; Non-Contravention; Approvals. (a) Buyer has full
corporate power and authority to enter into this Agreement and, subject to the
Buyer Required Statutory Approvals, to consummate the Transactions. This
Agreement has been approved by the board of directors and the sole stockholder
of Buyer, and no other corporate proceedings on the part of Buyer are necessary
to authorize the execution and delivery of this Agreement or the consummation by
Buyer of the Transactions. This Agreement has been duly executed and delivered
by Buyer and, assuming the due authorization, execution and delivery hereof by
Seller, constitutes
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a valid and legally binding agreement of Buyer enforceable against Buyer in
accordance with its terms, except as such enforcement may be limited by (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general equitable principles.
(b) The execution and delivery of this Agreement by Buyer does not
violate, conflict with or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien upon any of the Properties of Buyer
under any of the terms, conditions or provisions of (i) the Certificate of
Incorporation or By-laws of Buyer, (ii) any Legal Requirement applicable to
Buyer or any of its Properties or (iii) any note, bond, mortgage, indenture,
deed of trust, Permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which Buyer is now a party or by which
Buyer or any of its Properties may be bound or affected. The consummation by
Buyer of the Transactions will not result in any violation, conflict, breach,
termination, acceleration or creation of Liens under any of the terms,
conditions or provisions described in clauses (i) through (iii) of the preceding
sentence, subject (x) in the case of the terms, conditions or provisions
described in clause (ii) above, to obtaining (prior to the Closing) Buyer
Required Statutory Approvals and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the Closing)
consents required from commercial lenders, lessors or other third parties.
Excluded from the foregoing sentences of this paragraph (b), insofar as they
apply to the terms, conditions or provisions described in clauses (ii) and (iii)
of the first sentence of this paragraph (b), are such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of Liens that would
not, in the aggregate, have a Material Adverse Effect.
(c) Except for (i) the filings by Buyer and Seller required by the HSR Act
and the expiration or early termination of all applicable waiting periods
thereunder and (ii) the filing of the Registration Statement with the SEC
pursuant to the Securities Act and the declaration of the effectiveness thereof
by the SEC and filings with various state blue sky authorities (the filings and
approvals referred to in clauses (i) and (ii) are collectively referred to
herein as the "Buyer Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
Governmental Authority is necessary for the execution and delivery of this
Agreement by Buyer or the consummation by Buyer of the Transactions, other than
such declarations, filings, registrations, notices, authorizations, consents or
approvals the absence of which, alone or in the aggregate, would not have a
Material Adverse Effect and required consents to the assignment of government
leases that are customarily obtained after a sale of oil and gas properties.
Section 4.5 Financial Statements. Buyer has heretofore delivered to
Seller copies of audited financial statements of Buyer consisting of (i) the
audited balance sheets of Buyer as of December 31, 1994 and 1995 and (ii) the
related statements of operations, stockholder's equity and cash flows of Buyer
for the fiscal years ended December 31, 1994 and 1995 (collectively, the "Buyer
Financial Statements"). The Buyer Financial Statements have been prepared in
accordance with
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generally accepted accounting principles applied on a consistent basis (except
as may be indicated therein or in the notes thereto) and fairly present the
financial position of Buyer as of the dates thereof and the results of its
operations and changes in financial position for the periods then ended,
subject, in the case of the unaudited interim financial statements, to normal
year-end audit adjustments and any other adjustments described therein.
Section 4.6 Absence of Certain Changes or Events. Since December 31,
1995, (i) except for those actions taken in compliance with this Agreement and
except as disclosed in Schedule 4.6 attached hereto, Buyer has conducted its
business in the ordinary and usual course and consistent with past practice,
(ii) no dividend or other distribution in respect of capital stock has been
declared, set aside, made or paid by Buyer and no shares of capital stock have
been purchased or redeemed by Buyer and (iii) there has not been any Material
Adverse Change.
Section 4.7 Litigation. Except as disclosed in Schedule 4.7 attached
hereto or in the Buyer Financial Statements, (i) there are no claims, suits,
actions or proceedings pending or, to the knowledge of Buyer, threatened
against, relating to or affecting Buyer before any Governmental Authority or any
arbitrator that seek to restrain or enjoin the consummation of the Transactions
or which could reasonably be expected, either alone or in the aggregate, to have
a Material Adverse Effect and (ii) Buyer is not subject to any Order which
prohibits or restricts the consummation of the Transactions or would have a
Material Adverse Effect.
Section 4.8 Registration Statement. None of the information to be
supplied by Buyer for inclusion in the Registration Statement on Form S-1 to be
filed under the Securities Act with the SEC by Buyer in connection with the
Initial Public Offering (the "Registration Statement"), as amended or
supplemented, at the time it becomes effective and at the Closing, will contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. The Registration Statement will, as of its effective
date, comply as to form in all material respects with all applicable laws,
including the provisions of the Securities Act and the rules and regulations
promulgated thereunder, except that no representation is made by Buyer with
respect to information supplied by Seller for inclusion therein.
Section 4.9 No Violation of Law. Except with respect to Environmental
Laws, which are addressed exclusively in Section 4.14, Buyer is not in violation
of, and has not been given notice or been charged with any violation of, any
Legal Requirement, except for violations or alleged violations which, in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
As of the date of this Agreement, to the knowledge of Buyer, no investigation or
review by any Governmental Authority is pending or threatened, nor has any
Governmental Authority indicated an intention to conduct the same, other than,
in each case, those the outcome of which, as far as reasonably can be foreseen,
will not have a Material Adverse Effect, except with respect to Environmental
Laws, which are addressed exclusively in Section 4.14. Buyer has all Permits
necessary to conduct its business as presently conducted, except for Permits the
absence of which, alone or in the aggregate, would not have, alone or in the
aggregate, a Material Adverse Effect.
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Except with respect to Environmental Laws, which are addressed exclusively in
Section 4.14, Buyer is not in violation of the terms of any of its Permits,
except for delays in filing reports or violations which, alone or in the
aggregate, would not have a Material Adverse Effect.
Section 4.10 Compliance with Agreements. Except as disclosed in Schedule
4.10 attached hereto, Buyer is not in breach or violation of or in default in
the performance or observance of any term or provision of, and no event has
occurred which, with lapse of time or action by a third party, could result in a
default under (a) the Certificate of Incorporation or By-laws of Buyer or (b)
any contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which Buyer is a party or
by which it is bound or to which any of its Property is subject except, in the
case of this clause (b), for such breaches, violations and defaults which,
singly or in the aggregate, would not have a Material Adverse Effect.
Section 4.11 Taxes. (a) Buyer has duly filed with the appropriate
Governmental Authorities all Tax Returns required by law to be filed by Buyer
(subject to any allowable extensions) other than those Tax Returns the failure
to file which, in the aggregate, would not have a Material Adverse Effect. All
Tax Returns so filed by Buyer are true, correct and complete in all material
respects. Buyer has duly paid in full, or made adequate provision for the
payment of, all Taxes payable by it other than (i) those which are not past due,
(ii) those which are being contested in good faith by appropriate proceedings
diligently conducted and (iii) those the non-payment of which, in the aggregate,
would not have a Material Adverse Effect.
(b) The liabilities and reserves for Taxes reflected in the most recent
balance sheet included in the Buyer Financial Statements are adequate to cover
all Taxes for all periods ending at or prior to the date hereof and there are no
material liens for Taxes upon any Property of Buyer, except for liens for Taxes
not yet due. None of the Tax Returns previously filed by Buyer with any
governmental taxing authority is under audit or examination by such authority
and there are no agreements, waivers or other arrangements providing for an
extension of time with respect to the assessment or collection of any material
Taxes against Buyer or with respect to any such Tax Return. There are no
unresolved issues of law or fact arising out of a notice of deficiency, proposed
deficiency or assessment from the IRS or any other governmental taxing authority
with respect to Taxes of Buyer which, if decided adversely, singly or in the
aggregate, would have a Material Adverse Effect. Except as disclosed in
Schedule 4.11 attached hereto, Buyer is not a party to any agreement providing
for the allocation or sharing of Taxes with any Person other than agreements the
consequences of which are fully and adequately reserved for in the Buyer
Financial Statements.
Section 4.12 Employee Benefit Plans; ERISA. (a) At the date hereof, Buyer
does not maintain or contribute to any material employee benefit plans
(including employee benefit plans within the meaning set forth in Section 3(3)
of ERISA), programs, arrangements or practices other than such plans, programs,
arrangements or practices of Buyer disclosed in Schedule 4.12 attached hereto
(the "Buyer Plans"). Buyer has no obligation to create any additional such plan
or to amend any Buyer Plan so as to increase benefits thereunder, except as
required under the terms of the Buyer Plans or to comply with applicable law.
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(b) There have been no prohibited transactions within the meaning of
Section 406 or 407 of ERISA or Section 4975 of the Code with respect to any of
the Buyer Plans that could result in penalties, taxes or liabilities which,
singly or in the aggregate, could have a Material Adverse Effect. Except for
premiums due, there is no outstanding material liability, whether measured alone
or in the aggregate, under Title IV of ERISA with respect to any of the Buyer
Plans which, singly or in the aggregate, could have a Material Adverse Effect.
Neither the Pension Benefit Guaranty Corporation nor any plan administrator has
instituted proceedings to terminate any of the Buyer Plans subject to Title IV
of ERISA other than in a "standard termination" described in Section 4041(b) of
ERISA. None of the Buyer Plans has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, as of the last day of the most recent fiscal year of each
of the Buyer Plans ended prior to the date of this Agreement. The current
present value of all projected benefit obligations under each of the Buyer Plans
which is subject to Title IV of ERISA did not, as of its latest valuation date,
exceed the then current value of the assets of such Buyer Plan allocable to such
benefit liabilities by more than the amount, if any, disclosed in the Buyer
Financial Statements as of June 30, 1995, based upon reasonable actuarial
assumptions currently utilized for such Buyer Plan. Each of the Buyer Plans has
been operated and administered in all material respects in accordance with
applicable laws during the period of time covered by the applicable statute of
limitations. Each of the Buyer Plans which is intended to be "qualified" within
the meaning of Section 401(a) of the Code, if any, has been determined by the
IRS to be so qualified and such determination has not been modified, revoked or
limited by failure to satisfy any condition thereof or by a subsequent amendment
thereto or a failure to amend, except that it may be necessary to make
additional amendments retroactively to maintain the "qualified" status of such
Buyer Plan, and the period for making any such necessary retroactive amendments
has not expired. To the knowledge of Buyer, there are no material pending,
threatened or anticipated claims involving any of the Buyer Plans other than
claims for benefits in the ordinary course. Buyer has no current material
liability for plan termination or withdrawal (complete or partial) under Title
IV of ERISA based on any plan to which any entity that would be deemed one
employer with Buyer under Section 4001 of ERISA or Section 414 of the Code
contributed during the period of time covered by the applicable statute of
limitations, and Buyer does not reasonably anticipate that any such liability
will be asserted against Buyer. No plan referred to in the preceding sentence
has an "accumulated funding deficiency" (as defined in Section 302 of ERISA and
Section 412 of the Code).
(c) Buyer is not a party to any material employment contracts or other
employee benefit arrangements with "change of control" or similar provisions.
Section 4.13 Labor Controversies. (a) There are no controversies pending
or, to the knowledge of Buyer, threatened between Buyer and any representatives
of any of its employees, (b) to the knowledge of Buyer, there are no
organizational efforts presently being made involving any of the presently
unorganized employees of Buyer, (c) Buyer has, to the knowledge of Buyer,
complied with all laws relating to the employment of labor, including any
provisions thereof relating to wages, hours, collective bargaining, and the
payment of social security and similar taxes and
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(d) no Person has, to the knowledge of Buyer, asserted that Buyer is liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing, except for such controversies, organizational efforts, non-
compliance and liabilities which, singly or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
Section 4.14 Environmental Matters. Except as disclosed in Schedule 4.14
attached hereto: (i) Buyer has conducted its business in compliance with all
applicable Environmental Laws, including having all Permits necessary under
applicable Environmental Laws for the operation of its business as presently
conducted; (ii) none of the Properties owned by Buyer contain any Hazardous
Substance as a result of any activity of Buyer in amounts that would require
remediation under applicable Environmental Laws; (iii) Buyer has not received
any notices, demand letters or requests for information from any Governmental
Authority or third party indicating that Buyer may be in violation of, or liable
under, any Environmental Law in connection with the ownership or operation of
its business; (iv) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings pending or, to
the knowledge of Buyer, threatened against Buyer relating to any violation, or
alleged violation, of any applicable Environmental Law; (v) no reports have been
filed, or are required to be filed, by Buyer concerning the release of any
Hazardous Substance or the threatened or actual violation of any Environmental
Law; (vi) no Hazardous Substance has been disposed of, released or transported
in violation of any applicable Environmental Law from any Properties owned by
Buyer as a result of any activity of Buyer during the time such Properties were
owned, leased or operated by Buyer; (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analyses regarding
compliance or noncompliance with any applicable Environmental Law conducted by
or which are in the possession of Buyer relating to the activities of Buyer
which have not been delivered to Seller prior to the date hereof; (viii) to the
knowledge of Buyer, there are no underground storage tanks on, in or under any
Properties owned by Buyer and no underground storage tanks have been closed or
removed by Buyer from any of such Properties during the time such Properties
were owned, leased or operated by Buyer; (ix) to the knowledge of Buyer, there
is no asbestos or asbestos-containing material present in any of the Properties
owned by Buyer, and no asbestos has been removed by Buyer from any of such
Properties during the time such Properties were owned, leased or operated by
Buyer; and (x) neither Buyer nor any of its Properties is subject to any
material liabilities or expenditures (fixed or contingent) relating to any suit,
settlement, Legal Requirement or claim asserted or arising under any
Environmental Law as a result of the activities of Buyer; except, in the case of
each of the foregoing clauses (i) through (x), for violations of such clause
that, singly or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect. For purposes of this Section 4.14, references to "the
activities of Buyer" or actions taken "by Buyer" shall not include actions taken
by an operator (other than Buyer) of Properties owned by Buyer.
Section 4.15 Non-competition Agreements. Except as disclosed in Schedule
4.15 attached hereto, Buyer is not a party to any agreement which purports to
restrict or prohibit in any material respect Buyer from, directly or indirectly,
engaging in the exploration or development of oil or gas properties, the
production, marketing or sale of oil, gas or related hydrocarbons or any other
material business currently engaged in by Buyer. None of Buyer's officers or key
employees
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is a party to any agreement which, by virtue of such person's relationship with
Buyer, restricts in any material respect Buyer from, directly or indirectly,
engaging in any of the businesses described above.
Section 4.16 Title to Properties. Buyer has good and defensible title to
all its Properties reflected in the most recent balance sheet included in the
Buyer Financial Statements, except for such Properties that have been disposed
of in the ordinary course of business since the date of such balance sheet, free
and clear of all Liens except (i) Permitted Encumbrances and (ii) the Liens
described in Schedule 4.16 attached hereto. All leases under which Buyer
leases any Property are in good standing, valid and effective in accordance with
their respective terms, and there is not, under any of such leases, any existing
default or event which with notice or lapse of time or both would become a
default other than defaults under such leases which, in the aggregate, will not
have a Material Adverse Effect.
Section 4.17 Brokers. No broker, finder or investment banker is or,
except for customary underwriters' compensation in connection with the Initial
Public Offering, will be entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of Buyer.
Section 4.18 Stockholders. Prior to the Initial Public Offering, all of
the issued and outstanding shares of capital stock of Buyer are owned of record
by THEC Holdings Corp., a wholly-owned subsidiary of The Brooklyn Union Gas
Company.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
Section 5.1 Organization and Qualification. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. True, accurate and complete copies of the Seller's Certificate of
Incorporation and By-laws, in each case as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to Buyer.
Section 5.2 Authority; Non-Contravention; Approvals. (a) Seller has full
corporate power and authority to enter into this Agreement and, subject to the
Seller Stockholders' Approval (as defined in Section 6.7) and Seller Required
Statutory Approvals, to consummate the Transactions. This Agreement has been
approved by the board of directors of Seller, and no other corporate proceedings
on the part of Seller are necessary to authorize the execution and delivery of
this Agreement or, except for the Seller Stockholders' Approval, the
consummation by Seller of the Transactions. This Agreement has been duly
executed and delivered by Seller and, assuming the due authorization, execution
and delivery hereof by Buyer, constitutes a valid and legally binding
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agreement of Seller, enforceable against Seller in accordance with its terms,
except as such enforcement may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally and (ii) general equitable
principles.
(b) The execution and delivery of this Agreement by Seller does not
violate, conflict with or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien upon any of the Assets under any of
the terms, conditions or provisions of (i) the Certificate of Incorporation or
By-laws of Seller, (ii) any Legal Requirement applicable to Seller or any of the
Assets or (iii) any note, bond, mortgage, indenture, deed of trust, Permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which Seller is now a party or by which Seller or any of the Assets may
be bound or affected. The consummation by Seller of the Transactions will not
result in any violation, conflict, breach, termination, acceleration or creation
of Liens under any of the terms, conditions or provisions described in clauses
(i) through (iii) of the preceding sentence, subject (x) in the case of the
terms, conditions or provisions described in clause (ii) above, to obtaining
(prior to the Closing) the Seller Required Statutory Approvals and the Seller
Stockholders' Approval and (y) in the case of the terms, conditions or
provisions described in clause (iii) above, to obtaining (prior to the Closing)
consents required from commercial lenders, lessors or other third parties.
Excluded from the foregoing sentences of this paragraph (b), insofar as they
apply to the terms, conditions or provisions described in clauses (ii) and (iii)
of the first sentence of this paragraph (b), are such violations, conflicts,
breaches, defaults, terminations, accelerations or creations of Liens that would
not, in the aggregate, have a Material Adverse Effect.
(c) Except for the filings by Buyer and Seller required by the HSR Act and
the expiration or early termination of all applicable waiting periods thereunder
(the "Seller Required Statutory Approvals"), no declaration, filing or
registration with, or notice to, or authorization, consent or approval of, any
Governmental Authority is necessary for the execution and delivery of this
Agreement by Seller or the consummation by Seller of the Transactions, other
than such declarations, filings, registrations, notices, authorizations,
consents or approvals the absence of which, alone or in the aggregate, would not
have a Material Adverse Effect and required consents to the assignment of
government leases that are customarily obtained after a sale of oil and gas
properties.
Section 5.3 Investment Intent, Etc. Seller is acquiring the shares of
Buyer Common Stock to be issued to Seller in the Transactions for investment
purposes for its own account and not for any other Person or with a view toward
resale or distribution, except in connection with a distribution in a
transaction registered or exempt from registration under the Securities Act and
applicable state securities laws. Seller has sufficient knowledge and
experience in financial and business matters that it is capable of evaluating
the economic risks of investment in such shares of Buyer Common Stock, and
acknowledges that it must bear the economic risk of an investment in
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such shares for an indefinite period of time. Seller acknowledges that the
shares of Buyer Common Stock to be issued to Seller in the Transactions have not
been registered under the Securities Act or any state blue sky or securities
laws and therefore cannot be resold unless so registered or exempted from
registration thereunder, and that the certificates representing such shares of
Buyer Common Stock will bear an appropriate legend reflecting such restrictions
on transfer.
Section 5.4 Fairness of Transactions. Seller's Board of Directors has
determined that the transactions are fair and in the best interests of the
creditors and stockholders of Seller and, subject to the satisfaction or waiver
of the conditions to Closing set forth in Section 7.1 and 7.2, that the fair
value of the Purchase Shares to be issued to Seller in the Transactions,
together with the Cash Amount, will be reasonably equivalent to or greater than
the fair value of the Assets.
Section 5.5 Litigation. Except as disclosed in Schedule 5.5 attached
hereto, there are no claims, suits, actions or proceedings pending or, to the
knowledge of Seller, threatened against, relating to or affecting Seller or any
of the Assets before any Governmental Authority or any arbitrator that seek to
restrain the consummation of the Transactions or which could reasonably be
expected, either alone or in the aggregate, to have a Material Adverse Effect.
Seller is not subject to any Order which prohibits or restricts the consummation
of the Transactions or would have a Material Adverse Effect.
Section 5.6 Registration Statement. None of the information to be
supplied by Seller in writing specifically for inclusion in the Registration
Statement, as amended or supplemented, will, at the time the Registration
Statement becomes effective or at the Closing, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading.
Section 5.7 No Violation of Law. Except with respect to Environmental
Laws, which are addressed exclusively in Section 5.12, Seller is not in
violation of, and has not been given notice or been charged with any violation
of, any Legal Requirement or Order except for violations or alleged violations
which, in the aggregate, could not reasonably be expected to have a Material
Adverse Effect. As of the date of this Agreement, to the knowledge of Seller,
no investigation or review by any Governmental Authority is pending or
threatened with respect to Seller or any of the Assets, nor has any Governmental
Authority indicated an intention to conduct the same, other than, in each case,
those the outcome of which, as far as reasonably can be foreseen, will not have,
alone or in aggregate, a Material Adverse Effect except with respect to
Environmental Laws, which are addressed exclusively in Section 5.12, Seller has
all Permits necessary to own, possess and use the Assets except for Permits the
absence of which, alone or in the aggregate, would not have a Material Adverse
Effect. Except with respect to Environmental Laws, which are addressed
exclusively in Section 5.12, Seller is not in violation of the terms of any its
Permits, except for delays in filing reports or violations which, alone or in
the aggregate, would not have a Material Adverse Effect.
Section 5.8 Compliance with Agreements. Seller is not in breach or
violation of or in default in the performance or observance of any term or
provision of, and no event has occurred
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which, with lapse of time or action by a third party, could result in a default
under, (a) the Certificate of Incorporation or By-laws of Seller or (b) any
contract, commitment, agreement, indenture, mortgage, loan agreement, note,
lease, bond, license, approval or other instrument to which Seller is a party or
by which Seller is bound or to which any of its Property is subject except, in
the case of this clause (b), for such breaches, violations and defaults which,
singly or in the aggregate, would not have a Material Adverse Effect.
Section 5.9 Taxes. Seller has (i) duly filed with the appropriate
governmental authorities all Tax Returns for all periods ending on or prior to
the Closing Date for which Tax Returns are required to have been filed by Seller
(subject to any allowable extensions) other than those Tax Returns the failure
to file which would not have a Material Adverse Effect and (ii) duly paid in
full or made adequate provision for the payment of all Taxes for all periods
ending at or prior to the Closing Date other than those Taxes the non-payment of
which, in the aggregate, would not have a Material Adverse Effect. There are no
liens for Taxes upon any of the Assets except for liens for Taxes not yet due.
Section 5.10 Employee Benefit Plans; ERISA. No termination, withdrawal,
transaction (including a prohibited transaction within the meaning of Section
406 or 407 of ERISA or Section 4975 of the Code), violation, breach or other
event, happening or action has occurred, no default, claim or demand has been
asserted or is anticipated, no litigation or proceeding is pending, threatened
or anticipated and no fact, liability, deficiency, condition or circumstance
exists or is anticipated under or with respect to any employee benefit plans
(including employee benefit plans within the meaning set forth in Section 3(3)
of ERISA), programs, arrangements and practices maintained or contributed to by
Seller which, singly or in the aggregate, could have a Material Adverse Effect.
Section 5.11 Labor Controversies. (a) There are no significant
controversies pending or, to the knowledge of Seller, threatened between Seller
and any representatives of any of its employees, (b) to the knowledge of Seller,
there are no organizational efforts presently being made involving any of the
presently unorganized employees of Seller, (c) Seller has, to the knowledge of
Seller, complied in all respects with all laws relating to the employment of
labor, including any provisions thereof relating to wages, hours, collective
bargaining, and the payment of social security and similar taxes and (d) no
Person has, to the knowledge of Seller, asserted that Seller is liable in any
material amount for any arrears of wages or any taxes or penalties for failure
to comply with any of the foregoing, except for such controversies,
organizational efforts, non-compliance and liabilities which, singly or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
Section 5.12 Environmental Matters. Except as disclosed in Schedule 5.12
attached hereto: (i) Seller has conducted its business in compliance with all
applicable Environmental Laws, including having all Permits necessary under
applicable Environmental Laws for the operation of its business as presently
conducted; (ii) none of the Properties owned by Seller contain any Hazardous
Substance as a result of any activity of Seller in amounts that would require
remediation
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under applicable Environmental Laws; (iii) Seller has not received any notices,
demand letters or requests for information from any Governmental Authority or
third party indicating that Seller may be in violation of, or liable under, any
Environmental Law in connection with the ownership or operation of its
Properties; (iv) there are no civil, criminal or administrative actions, suits,
demands, claims, hearings, investigations or proceedings pending or, to the
knowledge of Seller, threatened, against Seller relating to any violation, or
alleged violation, of any Environmental Law; (v) no reports have been filed, or
are required to be filed, by Seller concerning the release of any Hazardous
Substance or the threatened or actual violation of any Environmental Law; (vi)
no Hazardous Substance has been disposed of, released or transported in
violation of any applicable Environmental Law from any Properties owned by
Seller as a result of any activity of Seller during the time such Properties
were owned, leased or operated by Seller; (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analyses regarding
compliance or noncompliance with any applicable Environmental Law conducted by
or which are in the possession of Seller relating to the activities of Seller
which have not been delivered to Buyer prior to the date hereof; (viii) to the
knowledge of Seller, there are no underground storage tanks on, in or under any
Properties owned by Seller and no underground storage tanks have been closed or
removed by Seller from any of such properties during the time such Properties
were owned, leased or operated by Seller; (ix) to the knowledge of Seller, there
is no asbestos or asbestos-containing material present in any of the Properties
owned by Seller, and no asbestos has been removed by Seller from any of such
Properties during the time such Properties were owned, leased or operated by
Seller; and (x) neither Seller nor any of its Properties are subject to any
liabilities or expenditures (fixed or contingent) relating to any suit,
settlement, Order or claim asserted or arising under any Environmental Law as a
result of the activities of Seller; except, in the case of each of the foregoing
clauses (i) through (x), for violations of such clause that, singly or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
For purposes of this Section 5.12, references to "the activities of Seller" or
actions taken "by Seller" shall not include actions taken by an operator (other
than Seller) of Properties owned by Seller.
Section 5.13 Title to Assets. Seller has good and defensible title to all
of the Assets, free and clear of all Liens except (i) Permitted Encumbrances and
(ii) the Liens described in Schedule 5.13 attached hereto. For purposes of this
Section 5.13, "good and defensible title" shall mean that, with respect to each
Oil and Gas Property of Seller included in the Schedule of Interests attached
hereto as Appendix B, Seller will have such title at Closing that (i) with
respect to working interests, is deducible from the records of the Minerals
Management Service or the Bureau of Land Management (in the case of federal
leases) or the applicable county, parish or state land office (in the case of
fee or state leases), (ii) will entitle Buyer, as Seller's successor in title,
to receive not less than the net revenue interest set forth in such Schedule of
all oil, gas and related hydrocarbons from such Property, without reduction,
suspension or termination throughout the productive life of such Property
(except as contemplated by such Schedule and except for decreases as a result of
future elections by Seller or Buyer to become a nonconsenting co-owner under
applicable operating agreements and decreases required to allow other working
interest owners to make up past underproduction or pipelines to make up past
underdeliveries by Seller) and (iii) will obligate Buyer, as Seller's successor
in title, to bear a share of costs and expenses for such Property not greater
than
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the working interests set forth in such Schedule for such Property (except as
contemplated by such Schedule and except for increases resulting from
contribution requirements with respect to defaulting co-owners under applicable
operating agreements and increases that are accompanied by at least a
proportionate increase in Seller's net revenue interest). All leases creating
or under which Seller possesses or enjoys any of the Assets are in good
standing, valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event which with
notice or lapse of time or both would become a default, other than defaults
under such leases which, singly or in the aggregate, will not have a Material
Adverse Effect.
Section 5.14 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of Seller.
Section 5.15 Stockholders. Schedule 5.15 attached hereto sets forth, as
of the date of this Agreement, the name of each stockholder of record of Seller
and the number and class of each share of capital stock of Seller owned by such
stockholder.
ARTICLE VI
CERTAIN COVENANTS
Section 6.1 Conduct of Business by Seller Pending the Closing. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless Buyer shall
otherwise agree in writing, Seller shall:
(a) conduct its business only in the ordinary and usual course of
business and consistent with past practice;
(b) not amend or propose to amend its Certificate of Incorporation or
By-laws;
(c) not issue or sell, or agree to issue or sell, any shares of
capital stock of any class of Seller, or any options, warrants or rights of
any kind to acquire any shares of its capital stock of any class or any
debt or equity securities convertible into or exchangeable for such capital
stock, except for the issuance and sale of shares issuable upon conversion
of convertible securities and exercise of options outstanding on the date
hereof;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness,
(ii) sell, pledge, dispose of or encumber any Properties or businesses
other than in the ordinary course of business consistent with past
practices or (iii) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
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(e) not engage in any action or conduct, directly or indirectly, (i)
which would cause any of the representations and warranties of Seller
contained in this Agreement not to be true and correct in any material
respect if such representations and warranties were made immediately after
such action or conduct or (ii) with the intent to, or which could
reasonably be expected to, adversely impact the Transactions;
(f) maintain with financially responsible insurance companies
insurance on the Assets and its business in such amounts and against such
risks and losses as are consistent with past practice;
(g) use all reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its present
officers and key employees, and preserve the goodwill and business
relationships with customers and others having business relationships with
it;
(h) use all reasonable efforts to obtain all necessary Consents and
waivers of all Preferential Purchase Rights with respect to the Assets; and
(i) confer on a regular and frequent basis with one or more
representatives of Buyer to report operational matters of materiality and
the general status of ongoing operations.
Nothing contained in this Agreement shall give to Buyer, directly or indirectly,
rights to control or direct Seller's operations prior to the Closing Date.
Prior to the Closing Date, Seller shall exercise, consistent with the terms and
conditions of this Agreement, complete control and supervision of its
operations.
Section 6.2 Conduct of Business by Buyer Pending the Closing. Except as
otherwise contemplated by this Agreement, after the date hereof and prior to the
Closing Date or earlier termination of this Agreement, unless Seller shall
otherwise agree in writing, Buyer shall:
(a) conduct its business only in the ordinary and usual course of
business and consistent with past practice;
(b) except as contemplated by Section 6.16, not amend or propose to
amend its Certificate of Incorporation or By-laws, or declare, set aside or
pay any dividend or distribution payable in, or repurchase or redeem any
outstanding shares of its capital stock for, cash, stock, Property or other
consideration;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any shares of Common Stock or any other capital stock
of any class of Buyer, or any options, warrants or rights of any kind to
acquire any shares of its capital stock of any class
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or any debt or equity securities convertible into or exchangeable for such
capital stock, except (i) in connection with the Transactions and (ii) for
the issuance and sale of shares issuable upon conversion of convertible
securities and exercise of options outstanding on the date hereof;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money other than (A) borrowings in the ordinary
course of business or (B) borrowings to refinance existing indebtedness,
(ii) sell, pledge, dispose of or encumber any Properties or businesses
other than in the ordinary course of business consistent with past
practices or (iii) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing; except that nothing
herein shall prohibit Buyer from entering into a $150 million revolving
credit facility with Texas Commerce Bank National Association, as agent;
(e) use all reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its present
officers and key employees, and preserve the goodwill and business
relationships with customers and others having business relationships with
it;
(f) confer on a regular and frequent basis with one or more
representatives of Seller to report operational matters of materiality and
the general status of ongoing operations;
(g) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors, officers or key employees,
except in the ordinary course and consistent with past practice;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee or retiree,
except as contemplated by this Agreement or required to comply with
applicable law;
(i) maintain with financially responsible insurance companies
insurance on its Properties and its business in such amounts and against
such risks and losses as are consistent with past practice; and
(j) not engage in any action or conduct, directly or indirectly, (i)
which would cause any of the representations and warranties of Buyer
contained in this Agreement not to be true and correct in any material
respect if such representations and warranties were made immediately after
such action or conduct or (ii) with the intent to, or which could
reasonably be expected to, adversely impact the Transactions.
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Section 6.3 Acquisition Transactions. (a) After the date hereof and prior
to the Closing Date or earlier termination of this Agreement, neither Seller nor
Buyer shall initiate, solicit, negotiate or provide non-public or confidential
information to facilitate (and each of Seller and Buyer shall (i) cause any
officer, director or employee of, or any attorney, accountant or other agent
retained by it and (ii) use its reasonable best efforts to cause any
stockholder, affiliate, financial advisor or investment banker retained by it,
not to initiate, solicit, negotiate or provide non- public or confidential
information to facilitate) any proposal or offer from any third Person to
acquire all or any substantial part of the business and Properties of Seller or
Buyer or any capital stock of Seller or Buyer, whether by merger, purchase of
assets, tender offer or otherwise, whether for cash, securities or any other
consideration or combination thereof; provided, however, that the actions of
Buyer in connection with the Initial Public Offering shall not be deemed to
violate this Section 6.3.
(b) Each of Buyer and Seller (i) acknowledges that a breach of any of its
covenants contained in this Section 6.3 will result in irreparable harm to the
other party which will not be compensable in money damages and (ii) agrees that
such covenant shall be specifically enforceable and that specific performance
and injunctive relief shall be a remedy properly available to the other party
for a breach of such covenant.
Section 6.4 Access to Information. Seller shall afford to Buyer and its
accountants, counsel, financial advisors and other representatives (the "Buyer
Representatives"), and Buyer shall afford to Seller and its accountants,
counsel, financial advisors and other representatives (the "Seller
Representatives"), full access during normal business hours throughout the
period prior to the Closing to all of their respective Properties, books,
contracts, commitments and records (including Tax Returns and the Property
Records) and, during such period, shall furnish promptly to one another (i) a
copy of each report, schedule and other document filed or received by any of
them pursuant to the requirements of federal or state securities laws or filed
by any of them with the SEC in connection with the Transactions or which may
have a material effect on their respective businesses, Properties or personnel
and (ii) such other information concerning their respective businesses,
Properties and personnel as Buyer or Seller, as the case may be, shall
reasonably request; provided that no investigation shall amend or modify any
representations or warranties made herein or the conditions to the obligations
of the respective parties to consummate the Transactions.
Section 6.5 Confidentiality. (a) Buyer shall hold and shall use its
reasonable best efforts to cause the Buyer Representatives to hold, and Seller
shall hold and shall use its reasonable best efforts to cause the Seller
Representatives to hold, in strict confidence all non-public documents and
information furnished to Buyer or to Seller, as the case may be, in connection
with the Transactions, except that (i) Buyer and Seller may disclose such
information as may be necessary in connection with seeking the Buyer Required
Statutory Approvals and the Seller Required Statutory Approvals, (ii) Seller may
disclose such information to its stockholders, provided that it advises such
stockholders of the confidential nature of such information and obtains such
stockholders' agreement to maintain the confidentiality of such information in
accordance with this Section 6.5, (iii) each of Buyer and Seller may disclose
any information that it is required by
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applicable Legal Requirement to disclose and (iv) each of Buyer and Seller may
use and disclose such information as may be necessary to enforce its rights
under this Agreement.
(b) In the event that this Agreement is terminated in accordance with its
terms, each party shall promptly redeliver to the other all non-public written
material provided pursuant to this Section 6.5 and shall not retain any copies,
extracts or other reproductions in whole or in part of such written material.
In such event, all documents, memoranda, notes and other writings prepared by
Buyer or Seller based on the information in such material shall be destroyed
(and Buyer and Seller shall use their respective reasonable best efforts to
cause their advisors and representatives to similarly destroy their documents,
memoranda and notes), and such destruction (and reasonable best efforts) shall
be certified in writing by an authorized officer supervising such destruction.
Notwithstanding the foregoing provisions of this Section 6.5(b), each party may
retain such material as it reasonably deems necessary to protect any rights that
may have accrued to it prior to or upon such termination.
Section 6.6 Registration Statement; Initial Public Offering. Buyer and
Seller agree that the Registration Statement shall not be filed with the SEC
until such time as Buyer determines, in its sole discretion, that market
conditions are favorable to the completion of the Initial Public Offering. Buyer
will advise Seller regarding the timing of the filing of the Registration
Statement. Buyer shall use all reasonable efforts, subject to the existence of
market conditions favorable to the completion of the Initial Public Offering, to
complete the Initial Public Offering and to have the Registration Statement
declared effective by the SEC as promptly as practicable after the filing of the
Registration Statement, subject to the right of Buyer to approve or withhold
approval of the Initial Public Offering Price. Buyer shall also take any action
required to be taken under applicable state blue sky or securities laws in
connection with the Initial Public Offering and the issuance of the shares of
Buyer Common Stock pursuant to this Agreement. Buyer and Seller shall promptly
furnish to each other all information, and take such other actions, as may
reasonably be requested in connection with any action by any of them in
connection with the provisions of this Section 6.6. Seller shall execute such
agreements not to sell or transfer (except to its stockholders, creditors or one
or more trusts for their benefit pursuant to a plan of liquidation, each of
which has executed and delivered a similar such agreement not to sell or
transfer) its shares of Buyer Common Stock for a period not to exceed 180 days
after the Closing as the underwriters for the Initial Public Offering may
reasonably require. Buyer shall select the managing underwriters for the
Initial Public Offering.
Section 6.7 Seller Stockholders' Approval. Seller shall, as promptly as
practical after the execution of this Agreement, submit this Agreement and the
transactions contemplated hereby for the approval of its stockholders by written
consent or at a meeting of stockholders and, subject to the fiduciary duties of
the Board of Directors of Seller under applicable law, shall use its reasonable
best efforts to obtain stockholder approval and adoption (the "Seller
Stockholders' Approval") of this Agreement and the transactions contemplated
hereby. Subject to the fiduciary duties of the Board of Directors of Seller
under applicable law, Seller shall, through its Board of Directors, recommend to
its stockholders approval of the transactions contemplated by this Agreement.
Seller (i) acknowledges that a breach of its covenant contained in this Section
6.7 to
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solicit written consents or to convene a meeting of its stockholders and call
for a vote thereat with respect to the approval of this Agreement and the
transactions contemplated hereby will result in irreparable harm to Buyer which
will not be compensable in money damages and (ii) agrees that such covenant
shall be specifically enforceable and that specific performance and injunctive
relief shall be a remedy properly available to Buyer for a breach of such
covenant.
Section 6.8 Agreement to Cooperate. (a) Subject to the terms and
conditions herein provided, each of the parties shall use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable Legal Requirements to
consummate and make effective as expeditiously as possible the Transactions,
including using its reasonable efforts to obtain all necessary or appropriate
waivers, consents and approvals and SEC "no-action" letters, to effect all
necessary registrations, filings and submissions and to lift any injunction or
other legal bar to the Transactions.
(b) In the event any litigation is commenced by any third party relating
to the Transactions, each of Buyer and Seller shall have the right, at its own
expense, to participate therein, and neither Buyer nor Seller shall settle any
such litigation without the consent of the other, which consent will not be
unreasonably withheld or delayed.
Section 6.9 HSR Act. Without limitation of Section 6.8, each of Buyer and
Seller undertakes and agrees to file as soon as practicable after the date
hereof a Notification and Report Form under the HSR Act with Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division"), unless Buyer and Seller shall agree that the filing
of such Notification and Report Form is not required by the HSR Act. Each of
Buyer and Seller shall (i) use its reasonable efforts to comply as expeditiously
as possible with all lawful requests of the FTC or the Antitrust Division for
additional information and documents and (ii) not extend any waiting period
under the HSR Act or enter into any agreement with the FTC or the Antitrust
Division not to consummate the Transactions, except with the prior consent of
the other party, which consent shall not be unreasonably withheld or delayed.
Section 6.10 Public Statements. The parties shall consult with each other
prior to issuing any press release or any written public statement with respect
to this Agreement, and shall not issue any such press release or written public
statement prior to such consultation.
Section 6.11 Seller Employees. The parties acknowledge that Buyer intends
to offer employment (commencing after the Closing) to those of Seller's
employees, if any, as Buyer may determine to be appropriate, provided that such
determination (as well as the terms and conditions of any such offer of
employment) shall be within the exclusive discretion of Buyer. Prior to the
Closing Date, Buyer shall notify Seller which employees of Seller, if any, that
Buyer desires to employ after the Closing. Nothing in this Agreement is
intended to or shall impose any liability or obligation on Buyer with respect to
any employees of Seller.
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Section 6.12 Notification of Certain Matters. Each of Seller and Buyer
agrees to give prompt notice to each other of, and to use its reasonable best
efforts to prevent or promptly remedy, (a) the occurrence or failure to occur or
the impending or threatened occurrence or failure to occur, of any event,
happening, circumstance or condition which could reasonably be expected to (i)
cause any of its representations or warranties in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Closing Date, (ii) have a Material Adverse Effect or (iii) adversely impact the
Transactions and (b) any material failure on its part to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.12 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
Section 6.13 Delivery and Maintenance of Records. (a) As soon as possible
after the Closing Date, but in any event within five (5) days after the Closing
Date, Seller will deliver or cause to be delivered to Buyer in its offices in
Houston, Texas, all of the Property Records, provided that Seller may retain
duplicate copies (or originals if necessary for federal income tax purposes) of
all accounting and financial records and records relating to Seller's continuing
obligations under this Agreement.
(b) Buyer shall, until the earlier of six years after the Closing Date or
two years after the termination of any related representation, warranty or
covenant of Seller contained in this Agreement, (i) retain the material Property
Records delivered to it, (ii) make such Property Records available to Seller and
its employees, consultants and representatives upon reasonable notice during
normal business hours and (iii) at the expense of Seller, furnish to Seller
copies of any and all such Property Records as Seller may reasonably request.
Section 6.14 Registration Rights Agreement. Buyer shall execute and
deliver at the Closing a Registration Rights Agreement in substantially the form
attached hereto as Appendix D (the "Registration Rights Agreement") relating to
the registration of the shares of Buyer Common Stock to be issued in the
Transactions.
Section 6.15 Amendment of Buyer's Certificate of Incorporation. Prior to
Closing, Buyer shall adopt an amendment to its Certificate of Incorporation (as
so amended, the "Amended Certificate"), in substantially the form previously
disclosed to Seller, to provide for the increase of its authorized common stock
and to authorize a class of preferred stock, issuable in one or more series with
rights and preferences established by the Board of Directors of Buyer.
Section 6.16 Acquisition Proposals following Termination of this
Agreement. In the event Buyer receives a proposal or offer from any third Person
to acquire all or any substantial part of the business and properties of Buyer
and determines to enter into the transaction contemplated by such proposal or
offer (or any such third Person accepts such a proposal or offer from Buyer)
within a period of six months following the termination of this Agreement, Buyer
shall provide Seller with written notice of such proposal or offer and
determination as promptly as reasonably practicable. Buyer shall use its
reasonable best efforts to permit the participation of
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Seller in such transaction on substantially equivalent economic terms, taking
into account the nature of the respective business and properties of Buyer and
Seller and other relevant considerations.
ARTICLE VII
CLOSING CONDITIONS
Section 7.1 Conditions to Each Party's Obligation to Close. The
respective obligations of each party to consummate the Transactions shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) this Agreement and the sale of the Assets contemplated hereby
shall have been approved and adopted by the requisite vote of the
stockholders of Seller under applicable law;
(b) any waiting period applicable to the purchase and sale of the
Assets contemplated hereby under the HSR Act shall have expired or been
terminated;
(c) the board of directors (or a committee thereof) of Buyer shall
have approved the Initial Public Offering Price, the Registration Statement
shall have become effective in accordance with the provisions of the
Securities Act, and no stop order suspending such effectiveness shall have
been issued and remain in effect and no proceeding for that purpose shall
have been instituted by the SEC or any state regulatory authorities;
(d) no preliminary or permanent injunction or other Order which
prevents the consummation of the Transactions shall have been issued by any
Governmental Authority and remain in effect;
(e) no action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any Governmental Authority which
would prevent the consummation of the Transactions or make the consummation
of the Transactions illegal; and
(f) all governmental waivers, consents, orders and approvals legally
required for the consummation of the Transactions (other than consents to
the assignment of governmental leases that are customarily obtained after a
sale of oil and gas properties), and all consents from lenders required to
consummate the Transactions, shall have been obtained and be in effect at
the Closing Date.
Section 7.2 Conditions to Obligation of Seller to Close. The obligation
of Seller to consummate the sale of the Assets contemplated hereby shall be
subject to the fulfillment at or prior to the Closing Date of the following
additional conditions:
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(a) Buyer shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of Buyer
contained in this Agreement shall be true and correct on and as of the date
made and on and as of the Closing Date as if made at and as of such date,
and Seller shall have received a certificate of the President or a Vice
President of Buyer to that effect;
(b) Seller shall have received an opinion from Andrews & Kurth
L.L.P., special counsel to Buyer, dated the Closing Date, reasonably
satisfactory to Seller and covering the due incorporation of Buyer, the
binding nature of this Agreement on Buyer, the validity of the Buyer Common
Stock to be issued in connection with the Transactions and such other
matters as may be reasonably requested by Seller; and
(c) Buyer shall have executed and delivered the Registration Rights
Agreement.
Section 7.3 Conditions to Obligations of Buyer to Close. The obligations
of Buyer to consummate the Transactions shall be subject to the fulfillment at
or prior to the Closing Date of the additional following conditions:
(a) Seller shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of Seller
contained in this Agreement shall be true and correct on and as of the date
made and on and as of the Closing Date as if made at and as of such date,
and Buyer shall have received a Certificate of the President or of a Vice
President of Seller to that effect;
(b) Buyer shall have received an opinion from Baker & Botts, L.L.P.,
special counsel to Seller, dated the Closing Date, reasonably satisfactory
to Buyer and covering the due incorporation of Seller, the binding nature
of this Agreement on Seller and such other matters as may be reasonably
requested by Buyer;
(c) all consents, Permits, approvals and other actions of any Person
required for the lawful transfer, conveyance and assignment to Buyer of the
Assets (except (i) consents for the assignment of government leases that
are customarily obtained after the closing of a sale of oil and gas
properties, (ii) waivers and consents subject to Section 2.2(b) and
consents the failure to obtain which will not, individually or in the
aggregate, have a Material Adverse Effect) shall have been obtained and
shall be in full force and effect; and
(d) Buyer shall have received a full release of all liens and
security interests encumbering the Assets in favor of Wells Fargo (Texas),
National Association, such release to be in a form reasonably acceptable to
Buyer.
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Section 7.4 Waiver. Any of the conditions set forth in this Article VII
may be waived, in whole or in part, by the party whose obligation to perform at
the Closing is subject to such condition.
ARTICLE VIII
TERMINATION
Section 8.1 Termination by Seller. Prior to the Closing, Seller shall
have the right to terminate this Agreement:
(a) if the conditions set forth in Sections 7.1 and 7.2 have not been
satisfied at or prior to the closing of the Initial Public Offering;
(b) if the Closing shall not have occurred by September 30, 1996;
(c) if the Transactions are enjoined by a final, unappealable court
order; or
(d) if Buyer (i) fails to perform in any material respect any of its
material covenants in this Agreement and (ii) does not cure such default in
all material respects within 30 days after notice of such default is given
to Buyer by Seller.
Section 8.2 Termination by Buyer. Prior to the Closing, Buyer shall have
the right to terminate this Agreement:
(a) if the conditions set forth in Sections 7.1 and 7.3 have not been
satisfied at or prior to Closing;
(b) at any time after June 30, 1996, if the Seller Stockholders'
Approval has not been obtained;
(c) if Buyer elects not to complete the Initial Public Offering
because the Initial Public Offering Price of Buyer Common Stock is less
than $1.15 per Mcfe of Buyer's proved reserves (taking into account the
proved reserves acquired from Seller hereunder as well as Buyer's
indebtedness);
(d) if the Closing shall not have occurred by September 30, 1996;
(e) if the Transactions are enjoined by a final, unappealable court
order; or
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(f) if Seller (i) fails to perform in any material respect any of its
material covenants in this Agreement and (ii) does not cure such default in
all material respects within 30 days after notice of such default is given
to Seller by Buyer.
Section 8.3 Limitation on Right to Terminate. Neither party shall be
allowed to exercise any right of termination pursuant to this Article VIII if
the event giving rise to such termination right shall be due to the willful
failure of such party (or any of its affiliates) to perform or observe in any
material respect any of the covenants or agreements hereof to be performed or
observed by such party.
Section 8.4 Effect of Termination. In the event of termination of this
Agreement pursuant to this Article VIII, this Agreement shall forthwith become
void and there shall be no further obligation on the part of Seller, Buyer or
their respective officers or directors except that this Section 8.4 and Sections
6.5, 6.10, 6.17 and 10.3 shall survive such termination. Nothing in this Section
8.4 shall relieve either party from liability for any breach of this Agreement.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
Section 9.1 Survival of Representations and Warranties. The
representations, warranties and covenants set forth in this Agreement or in any
certificate delivered at the Closing shall survive the Closing and shall not be
affected by any investigation, verification, or approval by either party or by
anyone acting on behalf of such party.
Section 9.2 Indemnification by Seller. Seller agrees, effective as of the
Closing, to pay, and to indemnify, save and hold harmless Buyer, its successors
and assigns and its officers, directors, stockholders and employees from and
against, any and all damages, liabilities, losses (including any diminution in
value), claims, deficiencies, payments, obligations, penalties, interest,
expenses, fines, assessments, charges, judgments, suits, proceedings and costs
(including fees and expenses of attorneys, accountants and other professional
advisors and any court costs) either directly or indirectly imposed on, incurred
by or asserted against such Persons (or any of them) in any way relating to or
arising from or out of (a) the Retained Liabilities (whether arising before or
after the Closing), (b) any breach or violation of any covenant or agreement of
Seller contained in this Agreement or in any certificate delivered by Seller to
Buyer at the Closing, or (c) subject to Section 9.8, any inaccuracy, breach or
failure of any representation or warranty of Seller contained in this Agreement
or in any certificate delivered by Seller to Buyer at the Closing (collectively,
the "Seller Representations"); provided, however, that Seller's obligation to
indemnify with respect to the inaccuracy, breach or failure of any Seller
Representation (other than those contained in Sections 5.9 and 5.12) shall
terminate on the first anniversary of the Closing Date, excepting in each case
matters for which a notice has been furnished to Seller under Section 9.4 prior
to such anniversary date.
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Section 9.3 Indemnification by Buyer. Buyer agrees, effective as of the
Closing, to pay, and to indemnify, save and hold harmless Seller, its successors
and assigns and its officers, directors, stockholders and employees from and
against, any and all damages, liabilities, losses (including any diminution in
value), claims, deficiencies, payments, obligations, penalties, interest,
expenses, fines, assessments, charges, judgments, suits, proceedings and costs
(including, without limitation, fees and expenses of attorneys, accountants and
other professional advisors and any court costs) either directly or indirectly
imposed on, incurred by or asserted against such Persons (or any of them) in any
way relating to or arising from or out of (a) the Assumed Liabilities (whether
arising before or after the Closing), (b) any breach or violation of any
covenant or agreement of Buyer contained in this Agreement or in any certificate
delivered by Buyer to Seller at the Closing, (c) subject to Section 9.8, any
inaccuracy, breach or failure of any representation or warranty of Buyer
contained in this Agreement or in any certificate delivered by Buyer to Seller
at the Closing (collectively, the "Buyer Representations") or (d) Buyer's
ownership, use or operation of the Assets after the Closing; provided, however,
that Buyer's obligation to indemnify with respect to the inaccuracy, breach or
failure of any Buyer Representation (other than those contained in Sections 4.11
and 4.14) shall terminate on the first anniversary of the Closing Date,
excepting in each case matters for which a notice has been furnished to Buyer
under Section 9.4 prior to such anniversary date.
Section 9.4 Demands. Each Person who may be entitled to indemnification
with respect to any matter under this Article IX (an "Indemnified Party") agrees
that upon its discovery of facts giving rise to a claim for indemnity with
respect to such matter under this Article IX, including receipt by it of notice
of any demand, assertion, claim, action or proceeding, judicial or otherwise, by
any third party (any such action being referred to in this Agreement as a
"Claim"), it will give prompt notice in writing to the Person who may be
obligated to provide indemnification with respect to such matter under this
Article IX (the "Indemnifying Party"), together with a statement of such
information respecting any of the foregoing as it shall then have; provided,
however, that the failure of the Indemnified Party to so notify the Indemnifying
Party promptly shall not relieve the Indemnifying Party from any liability that
the Indemnifying Party may have to the Indemnified Party unless the Indemnifying
Party is not afforded sufficient time so that its ability to defend against the
Claim is not prejudiced.
Section 9.5 Right to Contest and Defend. (a) The Indemnifying Party will
be entitled at its cost and expense to contest and defend by all appropriate
legal proceedings any Claim with respect to which it is called upon to indemnify
the Indemnified Party under this Article IX. Any such contest may be conducted
in the name and on behalf of the Indemnifying Party or the Indemnified Party as
may be appropriate. Such contest shall be conducted by attorneys employed by
the Indemnifying Party, but the Indemnified Party shall have the right to
participate in (but not control) such proceedings and to be represented by
attorneys of its own choosing at its cost and expense.
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(b) If the Indemnified Party joins in the contest of any such Claim, the
Indemnifying Party shall have full authority to determine and control over all
action to be taken with respect to such Claim. An Indemnifying Party shall not,
however, without the written consent of the Indemnified Party, (i) settle any
such Claim or consent to the entry of any judgment with respect thereto which
does not include an unconditional written release of the Indemnified Party from
all liability in respect of such Claim or (ii) settle such Claim or consent to
the entry of any judgment with respect thereto in any manner that may materially
and adversely affect the Indemnified Party. If the Indemnifying Party fails to
defend against a Claim of which it receives proper notice and for which it is
liable under the terms of this Article IX, the Indemnified Party shall have the
right to defend against the Claim at the expense of the Indemnifying Party with
counsel of its own choosing, subject to the right of the Indemnifying Party to
admit its liability and assume the defense of the Claim at any time prior to
settlement or final determination thereof. If the Indemnifying Party has not
yet admitted its liability for a Claim, the Indemnified Party shall send written
notice to the Indemnifying Party of any proposed settlement of the Claim. The
Indemnifying Party shall have an option for 30 days following receipt of such
notice to (i) admit in writing liability for the Claim and (ii) if liability is
so admitted, reject, in its reasonable judgment, the proposed settlement. If
the Indemnified Party settles any Claim with respect to which the Indemnifying
Party has admitted its liability in writing without the prior written consent of
the Indemnifying Party, the Indemnified Party shall thereby waive any right to
indemnity therefor.
Section 9.6 Cooperation. If requested by the Indemnifying Party, the
Indemnified Party agrees to cooperate with the Indemnifying Party and its
counsel in contesting any Claim which the Indemnifying Party elects to contest
or, if appropriate, in making any counterclaim against the Person asserting the
Claim or any cross-complaint against any Person, but the Indemnifying Party will
reimburse the Indemnified Party for any expenses incurred by it in so
cooperating.
Section 9.7 Right to Participate. The Indemnified Party agrees to afford
the Indemnifying Party and its counsel the opportunity to be present at, and to
participate in, conferences with representatives of or counsel for the Person
asserting the Claim and to reasonably cooperate with the Indemnifying Party and
its counsel and to provide them with reasonable access to its records and
information in connection with the Claim.
Section 9.8 Payment of Damages. The Indemnifying Party shall not be
obligated to pay, and the Indemnified Party shall not be entitled to receive,
any amount under this Article IX for Claims based on an inaccuracy, breach or
failure of a Seller Representation or a Buyer Representation (as the case may
be) unless and until, and then only to the extent that, the aggregate amount of
all damages, liabilities, losses, claims, deficiencies, payments, obligations,
penalties, interest, expenses, fines, assessments, charges, judgments, suits,
proceedings and costs actually incurred or sustained by the Indemnified Party on
account of such inaccuracy, breach or failure, when added to the aggregate
amount of all damages, liabilities, losses, claims, deficiencies, payments,
obligations, penalties, interest, expenses, fines, assessments, charges,
judgments, suits, proceedings and costs actually incurred or sustained by the
Indemnified Party on account of inaccuracies, breaches or failures of other
Seller Representations or Buyer Representations (as the
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case may be), exceeds the sum of $100,000. The Indemnifying Party shall pay to
the Indemnified Party in cash the amount of any payment to which the Indemnified
Party may become entitled by reason of the provisions of this Article IX within
five business days after the amount of the relevant Claim is finally determined
either by mutual agreement of the parties, by arbitration or pursuant to the
final unappealable judgment of a court of competent jurisdiction.
Section 9.9 Exclusive Remedy. The indemnification rights set forth in
this Article IX shall be (i) the exclusive remedy of Seller for the inaccuracy,
breach or failure of any Buyer Representation and (ii) the exclusive remedy of
Buyer for the inaccuracy, breach or failure of any Seller Representation.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested) or sent via facsimile to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Buyer to:
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attention: James G. Floyd
with copies to:
The Brooklyn Union Gas Company
One Metrotech Center
Brooklyn, New York 11201-3850
Attention: Thomas W. Powers
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: Jeffrey L. Wade
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Cullen and Dykman
177 Montague Street
Brooklyn, New York 11201-3611
Attention: Lance Myers
If to Seller, to:
Smith Offshore Exploration Company
811 Dallas, Suite 800
Houston, Texas 77002
Attention: Lester H. Smith
with a copy to:
Baker & Botts L.L.P.
3000 One Shell Plaza
Houston, Texas 77002
Attention: Walter J. Smith
Section 10.2 Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. In this Agreement, unless a contrary
intention appears, (i) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision, (ii) the term "including" (and
with correlative meaning "include") means including, without limiting the
generality of any description preceding such term and (iii) reference to any
Article or Section means such Article or Section hereof. No provision of this
Agreement or any Appendix attached hereto shall be interpreted or construed
against either party solely because such party or its legal representative
drafted such provision.
Section 10.3 Expenses and Fees. Except as provided in Section 10.4, all
costs and expenses incurred in connection with this Agreement and the
Transactions shall be paid by the party incurring such expenses.
Section 10.4 Taxes and Recording Fees. Buyer shall pay all use, sales and
other similar taxes which are imposed as a result of the transfer of the Assets
pursuant hereto, together with all documentary, filing and recording fees
required in connection with the filing and recording of any assignments or other
documents to be delivered at the Closing.
Section 10.5 Post-Closing Adjustments. From time to time after the
Closing, Seller and Buyer shall make the following adjustments (but only to the
extent that such adjustments have not been previously taken into account by the
parties hereto, whether pursuant to adjustments to the Cash Amount as finally
determined in accordance with Article III or otherwise):
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(a) Seller shall promptly deliver to Buyer in immediately available
funds the amount of any (i) revenues paid to Seller for oil, gas,
condensate, natural gas liquids and other petroleum product sales
attributable to production from the Assets on or after the Effective Date,
(ii) the amount of any proceeds received by Seller from the sale, salvage
or other disposition of any portion of the Assets on or after the Effective
Date and (iii) any other amounts received by Seller which are attributable
to the ownership and operation of the Assets on or after the Effective
Date. Seller shall promptly reimburse Buyer for the amount of any
Retained Liabilities in the nature of direct operating expenses (including
without limitation general and administrative costs paid to parties other
than Seller), Taxes (other than income taxes) and capital expenditures paid
by Buyer attributable to the ownership and operation of the Assets prior to
the Effective Date.
(b) Buyer shall promptly deliver to Seller in immediately available
funds the amounts of any (i) revenues paid to Buyer for oil, gas,
condensate, natural gas liquids and other petroleum product sales
attributable to production from the Assets prior to the Effective Date, and
(ii) any other amounts received by Buyer which are attributable to the
ownership and operation of the Assets prior to the Effective Date. Buyer
shall promptly reimburse Seller for the amount of any direct operating
expenses (including without limitation general and administrative costs
paid to parties other than Seller), Taxes (other than income taxes) and
capital expenditures paid by Seller attributable to the ownership and
operation of the Assets after the Effective Date.
Section 10.6 Entire Agreement. This Agreement (including the documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof.
Section 10.7 Amendments and Waivers. (a) This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties in compliance with applicable law.
(b) At any time prior to the Closing, either party may (a) extend the time
for the performance of any of the obligations or other acts of the other party,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant thereto or (c) waive compliance
with any of the agreements or conditions contained herein, provided that no such
extension or waiver shall be valid unless set forth in an instrument in writing
signed on behalf of such party.
Section 10.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE
STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY
WITHIN SUCH STATE.
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Section 10.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 10.10 Severability. If any provision of this Agreement is
determined by arbitration or pursuant to the final unappealable order of a court
of competent jurisdiction to be illegal, invalid or unenforceable under any
present or future laws, rules or regulations and if the rights or obligations of
Buyer or Seller under this Agreement will not be materially and adversely
affected thereby, (a) such provision will be fully severable, (b) this Agreement
will be construed and enforced as if such illegal, invalid or unenforceable
provision had never comprised a part hereof, (c) the remaining provisions of
this Agreement will remain in full force and effect and will not be affected by
the illegal, invalid or unenforceable provision or by its severance herefrom and
(d) in lieu of such illegal, invalid or unenforceable provision, there will be
added automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible. If the rights and obligations of Buyer or Seller
will be materially and adversely affected by any such provision so determined to
be illegal, invalid or unenforceable, then unless such provision is waived in
writing by the affected party in its sole discretion, this Agreement shall be
null and void.
Section 10.11 Parties In Interest. Except for rights of indemnified
parties under Article IX, nothing in this Agreement, express or implied, is
intended to confer upon any Person (other than the parties) any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 10.12 Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and permitted
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned, by operation of law or otherwise, by
either party without the consent of the other party; provided, however, that in
the event of any such assignment by a party by operation of law without the
consent of the other party as required above, such other party may consent to
such assignment after it has occurred and, in such event, this Agreement shall
be binding upon the Person receiving such assignment by operation of law; and
provided further, that Seller shall have the right after the Closing to assign
its rights and delegate its obligations under this Agreement to one or more
liquidating trusts, in the aggregate succeeding to substantially all of the
assets of Seller, for the benefit of the creditors and stockholders of Seller.
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IN WITNESS WHEREOF, Buyer and Seller have caused this Agreement to be
signed by their respective officers as of the date first written above.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------
James G. Floyd, President
SMITH OFFSHORE EXPLORATION
COMPANY
By:
-----------------------------
Lester H. Smith, President
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<PAGE> 47
Appendix A
OIL AND GAS PROPERTIES
Oil and Gas Lease of Submerged Lands dated effective October 1, 1989,
between The United States of America, Lessor, and Brooklyn Union
Exploration Company, Inc., et al, Lessee, covering All of Block 252,
Galveston Area, OCS Leasing Map, Texas Map No. 6, containing 5,760.00
acres, more or less, and bearing Serial Number OCS-G 11307
WORKING INTEREST: 30.00%
NET REVENUE INTEREST: .2396237*
Oil and Gas Lease of Submerged Lands dated effective October 1, 1990,
between The United States of America, Lessor, and Apache Corporation,
Lessee, covering All of Block 272, Galveston Area, OCS Leasing Map,
Texas Map No. 6, containing 5,760.00 acres, more or less, and bearing
Serial Number OCS-G 12497.
WORKING INTEREST: 18.75%
NET REVENUE INTEREST: .1497648*
Oil and Gas Lease of Submerged Lands dated Effective December 1, 1987,
between the United States of America, Lessor, and Brooklyn Union
Exploration Company, Inc., Lessee, covering N/2 of Block 138, High
Island Area, OCS Leasing Map, Texas Map No. 7, containing 2,880.00
acres, more or less, and bearing Serial Number OCS-G 9079.
WORKING INTEREST: 37.50%
NET REVENUE INTEREST: .2995296*
Oil and Gas Lease of Submerged Lands dated effective November 1, 1987,
between The United States of America, Lessor, and Apache Corporation,
et al, Lessee, covering All of Block 650, Matagorda Island Area, OCS
Leasing Map, Texas Map No. 4, containing 5,760.00 acres, more or less,
and bearing Serial Number OCS-G 8998.
WORKING INTEREST: 22.6750%
NET REVENUE INTEREST: .1811156*
1
<PAGE> 48
Oil and Gas Lease of Submerged Lands dated effective October 1, 1989,
between The United States of America, Lessor, and Apache Corporation,
et al, Lessee, covering All of Block 671, Matagorda Island Area, OCS
Leasing Map, Texas Map No. 4, containing 5,760.00 acres, more or less,
and bearing Serial Number OCS-G 11268.
WORKING INTEREST: 22.675%
NET REVENUE INTEREST: .1811158*
Oil and Gas Lease of Submerged Lands dated effective December 1, 1988,
between The United States of America, Lessor, and Apache Corporation,
et al, Lessee, covering All of Block 672, Matagorda Island Area, OCS
Leasing Map, Texas Map No. 4, containing 5,760.00 acres, more or less,
and bearing Serial Number OCS-G 10198.
WORKING INTEREST: 22.675%
NET REVENUE INTEREST: .1811158*
Oil and Gas Lease of Submerged Lands dated effective October 1, 1990,
between The United States of America, Lessor, and Brooklyn Union
Exploration Company, Inc., Lessee, covering All of Block 858, Mustang
Island Area, OCS Leasing Map, Texas Map No. 3, containing 5,760.00
acres, more or less, and bearing Serial Number OCS-G 12421.
WORKING INTEREST: 32.50%
NET REVENUE INTEREST: .2595923*
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective October 1, 1983, between The United States of America,
Lessor, and Corpus Christi Exploration Company, Lessee, covering All
of Block 651, Matagorda Island Area, OCS Leasing Map, Texas Map No. 4,
containing 5,760.00 acres, more or less, and bearing Serial Number
OCS-G 6045, INSOFAR AND ONLY INSOFAR as said operating rights cover
the depths from the bottom of the Gulf of Mexico down to 13,000 feet
(true vertical depth) beneath mean sea level.
WORKING INTEREST: 45.1282%
NET REVENUE INTEREST: .3361284*
2
<PAGE> 49
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective October 1, 1987, between The United States of America,
Lessor, and Conoco Inc., Lessee, covering All of Block 785, Mustang
Island Area, OCS Leasing Map, Texas Map No. 3, containing 5,760.00
acres, more or less, and bearing Serial Number OCS-G 8975, INSOFAR AND
ONLY INSOFAR as said operating rights cover depths from the surface of
the earth down to and including but not below the stratigraphic
equivalent of 100' below a depth of 10,300' TVD as identified on the
electric log of Brooklyn Union MU 785 No. 2 Well.
WORKING INTEREST: 12.50%
NET REVENUE INTEREST: .0998432*
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective October 1, 1991, between The United States of America,
Lessor, and Hardy Oil & Gas USA Inc., et al, Lessee, covering N/2 of
Block 232, High Island Area, OCS Leasing Map, Texas Map No. 7,
containing 2,880.00 acres, more or less, and bearing Serial Number
OCS-G 13327, INSOFAR AND ONLY INSOFAR as said operating rights cover
depths from the surface to 9,500'.
WORKING INTEREST: 17.875%
NET REVENUE INTEREST: .1427758*
Oil and Gas Lease of Submerged Lands dated effective October 1, 1991,
between The United States of America, Lessor, and Hardy Oil & Gas USA
Inc., et al, Lessee, covering All of Block 232, High Island Area, OCS
Leasing Map, Texas Map No. 7, containing 5,760.00 acres,more or less,
and bearing Serial Number OCS-G 13327.
WORKING INTEREST: 16.25%
NET REVENUE INTEREST: .1297962*
3
<PAGE> 50
Oil and Gas Lease of Submerged Lands dated effective December 1, 1991,
between The United States of America, Lessor, and Brooklyn Union
Exploration Company, Inc., Lessee, covering All of Block 680,
Matagorda Island Area, OCS Leasing Map, Texas Map No. 4, containing
5,760.00 acres, more or less, and bearing Serial Number OCS-G 13289.
WORKING INTEREST: 50.00%
NET REVENUE INTEREST: .3993728*
Oil and Gas Lease of Submerged Lands dated effective November 1, 1994,
between The United States of America, Lessor, and The Houston
Exploration Company, Lessee, covering that portion of Block No. 859,
Mustang Island Area, OCS Leasing Map, Texas Map No. 3, seaward of the
Federal/State Boundary, containing 1,891.74 acres, more or less, and
bearing Serial Number OCS-G 14774.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3594355*
Oil and Gas Lease of Submerged Lands dated effective November 1, 1994,
between The United States of America, Lessor, and The Houston
Exploration Company, Lessee, covering that portion of Block No. 838,
Mustang Island Area, OCS Leasing Map, Texas Map No. 3, seaward of the
Federal/State Boundary, containing 3,249.15 acres, more or less, and
bearing Serial Number OCS-G 14769.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3594355*
Oil and Gas Lease of Submerged Lands dated effective November 1, 1994,
between The United States of America, Lessor, and The Houston
Exploration Company, Lessee, covering that portion of Block No. 842,
Mustang Island Area, OCS Leasing Map, Texas Map No. 3, seaward of the
Federal/State Boundary, containing 212.90 acres, more or less, and
bearing Serial Number OCS-G 14770.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3594355*
4
<PAGE> 51
Oil and Gas Lease of Submerged Lands dated effective November 1, 1994,
between The United States of America, Lessor, and The Houston
Exploration Company, Lessee, covering that portion of Block No. 843,
Mustang Island Area, OCS Leasing Map, Texas Map No. 3, seaward of the
Federal/State Boundary, containing 5,410.41 acres, more or less, and
bearing Serial Number OCS-G 14771.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3594355*
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95912), as Lessor and Crasheil Resources,
Inc., as Lessee, covering the S/2 of NE/4 of Tract 842-L, Gulf of
Mexico, Kleberg County, Texas, containing approximately 720 acres as
shown on the official map of the Gulf of Mexico now on file in the
Texas General Land Office, Austin, Texas, recorded in Volume 100, Page
506 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95913), as Lessor, and Crasheil Resources,
Inc., as Lessee, covering All of SE/4 of Tract 842-L, Northwest of the
Three Marine League Line, Gulf of Mexico, Kleberg County, Texas,
containing approximately 1,227.10 acres as shown on the official map
of the Gulf of Mexico now on file in the Texas General Land office,
Austin, Texas, recorded in Volume 100, Page 458, of the Official
Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
__________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty under
the lease terms.
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms.
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms.
5
<PAGE> 52
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95914), as Lessor, and Crasheil Resources,
Inc., as Lessee, covering the NW/4 and SW/4 of Tract 843-L, Northwest
of the Three Marine League Line, Gulf of Mexico, Kleberg County,
Texas, containing approximately 349.59 acres as shown on the official
map of the Gulf of Mexico now on file in the Texas General Land
Office, Austin, Texas, recorded in Volume 100, Page 466 of the
Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
Oil and Gas Lease dated October 4, 1994, betweeen The State of Texas
(State of Texas Lease No. M- 96148), as Lessor, and The Houston
Exploration Company, as Lessee, covering All of SW/4 of Tract 838-L,
Northwest of the Three Marine League Line, Gulf of Mexico, Kleberg
County, Texas, containing approximately 944.86 acres as shown on the
official map of the Gulf of Mexico now on file in the Texas General
Land Office, Austin, Texas, recorded in Volume 108, Page 411 of the
Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
___________________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty
under the lease terms.
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms.
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms.
6
<PAGE> 53
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95915), as Lessor, and Crasheil Resources,
Inc., as Lessee, covering the S/2 of SE/4 of Tract 863-L, Gulf of
Mexico, Kleberg County, Texas containing approximately 720 acres as
shown on the official map of the Gulf of Mexico now on file in the
Texas General Land Office, Austin, Texas recorded in Volume 100, Page
474 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95916), as Lessor, and Crasheil Resources,
Inc., as Lessee, covering the N/2 of NE/4 of Tract 880-L, Gulf of
Mexico, Kleberg County, Texas, containing approximately 720 acres as
shown on the official map of the Gulf of Mexico now on file in the
Texas General Land Office, Austin, Texas, recorded in Volume 100, Page
482 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
_________________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty under
the lease terms.
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms.
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms.
7
<PAGE> 54
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95917), as Lessor, and Crasheil Resources,
Inc., as Lessee, covering the S/2 of NE/4 of Tract 880-L, Gulf of
Mexico, Kleberg County, Texas, containing approximately 720 acres as
shown on the official map of the Gulf of Mexico now on file in the
Texas General Land Office, Austin, Texas, recorded in Volume 100, Page
490 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
Oil and Gas Lease dated April 5, 1994, between The State of Texas
(State of Texas Lease No. M-95918), as Lessor, and Crasheil Resources,
Inc., as Lessee, covering the N/2 of SE/4 of Tract 880-L, Gulf of
Mexico, Kleberg County, Texas, containing approximately 720 acres as
shown on the official map of the Gulf of Mexico now on file in the
Texas General Land Office, Austin, Texas, recorded in Volume 100, Page
498 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
_________________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty under
the lease terms.
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms.
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms.
8
<PAGE> 55
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96146), as Lessor, and The Houston
Exploration Company, as Lessee, covering the SE/4 of Tract 883-L, West
of the Three Marine League Line, Gulf of Mexico, Kenedy County, Texas,
containing approximately 949.04 acres as shown on the official map of
the Gulf of Mexico now on file in the Texas General Land Office,
Austin, Texas, recorded in Volume 3, Page 775, of the Public Official
Records of Kenedy County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96147), as Lessor, and The Houston
Exploration Company, as Lessee, covering All of NE/4 of Tract 883-L,
West of the Three Marine League Line, Gulf of Mexico, Kenedy and
Kleberg Counties, Texas, containing approximately 1,228.12 acres as
shown on the official map of the Gulf of Mexico now on file in the
Texas General Land Office, Austin, Texas, recorded in Volume 3, Page
927 of the Public Official Records of Kenedy County, Texas and Volume
108, Page 402 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
________________________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty under
the lease terms.
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms.
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms.
9
<PAGE> 56
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96149), as Lessor, and The Houston
Exploration Company, as Lessee, covering the S/2 of SE/4 of Tract
860-L, Gulf of Mexico, Kleberg County, Texas, containing approximately
720 acres as shown on the official map of the Gulf of Mexico now on
file in the Texas General Land Office, Austin, Texas, recorded in
Volume 108, Page 420 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96150), as Lessor, and The Houston
Exploration Company, as Lessee, covering the N/2 of the NE/4 of Tract
863-L, Gulf of Mexico, Kleberg County, Texas, containing approximately
720 acres as shown on the official map of the Gulf of Mexico now on
file in the Texas General Land Office, Austin, Texas, recorded in
Volume 108, Page 429 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
______________________________________________________
(1) If the State is entitled to receive 20.00% royalty under the lease
terms.
(2) If the State is entitled to receive 22.50% royalty under the lease
terms.
(3) If the State is entitled to receive 25.00% royalty under the lease
terms.
10
<PAGE> 57
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96151), as Lessor, and The Houston
Exploration Company, as Lessee, covering the S/2 of NE/4 of Tract
863-L, Gulf of Mexico, Kleberg County, Texas containing approximately
720 acres as shown on the official map of the Gulf of Mexico now on
file in the Texas General Land Office, Austin, Texas, recorded in
Volume 108, Page 438 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 1*
.3342750 2*
.3234920 3*
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96152), as Lessor, and The Houston
Exploration Company, as Lessee, covering the N/2 of SE/4 of Tract
863-L, Gulf of Mexico, Kleberg County, Texas, containing approximately
720 acres as shown on the official map of the Gulf of Mexico now on
file in the Texas General Land Office, Austin, Texas, recorded in
Volume 108, Page 447 of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 1*
.3342750 2*
.3234920 3*
___________________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty under
the lease terms.
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms.
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms.
11
<PAGE> 58
Oil and Gas Lease dated October 4, 1994, between The State of Texas
(State of Texas Lease No. M-96153), as Lessor, and The Houston
Exploration Company, as Lessee, covering the S/2 of SE/4 of Tract
880-L, Northwest of the Three Marine League line, Gulf of Mexico,
Kleberg County, Texas, containing approximately 714.93 acres as shown
on the official map of the Gulf of Mexico now on file in the Texas
General Land Office, Austin, Texas, recorded in Volume 108, Page 456,
of the Official Records of Kleberg County, Texas.
WORKING INTEREST: 45.00%
NET REVENUE INTEREST: .3450581 (1)*
.3342750 (2)*
.3234920 (3)*
_______________________________________________________
(1) If the State of Texas is entitled to receive 20.00% royalty under
the lease terms
(2) If the State of Texas is entitled to receive 22.50% royalty under
the lease terms
(3) If the State of Texas is entitled to receive 25.00% royalty under
the lease terms
12
<PAGE> 59
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective June 1, 1988, between The United States of America, Lessor,
and CNG Producing Company, et al, Lessee, covering S/2 and S/2 of N/2
of Block 60, West Cameron Area, OCS Leasing Map, Louisiana Map No. 1,
containing 3,750.00 acres, more or less, and bearing Serial Number
OCS-G 9383, INSOFAR AND ONLY INSOFAR as said operating rights cover
depths from the surface down to 40,000 feet.
WORKING INTEREST: 4.875%
NET REVENUE INTEREST: .0389389*
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective June 1, 1988, between The United States of America, Lessor,
and CNG Producing Company, et al, Lessee, covering S/2 and S/2 of N/2
of Block 61, West Cameron Area, OCS Leasing Map, Louisiana Map No. 1,
containing 3,750.00 acres, more or less, and bearing Serial Number
OCS-G 9384, INSOFAR AND ONLY INSOFAR as said operating rights cover
depths from the surface down to 40,000 feet.
WORKING INTEREST: 4.875%
NET REVENUE INTEREST: .0389389*
13
<PAGE> 60
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective June 1, 1988, between The United States of America, Lessor,
and BHP Petroleum (Americas) Inc., et al, Lessee, covering N/2 and N/2
of S/2 of Block 76, West Cameron Area, OCS Leasing Map, Louisiana Map
No. 1, containing 3,750.00 acres, more or less, and bearing Serial
Number OCS-G 9386, INSOFAR AND ONLY INSOFAR as said operating rights
cover depths from the surface down to 40,000 feet.
WORKING INTEREST: 4.875%
NET REVENUE INTEREST: .0389389*
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective June 1, 1988, between The United States of America, Lessor,
and BHP Petroleum (Americas) Inc., et al, Lessee, covering N/2 and N/2
of S/2 of Block 77, West Cameron Area, OCS Leasing Map, Louisiana Map
No. 1, containing 3,750.00 acres, more or less, and bearing Serial
Number OCS-G 9387, INSOFAR AND ONLY INSOFAR as said operating rights
cover depths from the surface down to 40,000 feet.
WORKING INTEREST: 4.875%
NET REVENUE INTEREST: .0389389*
Oil and Gas Lease of Submerged Lands dated effective June 1, 1988,
between The United States of America, Lessor, and BHP Petroleum
(Americas) Inc., et al, Lessee, covering All of Block 76, West Cameron
Area, OCS Leasing Map, Louisiana Map No. 1, containing 5,000.00 acres,
more or less, and bearing Serial Number OCS-G 9386.
WORKING INTEREST: 8.125%
NET REVENUE INTEREST: .0648927*
14
<PAGE> 61
Oil and Gas Lease of Submerged Lands dated effective June 1, 1988,
between The United States of America, Lessor, and BHP Petroleum
(Americas) Inc., et al, Lessee, covering All of Block 77, West Cameron
Area, OCS Leasing Map, Louisiana Map No. 1, containing 5,000.00 acres,
more or less, and bearing Serial Number OCS-G 9387.
WORKING INTEREST: 8.125%
NET REVENUE INTEREST: .0648927*
OPERATING RIGHTS IN Oil and Gas Lease of Submerged Lands dated
effective July 1, 1985, between The United States of America, Lessor,
and Kerr-McGee Corporation, et al, Lessee, covering All of Block 48,
Eugene Island Area, OCS Leasing Map, Louisiana Map No. 4, containing
5,000.00 acres, more or less, and bearing Serial Number OCS-G 7727,
INSOFAR AND ONLY INSOFAR as said lease covers depths from the surface
down to the stratigraphic equivalent of the true vertical depth of
10,742 feet found in OCS-G 7727 Well No. 2
WORKING INTEREST: 19.25000%(1)
35.00000%(2)
45.16129%(3)
NET REVENUE INTEREST: .1537585*(1)
.2443362*(2)
.3254991*(3)
__________________________________________________
(1) OWNERSHIP IN OCS-G 7727 WELL A-1 ONLY (FORMERLY NO. 2 WELL)
(2) OWNERSHIP OF OCS-G 7727 WELL A-2 AND BALANCE OF OPERATING RIGHTS.
(3) EXPENSE PERCENTAGE AND REVENUE RECEIVABLE UNTIL NON-CONSENT
PENALTY RECOUPED IN OCS-G 7727 WELL NO. B-1 ONLY.
15
<PAGE> 62
OPERATING RIGHTS AND OVERRIDING ROYALTY INTEREST IN Oil and Gas Lease
of Submerged Lands dated effective July 1, 1983, between The United
States of America, Lessor, and Shell Offshore Inc., et al, Lessee,
covering the S/2 of Block 95, Vermilion Area, OCS Leasing Map,
Louisiana Map No. 3, containing 2,500.00 acres, more or less, and
bearing Serial Number OCS-G 5408, INSOFAR AND ONLY INSOFAR as said
lease covers depths down to and including 100' below the stratigraphic
equivalent of the base of the productive sand seen at 9,600' TVD in
OCS-G 5408 Well No. 1.
WORKING INTEREST: 25.00%
NET REVENUE INTEREST: .1708983*
OVERRIDING ROYALTY INTEREST: .0416667
Oil and Gas Lease dated March 15, 1985, recorded in Volume 280, under
Entry No. 322,028 in the Conveyance Records of Allen Parish,
Louisiana, executed by W.D. Blake, Agent and Attorney-in-Fact, et al,
as Lessors, in favor of Shell Western E&P Inc., as Lessee, as amended
by Amendment of Lease recorded in Volume 307, under Entry No. 345,021
in the Conveyance Records of Allen Parish, Louisiana, INSOFAR AND ONLY
INSOFAR as the South Half of the Northeast Quarter and the North Half
of the Southeast Quarter (S/2NE/4 and N/2SE/4) of Section 22, Township
6 South, Range 3 West, as to depths between 6,500' and 15,100' below
the surface of the earth. CONTRACTUAL RIGHTS. INTEREST NOT OF RECORD.
WORKING INTEREST: 44.44445%(1)
26.22222%(2)
17.77778%(3)
NET REVENUE INTEREST: .3194983*(1)
.1884914*(2)
.1277994*(3)
_____________________________________________
(1) Until Shell non-consent penalty recouped.
(2) After non-consent penalty recouped and prior to entire well payout.
(3) After entire well payout.
16
<PAGE> 63
Oil and Gas Lease dated January 20, 1989, between Amoco Production
Company, as Lessor, and Kriti Exploration, Inc., Lessee, recorded
under Film Code 103 31 0582 of the Real Property Records of Jefferson
County, Texas, and covering 320 acres, out of the Wesley Dikes Survey,
Abstract 17 and the Hezekiah Williams Survey, Abstract 56, Jefferson
County, Texas, as more particularly described in said lease.
WORKING INTEREST: 26.5625%
NET REVENUE INTEREST: .1858581*
* Additional burden of net profits interests in favor of James G. Floyd
not exceeding in total 2.00%, proportionately reduced by Smith Offshore
Exploration Company's leasehold record title or operating rights
ownership. The interests assigned include the interests of Lester H.
Smith, FM 2754, Ltd., and LHS, Smith & Smith, Ltd., L.L.P. assigned to
Seller by Assignments of Overriding Royalty Interest of the same date
herewith.
17
<PAGE> 64
AN UNDIVIDED INTEREST IN THE FOLLOWING PIPELINE RIGHT-OF-WAYS:
Right-of-Way No. OCS-G 13747, Segment No. 9695, Mustang Island Block
785 to Mustang Island Block 782.
Right-of-Way No. OCS-G 13514, Segment No. 9701, Main Pass Block 107 to
Main Pass Block 108.
Right-of-Way No. OCS-G 10114, Vermilion Block 95 to Vermilion Block 96.
18
<PAGE> 65
Appendix B
SCHEDULE OF INTERESTS
<TABLE>
<CAPTION>
WI NRI
-- ---
<S> <C> <C> <C>
Blue Bayou Prospect
Bel Estate No. 1 Well: BPO: .5000000 .3750538 * 100% penalty
After 100% paid out.
penalty: .4444445 .3194982 *
After 300%
penalty: .2622222 .1884914 *
APO: .1777778 .1277994 *
Eugene Island Block 48 Prospect
Well No. A-1 Op rts sur-
10,742': .1925000 .1537585 *
Well No. A-2 Op rts sur-
10,742': .3500000 .2443363 *
Well No. B-1 Op rts sur-
10,742': .4516129 .3254991 * Before penalty
Op rts sur-
10,742': .3500000 .2443363 * After 600% penalty
recouped
Vermilion Block 95 Prospect
Well No. 1 Op rts sur-
9700' .2500000 .1708983 * plus
.0416667 ORRI
West Cameron Block 60 Prospect
Well No. A-2 Op rts sur-
40,000' .0487500 .0389389 *
West Cameron Block 61 Prospect
Well No. A-3 Op rts sur-
40,000' .0487500 .0389389 *
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
WI NRI
-- ---
<S> <C> <C>
West Cameron Block 76 Prospect
Well No. A-1 Op rts sur-
40,000' .0487500 .0389389 *
West Cameron Block 77 Prospect
Well No. A-4 Op rts sur-
40,000' .0487500 .0389389 *
Galveston Island Block 252 Prospect
Well No. A-1 .3000000 .2396237 *
Well No. A-2 .3000000 .2396237 *
Well No. A-3 .3000000 .2396237 *
Well No. A-4 .3000000 .2396237 *
Well No. A-5 .3000000 .2396237 *
Galveston Island Block 272 Prospect
Well No. A-1 .1875000 .1497648 *
Well No. 2 .1875000 .1497648 *
High Island Block 138 N/2 Prospect
Well No. A-1 .3750000 .2995296 *
Matagorda Island Block 650 Prospect
Well No. A-1 .2267500 .1811156 *
Well No. A-2 .2267500 .1811156 *
Well No. A-3 .2267500 .1811156 *
Matagorda Island Block 651
Well No. A-1 Op rts sur-
13,000' .4512820 .3361284 *
Well No. A-2 Op rts sur-
13,000' .4512820 .3361284 *
Well No. A-3 Op rts sur-
13,000' .4512820 .3361284 *
Well No. A-4 Op rts sur-
13,000' .4512820 .3361284 *
Well No. A-5 Op rts sur-
13,000' .4512820 .3361284 *
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
WI NRI
-- ---
<S> <C> <C>
Matagorda Island Block 671 Prospect
Well No. A-1 .2267500 .1811158 *
Well No. A-2 .2267500 .1811158 *
Well No. A-3 .2267500 .1811158 *
Well No. A-6 .2267500 .1811158 *
Well No. A-7 .2267500 .1811158 *
Matagorda Island Block 672 Prospect
Well No. B-1 .2267500 .1811158 *
Well No. B-2 .2267500 .1811158 *
Well No. B-3 .2267500 .1811158 *
Well No. A-4 .2267500 .1811158 *
Well No. A-5 .2267500 .1811158 *
Well No. B-4 .2267500 .1811158 *
Well No. B-5 .2267500 .1811158 *
Mustang Island Block 785 Prospect
Well No. A-1 Op rts sur-
10,400' .1250000 .0998432 *
Well No. A-2 Op rts sur-
10,400' .1250000 .0998432 *
Well No. A-3 Op rts sur-
10,400' .1250000 .0998432 *
Well No. A-4 Op rts sur-
10,400' .1250000 .0998432 *
Well No. A-5 Op rts sur-
10,400' .1250000 .0998432 *
Mustang Island Block 858 Prospect
Well No. 1 .3250000 .2595923 *
Well No. A-2 .3250000 .2595923 *
Well No. A-3 .3250000 .2595923 *
Northwest Beaumont Prospect
Amoco Fee No. 1 Well .2656250 .1858581 *
Amoco Fee No. 2 Well .2656250 .1858581 *
</TABLE>
<PAGE> 68
* Additional burden of net profits interest in favor of James G. Floyd,
not exceeding in total 2.00%, proportionately reduced by Smith
Offshore Exploration Company's leasehold record title or operating
rights ownership. The interests assigned include the interests of
Lester H. Smith, FM 2754, Ltd., and LHS, Smith & Smith, Ltd., L.L.P.,
assigned to Seller by Assignments of Overriding Royalty Interest of
the same date herewith.
<PAGE> 1
EXHIBIT 10.17
PURCHASE AND SALE AGREEMENT - TRANSTEXAS
<PAGE> 2
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
EXHIBIT "A"
CHARCO
ZAPATA COUNTY, TEXAS
PART I
1. Oil & Gas Lease between Derly Villarreal, et al, as Lessors and
TransAmerican Natural Gas Corporation, as Lessee dated October 20,
1990, recorded in Volume 480, Page 252 of the Official Records of
Zapata County, Texas. (005-001B)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Derly No. 1 147576 100% 80%
Derly No. 2 152431 100% 80%
Derly No. 3 150710 100% 80%
Derly No. 4 152451 100% 80%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 80%
2. Oil & Gas Lease between Jacoba Villarreal, Trustee, as Lessor and
TransAmerican Natural Gas Corporation, as Lessee, dated September 30,
1990, but effective September 17, 1990, recorded in Volume 433, Page
391 of the Official Records of Zapata County, Texas. One year Lease
Extension dated September 16, 1993, recorded in Volume 486, Page 676,
and additional year Lease Extension dated September 9, 1994, recorded
in Volume 509, Page 592. Rental Division Order dated June 18, 1969,
recorded in Volume 155, Page 33. (005-002B)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Jacoba No. A1 156605 100% 78.5%
Jacoba No. A2 000011 100% 78.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.5%
3. Memorandum of Oil & Gas Lease between Ramirez Mineral Trust, as Lessor
and TransAmerican Natural Gas Corporation, as Lessee, dated June 15,
1989, recorded in Volume 416, Page 195 of the Official Records of
Zapata County, Texas. (005-003A)
-1-
<PAGE> 3
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
R.M.T. No. 1 127973 100% 73.5%
R.M.T. No. 2 151335 100% 73.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 73.5%
4. Memorandum of Oil and Gas Lease between Gloria E. Gutierrez, et al, as
Lessors and TransTexas Gas Corporation, as Lessee, dated March 7,
1994, recorded in Volume 503 at Page 476 of the Official Records of
Zapata County, Texas. (005-005/01B)
5. Oil and Gas Lease between Gloria E. Gutierrez, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 7, 1994, recorded
in Volume 497 at Page 444, Correction Memorandum of Oil and Gas Lease
recorded in Volume 518 at Page 310 of the Official Records of Zapata
County, Texas. (005-005/02B)
6. Oil and Gas Lease between Manuel G. Ramirez, et ux, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 5, 1994, recorded
in Volume 498 at Page 44 of the Official Records of Zapata County,
Texas. (005-006B)
7. Oil and Gas Lease between Juan D. Gutierrez, et ux, as Lessors and
TransTexas Gas Corporation, as Lessee, dated July 1, 1994, a
Memorandum of which is recorded in Volume 508 at Page 464 of the
Official Records of Zapata County, Texas. (005-007B)
8. Oil and Gas Lease between Derly N. Ramirez, et ux, as Lessors and
TransTexas Gas Corporation, as Lessee, dated April 26, 1996, a
Memorandum of which is recorded in Volume at Page
of the Official Records of Zapata County, Texas. (005-008B)
9. Memorandum of Oil and Gas Lease between Jose C. Gutierrez, et al, as
Lessors and TransTexas Gas Corporation, as Lessee, dated November 15,
1994, recorded in Volume 513 at Page 213 of the Official Records of
Zapata County, Texas. (005-010B)
10. Memorandum of Oil and Gas Lease between Rafael Eduardo Gutierrez, et
ux, as Lessors and TransTexas Gas Corporation, as Lessee, dated August
15, 1994, recorded in Volume 508 at Page 467 of the Official Records
of Zapata County, Texas. (005-011B)
11. Oil and Gas Lease between Jacoba G. Villarreal, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated
-2-
<PAGE> 4
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
August 24, 1994, recorded in Volume 508 at Page 476 of the Official
Records of Zapata County, Texas. (005-012B)
12. Oil and Gas Lease between Irene G. de Gutierrez, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated August 23, 1994, recorded
in Volume 508 at Page 448 of the Official Records of Zapata County,
Texas. (005-013B)
13. Memorandum of Oil and Gas Lease between Jesus M. Garcia, et al, as
Lessors and TransTexas Gas Corporation, as Lessee, dated February 12,
1996, Counterparts of which is recorded in Volume at Page
of the Official Records of Zapata County, Texas. (005-020/01A)
14. Memorandum of Oil and Gas Lease between Petra G. Dilley, as Lessor and
TransTexas Gas Corporation, as Lessee, dated February 12, 1996,
recorded in Volume , Page of the Official Records of
Zapata County, Texas. (005-020/02A)
15. Oil and Gas Lease between Aurora G. Ramirez, as Lessor and TransTexas
Gas Corporation, as Lessee, dated March 8, 1996, a Memorandum of which
is recorded in Volume at Page of the Official Records
of Zapata County, Texas. (005-020/03A)
16. Oil and Gas Lease between Jose Angel Garcia, as Lessor and TransTexas
Gas Corporation, as Lessee, dated February 12, 1996, recorded in
Volume , Page of the Official Records of Zapata County,
Texas. (005-020/04A)
17. Oil and Gas Lease between Rodolfo Morales, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated February 12, 1996, a
Memorandum of which is recorded in Volume at Page of
the Official Records of Zapata County, Texas. (005-020/06A)
18. Oil and Gas Lease between Adalberto Garcia, as Lessor and TransTexas
Gas Corporation, as Lessee, dated February 18, 1996, a Memorandum of
which is recorded in Volume at Page of the Official
Records of Zapata County, Texas. (005-020/07A)
19. Oil and Gas Lease between Heberto Garcia, as Lessor and TransTexas Gas
Corporation, as Lessee, dated February 18, 1996, a Memorandum of which
is recorded in Volume at Page of the Official Records of
Zapata County, Texas. (005-020/08A)
20. Oil and Gas Lease between Amelia G. Alegria, as Lessor and TransTexas
Gas Corporation, as Lessee, dated February 12, 1996, a Memorandum of
which is recorded in Volume at Page of the Official
Records of Zapata County, Texas. (005-020/09A)
-3-
<PAGE> 5
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
21. Memorandum of Oil and Gas Lease between Martin Garcia Benavides, et
al, as Lessors and TransTexas Gas Corporation, as Lessee, dated March
9, 1996, Counterparts of which is recorded in Volume at
Page of the Official Records of Zapata County, Texas. (005-020/10A)
22. Memorandum of Oil and Gas Lease between Aida R. Garcia, et al, as
Lessors and TransTexas Gas Corporation, as Lessee, dated April 6,
1996, Counterparts of which is recorded in Volume at Page
of the Official Records of Zapata County, Texas. (005-020/11A)
23. Memorandum of Oil and Gas Lease between Javier Ramirez and Graciela
Ramirez Garza, as Lessors and TransTexas Gas Corporation, as Lessee,
dated March 22, 1996, recorded in Volume , Page of the
Official Records of Zapata County, Texas. (005-020/12A)
24. Memorandum of Oil and Gas Lease between Rosa G. Garcia, et al, as
Lessors and TransTexas Gas Corporation, as Lessee, dated March 9,
1996, Counterparts of which are recorded in Volume at Page of
the Official Records of Zapata County, Texas. (005-020/13A)
25. Oil and Gas Lease between Elia O. Hinojosa, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 5, 1996, a
Memorandum of which is recorded in Volume at Page of
the Official Records of Zapata County, Texas. (005-020/14A)
26. Oil and Gas Lease between Florinda A. Garcia, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 19, 1996, a
Memorandum of which is recorded in Volume at Page of the
Official Records of Zapata County, Texas. (005-020/15A)
27. Oil and Gas Lease between Yolanda Garcia, et vir, as Lessors and
TransTexas Gas Corporation, as Lessee, dated February 12, 1996, a
Memorandum of which is recorded in Volume at Page of the
Official Records of Zapata County, Texas. (005-020/16A)
28. Oil and Gas Lease between Yolanda G. Lopez, et al, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 15, 1996, a
Memorandum of which is recorded in Volume at Page of the
Official Records of Zapata County, Texas. (005-020/17A)
29. Oil and Gas Lease between Jose C. Morales, et ux, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 11, 1996, a
Memorandum of which is recorded in Volume at Page of
the Official Records of Zapata County, Texas. (005-020/18)
-4-
<PAGE> 6
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
30. Oil, Gas and Mineral Lease between Jorge Perez, et ux, as Lessors and
TransTexas Gas Corporation, as Lessee, dated March 22, 1996, recorded
in Volume at Page of the Official Records of Zapata County,
Texas. (005-022A)
31. Oil, Gas and Mineral Lease between Eliseo J. Perez, et ux, as Lessors
and TransTexas Gas Corporation, as Lessee, dated March 22, 1996,
recorded in Volume at Page of the Official Records of Zapata
County, Texas. (005-023A)
32. Memorandum of Oil and Gas Lease between Jose Clemente Gutierrez, et
al, as Lessors and TransTexas Gas Corporation, as Lessee, dated May
15, 1996, recorded in Volume , Page of the Official
Records of Zapata County, Texas. (005-024A)
33. Oil and Gas Lease between the USA TX NM 90928, as Lessor and Phoenix
Energy Companies, Inc., as Lessee, dated June 1, 1993, recording not
applicable, Zapata County, Texas. (005-025)
34. Oil & Gas Lease between Jesus V. Cuellar, et ux, as Lessors and James
A. Mayo, as Lessee, dated October 20, 1971, recorded in Volume 167,
Page 159 of the Deed Records of Zapata County, Texas, Renewal dated
September 30, 1976, recorded in Volume 222, Page 261, and ratification
by Graciela F.V. Cuellar, et al by agreement dated August 21, 1978,
recorded in Volume 222, Page 266 of the Deed Records of Zapata County,
Texas. Ratified December 9, 1988, recorded in Volume 400, Page 344
and April 16, 1993, recorded in Volume 481, Page 830. (009-033)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
JV Cuellar No. 1 153187 100% 68.5%
JV Cuellar No. 2 153179 100% 68.5%
JV Cuellar No. 3 153181 100% 68.5%
JV Cuellar No. 4 153501 100% 68.5%
JV Cuellar No. 5 154449 100% 68.5%
JV Cuellar No. 6 N/A 100% 68.5%
JV Cuellar No. 7 157633 100% 68.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 68.5%
35. Oil, Gas & Mineral Lease between Abel Ramirez, et ux, as Lessors and
James A. Mayo, as Lessee, dated October 7, 1966, recorded in Volume
139, Page 27 of the Deed Records of Zapata County, Texas. (009-070)
-5-
<PAGE> 7
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Abel Ramirez No. 1 065181 100% 76.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
36. Oil, Gas & Mineral Lease between Delia R. de Martinez, et al, as
Lessors and James A. Mayo, as Lessee, dated May 2, 1968, recorded in
Volume 156, Page 119 of the Deed Records of Zapata County, Texas.
(009-090)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Martinez-
Ramirez GU No. 1 063229 100% 76.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
37. Oil, Gas & Mineral Lease between Sarah R. de Ramirez, et al, as
Lessors and James A. Mayo, as Lessee, dated May 2, 1968, recorded in
Volume 156, Page 139 of the Deed Records of Zapata County, Texas.
(009-091)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Martinez-
Ramirez GU No. 1 063229 100% 76.0%
M. Ramirez
GU No. 1 064507 100% 76.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
38. Oil, Gas & Mineral Lease between Francisco Ramirez, et ux, as Lessors
and James A. Mayo, et al, as Lessees, dated May 2, 1968, recorded in
Volume 156, Page 213 of the Deed Records of Zapata County, Texas.
(009-092)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Martinez-
Ramirez GU No. 1 063229 100% 76.0%
</TABLE>
-6-
<PAGE> 8
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
39. Oil, Gas & Mineral Lease between Antonio Ramirez, et al, as Lessors
and James A. Mayo, as Lessee, dated May 2, 1968, recorded in Volume
156, Page 149 of the Deed Records of Zapata County, Texas. (009-095)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
M. Ramirez
GU No. 1 064507 100% 76.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
40. Oil, Gas & Mineral Lease between Rafael Ramirez, et al, as Lessors and
James A. Mayo, as Lessee, dated May 2, 1968, recorded in Volume 156,
Page 163 of the Deed Records of Zapata County, Texas. (009-096)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
M. Ramirez
GU No. 1 064507 100% 76.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
41. Oil, Gas & Mineral Lease between Arturo Ramirez, et al, as Lessors and
James A. Mayo, as Lessee, dated May 2, 1968, recorded in Volume 156,
Page 108 of the Deed Records of Zapata County, Texas. (009-097)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Martinez-
Ramirez GU No. 1 063229 100% 76.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.0%
-7-
<PAGE> 9
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
42. Oil & Gas Lease between George R. Swantner, Jr., et al, as Lessors and
Seymour Wormser, as Lessee dated July 10, 1974, recorded in Volume
184, Page 330 of the Deed Records of Zapata County, Texas.
(016-064/01)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
G. R. Swantner No. 1 075447 100% 79.23%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 79.23%
43. Oil, Gas & Mineral Lease between Lloyd M. Bentsen, Tr., as Lessor and
Seymour Wormser, as Lessee dated July 24, 1974, recorded in Volume
184, Page 543 of the Deed Records of Zapata County, Texas.
(016-064/02)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
G. R. Swantner No. 1 075447 100% 79.23%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 79.23%
44. Oil & Gas Lease between Lydia de Alonzo, et vir, as Lessors and Good
Hope Refineries, Inc., as Lessee dated June 18, 1979, recorded in
Volume 230, Page 356 of the Deed Records of Zapata County, Texas.
(016-070A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Porras GU No. 1 102788 100% 72%
Porras GU No. 2 106086 100% 72%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 75.86842%
45. Oil & Gas Lease between Araceli Ramirez, et vir, as Lessors and Good
Hope Refineries, Inc., as Lessee dated June 18, 1979, recorded in
Volume 246, Page 229 of the Deed Records of Zapata County, Texas.
(016-071A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Porras GU No. 1 102788 100% 72%
Porras GU No. 2 106086 100% 72%
</TABLE>
-8-
<PAGE> 10
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 75.86842%
46. Oil, Gas & Mineral Lease between Leonardo Flores, Sr., et al, as
Lessors and C. Neil Johnson, Jr., as Lessee dated July 5, 1974,
recorded in Volume 184, Page 564 of the Deed Records of Zapata County,
Texas. (016-072)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Leonardo No. 2 087817 100% 79.22916%
Leonardo No. 3R 114114 100% 75.19270%
Leonardo No. 4 114509 100% 76.53819%
Leonardo No. 6 117133 100% 79.22916%
Leonardo No. 7 120232 100% 79.22916%
Leonardo No. 8 121970 100% 79.22916%
Leonardo No. 9 123375 100% 79.22916%
Leonardo No. 10 124839 100% 79.22917%
Leonardo No. 11 124005 100% 79.22916%
Leonardo No. 12 000032 100% 79.22916%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 79.22916%
47. Oil & Gas Lease between Francisca F. de Porras, et vir, as Lessors and
Good Hope Refineries, Inc., as Lessee dated June 18, 1979, recorded in
Volume 246, Page 239 of the Deed Records of Zapata County, Texas.
(016-073A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Porras GU No. 1 102788 100% 72%
Porras GU No. 2 106086 100% 72%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 75.86842%
48. Oil & Gas Lease between Martiniano Garza, et al, as Lessors and John
Manley, III, as Lessee dated March 27, 1974, recorded in Volume 181,
Page 226 of the Deed Records of Zapata County, Texas. (016-092)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
M. Garza No. 1 089705 100% 77.25%
</TABLE>
-9-
<PAGE> 11
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.25%
49. Oil & Gas Lease between Amando Garza, as Lessor and Good Hope
Refineries, Inc., as Lessee dated September 17, 1974, recorded in
Volume 186, Page 73 of the Deed Records of Zapata County, Texas.
(016-118)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
A. Garza No. 1 094266 100% 79.22916%
A. Garza No. 2 100535 100% 79.22916%
A. Garza No. 3 120420 100% 75.19270%
A. Garza No. 5 000045 100% 79.22916%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 79.22916%
50. Oil & Gas Lease between Alfonso Garza, et al, as Lessors and Good Hope
Refineries, Inc., as Lessee dated September 17, 1974, recorded in
Volume 186, Page 105 of the Deed Records of Zapata County, Texas.
(016-120) SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a square around a point designated according to the
drilling agreement between Sovereign Energy and GHR Energy
Corp., et al. Said point (the Alfonso #7) being within the
Fernando Garza Survey, Charco de la India Grant, Abstract No.
74, Zapata County, Texas, and in the center of said 80 acres,
being described as follows:
BEGINNING at the Southeast corner of the Fernando
Garza Survey; THENCE Southwest along the Southeast
line of the Fernando Garza Survey 1866.76 feet for
the place of beginning.
THENCE Southwest along the Southeast line of the
Southeast line of the Fernando Garza Survey, 1866.76
feet for the Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of the Fernando Garza Survey,
-10-
<PAGE> 12
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
1866.76 feet for the Northwest corner of said 80
acre tract.
THENCE Northeast along a line parallel to the
Southeast line of the Fernando Garza Survey, 1866.76
feet for the Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of the Fernando Garza Survey, 1866.76
feet to the place of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Alfonso No. 1 101258 100% 79.22916%
Alfonso No. 2 101256 100% 79.22916%
Alfonso No. 3 104941 100% 75.19270%
Alfonso No. 4 103583 100% 75.19270%
Alfonso No. 5R 118274 100% 76.53819%
Alfonso No. 6 113615 100% 79.22916%
Alfonso No. 8 142622 100% 79.22916%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 79.22916%
51. Oil, Gas & Mineral Lease between Leonardo G. Flores, et ux, as Lessors
and George H. Coates, as Lessee dated July 23, 1965, recorded in
Volume 132, Page 253 of the Deed Records of Zapata County, Texas.
Amendment dated September 22, 1977, recorded in Volume 371, Page 544;
Amendment dated June 14, 1985, recorded in Volume 366, Page 315; and
Amendment dated October 15, 1989, recorded in Volume 448, Page 330.
(016-124) SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Cliffs Drilling Company and
TransAmerican Natural Gas Corporation, et al. Said point (the
L.G. Flores #4) being within the Leonardo G. Flores Tract, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, being described as follows:
BEGINNING at the Northeast corner of the Leonardo G.
Flores Tract for the place of beginning.
-11-
<PAGE> 13
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Southwest along the Northwest line of the
Leonardo G. Flores Tract, 2323 feet for the Northwest
corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of the Leonardo G. Flores Tract, 1500
Feet for the Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of the Leonardo G. Flores Tract, 2323
feet for the Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of the Leonardo G. Flores Tract, 1500
feet to the place of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
L. G. Flores No. 1 070208 100% 77.21094%
L. G. Flores No. 2 118270 100% 77.21094%
L. G. Flores No. 5 126913 100% 77.21094%
L. G. Flores No. 6 128999 100% 77.21094%
L. G. Flores No. 7 131586 100% 77.21094%
L. G. Flores No. 8 132055 100% 77.21094%
L. G. Flores No. 9 135085 100% 77.21094%
L. G. Flores No. 10 137234 100% 77.21094%
L. G. Flores No. 11 145265 100% 77.21094%
L. G. Flores No. 13 147307 100% 77.21094%
L. G. Flores No. 14C 149952 100% 77.21094%
L. G. Flores No. 14T 149060 100% 77.21094%
L. G. Flores No. 15C 150226 100% 77.21094%
L. G. Flores No. 15T 150795 100% 77.21094%
L. G. Flores No. 16C 151453 100% 77.21094%
L. G. Flores No. 16T 150546 100% 77.21094%
L. G. Flores No. 17 153316 100% 77.21094%
L. G. Flores No. 17R 151751 100% 77.21094%
L. G. Flores No. 18 152922 100% 77.21094%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.21094%
52. Oil & Gas Lease between Vale A. Ackerman, et al, as Lessors and Good
Hope Refineries, Inc., as Lessee dated June 29,
-12-
<PAGE> 14
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
1979, recorded in Volume 228, Page 453 of the Deed Records of Zapata
County, Texas. Amendment dated effective as of April 1, 1991,
recorded in Volume 442, Page 448. (016-136) SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a square around a point designated according to the
drilling agreement between Cliffs Drilling Company and
TransAmerican Natural Gas Corporation, et al. Said point (the
Asche #10) being within the Fred Asche Tract Charco De La
India Grant, Abstract No. 74, Zapata County, Texas, and in the
center of said 80 acres, being described as follows:
BEGINNING at the Northwest Corner of the Fred Asche
Tract; THENCE Northeast along the Northwest line of
the Fred Asche Tract 23400, more or less, feet;
THENCE Southeast along a line perpendicular to the
Northwest line of the Fred Asche tract 1867, more or
less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Northwest line of the Fred Asche Tract, 1866.76 feet
for the Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of the Fred Asche Tract, 1866.76 feet
for the Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of the Fred Asche Tract, 1866.76 feet
for the Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of the Fred Asche Tract, 1866.76 feet
to the place of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Asche No. 1 101877 100% 67.5%
Asche No. 2 095072 100% 67.5%
Asche No. 3 096883 100% 67.5%
</TABLE>
-13-
<PAGE> 15
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Asche No. 4 156601 100% 67.5%
Asche No. 5 103582 100% 67.5%
Asche No. 6 107943 100% 67.5%
Asche No. 7 112821 100% 67.5%
Asche No. 8 117737 100% 65.2%
Asche No. 11 119540 100% 67.5%
Asche No. 12 123646 100% 67.5%
Asche No. 13C 124681 100% 67.5%
Asche No. 13T 124682 100% 67.5%
Asche No. 14 124838 100% 67.5%
Asche No. 15C 126891 100% 67.5%
Asche No. 15T 126890 100% 67.5%
Asche No. 16C 127199 100% 67.5%
Asche No. 16T 127204 100% 67.5%
Asche No. 17 127380 100% 67.5%
Asche No. 18 127867 100% 67.5%
Asche No. 20 130636 100% 67.5%
Asche No. 21 135990 100% 67.5%
Asche No. 22 139718 100% 67.5%
Asche No. 24 143872 100% 67.5%
Asche No. 25 148977 100% 67.5%
Asche No. 26 150255 100% 67.5%
Asche No. 27 152399 100% 67.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 67.5%
53. Memorandum of Oil & Gas Lease between Maurilio Flores, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated
September 4, 1979, recorded in Volume 232, Page 655 of the Deed
Records of Zapata County, Texas. (061-001A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
M. Flores No. 2 103040 100% 73.55%
M. Flores No. 3 105944 100% 73.50%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 73.55%
54. Memorandum of Oil & Gas Lease between David Bustamante, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated
December 16, 1983, to be effective as of December 18, 1983, recorded
in Volume 284, Page 742 of the Deed Records of Zapata County, Texas.
(061-008A) SAVE AND EXCEPT:
-14-
<PAGE> 16
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
-15-
<PAGE> 17
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
55. Memorandum of Oil & Gas Lease between Feliz F. Bustamante, as Lessor
and Southern States Exploration, Inc., as Lessee, dated December 16,
1983, to be effective as of December 18, 1983, recorded in Volume 284,
Page 748 of the Deed Records of Zapata County, Texas. (061-009A)
SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
-16-
<PAGE> 18
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
56. Memorandum of Oil & Gas Lease between Daniel Yzaguirre, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated
December 16, 1983, to be effective as of December 18, 1983, recorded
in Volume 284, Page 754 of the Deed Records of Zapata County, Texas.
(061-010A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Yzaguirre-Leo No. 1 126887 100% 77.57217%
Yzaguirre-Leo No. 3 132355 100% 77.57217%
Yzaguirre-Leo No. 5 139695 100% 77.57217%
Yzaguirre-Leo No. 6 146889 100% 77.57217%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.57217%
57. Oil & Gas Lease between Ricardo de los Santos, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated December 16, 1983,
to be effective as of December 18, 1983, recorded in Volume 374, Page
629 of the Official Records of Zapata County, Texas, and ratification
by Simon Sifuentes by agreements dated May 31, 1988, recorded in
Volume 394, Page 378 and Volume 394, Page 381, respectively, of the
Official Records of Zapata County, Texas. (061-011/01A) SAVE AND
EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las
-17-
<PAGE> 19
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15, 1867,
more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of
-18-
<PAGE> 20
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Share 15, 1866.76 feet for the Southwest corner of
said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(C) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
-19-
<PAGE> 21
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- --------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
<TABLE>
<S> <C> <C> <C>
Yzaguirre-Leo No. 1 126887 100% 77.57217%
Yzaguirre-Leo No. 3 132355 100% 77.57217%
Yzaguirre-Leo No. 5 139695 100% 77.57217%
Yzaguirre-Leo No. 6 146889 100% 77.57217%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.57217%
58. Oil & Gas Lease between Ricardo de los Santos, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated December 16, 1983,
recorded in Volume 374, Page 656 of the Official Records of Zapata
County, Texas, and
-20-
<PAGE> 22
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
ratification by Simon Sifuentes by agreements dated May 31, 1988,
recorded in Volume 394, Page 378 and Volume 394, Page 381,
respectively, of the Official Records of Zapata County, Texas.
(061-011/01A) SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and
-21-
<PAGE> 23
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
in the center of said 80 acres, said 80 acres being described
as follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15, 1867,
more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(C) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
-22-
<PAGE> 24
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
<TABLE>
<S> <C> <C> <C>
Yzaguirre-Leo No. 1 126887 100% 77.57217%
Yzaguirre-leo No. 3 132355 100% 77.57217%
Yzaguirre-Leo No. 5 139695 100% 77.57217%
</TABLE>
-23-
<PAGE> 25
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Yzaguirre-Leo No. 6 146889 100% 77.57217%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.57217%
59. Memorandum of Oil & Gas Lease between Maria G. Garcia, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated
December 16, 1983, to be effective as of December 18, 1983, recorded
in Volume 284, Page 760 of the Deed Records of Zapata County, Texas.
(061-014A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
60. Oil, Gas & Mineral Lease between Jose L. Bustamante, et al, as Lessors
and Southern States Exploration, Inc., as Lessee, dated December 18,
1983, recorded in Volume 284, Page 410 of the Deed Records of Zapata
County, Texas. (061-015/01A) SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of
-24-
<PAGE> 26
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Share 26, 2323 feet for the Northwest corner of said
80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
61. Oil, Gas & Mineral Lease between Silvester Bustamante, et al., as
Lessors, and Southern States Exploration, Inc., as Lessee, dated
December 18, 1987, recorded in Volume 376, Page 850 of the Official
Records of Zapata County, Texas. (061-015/02B)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
Rodriguez GU No. 6C 150195 100% 71.78180%
</TABLE>
-25-
<PAGE> 27
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 71.78180%
62. Oil & Gas Lease between Marcela de los Santos, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated December 16, 1983,
to be effective as of December 18, 1983, recorded in Volume 403, Page
100 of the Official Records of Zapata County, Texas. (061-016A) SAVE
AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
-26-
<PAGE> 28
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
63. Oil & Gas Lease between Marcela de los Santos, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated December 16, 1983,
to be effective as of December 18, 1983, recorded in Volume 403, Page
125 of the Official Records of Zapata County, Texas. (061-016A) SAVE
AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
-27-
<PAGE> 29
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
64. Oil & Gas Lease between Julian Bustamante, et al, as Lessors and
Southern States Exploration, Inc. as Lessee, dated December 18, 1983,
recorded in Volume 373, Page 418 of the Official Records of Zapata
County, Texas. (061-017A) SAVE AND EXCEPT:
(A) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
-28-
<PAGE> 30
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
-29-
<PAGE> 31
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
65. Oil, Gas & Mineral Lease between Francisco de los Santos, et ux, as
Lessors and Southern States Exploration, Inc., as Lessee, dated
December 20, 1983, recorded in Volume 284, Page 420 of the Deed
Records of Zapata County, Texas, and ratification by Carlos de los
Santos by agreement dated May 14, 1987, recorded in Volume 364, Page
197 of the Official Records of Zapata County, Texas; and ratification
by Juana B. Espinoza, et ux, by agreement dated October 20, 1987,
recorded in Volume 374, Page 399 of the Official Records of Zapata
County, Texas; and ratification by Refugio Bustamante, et ux by
agreement dated October 20, 1987, recorded in Volume 374, Page 401 of
the Official Records of Zapata County, Texas; and ratification by
Julian Bustamante, et ux by agreement dated October 20, 1987, recorded
in Volume 374, Page 403 of the Official Records of Zapata County,
Texas. (061-019/01A) SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
-30-
<PAGE> 32
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
-31-
<PAGE> 33
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(C) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15,
3200, more or less, feet; THENCE Northwest along a
line perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
-32-
<PAGE> 34
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
66. Oil & Gas Lease between I. W. Shaffer, et al, as Lessors and
TransAmerican Natural Gas Corporation, as Lessee, dated January 30,
1986, recorded in Volume 333, Page 228 of the Official Records of
Zapata County, Texas. (061-019/02) SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
-33-
<PAGE> 35
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
-34-
<PAGE> 36
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
67. Oil & Gas Lease between Rutilde B. Martinez, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated December 16, 1983,
to be effective as of December 18, 1983, recorded in Volume 373, Page
440 of the Official Records of Zapata County, Texas. (061-020A) SAVE
AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square
-35-
<PAGE> 37
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
around a point designated according to the drilling agreement
between Aspen Services and TransAmerican Natural Gas
Corporation, et al. Said point (the De Los Santos G.U. #1,
Well #3) being within Share 15, Las Comitas Grant, Abstract
No. 559, Zapata County, Texas, and in the center of said 80
acres, said 80 acres being described as follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15,
3200, more or less, feet; THENCE Northwest along a
line perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(C) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15;
THENCE Southwest along
-36-
<PAGE> 38
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
the Southeast line of S BEGINNING at the Southeast
corner of Share 15; THENCE Southwest along the
Southeast line of Share 15, 3200, more or less,
feet; THENCE Northwest along a line perpendicular to
the Southeast line of Share 15, 1867, more or less,
feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
</TABLE>
-37-
<PAGE> 39
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
68. Memorandum of Oil & Gas Lease between Rogelio Uribe Land & Cattle Co.,
Ltd., as Lessors and Southern States Exploration, Inc., as Lessee,
dated March 5, 1984, to be effective as of February 28, 1984, recorded
in Volume 286, Page 395 of the Deed Records of Zapata County, Texas.
(061-021A) SAVE AND EXCEPT:
(A) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15,
3200, more or less, feet; THENCE Northwest along a
line perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast
-38-
<PAGE> 40
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
line of Share 15, 1866.76 feet to the place of
beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15,
3200, more or less, feet; THENCE Northwest along a
line perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
</TABLE>
-39-
<PAGE> 41
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Rodriguez GU No. 6C 150195 100% 71.78180%
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 71.78180%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
69. Memorandum of Oil & Gas Lease between Rogelio Uribe Land & Cattle Co.,
Ltd., as Lessors and Southern States Exploration, Inc., as Lessee,
dated March 5, 1984, to be effective as of February 28, 1984, recorded
in Volume 286, Page 399 of the Deed Records of Zapata County, Texas.
(061-021A) SAVE AND EXCEPT:
(A) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along line
perpendicular to the Southeast line of Share 15, 1867,
more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
-40-
<PAGE> 42
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #4) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15, 1867,
more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
-41-
<PAGE> 43
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<Catpion>
Well Name R.R.C. No. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
Rodriguez GU No. 6C 150195 100% 71.78180%
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 71.78180%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
70. Oil, Gas & Mineral Lease between Juan J. Garza, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated February 10, 1984,
recorded in Volume 286, Page 349 of the Deed Records of Zapata County,
Texas. (061-023A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
Rodriguez GU No. 6C 150195 100% 71.78180%
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
</TABLE>
-42-
<PAGE> 44
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 71.78180%
71. Oil, Gas & Mineral Lease between William R. Leo, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated August 15, 1984,
recorded in Volume 294, Page 906 of the Official Records of Zapata
County, Texas, and ratification by Matiana Cuellar Bustamante by
agreement dated June 30, 1988, recorded in Volume 402, Page 299 of the
Official Records of Zapata County, Texas. (061-026/01A) SAVE AND
EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
-43-
<PAGE> 45
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Yzaguirre-Leo No. 1 126887 100% 77.57217%
Yzaguirre-Leo No. 3 132355 100% 77.57217%
Yzaguirre-Leo No. 5 139695 100% 77.57217%
Yzaguirre-Leo No. 6 146889 100% 77.57217%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.57217%
<TABLE>
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
Rodriguez GU No. 6C 150195 100% 71.78180%
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 71.78180%
72. Oil, Gas & Mineral Lease between William R. Leo, et al, as Lessors and
TransAmerican Natural Gas Corporation, as Lessee, dated December 15,
1987, recorded in Volume 378, Page 533 of the Official Records of
Zapata County, Texas. (061-026/02) SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and
-44-
<PAGE> 46
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
TransAmerican Natural Gas Corporation, et al. Said point (the
Bernardo G.U #1, Well #3) being within the Bernardo G.U. #1,
Las Comitas Grant, Abstract No. 559, Zapata County, Texas, and
in the confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
-45-
<PAGE> 47
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
73. Memorandum of Oil & Gas Lease between Roberto Garcia, Jr., et al, as
Lessors and GHR Energy Corp., as Lessee, dated May 1, 1985, recorded
in Volume 309, Page 475 of the Official Records of Zapata County,
Texas. (061-028A) SAVE AND EXCEPT:
(A) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15, 1867,
more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al.
-46-
<PAGE> 48
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Said point (the De Los Santos G.U. #1, Well #4) being within
Share 15, Las Comitas Grant, Abstract No. 559, Zapata County,
Texas, and in the center of said 80 acres, said 80 acres being
described as follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15, 1867,
more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
-47-
<PAGE> 49
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
74. Oil & Gas Lease between Jose M. Gutierrez, Jr., et al, as Lessors and
Hilda U. Martinez, as Lessee, dated May 10, 1980, recorded in Volume
239, Page 805 of the Deed Records of Zapata County, Texas. (061-030)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
JM Gutierrez No. 2 118924 100% 80.83333%
JM Gutierrez No. 4 123611 100% 80.83333%
JM Gutierrez No. 7 126079 100% 80.83333%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 80.8333%
75. Memorandum of Oil & Gas Lease between Emma D. Rodriguez, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated April
27, 1984, to be effective as of June 27, 1984, recorded in Volume 289,
Page 235 of the Official Records of Zapata County, Texas. (061-037A)
SAVE AND EXCEPT:
(A) Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of
-48-
<PAGE> 50
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Share 26, 2323 feet for the Southeast corner of said
80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
(B) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square around a point designated
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
De Los Santos G.U. #1, Well #3) being within Share 15, Las
Comitas Grant, Abstract No. 559, Zapata County, Texas, and in
the center of said 80 acres, said 80 acres being described as
follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southwest corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
(C) Eighty (80) acres, more or less, of land in Zapata County,
Texas, in the form of a square
-49-
<PAGE> 51
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
around a point designated according to the drilling agreement
between Aspen Services and TransAmerican Natural Gas
Corporation, et al. Said point (the De Los Santos G.U. #1,
Well #4) being within Share 15, Las Comitas Grant, Abstract
No. 559, Zapata County, Texas, and in the center of said 80
acres, said 80 acres being described as follows:
BEGINNING at the Southeast corner of Share 15; THENCE
Southwest along the Southeast line of Share 15, 3200,
more or less, feet; THENCE Northwest along a line
perpendicular to the Southeast line of Share 15,
1867, more or less, feet for the place of beginning.
THENCE Northeast along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet for the
Northeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Southeast line of Share 15, 1866.76 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Southeast line of Share 15, 1866.76 feet to the place
of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
<S> <C> <C> <C>
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
Rodriguez GU No. 6C 150195 100% 71.78180%
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
</TABLE>
-50-
<PAGE> 52
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 71.78180%
<TABLE>
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
<TABLE>
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
76. Oil & Gas Lease between Juan A. Coronado, et ux, as Lessors and
Southern States Exploration, Inc., as Lessee, dated August 21, 1984,
recorded in Volume 293, Page 853 of the Official Records of Zapata
County, Texas. (061-043A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
-51-
<PAGE> 53
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
77. Oil & Gas Lease between Pedro Dominguez, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated August 1, 1984,
recorded in Volume 292, Page 10 of the Official Records of Zapata
County, Texas. (061-047/01A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
78. Oil & Gas Lease between Manuel Rodriguez, et ux, as Lessors and
Southern States Exploration, Inc., as Lessee, dated December 10, 1984,
recorded in Volume 303, Page 3 of the Official Records of Zapata
County, Texas. (061-047/02A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
79. Memorandum of Oil & Gas Lease between Rogelio Uribe Land & Cattle Co.,
Ltd., as Lessor and Southern States Exploration, Inc., as Lessee,
dated March 5, 1984, to be effective as of February 28, 1984, recorded
in Volume 289, Page 231 of the Official Records of Zapata County,
Texas. (061-047/03A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
</TABLE>
-52-
<PAGE> 54
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
80. Memorandum of Oil & Gas Lease between Rogelio Uribe Land & Cattle Co.,
Ltd., as Lessor and Southern States Exploration, Inc., as Lessee,
dated March 5, 1984, to be effective as of February 28, 1984, recorded
in Volume 286, Page 344 of the Deed Records of Zapata County, Texas.
(061-047/03A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
81. Oil, Gas & Mineral Lease between Pedro Vela, Jr., as Lessor and
TransAmerican Natural Gas Corporation, as Lessee, dated March 26,
1986, recorded in Volume 333, Page 483 of the Official Records of
Zapata County, Texas. (061-047/04)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
-53-
<PAGE> 55
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
82. Oil & Gas Lease between Guadalupe S. Garcia, as Lessor and Southern
States Exploration, Inc., as Lessee, dated September 21, 1984,
recorded in Volume 295, Page 861 of the Official Records of Zapata
County, Texas, and ratification by Dora Salinas, et al, dated July 10,
1986, recorded in Volume 346, Page 327 of the Official Records of
Zapata County, Texas. (061-048A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
83. Oil, Gas & Mineral Lease between Stanley G. Marshall, Jr., et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated May 3,
1986, recorded in Volume 338, Page 653 of the Official Records of
Zapata County, Texas. (061-060/01A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Daisy No. 1 128719 100% 77.5%
Daisy No. 2 130248 100% 77.5%
Daisy No. 3 141052 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.5%
84. Oil & Gas Lease between Gladys H. Quilliam, as Lessor and Southern
States Exploration, Inc., as Lessee, dated May 31, 1988, recorded in
Volume 390, Page 724 of the Official Records of Zapata County, Texas.
(061-060/02B)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Daisy No. 1 128719 100% 77.5%
Daisy No. 2 130248 100% 77.5%
Daisy No. 3 141052 100% 77.5%
</TABLE>
-54-
<PAGE> 56
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.5%
85. Oil, Gas & Mineral Lease between Guadalupe S. Garcia, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated
September 2, 1985, recorded in Volume 318, Page 688 of the Official
Records of Zapata County, Texas, and ratification by Dora Salinas, et
al, by agreement dated October 18, 1985, recorded in Volume 320, Page
633 of the Official Records of Zapata County, Texas, and ratification
by Adelfa S. Coronado by agreement dated July 2, 1986, recorded in
Volume 340, Page 505 of the Official Records of Zapata County, Texas.
(061-061A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
86. Oil, Gas & Mineral Lease between Angelica M. Salinas, et al, as
Lessors and Southern States Exploration, Inc., as Lessee, dated July
27, 1985, recorded in Volume 313, Page 541 of the Official Records of
Zapata County, Texas. (061-062A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
-55-
<PAGE> 57
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
87. Oil & Gas Lease between Estate of Lauro Garza, et al, as Lessors and
TransAmerican Natural Gas Corporation, et al, as Lessee, dated March
24, 1986, recorded in Volume 334, Page 457 of the Official Records of
Zapata County, Texas. (061-077A) INSOFAR AND ONLY INSOFAR as said
lease covers the following described lands:
(A) Eighty-eight (88) acres, more or less, surrounding the L.
Garza "B" No. 1, being more particularly described as follows:
Beginning at the most Easterly corner of the C. A.
Douglas Subdivision of the Charco de la India Grant,
Original Grantee, A. B. Pareda, Abstract 74, which
plat of the C. A. Douglas Subdivision appears of
record in Volume 1, Page 21, Zapata County plat
records, thence Southwest along the Southeast line of
the C. A. Douglas Subdivision 3,984 feet, more or
less, for the place of beginning.
Thence Northwest along a line perpendicular to the
Southeast line of the C. A. Douglas Subdivision,
1,958 feet;
Thence Southwest along a line parallel to the
Southeast line of the C. A. Douglas Subdivision,
1,958 feet;
Thence Southeast along a line perpendicular to the
Southeast line of the C. A. Douglas Subdivision,
1,958 feet;
Thence Northeast along the Southeast line of the C.
A. Douglas Subdivision, 1,958 feet to the place of
beginning.
(B) Eighty-eight (88) acres, more or less, surrounding the L.
Garza "B" No. 2, being more particularly described as follows:
Beginning at the most Southerly corner of Block 96 of
the C. A. Douglas Subdivision of the Charco de la
India Grant, Original Grantee, A. B. Pareda, Abstract
74,
-56-
<PAGE> 58
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
which plat of the C. A. Douglas Subdivision appears
of record in Volume 1, Page 21, Zapata County plat
records;
Thence Northeast along the Southeast line of Block
96, being the Southeast line of the C. A. Douglas
Subdivision, past the most Easterly corner of Block
96 a distance of 1,958 feet;
Thence Northwest along a line perpendicular to the
Southeast line of the C. A. Douglas Subdivision,
1,958 feet;
Thence Southwest along a line parallel to the
Southeast line of C. A. Douglas Subdivision, 1,958
feet;
Thence Southeast along a line perpendicular to the
Southeast line of the C. A. Douglas Subdivision,
1,958 feet to the place of beginning.
(C) Eighty-eight (88) acres, more or less, surrounding the L.
Garza "B" No. 3, being more particularly described as follows:
Beginning at the most westerly corner of Block 55 of
the C. A. Douglas Subdivision of the Charco de la
India Grant, Original Grantee, A. B. Pareda, Abstract
74, which plat of the C. A. Douglas Subdivision
appears of record in Volume 1, Page 21, Zapata County
plat records;
Thence Northeast along the Northwest line of Block 55
past the Westerly corner of Block 54, 1,958 feet;
Thence Southeast along a line perpendicular to the
Northwest lines of Blocks 54 and 55, 1,958 feet;
-57-
<PAGE> 59
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Thence Southwest along a line parallel to the
Northwest lines Blocks 54 and 55, 1,958 feet;
Thence Northwest along the Southwest lines of Blocks
62 and 54, 1,958 feet to the place of beginning.
(D) Eighty-eight (88) acres, more or less, surrounding the L.
Garza "B" No. 4, being more particularly described as follows:
Beginning at the most Easterly corner of Block 67 of
the C. A. Douglas Subdivision of the Charco de la
India Grant, Original Grantee, A. B. Pareda, Abstract
74, which plat of the C. A. Douglas Subdivision
appears of record in Volume 1, Page 21, Zapata County
plat records;
Thence Northwest along the Northeast line of Block
67, being the Northeast line of the C. A. Douglas
Subdivision, past the Eaterly corner of Block 66,
1,958 feet;
Thence Southwest along a line perpendicular to the
Northeast line of the C. A. Douglas Subdivision,
1,958 feet;
Thence Southeast along a line parallel to the
Northeast line of the C. A. Douglas Subdivision,
1,958 feet;
Thence Northeast along a line perpendicular to the
Northeast line of the C. A. Douglas Subdivision,
1,958 feet to the place of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
L. Garza No. B1C 133833 100% 72.5%
L. Garza No. B1T 133347 100% 72.5%
L. Garza No. B2 131322 100% 71.25%
L. Garza No. B3 135328 100% 71.25%
L. Garza No. B4 137337 100% 72.5%
</TABLE>
-58-
<PAGE> 60
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 72.5%
88. Oil & Gas Lease between Martiniano Garza, et al, as Lessors and GHR
Energy Corp., as Lessee, dated March 30, 1982, recorded in Volume 260,
Page 693 of the Deed Records of Zapata County, Texas. (061-078) SAVE
AND EXCEPT:
(A) Eighty-eight (88) acres, more or less, surrounding the L.
Garza No. 2, being more particularly described as follows;
Beginning at the Northwest corner of the C. A.
Douglas Subdivision of the Charco de la India Grant,
Original Grantee, A. B. Pareda, Abstract 74, which
plat of the C. A. Douglas Subdivision appears of
record in Volume 1, Page 21, Zapata County plat
records, thence East along the Southwest line of the
C. A. Douglas Subdivision, 1958 feet;
Thence Northeast along a line perpendicular to the
Southwest line, 1958 feet;
Thence Northwest along a line parallel to the
Southwest line, 1958 feet;
Thence Southwest along a line perpendicular to the
Southwest line, 1958 feet to the place of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
L. Garza No. 1 114142 100% 70.03334%
L. Garza No. 3 110236 100% 68.8%
L. Garza No. 4 123172 100% 72.5%
L. Garza No. 5 124674 100% 72.5%
L. Garza No. 6 126081 100% 72.5%
</TABLE>
As the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 72.5%
89. Oil, Gas & Mineral Lease between Elodia G. Munoz, et al, as Lessors
and Southern States Exploration, Inc., as Lessee,
-59-
<PAGE> 61
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
dated November 15, 1982, recorded in Volume 270, Page 561 of the Deed
Records of Zapata County, Texas. (061-080/01) SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a square around a point designated according to the
drilling agreement between Sovereign Energy and GHR Energy
Corp., et al. Said point (the Munoz #1) being within the
Evaristo Gutierrez Tract, Las Comitas Grant, Abstract No. 559,
Zapata County, Texas, and in the center of said 80 acres,
being described as follows:
BEGINNING at the Northwest corner of the E. Gutierrez
Tract for the place of beginning.
THENCE Northeast along the Northwest line of the E.
Gutierrez Tract, 1866.76 feet for the Northeast
corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of the E. Gutierrez Tract, 1866.76
feet for the Southeast corner of said 80 acre tract.
THENCE Southwest along a line parallel to the
Northwest line of the E. Gutierrez Tract, 1866.76
feet for the Southwest corner corner of said 80 acre
tract.
THENCE Northwest along a line perpendicular to the
Northwest line of the E. Gutierrez Tract, 1866.76
feet to the place of beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Munoz No. 2 125688 100% 77.5%
Munoz No. 3C 123613 100% 77.5%
Munoz No. 3T 124658 100% 77.5%
Munoz-Gutierrez GU 127704 100% 73.72519%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.5%
-60-
<PAGE> 62
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
90. Oil, Gas & Mineral Lease between Alicia O. Gutierrez, et al, as
Lessors and Fred S. Hopson, as Lessee, dated September 12, 1985,
recorded in Volume 318, Page 749 of the Official Records of Zapata
County, Texas. (061-080/02)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Munoz-Gutierrez GU 127704 100% 73.72519%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 73.72519%
91. Oil & Gas Lease between Eliseo E. Gutierrez, as Lessor and GHR Energy
Corp., as Lessee, dated September 30, 1983, recorded in Volume 281,
Page 563 of the Deed Records of Zapata County, Texas. (061-081)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
EE Gutierrez No. 1C 122469 100% 77.5%
EE Gutierrez No. 2R 130147 100% 77.5%
EE Gutierrez No. 3 125448 100% 78.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.5%
92. Memorandum of Oil & Gas Lease between Diamantina G. Ramirez, et al, as
Lessors and TransAmerican Natural Gas Corporation, as Lessee, dated
October 27, 1988, recorded in Volume 397, Page 788 of the Official
Records of Zapata County, Texas. (061-083A) SAVE AND EXCEPT:
1380.3 acres, more or less, being the NE 1380.3 acres of what
is known as "Las Avispas" ranch in Porciones 39 and 40 being
out of the same tract of land conveyed by Manuel Villarreal
Garcia, et al., to Abel Ramirez, by Warranty Deed dated
September 27, 1945, and recorded in Volume 56, Page 376-8,
Zapata County Deed Records, said tract of 1380.3 acres being
further described as the Second Tract under that certain
Memorandum of Oil and Gas Lease dated October 26, 1988, by and
between Diamantina G. Ramirez, et al., as Lessor, and TNGC,
as Lessee, recorded in Volume 397, Page 788 of the Official
Records of Zapata County, Texas.
-61-
<PAGE> 63
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
93. Oil & Gas Lease between Irene G. Gutierrez, as Lessor and GHR Energy
Corp., as Lessee, dated December 22, 1983, recorded in Volume 284,
Page 710 of the Deed Records of Zapata County, Texas. (061-084)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Irene No. 1-C 125443 100% 78.5%
Irene No. 1-T 125323 100% 78.5%
Irene No. 2-C 130006 100% 77.5%
Irene No. 2-T 129881 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.5%
94. Oil & Gas Lease between Jacoba Villarreal, as Lessor and GHR Energy
Corp., as Lessee, dated December 22, 1983, recorded in Volume 284,
Page 726 of the Deed Records of Zapata County, Texas, as ratified by
Irene G. Gutierrez by agreement dated April 21, 1987, recorded in
Volume 360, Page 538 of the Official Records of Zapata County, Texas.
(061-085)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Jacoba No. 1C 123612 100% 77.5%
Jacoba No. 1T 123919 100% 77.5%
Jacoba No. 2C 126687 100% 78.5%
Jacoba No. 2T 126539 100% 78.5%
Jacoba No. 3C 126078 100% 78.5%
Jacoba No. 3T 126274 100% 78.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.5%
95. Oil & Gas Lease between Guadalupe S. Garcia, et al, as Lessors and
Southern States Exploration, Inc., as Lessee, dated September 21,
1984, recorded in Volume 296, Page 243 of the Official Records of
Zapata County, Texas, and ratification by Dora Salinas, et al by
agreement dated July 10, 1986, recorded in Volume 346, Page 332 of the
Official Records of Zapata County, Texas. (061-087A)
-62-
<PAGE> 64
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
96. Oil, Gas & Mineral Lease between Genevevo Bustamante, et al, as
Lessors and TransAmerican Natural Gas Corporation, as Lessee, dated
October 21, 1985, recorded in Volume 321, Page 181 of the Official
Records of Zapata County, Texas, and ratification by Osvelia B.
Montalvo, et al, by agreement dated August 1, 1986, recorded in Volume
342, Page 716 of the Official Records of Zapata County, Texas.
(061-088/01)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
97. Oil, Gas & Mineral Lease between Salvador Flores, as Lessor and
TransAmerican Natural Gas Corporation, as Lessee, dated October 21,
1985, recorded in Volume 321, Page 178 of the Official Records of
Zapata County, Texas, and ratification by Osvelia B. Montalvo, et al,
by agreement dated August 1, 1986, recorded in Volume 342, Page 716 of
the Official Records of Zapata County, Texas. (061-088/01)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
</TABLE>
-63-
<PAGE> 65
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
98. Oil, Gas & Mineral Lease between Lauro Flores, as Lessor and
TransAmerican Natural Gas Corporation, et al, as Lessee, dated October
21, 1985, recorded in Volume 321, Page 175 of the Official Records of
Zapata County, Texas, and ratification by Osvelia B. Montalvo, et al,
by agreement dated August 1, 1986, recorded in Volume 342, Page 716 of
the Official Records of Zapata County, Texas. (061-088/01)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
99. Mineral & Royalty Deed between Antonio Bustamante, Jr., as Grantor and
TransAmerican Natural Gas Corporation, as Grantee, dated June 1, 1986,
recorded in Volume 355, Page 761 of the Official Records of Zapata
County, Texas. (061-088/02)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante GU 1-1 121827 100% 77.5%
Bustamante GU 1-2C 124101 100% 77.5%
Bustamante GU 1-2T 124924 100% 77.5%
Bustamante GU 1-3C 127205 100% 78.4%
Bustamante GU 1-3T 127136 100% 78.4%
Bustamante GU 1-4 140561 100% 77.5%
Bustamante GU 1-5 144759 100% 77.5%
Bustamante GU 1-6 152599 100% 77.5%
</TABLE>
-64-
<PAGE> 66
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.4%
100. Oil, Gas & Mineral Lease between L & B Cattle Co., as Lessor and
TransAmerican Natural Gas Corporation, as Lessee, dated October 4,
1985, recorded in Volume 323, Page 250 of the Official Records of
Zapata County, Texas. (061-089)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Yzaguirre-Leo No. 1 126887 100% 77.57217%
Yzaguirre-Leo No. 3 132355 100% 77.57217%
Yzaguirre-Leo No. 5 139695 100% 77.57217%
Yzaguirre-Leo No. 6 146889 100% 77.57217%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 77.57217%
101. Oil, Gas & Mineral Lease between Carlos C. Garza, et al, as Lessors
and TransAmerican Natural Gas Corporation, as Lessee, dated November
18, 1985, recorded in Volume 323, Page 851 of the Official Records of
Zapata County, Texas. (061-090) SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
-65-
<PAGE> 67
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
102. Oil & Gas Lease between Jose O. Dodier, et al, as Lessors and Jose A.
Dodier, et al, as Lessees, dated December 2, 1985, recorded in Volume
324, Page 148 of the Official Records of Zapata County, Texas.
(061-091)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
JOD No. 1 126886 100% 78.5%
JOD No. 2 130010 100% 77.5%
JOD No. 3 133964 100% 77.5%
JOD No. 4 137336 100% 77.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.5%
103. Oil, Gas & Mineral Lease between Juan J. Garza, et al, as Lessors and
TransAmerican Natural Gas Corporation, as Lessee, dated November 25,
1985, recorded in Volume 324, Page 142 of the Official Records of
Zapata County, Texas. (061-092) SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated
-66-
<PAGE> 68
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
according to the drilling agreement between Aspen Services and
TransAmerican Natural Gas Corporation, et al. Said point (the
Bernardo G.U #1, Well #3) being within the Bernardo G.U. #1,
Las Comitas Grant, Abstract No. 559, Zapata County, Texas, and
in the confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
104. Oil & Gas Lease between Victoria S. Lopez, et al, as Lessors and
TransAmerican Natural Gas Corporation, as Lessee, dated
-67-
<PAGE> 69
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
February 7, 1986, recorded in Volume 335, Page 174 of the Official
Records of Zapata County, Texas. (061-094)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
L.F.T. No. 1 126444 100% 75.0%
L.F.T. No. 2 135298 100% 75.0%
L.F.T. No. 4 ______ 100% 75.0%
L.F.T. No. 5 143183 100% 75.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 75.0%
105. Memorandum of Oil & Gas Lease between Estate of Lauro Garza, Deceased,
as Lessors and TransAmerican Natural Gas Corporation, as Lessee, dated
April 1, 1986, recorded in Volume 341, Page 737 of the Official
Records of Zapata County, Texas. (061-095)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
D. Garza GU No. 1 ______ 100% 70.80975%
D. Garza GU No. 1-1C 124683 100% 70.80975%
D. Garza GU No. 1-1T 124589 100% 70.80975%
D. Garza GU No. 1-2 131663 100% 73.93475%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 73.98475%
106. Memorandum of Oil & Gas Lease between Araceli F. Ramirez, et vir, as
Lessors and TransAmerican Natural Gas Corporation, as Lessee, dated
July 15, 1987, recorded in Volume 375, Page 250 of the Official
Records of Zapata County, Texas. (061-096)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Araceli No. 1 130333 100% 74.0%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 74.0%
107. Oil, Gas & Mineral Lease between Carlos Garza, et al, as Lessors and
TransAmerican Natural Gas Corporation, as Lessee, dated December 14,
1988, recorded in Volume 402, Page 316 of the Official Records of
Zapata County, Texas. (061-097A) SAVE AND EXCEPT:
-68-
<PAGE> 70
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
-69-
<PAGE> 71
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
108. Memorandum of Oil & Gas Lease between Zapata County Independent School
District, as Lessors and TransAmerican Natural Gas Corporation, as
Lessee, dated November 21, 1988, recorded in Volume 402, Page 322 of
the Official Records of Zapata County, Texas. (061-098) SAVE AND
EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line of Share 26, 1500 feet for the
Southwest corner of said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
</TABLE>
-70-
<PAGE> 72
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<S> <C> <C> <C>
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
109. Oil & Gas Lease between Rogelio Uribe Land & Cattle Co., Ltd., as
Lessors and Southern States Exploration, Inc., as Lessee, dated
September 1, 1988, recorded in Volume 405, Page 480 of the Official
Records of Zapata County, Texas, and ratification by Priscilla R. de
Martinez by agreement dated March 5, 1991, recorded in Volume 441,
Page 409 of the Official Records of Zapata County, Texas. (061-099A)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Emma No. 1 137021 100% 67.5%
Emma No. 2 152428 100% 67.5%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 67.5%
110. Oil, Gas & Mineral Lease between Herminia B. Bustamante, as Lessor and
TransAmerican Natural Gas Corporation, as Lessee, dated May 24, 1989,
recorded in Volume 410, Page 105 of the Official Records of Zapata
County, Texas. (061-100) SAVE AND EXCEPT:
Eighty (80) acres of land in Zapata County, Texas, in the form
of a rectangle around a point designated according to the
drilling agreement between Aspen Services and TransAmerican
Natural Gas Corporation, et al. Said point (the Bernardo G.U
#1, Well #3) being within the Bernardo G.U. #1, Las Comitas
Grant, Abstract No. 559, Zapata County, Texas, and in the
confines of said 80 acres, being described as follows:
BEGINNING at the Most Easterly Northeast corner of
the Pedro De Los Santos Share 26 for the place of
beginning.
THENCE Southwest along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Northwest corner of said 80 acre tract.
THENCE Southeast along a line perpendicular to the
Northwest line
-71-
<PAGE> 73
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
of Share 26, 1500 feet for the Southwest corner of
said 80 acre tract.
THENCE Northeast along a line parallel to the
Northwest line of Share 26, 2323 feet for the
Southeast corner of said 80 acre tract.
THENCE Northwest along a line perpendicular to the
Northwest line of Share 26, 1500 feet to the place of
beginning.
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 76.86796%
111. Oil, Gas & Mineral Lease between Noelia de los Santos Coronado, et al,
as Lessors and TransAmerican Natural Gas Corporation, as Lessee, dated
June 1, 1987, recorded in Volume 456, Page 627 of the Official Records
of Zapata County, Texas. (061-102)
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
DeLosSantos No. 1-1 126080 100% 78.51927%
DeLosSantos No. 1-2 125040 81.25% 58.98096%
DeLosSantos No. 1-5 127866 100% 77.73096%
DeLosSantos No. 1-6 128416 100% 77.73096%
DeLosSantos No. 1-7 141730 100% 77.73096%
</TABLE>
As to the remainder of the above lease, save and except for the well
bores for the above wells:
W.I. 100% N.R.I. 78.51927%
112. Oil, Gas and Mineral Lease between Bernardo Bustamante, et ux, as
Lessor and TransTexas Gas Corporation, as Lessee,
-72-
<PAGE> 74
EXHIBIT "A" - PART I
CHARCO - ZAPATA COUNTY, TEXAS
dated January 26, 1994, recorded in Volume 495 at Page 40 of the
Official Records of Zapata County, Texas. (061-103/01)
113. Oil, Gas and Mineral Lease between Rafael Trevino, et ux, as Lessor
and TransTexas Gas Corporation, as Lessee, dated January 26, 1994,
recorded in Volume 495 at Page 46 of the Official Records of Zapata
County, Texas. (061-103/02)
114. Oil, Gas and Mineral Lease between Raul Trevino, et al, as Lessor and
TransTexas Gas Corporation, as Lessee, dated January 26, 1994,
recorded in Volume 495 at Page 52 of the Official Records of Zapata
County, Texas. (061-103/03)
115. Oil, Gas and Mineral Lease between Jose Luis Bustamante, et ux, as
Lessor and TransTexas Gas Corporation, as Lessee, dated January 26,
1994, recorded in Volume 495 at Page 58 of the Official Records of
Zapata County, Texas. (061-103/04)
116. Oil and Gas Lease between Fred W. Winch, Jr., et al, as Lessor and
TransTexas Gas Corporation, as Lessee, dated May 2, 1994, a Memorandum
of which is recorded in Volume 498 at Page 822 of the Official Records
of Zapata County, Texas. (061-103/05)
117. Oil and Gas Lease between NationsBank of Texas, Agent, as Lessor and
TransTexas Gas Corporation, as Lessee, dated March 9, 1994, recorded
in Volume 501 at Page 442 of the Official Records of Zapata County,
Texas. (061- 103/06)
118. ALL AMENDMENTS, RENEWALS, EXTENSIONS, RATIFICATIONS AND MODIFICATIONS
OF THE FOREGOING LEASES, WHETHER OR NOT LISTED ABOVE, AND ALL NEW OR
REPLACEMENT LEASES WITH RESPECT TO ANY OF THE FOREGOING LEASES,
WHETHER OR NOT LISTED ABOVE.
-73-
<PAGE> 75
EXHIBIT "A"
CHARCO
ZAPATA COUNTY, TEXAS
PART II
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Alfonso No. 1 101258 100% 79.22916%
Alfonso No. 2 101256 100% 79.22916%
Alfonso No. 3 104941 100% 75.19270%
Alfonso No. 4 103583 100% 75.19270%
Alfonso No. 5R 118274 100% 76.53819%
Alfonso No. 6 113615 100% 79.22916%
Alfonso No. 8 142622 100% 79.22916%
Araceli No. 1 130333 100% 74.0%
Asche No. 1 101877 100% 67.5%
Asche No. 2 095072 100% 67.5%
Asche No. 3 096883 100% 67.5%
Asche No. 4 156601 100% 67.5%
Asche No. 5 103582 100% 67.5%
Asche No. 6 107943 100% 67.5%
Asche No. 7 112821 100% 67.5%
Asche No. 8 117737 100% 65.2%
Asche No. 11 119540 100% 67.5%
Asche No. 12 123646 100% 67.5%
Asche No. 13 124681 100% 67.5%
Asche No. 14 124838 100% 67.5%
Asche No. 15C 126891 100% 67.5%
Asche No. 15T 126890 100% 67.5%
Asche No. 16C 127199 100% 67.5%
Asche No. 16T 127204 100% 67.5%
Asche No. 17 127380 100% 67.5%
Asche No. 18 127867 100% 67.5%
Asche No. 20 130636 100% 67.5%
Asche No. 21 135990 100% 67.5%
Asche No. 22 139718 100% 67.5%
Asche No. 24 143872 100% 67.5%
Asche No. 25 148977 100% 67.5%
Asche No. 26 150255 100% 67.5%
Asche No. 27 152399 100% 67.5%
Bernardo GU No. 1 126995 100% 76.86796%
Bernardo GU No. 2 127859 100% 76.86796%
Bernardo GU No. 4 131664 100% 76.86796%
Bernardo GU No. 5R 137333 100% 76.86796%
Bernardo GU No. 6 137341 100% 76.86796%
Bernardo GU No. 7 147897 100% 76.86796%
Bernardo GU No. 8 149173 100% 76.86796%
Bernardo GU No. 9 151365 100% 76.86796%
Bernardo GU No. 12 153873 100% 76.86796%
</TABLE>
Page 1 of 5 Pages
<PAGE> 76
EXHIBIT "A" - PART II
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Bustamante No. 1-1 121827 100% 77.5%
Bustamante No. 1-2C 124101 100% 77.5%
Bustamante No. 1-2T 124924 100% 77.5%
Bustamante No. 1-3C 127205 100% 78.4%
Bustamante No. 1-3T 127136 100% 78.4%
Bustamante No. 1-4 140561 100% 77.5%
Bustamante No. 1-5 144759 100% 77.5%
Bustamante No. 1-6 152599 100% 77.5%
J. V. Cuellar No. 1 153187 100% 68.5%
J. V. Cuellar No. 2 153179 100% 68.5%
J. V. Cuellar No. 3 153181 100% 68.5%
J. V. Cuellar No. 4 153501 100% 68.5%
J. V. Cuellar No. 5 154449 100% 68.5%
J. V. Cuellar No. 6 ______ 100% 68.5%
J. V. Cuellar No. 7 157633 100% 68.5%
Daisy No. 1 128719 100% 77.5%
Daisy No. 2 130248 100% 77.5%
Daisy No. 3 141052 100% 77.5%
De Los Santos No. 1-1 126080 100% 78.51927%
De Los Santos No. 1-2 125040 81.25% 58.98096%
De Los Santos No. 1-5 127866 100% 77.73096%
De Los Santos No. 1-6 128416 100% 77.73096%
De Los Santos No. 1-7 141730 100% 77.73096%
Derly No. 1 147576 100% 80.0%
Derly No. 2 152431 100% 80.0%
Derly No. 3 150710 100% 80.0%
Derly No. 4 152451 100% 80.0%
Emma No. 1 137021 100% 67.5%
Emma No. 2 152428 100% 67.5%
L. G. Flores No. 1 070208 100% 77.21094%
L. G. Flores No. 2 118270 100% 77.21094%
L. G. Flores No. 5 126913 100% 77.21094%
L. G. Flores No. 6 128999 100% 77.21094%
L. G. Flores No. 7 131586 100% 77.21094%
L. G. Flores No. 8 132055 100% 77.21094%
L. G. Flores No. 9 135085 100% 77.21094%
L. G. Flores No. 10 137234 100% 77.21094%
L. G. Flores No. 11 145265 100% 77.21094%
L. G. Flores No. 13 147307 100% 77.21094%
L. G. Flores No. 14C 149952 100% 77.21094%
L. G. Flores No. 14T 149060 100% 77.21094%
L. G. Flores No. 15C 150226 100% 77.21094%
</TABLE>
Page 2 of 5 Pages
<PAGE> 77
EXHIBIT "A" - PART II
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
L. G. Flores No. 15T 150795 100% 77.21094%
L. G. Flores No. 16C 151453 100% 77.21094%
L. G. Flores No. 16T 150546 100% 77.21094%
L. G. Flores No. 17 153316 100% 77.21094%
L. G. Flores No. 17R 151751 100% 77.21094%
L. G. Flores No. 18 152922 100% 77.21094%
M. Flores No. 2 103040 100% 73.55%
M. Flores No. 3 105944 100% 73.50%
A. Garza No. 1 094266 100% 79.22916%
A. Garza No. 2 100535 100% 79.22916%
A. Garza No. 3 120420 100% 75.19270%
A. Garza No. 5 000045 100% 79.22916%
D. Garza GU No. 1 ______ 100% 70.80975%
D. Garza GU No. 1C 124683 100% 70.80975%
D. Garza GU No. 1T 124589 100% 70.80975%
D. Garza GU No. 2 131663 100% 73.93475%
L. Garza No. 1 114142 100% 70.03334%
L. Garza No. 3 110236 100% 68.8%
L. Garza No. 4 123172 100% 72.5%
L. Garza No. 5 124674 100% 72.5%
L. Garza No. 6 126081 100% 72.5%
L. Garza No. B1C 133833 100% 72.5%
L. Garza No. B1T 133347 100% 72.5%
L. Garza No. B2 131322 100% 71.25%
L. Garza No. B3 135328 100% 71.25%
L. Garza No. B4 137337 100% 72.5%
M. Garza No. 1 089705 100% 77.25%
EE Gutierrez No. 1C 122469 100% 77.5%
EE Gutierrez No. 2R 130147 100% 77.5%
EE Gutierrez No. 3 125448 100% 78.5%
JM Gutierrez No. 2 118924 100% 80.83333%
JM Gutierrez No. 4 123611 100% 80.83333%
JM Gutierrez No. 7 126079 100% 80.83333%
Irene No. 1C 125443 100% 78.5%
Irene No. 1T 125323 100% 78.5%
Irene No. 2C 130006 100% 77.5%
Irene No. 2T 129881 100% 77.5%
</TABLE>
Page 3 of 5 Pages
<PAGE> 78
EXHIBIT "A" - PART II
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
JOD No. 1 126886 100% 78.5%
JOD No. 2 130010 100% 77.5%
JOD No. 3 133964 100% 77.5%
JOD No. 4 137336 100% 77.5%
Jacoba No. 1C 123612 100% 77.5%
Jacoba No. 1T 123919 100% 77.5%
Jacoba No. 2C 126687 100% 78.5%
Jacoba No. 2T 126539 100% 78.5%
Jacoba No. 3C 126078 100% 78.5%
Jacoba No. 3T 126274 100% 78.5%
Jacoba No. A1 156605 100% 78.5%
Jacoba No. A2 000011 100% 78.5%
L.F.T. No. 1 126444 100% 75.0%
L.F.T. No. 2 135298 100% 75.0%
L.F.T. No. 4 ______ 100% 75.0%
L.F.T. No. 5 143183 100% 75.0%
Leonardo No. 2 087817 100% 79.22916%
Leonardo No. 3R 114114 100% 75.19270%
Leonardo No. 4 114509 100% 76.53819%
Leonardo No. 6 117133 100% 79.22916%
Leonardo No. 7 120232 100% 79.22916%
Leonardo No. 8 121970 100% 79.22916%
Leonardo No. 9 123375 100% 79.22916%
Leonardo No. 10 124839 100% 79.22917%
Leonardo No. 11 124005 100% 79.22916%
Leonardo No. 12 000032 100% 79.22916%
Martinez- Ramirez GU No. 1 063229 100% 76%
M. Ramirez GU No. 1 064507 100% 76%
Munoz No. 2 125688 100% 77.5%
Munoz No. 3C 123613 100% 77.5%
Munoz No. 3T 124658 100% 77.5%
Munoz-Gutierrez GU 127704 100% 73.72519%
Porras GU No. 1 102788 100% 72%
Porras GU No. 2 106086 100% 72%
R.M.T. No. 1 127973 100% 73.5%
R.M.T. No. 2 151335 100% 73.5%
</TABLE>
Page 4 of 5 Pages
<PAGE> 79
EXHIBIT "A" - PART II
CHARCO - ZAPATA COUNTY, TEXAS
<TABLE>
<CAPTION>
WELL NAME R.R.C. NO. W.I. N.R.I.
--------- ---------- ---- ------
<S> <C> <C> <C>
Abel Ramirez No. 1 065181 100% 76.0%
Rodriguez GU No. 1 127456 100% 71.78180%
Rodriguez GU No. 2 142476 100% 71.78180%
Rodriguez GU No. 3C 146753 100% 71.78180%
Rodriguez GU No. 4 147306 100% 71.78180%
Rodriguez GU No. 5C 147800 100% 71.78180%
Rodriguez GU No. 5T 147721 100% 71.78180%
Rodriguez GU No. 6C 150195 100% 71.78180%
Rodriguez GU No. 6T 150035 100% 71.78180%
Rodriguez GU No. 7C 151931 100% 71.78180%
Rodriguez GU No. 7T 152317 100% 71.78180%
G. R. SwantnerNo. 1 075447 100% 79.23%
Yzaguirre-Leo No. 1 126887 100% 77.57217%
Yzaguirre-Leo No. 3 132355 100% 77.57217%
Yzaguirre-Leo No. 5 139695 100% 77.57217%
Yzaguirre-Leo No. 6 146889 100% 77.57217%
</TABLE>
Page 5 of 5 Pages
<PAGE> 80
EXHIBIT A - PART III
TO PURCHASE AND SALE AGREEMENT
All of Seller's right, title and interest in and to the easements, surface fees,
surface leases, permits and rights-of-way useful to or used in connection with
the pipelines colored in red on the plat attached as Exhibit B to the Purchase
and Sale Agreement and all of Seller's right, title and interest in and to all
personal property and fixtures, including, but not limited to, all pipe and
meters, useful to or used in connection with such pipelines which pipelines are
commonly referred to as the entire "gathering system" for the Wells.
<PAGE> 81
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alfonso #1 Charco 9200 Perdido A 100.0% 79.229% 178
- ---------------------------------------------------------------------------------------------------------------------
Alfonso #2 Perdido B 100.0% 79.229% 0
- ---------------------------------------------------------------------------------------------------------------------
Alfonso #3 Charco 9400 Perdido A 100.0% 75.193% 433
- ---------------------------------------------------------------------------------------------------------------------
Alfonso #4 Charco 9200 Perdido A 100.0% 75.193% 179
- ---------------------------------------------------------------------------------------------------------------------
Alfonso #5R Perdido A&B 100.0% 76.538% 0
- ---------------------------------------------------------------------------------------------------------------------
Alfonso #6 Charco 9200 Perdido A&B 100.0% 79.229% 184
- ---------------------------------------------------------------------------------------------------------------------
Alfonso #8 Charco 9900 Perdido B 100.0% 79.229% 227
- ---------------------------------------------------------------------------------------------------------------------
Araceli #1 El Huefano 10800 Perdido B 100.0% 74.000% 285
- ---------------------------------------------------------------------------------------------------------------------
Asche #1 Charco 9200 Perdido A 100.0% 67.500% 181
- ---------------------------------------------------------------------------------------------------------------------
Asche #2 Charco 9200 Perdido A 100.0% 67.500% 551
- ---------------------------------------------------------------------------------------------------------------------
Asche #3 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #4 Perdido A 100.0% 67.500% 295
- ---------------------------------------------------------------------------------------------------------------------
Asche #5 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 82
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asche #6 Charco 9900 Perdido B 100.0% 67.500% 43
- ---------------------------------------------------------------------------------------------------------------------
Asche #7 Charco 9900 Perdido A&B 100.0% 67.500% 24
- ---------------------------------------------------------------------------------------------------------------------
Asche #8 Charco 9200 Perdido A&B 100.0% 65.200% 13
- ---------------------------------------------------------------------------------------------------------------------
Asche #11 Charco 9200 Perdido A 100.0% 67.500% 88
- ---------------------------------------------------------------------------------------------------------------------
Asche #12 Charco 9200 Perdido A&B 100.0% 67.500% 714
- ---------------------------------------------------------------------------------------------------------------------
Asche #13 Charco 9200 Perdido A&B 100.0% 67.500% 94
- ---------------------------------------------------------------------------------------------------------------------
Asche #14 Charco 9200 Perdido A 100.0% 67.500% 29
- ---------------------------------------------------------------------------------------------------------------------
Asche #15C Charco 9200 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #15T Charco 9900 Perdido B 100.0% 67.500% 1
- ---------------------------------------------------------------------------------------------------------------------
Asche #16C Charco 9200 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #17 Charco 9200 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #18 Charco 9900 Perdido B 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #20 Charco 9900 Perdido B 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 83
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asche #21 El Huerfano 10800 Perdido B 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #22 El Huefano 10800 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #24 Munoz Lobo Lobo 1 100.0% 67.500% 72
- ---------------------------------------------------------------------------------------------------------------------
Asche #25 Charco 9900 Perdido A&B 100.0% 67.500% 607
- ---------------------------------------------------------------------------------------------------------------------
Asche #26 Charco 9900 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Asche #27 Charco 9900 Perdido A&B 100.0% 67.500% 48
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #1 El Huerfano 10800 Perdido A&B 100.0% 76.872% 9
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #2 El Huerfano 10800 Perdido A&B 100.0% 76.872% 0
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #4 El Huerfano 10800 Perdido A 100.0% 76.872% 65
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #5R El Huerfano 10800 Perdido A 100.0% 76.872% 307
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #6 El Huerfano 10800 Perdido A&B 100.0% 76.872% 104
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #7 El Huerfano 10800 Perdido A 100.0% 76.872% 641
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 84
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bernardo GU #8 El Huerfano 10800 Perdido A&B 100.0% 76.872% 113
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #9 El Huerfano 10800 Perdido A&B 100.0% 76.872% 939
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #10 El Huerfano 10800 Perdido B 100.0% 76.872% 1,008
- ---------------------------------------------------------------------------------------------------------------------
Bernardo GU #12 El Huerfano 10800 Perdido 100.0% 76.872% 227
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-1 El Huerfano 10800 Perdido A&B 100.0% 77.786% 25
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-2C El Huerfano 10800 Perdido A 100.0% 77.786% 0
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-2T Munoz Lobo Lobo 6 100.0% 77.786% 28
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-3C El Huerfano 10800 100.0% 77.786% 67
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-3T Munoz Lobo 100.0% 77.786% 11
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-4 Bustamante Wilcox Perdido A 100.0% 77.787% 159
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-5 Munoz Lobo Lobo 100.0% 77.787% 2,014
- ---------------------------------------------------------------------------------------------------------------------
Bustamante #1-6 Bustamante Wilcox Perdido 100.0% 77.787% 380
- ---------------------------------------------------------------------------------------------------------------------
Cuellar #1 Wilcox, L. Lobo 100.0% 68.500% 709
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 85
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cuellar #2 Wilcox, L. Lobo 100.0% 68.500% 684
- ---------------------------------------------------------------------------------------------------------------------
Cuellar #3 Wilcox, L. Lobo 100.0% 68.500% 385
- ---------------------------------------------------------------------------------------------------------------------
Cuellar #4 Wilcox, L. Lobo 100.0% 68.500% 778
- ---------------------------------------------------------------------------------------------------------------------
Cuellar #5 Wilcox, L. Lobo 100.0% 68.500% 984
- ---------------------------------------------------------------------------------------------------------------------
Cuellar #7 Wilcox, L. 100.0% 0
- ---------------------------------------------------------------------------------------------------------------------
Daisy #1 El Huerfano 10800 Perdido B 100.0% 77.500% 72
- ---------------------------------------------------------------------------------------------------------------------
Daisy #2 El Huerfano 10800 Perdido A 100.0% 77.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Daisy #3 El Huerfano 10800 Perdido A&B 100.0% 77.500% 74
- ---------------------------------------------------------------------------------------------------------------------
De Los Santos #1-1 El Huerfano 10800 100.0% 78.589% 140
- ---------------------------------------------------------------------------------------------------------------------
De Los Santos #1-2 El Huerfano 10800 Perdido A 100.0% 58.981% 0
- ---------------------------------------------------------------------------------------------------------------------
De Los Santos #1-5 El Huerfano 10800 Perdido A&B 100.0% 77.731% 24
- ---------------------------------------------------------------------------------------------------------------------
De Los Santos #1-6 El Huerfano 10800 Perdido A&B 100.0% 11
- ---------------------------------------------------------------------------------------------------------------------
De Los Santos #1-7 Bustamante Wilcox Perdido A&B 100.0% 77.731% 382
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 86
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Derly #1 Lobo Lobo 1,6 100.0% 80.000% 39
- ---------------------------------------------------------------------------------------------------------------------
Derly #2 100.0% 0
- ---------------------------------------------------------------------------------------------------------------------
Derly #3 Lobo Lobo 100.0% 80.000% 180
- ---------------------------------------------------------------------------------------------------------------------
Emma #1 El Huerfano 10800 Perdido A 100.0% 67.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Emma #2 El Huerfano 10800 Perdido A&B 100.0% 67.500% 460
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #1 Perdido B 100.0% 77.211% 0
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #2 Munoz Lobo Lobo 1, 3 100.0% 77.211% 0
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #4 Munoz Lobo 100.0% 27.024% 47
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #5 Munoz Lobo 100.0% 77.219% 213
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #6 El Huerfano 10800 Perdido A&B 100.0% 77.211% 43
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #7 El Huerfano 10800 Perdido A&B 100.0% 77.211% 51
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #8 El Huerfano 10800 Perdido A&B 100.0% 77.211% 155
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #9 El Huerfano 10800 Perdido B 100.0% 77.211% 144
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 87
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Flores, LG #10 El Huerfano 10800 Perdido A&B 100.0% 77.211% 0
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #11 Munoz Lobo Lobo 100.0% 77.211% 1,392
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #12 0
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #13 Munoz Lobo Lobo 100.0% 77.211% 516
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #14C El Huerfano 10800 Perdido A&B 100.0% 77.211% 1,831
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #14T Munoz Lobo Lobo 100.0% 77.211% 240
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #15C El Huerfano 10800 Perdido B 100.0% 77.211% 145
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #15T Munoz Lobo 100.0% 77.211% 47
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #16C Bustamante Wilcox Lobo 100.0% 77.211% 379
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #16T Munoz Lobo Lobo 100.0% 77.211% 382
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #17 Bustamante 7950 Lobo 100.0% 77.211% 1
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #17R Munoz Lobo 100.0% 77.211% 53
- ---------------------------------------------------------------------------------------------------------------------
Flores, LG #18 Bustamante Wilcox Perdido 100.0% 77.211% 35
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 88
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Flores M A-1 729
- ---------------------------------------------------------------------------------------------------------------------
Flores M 2 Perdido Perdido A 100.0% 73.550% 18
- ---------------------------------------------------------------------------------------------------------------------
Flores M 3 Perdido Perdido A 100.0% 73.550% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza A1 Charco 9200 Perdido A 100.0% 79.229% 377
- ---------------------------------------------------------------------------------------------------------------------
Garza A2 Charco 9200 Perdido A 100.0% 79.229% 611
- ---------------------------------------------------------------------------------------------------------------------
Garza A3 Charco 9900 Perdido B 100.0% 75.193% 82
- ---------------------------------------------------------------------------------------------------------------------
Garza A5 100.0% 715
- ---------------------------------------------------------------------------------------------------------------------
Garza D1C El Huerfano 10800 Perdido 100.0% 70.810% 481
- ---------------------------------------------------------------------------------------------------------------------
Garza D1T Munoz Lobo Lobo 100.0% 70.810% 24
- ---------------------------------------------------------------------------------------------------------------------
Garza D2 El Huerfano 10800 Perdido B 100.0% 73.935% 26
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #1 Perdido B 100.0% 70.033% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #3 Perdido A 100.0% 68.800% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #4 Munoz Lobo Lobo 100.0% 72.500% 0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 89
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Garza, L #5 El Huerfano 10800 100.0% 72.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #6 El Huerfano 10800 Perdido A 100.0% 72.500% 45
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #B1C El Huerfano 10800 Perdido B 100.0% 72.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #B1T Munoz Lobo Lobo 100.0% 72.500% 1
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #B2 Munoz Lobo Lobo 100.0% 71.250% 378
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #B3 El Huerfano 10800 Perdido A 100.0% 71.250% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza, L #B4 El Huerfano 10800 Perdido 100.0% 72.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Garza, M. #1 El Huerfano 10800 Perdido B 100.0% 77.250% 3
- ---------------------------------------------------------------------------------------------------------------------
Gutierrez, EE #1C El Huerfano 10800 Perdido A 100.0% 77.500% 13
- ---------------------------------------------------------------------------------------------------------------------
Gutierrez, EE #2R El Huerfano 10800 Perdido B 100.0% 77.500% 113
- ---------------------------------------------------------------------------------------------------------------------
Gutierrez, EE #3 El Huerfano 10800 100.0% 77.500% 159
- ---------------------------------------------------------------------------------------------------------------------
Gutierrez, JM #2 Perdido A 100.0% 80.833% 0
- ---------------------------------------------------------------------------------------------------------------------
Gutierrez, JM #4 Charco 9200 Perdido A 100.0% 80.833% 446
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 90
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gutierrez, JM #7 Charco 9200 Perdido A 100.0% 80.833% 0
- ---------------------------------------------------------------------------------------------------------------------
Irene #1C El Huerfano 10800 100.0% 77.500% 114
- ---------------------------------------------------------------------------------------------------------------------
Irene #1T Munoz Lobo 100.0% 78.400% 0
- ---------------------------------------------------------------------------------------------------------------------
Irene #2C El Huerfano 10800 Perdido A 100.0% 77.500% 99
- ---------------------------------------------------------------------------------------------------------------------
Irene #2T Munoz Lobo Lobo 100.0% 77.500% 81
- ---------------------------------------------------------------------------------------------------------------------
J.O.D. #1 El Huerfano 10800 100.0% 77.500% 20
- ---------------------------------------------------------------------------------------------------------------------
J.O.D. #2 El Huerfano 10800 Perdido A&B 100.0% 77.500% 0
- ---------------------------------------------------------------------------------------------------------------------
J.O.D. #3 El Huerfano 10800 Perdido A&B 100.0% 77.500% 808
- ---------------------------------------------------------------------------------------------------------------------
J.O.D. #4 El Huerfano 10800 Perdido A&B 100.0% 77.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Jacoba #1C El Huerfano 10800 Perdido A&B 100.0% 77.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Jacoba #1T Munoz Lobo Lobo 100.0% 77.500% 267
- ---------------------------------------------------------------------------------------------------------------------
Jacoba #2C El Huerfano 10800 100.0% 77.500% 4
- ---------------------------------------------------------------------------------------------------------------------
Jacoba #2T Munoz Lobo 100.0% 77.500% 0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 91
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jacoba #3C El Huerfano 10800 100.0% 78.400% 0
- ---------------------------------------------------------------------------------------------------------------------
Jacoba #3T Munoz Lobo 100.0% 78.400% 21
- ---------------------------------------------------------------------------------------------------------------------
Jacoba A1 100.0% 78.500% 503
- ---------------------------------------------------------------------------------------------------------------------
Jacoba A2 Lobo 100.0% 80.000% 503
- ---------------------------------------------------------------------------------------------------------------------
L.F.T.#1 El Huerfano 10800 Perdido A 100.0% 75.000% 0
- ---------------------------------------------------------------------------------------------------------------------
L.F.T.#2 El Huerfano 10800 Perdido A&B 100.0% 75.000% 7
- ---------------------------------------------------------------------------------------------------------------------
L.F.T.#4 El Huerfano 10800 Perdido A 100.0% 75.000% 4
- ---------------------------------------------------------------------------------------------------------------------
L.F.T.#5 Munoz Lobo Lobo 100.0% 75.000% 0
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #2 Charco 9400 Perdido A&B 100.0% 79.229% 153
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #3R Lobo 100.0% 75.193% 0
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #4 Perdido B 100.0% 0
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #6 Charco 9900 Perdido B 100.0% 79.229% 152
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #7 Charco 9200 Perdido A 100.0% 79.229% 0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 92
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Leonardo #8 Charco 9200 Perdido A 100.0% 79.229% 1,097
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #9 Charco 9200 100.0% 79.229% 56
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #10 Charco 9200 Perdido A 100.0% 31.692% 0
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #11 Charco 9900 Perdido A 100.0% 79.229% 207
- ---------------------------------------------------------------------------------------------------------------------
Leonardo #12 100.0% 79.229% 2,680
- ---------------------------------------------------------------------------------------------------------------------
Martinez Ramirez 100.0% 76.000% 229
- ---------------------------------------------------------------------------------------------------------------------
Munoz #2 El Huerfano 10800 Perdido A&B 100.0% 77.500% 250
- ---------------------------------------------------------------------------------------------------------------------
Munoz #3C El Huerfano 10800 Perdido A 100.0% 77.500% 0
- ---------------------------------------------------------------------------------------------------------------------
Munoz #3T Munoz Lobo Lobo 100.0% 77.500% 535
- ---------------------------------------------------------------------------------------------------------------------
Munoz-Gutierrez #1 Munoz Lobo Lobo 6 100.0% 73.725% 0
- ---------------------------------------------------------------------------------------------------------------------
PorrasGU #1 Charco 9400 Perdido A 100.0% 72.000% 275
- ---------------------------------------------------------------------------------------------------------------------
PorrasGU #2 Charco 9400 Perdido B 100.0% 72.000% 0
- ---------------------------------------------------------------------------------------------------------------------
R.M.T. #1 Lobo 100.0% 73.500% 0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 93
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
R.M.T. #2 Perdido Perdido A&B 100.0% 73.500% 129
- ---------------------------------------------------------------------------------------------------------------------
Ramirez, Abel #1 Wilcox 100.0% 76.000% 88
- ---------------------------------------------------------------------------------------------------------------------
Ramirez M 1 100.0% 76.000% 420
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #1 Munoz Lobo Lobo 100.0% 71.782% 105
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #2 Bustamante Wilcox Perdido 100.0% 71.782% 268
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #3C Bustamante Wilcox Perdido A&B 100.0% 71.782% 1,299
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #4 Munoz Lobo Lobo 100.0% 71.782% 389
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #5C Bustamante Wilcox Perdido 100.0% 71.782% 561
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #5T Munoz Lobo Lobo 100.0% 71.782% 0
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #6C Bustamante Wilcox Perdido 100.0% 71.782% 21
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #6T Munoz Lobo Lobo 100.0% 71.782% 0
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #7C Bustamante Wilcox Perdido 100.0% 71.782% 202
- ---------------------------------------------------------------------------------------------------------------------
Rodriguez GU #7T Munoz Lobo Lobo 100.0% 71.782% 22
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 94
EXHIBIT A - PART IV
To Purchase and Sale Agreement
Well Valuation:
<TABLE>
<CAPTION>
=====================================================================================================================
WELL NAME FIELD NAME FORMATION WI% NRI% VALUATION
(M$)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Swatner GR 1 100.0% 76.000% 96
- ---------------------------------------------------------------------------------------------------------------------
Yzaguirre - Leo #1 El Huerfano 10800 Perdido A 100.0% 77.927% 0
- ---------------------------------------------------------------------------------------------------------------------
Yzaguirre - Leo #3 El Huerfano 10800 Perdido B 100.0% 77.927% 157
- ---------------------------------------------------------------------------------------------------------------------
Yzaguirre - Leo #5 El Huerfano 10800 Perdido B 100.0% 77.927% 98
- ---------------------------------------------------------------------------------------------------------------------
Yzaguirre - Leo #6 El Huerfano 10800 Perdido A 100.0% 805
=====================================================================================================================
</TABLE>
14
<PAGE> 95
EXHIBIT A - PART IV
TO PURCHASE AND SALE AGREEMENT
Lease Valuation:
<TABLE>
<CAPTION>
===========================================================================================================
LEASE NAME LEASE # GROSS ACRES NET VALUE
ACRES (M$)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Derley Villarreal 005-001B 480.129 480.129 72
- -----------------------------------------------------------------------------------------------------------
Jacoba Villarreal 005-002B 2,323.760 2,323.760 349
- -----------------------------------------------------------------------------------------------------------
Ramirez Mineral Trust 005-003A 907.100 907.100 136
- -----------------------------------------------------------------------------------------------------------
Gloria E. Gutierrez 005-005/01B 542.014 18.582 16
- -----------------------------------------------------------------------------------------------------------
Gloria E. Gutierrez 005-005/02B 542.014 433.432 65
- -----------------------------------------------------------------------------------------------------------
Manual Ramirez 005-006B 140.930 140.930 35
- -----------------------------------------------------------------------------------------------------------
Juan D. Gutierrez 055-007B 84.660 84.660 13
- -----------------------------------------------------------------------------------------------------------
Jose C. Gutierrez 005-010B 124.220 124.220 19
- -----------------------------------------------------------------------------------------------------------
Rafael E. Gutierrez 005-011B 50.009 50.009 8
- -----------------------------------------------------------------------------------------------------------
Jacoba G. Villerreal 005-012B 855.050 855.050 128
- -----------------------------------------------------------------------------------------------------------
Irene G. de Gutierrez 005-013B 104.660 104.660 16
- -----------------------------------------------------------------------------------------------------------
Aida R. Garcia 005-020/11 891.300 7.958 1
- -----------------------------------------------------------------------------------------------------------
Graciela Ramirez Garza 005-020/12 891.300 63.660 10
- -----------------------------------------------------------------------------------------------------------
Graciela Morales Montez 005-021 366.000 366.000 55
- -----------------------------------------------------------------------------------------------------------
Jose C. Morales 005-021 0
- -----------------------------------------------------------------------------------------------------------
Francisco Villarreal 005-021 0
- -----------------------------------------------------------------------------------------------------------
Jorge Perez 005-022 168.030 168.030 25
- -----------------------------------------------------------------------------------------------------------
Eliseo J. Perez 005-023 95.000 95.000 14
- -----------------------------------------------------------------------------------------------------------
Jose Clemente Gutierrez 005-024 163.530 163.530 25
- -----------------------------------------------------------------------------------------------------------
Phoenix Energy 005-025 596.740 596.740 90
- -----------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 96
EXHIBIT A - PART IV
TO PURCHASE AND SALE AGREEMENT
Lease Valuation:
<TABLE>
<CAPTION>
===========================================================================================================
LEASE NAME LEASE # GROSS ACRES NET VALUE
ACRES (M$)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jesus V. Cuellar 009-033 320.000 320.000 48
- -----------------------------------------------------------------------------------------------------------
Abel Ramirez 009-070 320.000 320.000 332
- -----------------------------------------------------------------------------------------------------------
Delia R. de Martinez 009-090 146.798 146.798 22
- -----------------------------------------------------------------------------------------------------------
Sarah R. de Ramirez 009-091 378.430 378.430 95
- -----------------------------------------------------------------------------------------------------------
Francisco Ramirez 009-092 43.570 43.570 11
- -----------------------------------------------------------------------------------------------------------
Antonio Ramirez 009-095 19.568 19.568 5
- -----------------------------------------------------------------------------------------------------------
Rafael Ramirez 009-096 23.384 23.384 6
- -----------------------------------------------------------------------------------------------------------
Arturo Ramirez 009-097 28.244 28.244 7
- -----------------------------------------------------------------------------------------------------------
George R. Swatner 016-064/01 320.000 266.670 67
- -----------------------------------------------------------------------------------------------------------
Lloyd M. Bentson 016-064/02 1,000.000 166.667 42
- -----------------------------------------------------------------------------------------------------------
Lydia de Alonzo 016-070a 96.470 96.470 14
- -----------------------------------------------------------------------------------------------------------
Araceli Ramirez 016-071A 202.510 202.510 653
- -----------------------------------------------------------------------------------------------------------
Leonardo Flores 016-072 2,291.200 2,291.200 1,477
- -----------------------------------------------------------------------------------------------------------
Francisca de Porras 016-073A 405.020 405.020 1,298
- -----------------------------------------------------------------------------------------------------------
Martiniano Garza 016-092 294.500 294.500 872
- -----------------------------------------------------------------------------------------------------------
Amando Garza 016-118 960.000 960.000 459
- -----------------------------------------------------------------------------------------------------------
Alfonso Garza 016-120 1,103.000 1,103.000 207
- -----------------------------------------------------------------------------------------------------------
Leonardo G. Flores 016-124 1,527.000 1,527.000 1,207
- -----------------------------------------------------------------------------------------------------------
Vale A. Ackerman 016-136 4,571.700 4,571.700 4,930
- -----------------------------------------------------------------------------------------------------------
Maurilio Flores 061-011A 880.000 880.000 176
- -----------------------------------------------------------------------------------------------------------
David Bustamante 061-008A 27.660 27.660 4
- -----------------------------------------------------------------------------------------------------------
Feliz F. Bustamante 061-009A 56.600 56.600 8
- -----------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 97
EXHIBIT A - PART IV
TO PURCHASE AND SALE AGREEMENT
Lease Valuation:
<TABLE>
<CAPTION>
===========================================================================================================
LEASE NAME LEASE # GROSS ACRES NET VALUE
ACRES (M$)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel Yzaguirre 061-010A 207.800 207.800 31
- -----------------------------------------------------------------------------------------------------------
Ricardo de los Santos 061-011/01A 299.120 290.450 44
- -----------------------------------------------------------------------------------------------------------
Maria G. Garcia 061-014A 100.200 100.200 15
- -----------------------------------------------------------------------------------------------------------
Jose L. Bustamente 061-015/01A 142.890 142.890 21
- -----------------------------------------------------------------------------------------------------------
Marcela de los Santos 061-016A 36.400 36.400 5
- -----------------------------------------------------------------------------------------------------------
Julian Bustamente 061-017A 90.250 90.250 14
- -----------------------------------------------------------------------------------------------------------
Francisco de los Santos 061-019/01A 211.320 141.915 21
- -----------------------------------------------------------------------------------------------------------
I.W. Shaffer 061-019/02 138.810 48.560 7
- -----------------------------------------------------------------------------------------------------------
Rutilde B. Martinez 061-020A 138.810 138.810 21
- -----------------------------------------------------------------------------------------------------------
Rogelio Uribe L&C 061-021A 222.300 222.300 33
- -----------------------------------------------------------------------------------------------------------
Juan J. Garza 061-023A 64.100 64.100 10
- -----------------------------------------------------------------------------------------------------------
William R. Leo 061-026/01A 0.500 0.500 0
- -----------------------------------------------------------------------------------------------------------
William R. Leo 061-026/02 326.500 321.600 48
- -----------------------------------------------------------------------------------------------------------
Roberto Garcia 061-028A 87.200 87.200 13
- -----------------------------------------------------------------------------------------------------------
Jose M. Gutierrez 061-030 1,234.000 1,234.000 185
- -----------------------------------------------------------------------------------------------------------
Emma D. Rodriguez 061-037A 410.600 410.600 963
- -----------------------------------------------------------------------------------------------------------
Juan A. Coronado 061-043A 62.500 62.500 9
- -----------------------------------------------------------------------------------------------------------
Pedro Dominguez 061-047/01A 187.500 104.250 16
- -----------------------------------------------------------------------------------------------------------
Manuel Rodriguez 061-047/02A 62.500 31.250 5
- -----------------------------------------------------------------------------------------------------------
Rogelio Uribe L&C 061-047/03A 62.5 42.000 6
- -----------------------------------------------------------------------------------------------------------
Pedro Vela 061-047/04 62.5 62.5 9
- -----------------------------------------------------------------------------------------------------------
Guadalupe S. Garcia 061-048A 31.25 31.25 5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 98
EXHIBIT A - PART IV
TO PURCHASE AND SALE AGREEMENT
Lease Valuation:
<TABLE>
<CAPTION>
===========================================================================================================
LEASE NAME LEASE # GROSS ACRES NET VALUE
ACRES (M$)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stanley G. Marshall 061-060/01A 295 270.520 54
- -----------------------------------------------------------------------------------------------------------
Gladys H. Quilliam 061-060/02B 295 24.480 5
- -----------------------------------------------------------------------------------------------------------
Guadalupe S. Garcia 061-061A 62.5 62.5 9
- -----------------------------------------------------------------------------------------------------------
Angelica M. Salinas 061-062A 62.5 62.5 9
- -----------------------------------------------------------------------------------------------------------
Lauro Garza 061-077A 352 352 53
- -----------------------------------------------------------------------------------------------------------
Martinoa Garza 061-078 352 352 53
- -----------------------------------------------------------------------------------------------------------
Elodia G. Munzo 061-08/01 845 845 3,409
- -----------------------------------------------------------------------------------------------------------
Alicia O. Gutierrez 061-080/02 160 160 24
- -----------------------------------------------------------------------------------------------------------
Eliseo E. Gutierrez 061-081 334.794 334.794 50
- -----------------------------------------------------------------------------------------------------------
Diamantina G. Ramirez 061-083A 1955.79 1955.79 293
- -----------------------------------------------------------------------------------------------------------
Irene G. Gutierrez 061-084 334.794 334.794 1,596
- -----------------------------------------------------------------------------------------------------------
Jacoba Villarreal 061-085 334.794 334.794 852
- -----------------------------------------------------------------------------------------------------------
Guadalupe S. Garcia 061-087A 31.25 31.25 5
- -----------------------------------------------------------------------------------------------------------
Genevevo Bustamante 061-088/01 62.5 62.5 9
- -----------------------------------------------------------------------------------------------------------
Salvador Flores 061-088/01 0
- -----------------------------------------------------------------------------------------------------------
Lauro Flores 061-088/01 0
- -----------------------------------------------------------------------------------------------------------
Antonio Bustamante 061-088/02 62.5 62.5 9
- -----------------------------------------------------------------------------------------------------------
L&B Cattle 061-089 100.2 100.2 15
- -----------------------------------------------------------------------------------------------------------
Carlos C. Garza 061-090 21.8 21.8 3
- -----------------------------------------------------------------------------------------------------------
Jose O. Dodier 061-091 1294 1294 1,032
- -----------------------------------------------------------------------------------------------------------
Juan J. Garza 061-092 1 1 0
- -----------------------------------------------------------------------------------------------------------
Victoria S. Lopez 061-094 1294 1294 194
- -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 99
EXHIBIT A - PART IV
TO PURCHASE AND SALE AGREEMENT
Lease Valuation:
<TABLE>
<CAPTION>
===========================================================================================================
LEASE NAME LEASE # GROSS ACRES NET VALUE
ACRES (M$)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estate of Lauro Garza 061-096 93.44 93.44 14
- -----------------------------------------------------------------------------------------------------------
Araceli F. Ramirez 061-096 88 88 13
- -----------------------------------------------------------------------------------------------------------
Carlos Garza 061-097A 1 1 0
- -----------------------------------------------------------------------------------------------------------
Zapata County ISD 061-098 3 3 0
- -----------------------------------------------------------------------------------------------------------
Rogelio Uribe L&C 061-099A 103.6 103.6 16
- -----------------------------------------------------------------------------------------------------------
Herminia B. Bustamante 061-100 7.3 7.3 1
- -----------------------------------------------------------------------------------------------------------
Noelia de los Santos 061-102 39 8.670 1
- -----------------------------------------------------------------------------------------------------------
Bernardo Bustamente 061-103/01 60 30.000 5
- -----------------------------------------------------------------------------------------------------------
Rafael Trevino 061-103/02 134.35 33.588 5
- -----------------------------------------------------------------------------------------------------------
Raul Trevino 061-103/03 134.35 33.588 5
- -----------------------------------------------------------------------------------------------------------
Jose Luis Bustamante 061-103/04 85.17 42.585 6
- -----------------------------------------------------------------------------------------------------------
Fred W. Winch 061-103/05 279.52 46.586 7
- -----------------------------------------------------------------------------------------------------------
NationsBank 061-103/06 279.3 46.550 7
===========================================================================================================
Total Leasehold Value 38081.102 33568.1 22,255
Total Well Value 38,419
Total Gathering Value 4,827
</TABLE>
19
<PAGE> 100
EXHIBIT "C-1"
TO PURCHASE AND SALE AGREEMENT
CONVEYANCE, BILL OF SALE AND ASSIGNMENT
STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF ZAPATA )
That the undersigned TRANSTEXAS GAS CORPORATION, a Delaware
corporation and TRANSTEXAS TRANSMISSION CORPORATION, a Delaware corporation
(collectively, "Assignor"), whose addresses are 1300 East North Belt, Suite
310, Houston, Texas 77032-2949, for and in consideration of the sum of Ten
Dollars ($10.00), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, do hereby BARGAIN, SELL,
TRANSFER, ASSIGN AND CONVEY unto THE HOUSTON EXPLORATION COMPANY, a Delaware
corporation ("Assignee"), whose address is 1331 Lamar, Suite 1065, Houston,
Texas 77010, the following described property in Zapata County, Texas:
(a) all of Assignor's right, title and interest in and to the Oil
and Gas Leases set forth and identified in Exhibit A - Part I,
attached hereto and made a part hereof (the "Leases"),
including, but not limited to the working interests ("W.I.")
and net revenue interests ("N.R.I.") (collectively, the "Lease
Interests") specifically set forth in Exhibit A - Part I as to
some of the Leases, pursuant to the terms of the Leases,
together with all of Assignor's right, title and interest in
and to all personal property, fixtures, machinery and
equipment situated on the Leases (collectively, "Lease
Equipment");
(b) all of Assignor's right, title and interest in and to the
wells (the "Wells") as identified and set forth in Exhibit A -
Part II attached hereto and made a part hereof, including all
casing, tubing, rods, tanks, separators, pumps, machinery,
equipment and all other
<PAGE> 101
personal property and fixtures situated thereon (collectively,
"Well Equipment"), together with a like interest in all
contracts, operating agreements, rights-of-way, easements,
surface leases, permits, licenses, pooling or unitization
agreements and other associated agreements or rights affecting
the Leases and Wells.
(c) all of Assignor's right, title and interest in and to the
easements, surface fees, surface leases, permits and rights of
way (the "Easements") listed on Exhibit "B", attached hereto
and made a part hereof and all personal property and fixtures
used or useful in connection with the Easements including, but
not limited to, all gathering and flowlines and all meters
(collectively, "Gathering System Property").
TO HAVE AND TO HOLD the above described property unto Assignee and its
successors and assigns, forever.
This Conveyance, Bill of Sale and Assignment is made subject to the
following:
(a) Purchase and Sale Agreement dated June 21, 1996 by and between
Assignor and Assignee ("Purchase and Sale Agreement").
(b) The Lease Equipment, Wells, Well Equipment and Gathering
System Property are conveyed in "AS IS" condition "WITH ALL
FAULTS" and Assignor hereby expressly DISCLAIMS ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY
WARRANTY OF TITLE, EITHER EXPRESS OR IMPLIED, as to the Wells,
Well Equipment, Easements, Lease Equipment, Agreements and
Gathering System Property.
(c) ASSIGNOR MAKES NO WARRANTY OF TITLE TO THE LEASE INTERESTS AND
THE LEASES, EITHER EXPRESS OR IMPLIED, EXCEPT AS SET FORTH IN
THE PURCHASE AND SALE AGREEMENT.
All of the provisions of this Assignment and Bill of Sale shall be
available to and binding upon the respective successors and assigns of the
Assignor and Assignee.
2
<PAGE> 102
EXECUTED, this 2nd day of July, 1996, but to be effective as of May 1,
1996, at 7:00 a.m. local time.
ASSIGNOR:
TRANSTEXAS GAS CORPORATION
By:_____________________________________
Arnold H. Brackenridge
President and Chief Operating
Officer
TRANSTEXAS TRANSMISSION CORPORATION
By:_____________________________________
Arnold H. Brackenridge
President and Chief Operating
Officer
3
<PAGE> 103
ASSIGNEE:
THE HOUSTON EXPLORATION COMPANY
By:_____________________________________
James G. Floyd
President and Chief Executive
Officer
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this 2nd day of July,
1996, by Arnold H. Brackenridge, President of TRANSTEXAS GAS CORPORATION, a
Delaware corporation, on behalf of said corporation.
________________________________________
Notary Public in and for
the State of TEXAS
________________________________________
(Printed Name of Notary)
My Commission Expires:__________________
4
<PAGE> 104
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this 2nd day of July,
1996, by Arnold H. Brackenridge, President of TRANSTEXAS TRANSMISSION
CORPORATION, a Delaware corporation, on behalf of said corporation.
________________________________________
Notary Public in and for
the State of TEXAS
________________________________________
(Printed Name of Notary)
My Commission Expires:__________________
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this 2nd day of July,
1996, by James G. Floyd, President of THE HOUSTON EXPLORATION COMPANY, a
Delaware corporation, on behalf of said corporation.
________________________________________
Notary Public in and for
the State of TEXAS
________________________________________
(Printed Name of Notary)
My Commission Expires:__________________
5
<PAGE> 105
EXHIBIT "C-2"
TO PURCHASE AND SALE AGREEMENT
MINERAL DEED
STATE OF TEXAS )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF ZAPATA )
That the undersigned TRANSTEXAS GAS CORPORATION, a Delaware
corporation and TRANSAMERICAN NATURAL GAS CORPORATION, a Texas corporation
(collectively "Grantor"), whose address is 1300 East North Belt, Suite 310,
Houston, Texas 77032-2949, for and in consideration of the sum of Ten Dollars
($10.00), and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, does hereby bargain, sell,
transfer, assign and convey unto THE HOUSTON EXPLORATION COMPANY, a Delaware
corporation ("Grantee") whose address is 1331 Lamar, Suite 1065, Houston, Texas
77010, the following described property in Zapata County, Texas:
(a) an undivided 9.5% interest in the mineral estate in and to the
lands described in Oil and Gas Lease dated October 9, 1985
from L&B Cattle Company to TransAmerican Natural Gas
Corporation recorded in Volume 323, Page 250, et seq. of the
Real Property Records of Zapata County, Texas.
(b) all of Assignor's right, title and interest in and to all
mineral fees, royalties and overriding royalties in and under
the lands covered by the Oil and Gas Leases described on
Exhibit A - Part I attached hereto and made a part hereof.
TO HAVE AND TO HOLD the above described interests unto Grantee and its
successors and assigns forever.
<PAGE> 106
This Mineral Deed is made without any warranty of title whatsoever.
EXECUTED, this _____ day of July, 1996, but effective as of May 1,
1996, at 7:00 a.m. local time.
ASSIGNOR:
TRANSTEXAS GAS CORPORATION
By:__________________________________
Arnold H. Brackenridge
President and Chief Operating
Officer
TRANSAMERICAN NATURAL GAS CORPORATION
By:__________________________________
Arnold H. Brackenridge
Executive Vice President
ASSIGNEE:
THE HOUSTON EXPLORATION COMPANY
By:__________________________________
James G. Floyd
President and Chief Executive
Officer
2
<PAGE> 107
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this _____ day of July,
1996, by Arnold H. Brackenridge, President of TransTexas Gas Corporation, a
Delaware corporation, on behalf of said corporation.
_____________________________________
Notary Public in and for
the State of TEXAS
_____________________________________
(Printed Name of Notary)
My Commission Expires:_______________
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this _____ day of July,
1996, by Arnold H. Brackenridge, Executive Vice President of TransAmerican
Natural Gas Corporation, a Texas corporation, on behalf of said corporation.
_____________________________________
Notary Public in and for
the State of TEXAS
_____________________________________
(Printed Name of Notary)
My Commission Expires:_______________
3
<PAGE> 108
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this _____ day of July,
1996, by James G. Floyd, President of The Houston Exploration Company, a
Delaware corporation, on behalf of said corporation.
_____________________________________
Notary Public in and for
the State of TEXAS
_____________________________________
(Printed Name of Notary)
My Commission Expires:_______________
4
<PAGE> 109
EXHIBIT "F"
TO PURCHASE AND SALE AGREEMENT
ARBITRATION AGREEMENT
THIS ARBITRATION AGREEMENT ("Agreement") is made and entered on this
the _____ day of July, 1996 by and between TransTexas Gas Corporation
("TransTexas") and The Houston Exploration Company ("THEC").
TransTexas and THEC wish to dispose of their differences promptly and
privately without resorting to the high cost and long delays of extensive court
litigation, and to obtain a final and binding adjudication of their differences
by an impartial arbitrator, all pursuant to the provisions of this Agreement.
NOW, THEREFORE, in consideration of the recitals, mutual agreements and
benefits contained herein, and intending to be legally bound, the parties
hereby mutually agree to the following.
1. Arbitration. Any dispute, controversy, or claim (the
"Dispute") arising out of or relating to Section 5.09 of Purchase and Sale
Agreement dated June ___, 1996 by and between TransTexas Gas Corporation, et
al. and The Houston Exploration Company (the "PSA") shall be arbitrated
pursuant to the terms hereof.
2. Single Arbitrator. The arbitration shall be conducted before
a single neutral arbitrator. The Parties shall use their best efforts to agree
on an arbitrator. In the event the Parties cannot agree, either Party may
request the Chief Judge of the United States District Court for the Southern
District of Texas to make the appointment and obtain acceptance.
3. Vacancy. In the event of the death, resignation, or
incapacity of the Arbitrator, or at any time a vacancy otherwise occurs, the
Parties shall use their best efforts to agree on the successor arbitrator. In
the event the Parties cannot agree, either Party may request the Chief Judge of
the United States District Court for the Southern District of Texas to make the
appointment and obtain acceptance. Upon the filling of a vacancy, and after
allowing the newly appointed arbitrator sufficient time to familiarize himself
or herself with the submissions and proceedings, the proceedings shall be
continued without rehearing from the point at which the vacancy occurred,
unless the Parties agree otherwise. The new arbitrator shall have the power to
determine the extent to which he or she shall act on the record, if any,
already made in the arbitration.
4. Qualifications. Any arbitrator shall be a lawyer admitted to
the Bar of the State of Texas who shall have practiced (including service on
the bench) for 15 years and shall have significant expertise in the laws
regarding oil and gas exploration and development.
5. Entry of Judgment. The Parties agree that judgment on the
arbitration award may be entered by any federal or state court having
jurisdiction thereof.
<PAGE> 110
6. Written Opinion. Any award or portion thereof, whether
preliminary or final, shall be in a writing signed by the Arbitrator and shall
state the reasons upon which the award or portion thereof is based and shall be
based on and accompanied by a written opinion containing findings of fact and
conclusions of law. The Arbitrator shall render its final decision on the
merits of the dispute based solely on the evidence presented, on the
substantive law as applicable to the Dispute and as argued by the Parties, and
consistent with the provisions of this Agreement.
7. Voluntary Agreement. The Parties affirm that they have
entered into this Agreement and the arbitration provided for herein
voluntarily, knowingly, and after full opportunity for consultation with legal
counsel of their choosing. The Parties further affirm that they understand and
agree that the final decision of the Arbitrator provided for herein will be
final, binding, and unappealable as to all matters rendered therein and hereby
waive any and all rights that they now have with regard to the Disputes,
whether grounded in state or federal statute, common law, tort, contract, or
otherwise, with the exception of rights, if any, pursuant to the final decision
of the Arbitrator. The Parties hereby waive their right to appeal the
Arbitrator's final decision.
8. Forum Selection. The Parties agree that the district Courts
of Harris County, Texas shall have exclusive jurisdiction over an action
brought to enforce the rights and obligations created in or arising from this
agreement to arbitrate, and each of the Parties hereto irrevocably submits to
the jurisdiction of such Courts.
9. Governing Substantive Law. The Arbitrator shall determine the
rights and obligations of the Parties according to the substantive laws of the
State of Texas (excluding conflicts of laws principles) as though acting as a
court of the State of Texas.
10. Time of Proceedings. It is the intent of the Parties that,
barring extraordinary circumstances, the arbitration shall be concluded within
two weeks after the Arbitrator is selected. The Arbitrator shall use his or
her best efforts to issue the final award or awards within a period of five
days after closure of the proceedings. Failure to do so shall not be a basis
for challenging the award.
11. Preliminary Meeting. The Arbitrator shall hold a preliminary
meeting with the Parties, at a time and place determined by the Arbitrator, for
the discussion of procedural matters prior to the issuance of procedural
directives by the Arbitrator and for discussion of such other matters as the
Arbitrator may determine.
12. Procedures. The procedure to be followed in any arbitration
hereunder shall be as prescribed herein and in such directives that shall be
issued by the Arbitrator following consultation with the Parties. Unless
otherwise agreed by the Parties, the procedures shall provide for the
submissions of briefs by the Parties, the introduction of documents and the
oral testimony of witnesses, cross-examination of witnesses, oral arguments,
the closure of the proceedings and such other matters as
2
<PAGE> 111
the Arbitrator may deem appropriate. Further, the Arbitrator shall regulate
all matters relating to the conduct of the arbitration not otherwise provided
for.
13. Failure to Participate. In the event a Party, having been
given notice and opportunity, shall fail or shall refuse to appear or
participate in any part of the arbitration, the proceedings shall nevertheless
be conducted to conclusion and final award. Any award rendered under such
circumstances shall be as valid and enforceable as if both Parties had appeared
and participated fully at all stages.
14. Confidentiality. The Parties and Arbitrator shall treat all
aspects of the arbitration proceedings, including without limitation testimony
and other evidence, briefs and the award, as strictly confidential except: a)
to the extent all Parties otherwise agree in writing; b) as may be appropriate
in response to a governmental agency, financing, auditing or legal requirement;
or c) except as otherwise provided in this Agreement.
15. No Ex Parte Communications. No Party or anyone acting on
behalf of a Party shall have any private or ex parte communications with the
Arbitrator with respect to the subject matter of this arbitration after his or
her appointment.
16. Places of Arbitration. The place of arbitration shall be
Houston, Harris County, Texas, unless otherwise agreed by the Parties or unless
the Arbitrator designates some other location.
17. Evidence. The Arbitrator shall apply the Texas Rules of
Evidence, except that the Arbitrator shall have the power to admit hearsay to
the extent deemed appropriate by the Arbitrator in his or her sole discretion
and to make orders with respect to the order and form of testimony of the
witnesses as are in the interest of justice and the expeditious resolution of
the case. The Arbitrator shall be the exclusive judge of relevance and
materiality.
18. Costs. Each Party shall bear its own costs and each Party
shall be responsible to pay one-half of the Arbitrator's fees and expenses.
IN WITNESS WHEREOF, each of the Parties hereto executes this Agreement
as of the day set forth hereinabove.
THE HOUSTON EXPLORATION COMPANY TRANSTEXAS GAS CORPORATION
By:_____________________________ By:________________________________
Title:___________________________ Title:______________________________
3
<PAGE> 1
Exhibit 10.20
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, dated as of __________, 1996
(the "Agreement"), is entered into by and between The Houston Exploration
Company, a Delaware corporation ("Houex"), and THEC Holdings Corp., a Delaware
corporation ("Holdings").
WHEREAS, Holdings is a wholly-owned subsidiary of The Brooklyn
Union Gas Company ("Brooklyn Union"), and Houex is a wholly-owned subsidiary of
Holdings; and
WHEREAS, in February 1996, Brooklyn Union implemented a
reorganization of its exploration and production assets by transferring to
Houex certain onshore producing properties and developed and undeveloped
acreage; and
WHEREAS, such reorganization was effected as follows:
(i) Fuel Resources Gathering Inc., a Delaware corporation
("FRGI"), a wholly-owned subsidiary of Fuel Resources Inc., a Delaware
corporation ("FRI"), merged with and into Fuel Resources Production and
Development Company, Inc., a Delaware corporation ("FRPD"), another
wholly-owned subsidiary of FRI;
(ii) FRI, a wholly-owned subsidiary of Brooklyn Union,
contributed its onshore producing properties and developed and undeveloped
acreage (including, by way of FRI's contribution of the stock of FRPD,
those held by FRPD and its subsidiaries) to a newly-formed subsidiary,
Bill & Lance's Excellent Company, Inc., a Delaware corporation ("B&LEC");
(iii) B&LEC contributed such onshore producing properties
and developed and undeveloped acreage (with the exception of the stock of
FRPD and its subsidiaries) to a newly-formed subsidiary, Bill & Lance's
Bogus Subsidiary, Inc., a Delaware corporation ("B&LBS");
(iv) FRI dividended the outstanding capital stock of B&LEC
to Brooklyn Union;
(v) B&LEC merged with and into Holdings;
(vi) Holdings contributed all of the outstanding capital
stock of B&LBS and FRPD to Houex; and
(vii) B&LBS and FRPD merged with and into Houex; and
<PAGE> 2
WHEREAS, certain former employees of FRI are entitled to
remuneration for the increase in value of the onshore oil and gas properties
formerly held by FRI and FRPD (as used herein, all such remuneration to which
such former employees are entitled is referred to as "Remuneration"); and
WHEREAS, certain of such former employees of FRI filed suit
against Brooklyn Union, FRI and Houex alleging claims relating to the amount of
Remuneration to which they are entitled and claims alleging, inter alia, breach
of contract, breach of fiduciary duty, fraud, negligent misrepresentation and
conspiracy in R. Gerald Bennett, Ronnie M.. Botkin and Marvin L. Steakley v.
The Brooklyn Union Gas Company and Fuel Resources Inc. (Cause No. 96-007795 in
the 164th Judicial District Court of Harris County, Texas) (as such claims may
be amended, modified, supplemented or refiled in the District Court of Harris
County or any other court or jurisdiction, and including any other claims by
the former employees of FRI who are or may become after the date hereof parties
thereto, the "Pending Litigation"); and
WHEREAS, Holdings desires to indemnify Houex from and against
all liabilities with respect to the Pending Litigation;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
SECTION 1. Indemnification. Holdings agrees to pay, and to
indemnify, save and hold harmless Houex, its successors and assigns and its
officers, directors, stockholders, employees and subsidiaries (collectively,
the "Indemnified Persons") from and against any and all damages, liabilities,
losses, claims, deficiencies, payments, obligations, penalties, interest,
expenses, fines, assessments, charges, judgments, suits, proceedings and costs
(including reasonable fees and expenses of attorneys, accountants and other
professional advisors and any court costs) (collectively, a "Loss") either
directly or indirectly imposed on, incurred by or asserted against such
Indemnified Persons (or any of them) in any way relating to or arising from or
out of the Pending Litigation.
SECTION 2. Demands. Each Indemnified Person agrees that
upon its discovery of facts giving rise to a claim for indemnity with respect
to such matter under this Agreement, including receipt by it of notice of any
demand, assertion, claim, action or proceeding, judicial or otherwise, by any
third party (any such action being referred to in this Agreement as a "Claim"),
it will give prompt notice in writing to Holdings, together with a statement of
such information respecting any of the foregoing as it shall then have;
provided, however, that the failure of an Indemnified Person to so notify
Holdings promptly shall not relieve Holdings from any liability that Holdings
may have to such Indemnified Person except to the extent that Holdings is
materially prejudiced thereby; and further provided that, for purposes of this
Section 2, Holdings shall be deemed to have been given notice by Houex and
each other Indemnified Person with respect to all Claims arising in or under
the Pending Litigation.
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<PAGE> 3
SECTION 3. Right to Contest and Defend. (a) Holdings will at
its cost and expense contest and defend by all appropriate legal proceedings
any Claim with respect to which it has agreed herein to indemnify an
Indemnified Person under this Agreement. Any such contest may be conducted in
the name and on behalf of Holdings or such Indemnified Person as may be
appropriate. Such contest shall be conducted by attorneys engaged by Holdings,
but the Indemnified Persons shall have the right to participate in (but not
control) such proceedings and to be represented by attorneys of their own
choosing at their own cost and expense.
(b) If an Indemnified Person joins in the contest of any such
Claim, Holdings shall have full authority to determine and exercise control
over all action to be taken with respect to such Claim. Holdings shall not,
however, without the written consent of the Indemnified Person, (i) settle any
such Claim or consent to the entry of any judgment with respect thereto which
does not include an unconditional written release of the Indemnified Person
from all liability in respect of such Claim or (ii) settle such Claim or
consent to the entry of any judgment with respect thereto in any manner that
may materially and adversely affect the Indemnified Person. If Holdings fails
to defend against a Claim of which it receives proper notice and for which an
Indemnified Person is entitled to indemnification hereunder, the Indemnified
Person shall have the right to defend against the Claim at the expense of
Holdings with counsel of its own choosing, subject to the right of Holdings to
admit its liability and assume the defense of the Claim at any time prior to
settlement or final determination thereof. If Holdings has not yet admitted
its liability for a Claim, the Indemnified Person shall send written notice to
Holdings of any proposed settlement of the Claim. Holdings shall have an
option for 30 days following receipt of such notice to (i) admit in writing
liability for the Claim and (ii) if liability is so admitted, reject, in its
reasonable judgment, the proposed settlement. Otherwise, the Indemnified
Person shall be entitled to enter into the proposed settlement and receive
reimbursement in full from Holdings with respect to any Loss incurred by such
Indemnified Person in any way relating to or arising from or out of the
settlement of such Claim pursuant to such settlement. If an Indemnified Person
settles any Claim with respect to which Holdings has admitted its liability in
writing without the prior written consent of Holdings, however, the Indemnified
Person shall thereby waive any right to indemnity therefor.
SECTION 4. Cooperation. If requested by Holdings, the
Indemnified Persons agree to cooperate with Holdings and its counsel in
contesting any Claim which Holdings elects to contest or, if appropriate, in
making any counterclaim against the person asserting the Claim or any
cross-complaint against any person, but Holdings will reimburse the Indemnified
Persons for any expenses incurred by them in so cooperating.
SECTION 5. Right to Participate. The Indemnified Persons
agree to afford Holdings and its counsel the opportunity to be present at, and
to participate in, conferences with representatives of or counsel for the
person asserting the Claim and to reasonably cooperate with Holdings and its
counsel and to provide them with reasonable access to its records and
information in connection with the Claim.
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<PAGE> 4
SECTION 6. Payment of Damages. Holdings shall pay to the
Indemnified Persons in cash the amount of any payment to which the Indemnified
Persons may become entitled by reason of the provisions of this Agreement
within five business days after the amount of the relevant Claim or Loss, as
the case may be, is finally determined either by mutual agreement of the
parties, by arbitration or pursuant to the final unappealable judgment of a
court of competent jurisdiction; provided that Holdings shall reimburse
expenses of the Indemnified Person with respect to which the Indemnified
Persons are entitled to be indemnified hereunder as such expenses are incurred.
SECTION 7. Pledge of Houex Common Stock.
(a) In order to secure the full and punctual payment of
Holdings' obligations under this Agreement, including without limitation all
selling commissions, brokerage fees and other expenses incurred in connection
with a sale of the Common Stock pledged hereby, Holdings hereby hypothecates,
transfers and grants to Houex a continuing security interest in and to all
right, title and interest of Holdings in the following property, whether now
owned or existing or hereafter acquired or arising and regardless of where
located (all being collectively referred to as the "Collateral"):
(i) all of the presently outstanding shares of Common Stock,
par value $0.01 per share ("Houex Common Stock"), of Houex (the "Pledged
Shares") and the certificates representing the Pledged Shares, and all
dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or
all of the Pledged Shares;
(ii) all additional shares of capital stock of Houex from
time to time received by Holdings in any manner, and the certificates
representing such additional shares, and all dividends, cash, instruments
and other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such shares; and
(iii) all proceeds of any of the foregoing.
(b) The inclusion of proceeds in this Agreement does not
authorize Holdings to sell, dispose of or otherwise use the Collateral in any
manner not specifically authorized hereby.
SECTION 8. Delivery of Pledged Shares.
All certificates or instruments representing or evidencing the
Collateral shall be delivered to and held by or on behalf of Houex for its
benefit and the benefit of the other persons who are or may become Indemnified
Persons hereunder and shall be in suitable form for transfer by delivery, or
shall be accompanied by duly executed instruments of transfer or assignment in
blank, all in form and substance satisfactory to Houex. Houex for its benefit
and the benefit of the other persons who are or may become Indemnified Persons
hereunder shall have the right, at any time in its sole discretion and, upon
prior notice to Holdings sent at least three business days prior to such
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<PAGE> 5
transfer, to transfer to or to register in the name of Houex or any of its
nominees any or all of the Collateral, subject only to the revocable rights
specified in Section 10(a) hereof.
SECTION 9. Further Assurances.
Holdings agrees that from time to time, at its expense, it
will promptly execute and deliver all further instruments and documents, and
take all further action that may be necessary or desirable, or that Houex may
request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Houex to exercise and enforce its
rights and remedies hereunder with respect to any Collateral.
SECTION 10. Voting Rights; Dividends; Etc.
(a) So long as Holdings is not in default with respect to any
of its obligations under this Agreement:
(i) Holdings shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or any
part thereof for any purpose not inconsistent with the terms of this
Agreement.
(ii) Holdings shall be entitled to receive and retain any
and all dividends and interest paid in respect of the Collateral,
provided, however, that any and all (A) 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 Collateral, (B) dividends and other distributions
paid or payable in cash in respect of any Collateral 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 (C) cash
paid, payable or otherwise distributed in redemption of, or in exchange
for, any Collateral, shall be, and shall be forthwith delivered to Houex
to hold as, Collateral and shall, if received by Holdings, be received in
trust for the benefit of Houex, be segregated from the other property or
funds of Holdings, and be forthwith delivered to Houex as Collateral in
the same form as so received (with any necessary endorsement).
(iii) Houex shall execute and deliver (or cause to be
executed and delivered) to Holdings all such proxies and other instruments
as Holdings may reasonably request for the purpose of enabling Holdings to
exercise the voting and other rights which it is entitled to exercise
pursuant to paragraph (i) above and to receive the dividends which it is
authorized to receive and retain pursuant to paragraph (ii) above.
(b) Upon the occurrence and during the continuance of any
default by Holdings with respect to any of its obligations under this Agreement:
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<PAGE> 6
(i) At the option of Houex exercised in a writing sent by
overnight courier or by telecopier (confirmed by overnight courier) to
Holdings, all rights of Holdings to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise
pursuant to Section 10(a)(i) shall cease, and Houex or its nominee shall
thereupon have the sole right to exercise such voting and other consensual
rights.
(ii) All rights of Holdings to receive the dividends which
it would otherwise be entitled to receive and retain pursuant to Section
10(a)(ii) shall cease, and Houex shall thereupon have the sole right to
receive and hold as Collateral such dividends and interest.
(iii) All dividend payments which are received by Holdings
contrary to the provisions of paragraph (ii) of this Section 10(b) shall
be received in trust for the benefit of Houex, shall be segregated from
other funds of Holdings and shall be forthwith paid over to Houex as
Collateral in the same form as so received (with any necessary
endorsement).
SECTION 11. Transfers and Other Liens. Holdings shall not: (a)
sell, assign (by agreement, operation of law or otherwise) or otherwise dispose
of, or grant any option with respect to, any of the Collateral, or (b) create
or permit to exist any lien upon or with respect to any of the Collateral,
except for the security interest created by this Agreement.
SECTION 12. Remedies upon Default. If Holdings is in default with
respect to any of its obligations under this Agreement, Houex may exercise in
respect of the Collateral, in addition to other rights and remedies provided
for herein or otherwise available to it, all the rights and remedies of a
secured party on default under the Uniform Commercial Code ("UCC") (whether or
not the UCC applies to the affected Collateral), and Houex may also, without
notice except as specified below, sell the Collateral or any part thereof in
one or more parcels at public or private sale, at any exchange, broker's board
or at any of Houex's offices or elsewhere, for cash, on credit or for future
delivery, and upon such other terms as Houex may deem commercially reasonable.
Houex shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. Houex 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 13. Termination of Pledge. The pledge of the Pledged
Shares pursuant to this Agreement shall terminate upon the entry of final,
nonappealable judgment in favor of Houex with respect to the Pending Litigation
and all related Claims or the full and unconditional release of all Claims
relating to the Pending Litigation against all of the Indemnified Persons by
each former employee entitled to Remuneration; provided that the pledge of the
Pledged Shares may be terminated prior to such time if the obligations of
Holdings under this Agreement are assumed or guaranteed by an entity with
stockholders' equity (determined in accordance with generally accepted
accounting principles) in excess of $300,000,000 by means of a binding written
instrument in form and substance reasonably acceptable to Houex.
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<PAGE> 7
SECTION 14. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed
by registered or certified mail (return receipt requested) or sent via
overnight courier or facsimile to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
If to Houex to:
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attention: James G. Floyd
with copies to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: Jeffrey L. Wade
If to Holdings, to:
THEC Holdings Corp.
c/o The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, New York 11201-3850
Attention: Theodore Spar
with a copy to:
Cullen and Dykman
177 Montague Street
Brooklyn, New York 11201-3611
Attention: Lance Myers
SECTION 15. Entire Agreement. This Agreement (including the
documents and instruments referred to herein) constitutes the entire agreement
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
SECTION 16. Amendments and Waivers. (a) This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties in compliance with applicable law.
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<PAGE> 8
(b) Either party may (a) extend the time for the performance
of any of the obligations or other acts of the other party, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto or (c) waive compliance with any of the
agreements or conditions contained herein, provided that no such extension or
waiver shall be valid unless set forth in an instrument in writing signed on
behalf of such party.
SECTION 17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED
IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF
THE STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED
WHOLLY WITHIN SUCH STATE.
SECTION 18. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
SECTION 19. Severability. If any provision of this Agreement
is determined by arbitration or pursuant to the final unappealable order of a
court of competent jurisdiction to be illegal, invalid or unenforceable under
any present or future laws, rules or regulations and if the rights or
obligations of Houex or Holdings under this Agreement will not be materially
and adversely affected thereby, (a) such provision will be fully severable, (b)
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, (c) the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom and (d) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar in its terms to such illegal,
invalid or unenforceable provision as may be possible. If the rights and
obligations of Houex or Holdings will be materially and adversely affected by
any such provision so determined to be illegal, invalid or unenforceable, then
unless such provision is waived in writing by the affected party in its sole
discretion, this Agreement shall be null and void.
SECTION 20. Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned, by operation of law or otherwise,
by either party without the consent of the other party; provided, however, that
in the event of any such assignment by a party by operation of law without the
consent of the other party as required above, such other party may consent to
such assignment after it has occurred and, in such event, this Agreement shall
be binding upon the person receiving such assignment by operation of law.
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<PAGE> 9
IN WITNESS WHEREOF, Houex and Holdings have caused this
Agreement to be signed by their respective officers as of the date first
written above.
THE HOUSTON EXPLORATION COMPANY
By: ___________________________________
James G. Floyd, President
THEC HOLDINGS CORP.
By: ___________________________________
Name:__________________________________
Title:_________________________________
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<PAGE> 1
Exhibit 10.21
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT, dated as of February 26, 1996
(the "Agreement"), is entered into by and between The Houston Exploration
Company, a Delaware corporation ("Houex"), and Fuel Resources Inc., a Delaware
corporation ("FRI").
WHEREAS, FRI is a wholly-owned subsidiary of The Brooklyn
Union Gas Company ("Brooklyn Union"), and Houex is a wholly-owned subsidiary of
THEC Holdings Corp., a Delaware corporation and a wholly-owned subsidiary of
Brooklyn Union ("Holdings"); and
WHEREAS, Brooklyn Union desires to implement a reorganization
of its exploration and production assets by transferring to Houex certain
onshore producing properties and developed and undeveloped acreage (the
"Reorganization"); and
WHEREAS, the Reorganization is to be effected as follows:
(i) Fuel Resources Gathering Inc., a Delaware
corporation ("FRGI"), a wholly-owned subsidiary of FRI, will merge
with and into Fuel Resources Production and Development Company, Inc.,
a Delaware corporation ("FRPD"), another wholly-owned subsidiary of
FRI, pursuant to the Agreement of Merger attached hereto as Exhibit A;
(ii) FRI, a wholly-owned subsidiary of Brooklyn
Union, will contribute its onshore producing properties and developed
and undeveloped acreage (including, by way of FRI's contribution of
the stock of FRPD, those held by FRPD and its subsidiaries)
(collectively, the "Contributed Properties") to a newly-formed
subsidiary, Bill & Lance's Excellent Company, Inc., a Delaware
corporation ("B&LEC");
(iii) B&LEC will contribute such onshore producing
properties and developed and undeveloped acreage (with the exception
of the stock of FRPD and its subsidiaries) to a newly-formed
subsidiary, Bill & Lance's Bogus Subsidiary, Inc., a Delaware
corporation ("B&LBS");
(iv) FRI will dividend the outstanding capital
stock of B&LEC to Brooklyn Union;
(v) B&LEC will merge with and into Holdings,
pursuant to the Agreement of Merger attached hereto as Exhibit B;
(vi) Holdings will contribute all of the
outstanding capital stock of B&LBS and FRPD to Houex; and
<PAGE> 2
(vii) B&LBS and FRPD will merge with and
into Houex, pursuant to the Agreement of Merger attached
hereto as Exhibit C; and
WHEREAS, in connection with the foregoing transactions the
parties intend that Houex assume (i) the liabilities of FRI relating to FRI's
operation of the Contributed Properties and (ii) FRI's outstanding indebtedness
under that certain Credit Agreement and related documents between FRI and Texas
Commerce Bank National Association as Agent for the Banks named therein (the
"Assumed Liabilities"), but excluding from such Assumed Liabilities any
liability for or with respect to (x) any remuneration for the increase in value
of the onshore oil and gas properties formerly held by FRI and FRPD to which
former employees of FRI may be entitled (as used herein, all such remuneration
to which such former employees are entitled is referred to as "Remuneration"),
and (y) any liability of FRPD relating to or arising from or out of that
certain Purchase and Settlement Agreement dated as of November 1, 1995 by and
between FRI, R. Gerald Bennett, Ronnie M. Botkin, Marvin L. Steakley, XCO
Production Company, Southampton Mineral Corporation, Robert A. Gray, and
certain other individuals and entities named therein (the "XCO Liabilities"
and, together with the Remuneration, the "Excluded Liabilities"); and
WHEREAS, FRI and Houex desire to set forth their intended
rights and obligations with respect to the foregoing matters in this Agreement;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
SECTION 1. Implementation of Reorganization; Record
Conveyance of Title to Contributed Properties. FRI and Houex agree to
implement the Reorganization on the terms contemplated by the recitals to this
Agreement. In furtherance of the consummation of the Reorganization, FRI
agrees to execute any and all deeds, documents of title and other instruments
as may be reasonably requested by Houex in order to vest record title to the
Contributed Properties in Houex.
SECTION 2. Assumption of Assumed Liabilities. Houex hereby
agrees to perform, pay and discharge as they become due all of the Assumed
Liabilities, specifically excluding from such assumption the Excluded
Liabilities which shall remain the obligations of FRI.
SECTION 3. Indemnification. (a) Houex agrees to pay, and
to indemnify, save and hold harmless FRI, its successors and assigns and its
officers, directors, stockholders, employees and subsidiaries from and against
any and all damages, liabilities, losses, claims, deficiencies, payments,
obligations, penalties, interest, expenses, fines, assessments, charges,
judgments, suits, proceedings and costs (including reasonable fees and expenses
of attorneys, accountants and other professional advisors and any court costs)
(collectively, a "Loss") either directly or indirectly imposed on, incurred by
or asserted against such persons (or any of them) in any way relating to or
arising from or out of the Assumed Liabilities.
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<PAGE> 3
(b) FRI agrees to pay, and to indemnify, save and hold
harmless Houex, its successors and assigns and its officers, directors,
stockholders, employees and subsidiaries from and against any and all Losses
either directly or indirectly imposed on, incurred by or asserted against such
persons (or any of them) in any way relating to or arising from or out of the
Excluded Liabilities.
SECTION 4. Demands. Each person entitled to be
indemnified pursuant to Section 3 of this Agreement (an "Indemnified Person")
agrees that upon its discovery of facts giving rise to a claim for indemnity
with respect to such matter under this Agreement, including receipt by it of
notice of any demand, assertion, claim, action or proceeding, judicial or
otherwise, by any third party (any such action being referred to in this
Agreement as a "Claim"), it will give prompt notice in writing to the person
required to indemnify such Indemnified Person (the "Indemnifying Person"),
together with a statement of such information respecting any of the foregoing
as it shall then have; provided, however, that the failure of an Indemnified
Person to so notify the Indemnifying Person promptly shall not relieve the
Indemnifying Person from any liability that the Indemnifying Person may have to
such Indemnified Person.
SECTION 5. Right to Contest and Defend. (a) The Indemnifying
Person will at its cost and expense to contest and defend by all appropriate
legal proceedings any Claim with respect to which has agreed herein to
indemnify an Indemnified Person under this Agreement. Any such contest may be
conducted in the name and on behalf of the Indemnifying Person or such
Indemnified Person as may be appropriate. Such contest shall be conducted by
attorneys engaged by the Indemnifying Person, but the Indemnified Persons shall
have the right to participate in (but not control) such proceedings and to be
represented by attorneys of their own choosing at their own cost and expense.
(b) If an Indemnified Person joins in the contest of any such
Claim, the Indemnifying Person shall have full authority to determine and
exercise control over all action to be taken with respect to such Claim. The
Indemnifying Person shall not, however, without the written consent of the
Indemnified Person, (i) settle any such Claim or consent to the entry of any
judgment with respect thereto which does not include an unconditional written
release of the Indemnified Person from all liability in respect of such Claim
or (ii) settle such Claim or consent to the entry of any judgment with respect
thereto in any manner that may materially and adversely affect the Indemnified
Person. If the Indemnifying Person fails to defend against a Claim of which it
receives proper notice and for which an Indemnified Person is entitled to
indemnification hereunder, the Indemnified Person shall have the right to
defend against the Claim at the expense of the Indemnifying Person with counsel
of its own choosing, subject to the right of the Indemnifying Person to admit
its liability and assume the defense of the Claim at any time prior to
settlement or final determination thereof. If the Indemnifying Person has not
yet admitted its liability for a Claim, the Indemnified Person shall send
written notice to the Indemnifying Person of any proposed settlement of the
Claim. The Indemnifying Person shall have an option for 30 days following
receipt of such notice to (i) admit in writing liability for the Claim and (ii)
if liability is so admitted, reject,
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<PAGE> 4
in its reasonable judgment, the proposed settlement. Otherwise, the
Indemnified Person shall be entitled to enter into the proposed settlement and
receive reimbursement in full from the Indemnifying Person with respect to any
Loss incurred by such Indemnified Person in any way relating to or arising from
or out of the settlement of such Claim pursuant to such settlement. If the
Indemnified Person settles any Claim with respect to which the Indemnifying
Person has admitted its liability in writing without the prior written consent
of the Indemnifying Person, however, the Indemnified Person shall thereby waive
any right to indemnity therefor.
SECTION 6. Cooperation. If requested by the Indemnifying
Person, the Indemnified Persons agree to cooperate with the Indemnifying Person
and its counsel in contesting any Claim which the Indemnifying Person elects to
contest or, if appropriate, in making any counterclaim against the person
asserting the Claim or any cross-complaint against any person, but the
Indemnifying Person will reimburse the Indemnified Persons for any expenses
incurred by them in so cooperating.
SECTION 7. Right to Participate. The Indemnified Persons
agree to afford the Indemnifying Person and its counsel the opportunity to be
present at, and to participate in, conferences with representatives of or
counsel for the person asserting the Claim and to reasonably cooperate with the
Indemnifying Person and its counsel and to provide them with reasonable access
to its records and information in connection with the Claim.
SECTION 8. Payment of Damages. The Indemnifying Person shall
pay to the Indemnified Persons in cash the amount of any payment to which the
Indemnified Persons may become entitled by reason of the provisions of this
Agreement within five business days after the amount of the relevant Claim or
Loss, as the case may be, is finally determined either by mutual agreement of
the parties, by arbitration or pursuant to the final unappealable judgment of a
court of competent jurisdiction; provided that the Indemnifying Person shall
reimburse expenses of the Indemnified Persons with respect to which the
Indemnified Persons are entitled to be indemnified hereunder as such expenses
are incurred.
SECTION 9. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, mailed by registered or certified mail (return receipt requested)
or sent via overnight courier or facsimile to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
If to Houex to:
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attention: James G. Floyd
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<PAGE> 5
with copies to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
Attention: Jeffrey L. Wade
If to FRI, to:
Fuel Resources Inc.
c/o The Brooklyn Union Gas Company
One MetroTech Center
Brooklyn, New York 11201-3850
Attention: Theodore Spar
with a copy to:
Cullen and Dykman
177 Montague Street
Brooklyn, New York 11201-3611
Attention: Lance Myers
SECTION 10. Entire Agreement. This Agreement (including the
documents and instruments referred to herein) constitutes the entire agreement
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof.
SECTION 11. Amendments and Waivers. (a) This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties in compliance with applicable law.
(b) Either party may (i) extend the time for the performance
of any of the obligations or other acts of the other party, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto or (iii) waive compliance with any of the
agreements or conditions contained herein, provided that no such extension or
waiver shall be valid unless set forth in an instrument in writing signed on
behalf of such party.
SECTION 12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED
IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF
THE STATE OF DELAWARE APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED
WHOLLY WITHIN SUCH STATE.
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<PAGE> 6
SECTION 13. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
SECTION 14. Severability. If any provision of this Agreement
is determined by arbitration or pursuant to the final unappealable order of a
court of competent jurisdiction to be illegal, invalid or unenforceable under
any present or future laws, rules or regulations and if the rights or
obligations of Houex or FRI under this Agreement will not be materially and
adversely affected thereby, (a) such provision will be fully severable, (b)
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, (c) the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom and (d) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar in its terms to such illegal,
invalid or unenforceable provision as may be possible. If the rights and
obligations of Houex or FRI will be materially and adversely affected by any
such provision so determined to be illegal, invalid or unenforceable, then
unless such provision is waived in writing by the affected party in its sole
discretion, this Agreement shall be null and void.
SECTION 15. Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned, by operation of law or otherwise,
by either party without the consent of the other party; provided, however, that
in the event of any such assignment by a party by operation of law without the
consent of the other party as required above, such other party may consent to
such assignment after it has occurred and, in such event, this Agreement shall
be binding upon the person receiving such assignment by operation of law.
IN WITNESS WHEREOF, Houex and FRI have caused this Agreement
to be signed by their respective officers as of the date first written above.
THE HOUSTON EXPLORATION COMPANY
By:____________________________________
James G. Floyd, President
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<PAGE> 7
FUEL RESOURCES INC.
By:____________________________________
Name:_______________________________
Title:______________________________
-7-
<PAGE> 8
EXHIBIT A
CERTIFICATE OF MERGER
OF
FUEL RESOURCES GATHERING INC.
INTO
FUEL RESOURCES PRODUCTION AND DEVELOPMENT, INC.
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the merger is as follows:
Name State of Incorporation
Fuel Resources Gathering Inc. Delaware
Fuel Resources Production and Development, Inc. Delaware
SECOND: That a plan and agreement of merger between the parties to the
merger has been approved, adopted, certified, executed and acknowledged by each
of the constituent corporations in accordance with the requirements of Section
251 of the General Corporation Law of the State of Delaware.
THIRD: That the name of the surviving corporation of the merger is Fuel
Resources Production and Development Company, Inc.
FOURTH: That the certificate of incorporation of Fuel Resources Production
and Development, Inc., a Delaware corporation, the surviving corporation, shall
be the certificate of incorporation of the surviving corporation.
FIFTH: that the executed plan and agreement of merger is on file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is One MetroTech
Center, Brooklyn, New York 11201, Attention: Secretary.
SIXTH: that a copy of the plan and agreement of merger will be furnished
by the surviving corporation, on request and without cost to any stockholder of
any constituent corporation.
<PAGE> 9
IN WITNESS WHEREOF, the undersigned has hereto set his hand this 27th
day of February, 1996.
FUEL RESOURCES PRODUCTION AND
DEVELOPMENT COMPANY, INC.
By: /s/ Zain Mirza
--------------------------
Vice President
ATTEST:
By: /s/ Robert Guellich
----------------------------
Assistant Secretary
<PAGE> 10
EXHIBIT B
CERTIFICATE OF MERGER
of
BILL & LANCE'S EXCELLENT COMPANY, INC.
into
THEC HOLDINGS CORP.
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware.
DOES HERBY CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follow:
Name State of Incorporation
Bill & Lance's Excellent Company, Inc. Delaware
THEC Holdings Corp. Delaware
SECOND: That a plan and agreement of merger between the parties to the
merger has been approved, adopted, certified, executed and acknowledged by each
of the constituent corporations in accordance with the requirements of Section
251 of the General Corporation Law of the State of Delaware.
THIRD: That the name of the surviving corporation of the merger is THEC
Holdings Corp.
FOURTH: That the certificate of incorporation of THEC Holdings Corp., a
Delaware corporation, the surviving corporation, shall be the certificate of
incorporation of the surviving corporation.
FIFTH: That the executed plan and agreement of merger is on file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is One MetroTech
Center, Brooklyn, New York 11201, Attention: Secretary.
SIXTH: That a copy of the plan and agreement of merger will be furnished
by the surviving corporation, on request and without cost to any stockholder of
any constituent corporation.
<PAGE> 11
IN WITNESS WHEREOF, the undersigned has hereto set his hand this 27th day
of February, 1996.
THEC HOLDING CORP.
By: /s/ James G. Floyd
-----------------------------------
President
ATTEST:
By: /s/ Zain Mirza
----------------------------------
Secretary
<PAGE> 12
EXHIBIT C
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
FUEL RESOURCES PRODUCTION AND DEVELOPMENT COMPANY, INC.
AND BILL & LANCE'S BOGUS SUBSIDIARY, INC.
INTO
THE HOUSTON EXPLORATION COMPANY
(Pursuant to Section 253 of the General Corporation Law of Delaware)
The Houston Exploration Company, a Delaware corporation (the
"Corporation"), does hereby certify:
FIRST: That the Corporation is incorporated pursuant to the General
Corporation Law of the State of Delaware.
SECOND: That the Corporation owns all of the outstanding shares of each
class of the capital stock of Fuel Resources Production and Development
Company, Inc., a Delaware corporation.
THIRD: That the Corporation owns all of the outstanding shares of each
class of the capital stock of Bill & Lance's Bogus Subsidiary, Inc., a Delaware
corporation.
FOURTH: That the Corporation, by the following resolutions of its Board
of Directors duly adopted on the 28th day of February, 1996, determined to
merge into itself Fuel Resources Production and Development Company, Inc. and
Bill & Lance's Bogus Subsidiary, Inc. on the conditions set forth in such
resolutions:
RESOLVED, that The Houston Exploration Company merge into itself its
subsidiary Fuel Resources Production and Development Company, Inc., and
its subsidiary Bill & lance's Bogus Subsidiary, Inc., and assume all of
each of said subsidiaries' liabilities and obligations; and further
RESOLVED, that the President and Secretary of this Corporation be
and they thereby are directed to make, execute and acknowledge a
certificate of ownership and merger setting forth a copy of the resolution
to merge said Fuel Resources Production and Development Company, Inc. and
Bill & Lance's Bogus Subsidiary, Inc. into this Corporation and to assume
each of said subsidiaries' liabilities and obligations and the date of
adoption thereof and to file the same in the office of the Secretary of
State of Delaware and a certified copy thereof in the Office of the
Recorder of Deeds of County of New Castle.
<PAGE> 13
IN WITNESS WHEREOF, The Houston Exploration Company has caused its
corporate seal to be affixed and this certificate to be signed by James G.
Floyd, its President and James F. Westmoreland, its Secretary this 28th day
of February, 1996.
THE HOUSTON EXPLORATION COMPANY
By: /s/ James G. Floyd
-----------------------------------
James G. Floyd
President
ATTEST:
By: /s/ James F. Westmoreland
----------------------------------
Secretary
<PAGE> 1
Exhibit 10.22
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of ____________,
1996 (this "Agreement"), is entered into by and between The Houston Exploration
Company, a Delaware corporation (the "Company"), and James G. Floyd, (the
"Rights Holder").
W I T N E S S E T H
WHEREAS, the Company intends to offer and sell shares of its
Common Stock, par value $0.01 per share ("Common Stock"), in an initial public
offering pursuant to a Registration Statement on Form S-1 (No. 333-4437), as
amended (the "Offering");
WHEREAS, the Rights Holder is the President and Chief Executive
Officer of the Company and the Company has agreed to grant restricted shares of
Common Stock (the "Shares") to the Rights Holder upon completion of the
Offering; and
WHEREAS, the Company has agreed to give the Rights Holder
certain registration rights with respect to the Shares.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the meanings set forth below:
(a) "Commercially Reasonable Efforts," when used with
respect to an obligation to be performed or term or provision to be
observed hereunder, shall mean such efforts as a prudent person
seeking the benefits of such performance or action would make, use,
apply or exercise to preserve, protect or advance its rights or
interests, provided that such efforts do not require such person to
incur a material financial cost or a substantial risk of material
liability unless such cost or liability (i) would customarily be
incurred in the course of performance or observance of the relevant
obligation, term, or provision, (ii) is caused by or results from the
wrongful act or negligence of the person whose performance or
observance is required hereunder or (iii) is not excessive or
unreasonable in view of the rights or interests to be preserved,
protected or advanced. Such efforts may include, without limitation,
(A) the expenditure of such funds and retention by such person of such
accountants, attorneys or other experts or advisors as may be
necessary or appropriate to effect the relevant action, (B) the
undertaking of any special audit or internal investigation that may be
necessary or appropriate to effect the relevant action and (C) the
commencement, termination or
<PAGE> 2
settlement of any action, suit or proceeding involving such person to
the extent necessary or appropriate to effect the relevant action.
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
(c) "Company" shall have the meaning set forth in the initial
paragraph of this Agreement.
(d) "Common Stock" shall have the meaning set forth in the
recitals of this Agreement.
(e) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the
rules and regulations thereunder, all as the same shall be in effect
from time to time.
(f) "Holder" shall mean the Rights Holder and any holder of
Registrable Securities to whom the registration rights conferred by
this Agreement have been transferred in compliance with Section 9
hereof.
(g) "Immediate Family" shall have the meaning set forth in
Section 9.
(h) The terms "register," "registered" and "registration"
shall refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act and
applicable rules and regulations thereunder, and the declaration or
ordering of the effectiveness of such registration statement.
(i) "Registrable Securities" shall mean (i) the Shares, and
(ii) any Common Stock issued as a dividend or other distribution with
respect to or in exchange for or in replacement of the Shares,
provided, however, that Registrable Securities shall not include any
shares of Common Stock which have previously been registered under the
Securities Act, which have been sold or otherwise transferred under
Rule 144 or which may be sold without restriction pursuant to Rule
144(k).
(j) "Registration Expenses" shall mean all expenses incurred
in effecting any registration pursuant to this Agreement, including,
without limitation, all registration, qualification, and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for
the Company, blue sky fees and expenses, and expenses of any regular
or special audits incident to or required by any such registration,
but shall not include Selling Expenses (and shall not include the
compensation of regular employees of the Company, which shall be paid
in any event by the Company).
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<PAGE> 3
(k) "Rights Holder" shall have the meaning set forth in the
initial paragraph of this Agreement.
(l) "Rule 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from
time to time, or any similar successor rule that may be promulgated by
the Commission.
(m) "Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from
time to time, or any similar successor rule that may be promulgated by
the Commission.
(n) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time
to time.
(o) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable
Securities and all fees and disbursements of counsel for any Holder.
(p) "Shares" shall have the meaning set forth in the recitals
to this Agreement.
2. Piggyback Registration.
2.1 NOTICE OF REGISTRATION. If the Company shall determine
to register any of its securities either for its own account or the account of
a security holder or holders exercising their respective demand registration
rights, other than a registration relating solely to employee benefit plans, a
registration relating solely to a Rule 145 transaction, or a registration on
any registration form that does not permit secondary sales, the Company will:
(a) promptly give to each Holder written notice thereof; and
(b) use Commercially Reasonable Efforts to include in such
registration (and any related qualification under blue sky laws or
other compliance), except as set forth in Section 2.2 below, and in
any underwriting involved therein, all the Registrable Securities
specified in a written request or requests, made by any Holder within
20 days after the written notice from the Company described in clause
(i) above is given. Such written request may specify all or a part of
a Holder's Registrable Securities.
2.2 RIGHT TO TERMINATE REGISTRATION. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 2 prior to the effectiveness of such registration whether or not any
Holder has elected to include Registrable Securities in such registration.
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<PAGE> 4
2.3 UNDERWRITING. (a) If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to Section 2.1 above. In such event, the right of any
Holder to registration pursuant to this Section 2 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting (together with the Company and such other holders of securities of
the Company exercising registration rights with respect to such registration)
shall enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company or
the security holders initiating such registration, as the case may be.
(b) Notwithstanding any other provision of this Section 2, if
the representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and underwriting.
The Company shall so advise all holders of securities requesting registration,
and the amount of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in
Section 8 hereof. If any person does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from
the Company or the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
3. Expenses of Registration. All Registration Expenses in
any registration, qualification or compliance pursuant to Section 2 shall be
borne by the Company. All Selling Expenses relating to securities so
registered shall be borne by the holders of such securities pro rata on the
basis of the number of shares of securities so registered on their behalf.
4. Registration Procedures. In the case of each registration
effected by the Company pursuant to this Agreement, the Company will keep each
Holder advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense (except, as otherwise provided herein),
the Company will use Commercially Reasonable Efforts to:
(a) keep such registration effective for a period of 120 days
or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever
first occurs; provided, however, that such 120-day period shall be
extended for a period of time equal to the period after the
effectiveness of such registration that the Holder refrains from
selling any securities included in such registration at the request of
an underwriter of Common Stock (or other securities) of the Company;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration
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<PAGE> 5
statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement;
(c) furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request;
(d) notify each seller of Registrable Securities covered by
such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances then existing, not
misleading, and at the request of any such seller, prepare and furnish
to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances then
existing, not misleading;
(e) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
(f) provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a
CUSIP number for all such Registrable Securities, in each case not
later than the effective date of such registration; and
(g) comply with all applicable rules and regulations of the
Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of
at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act.
5. Indemnification.
(a) The Company will indemnify each Holder, each
of its officers, directors and partners, legal counsel, and accountants and
each person controlling such Holder within the meaning of Section 15 of the
Securities Act, if Registrable Securities of such Holder are included in the
securities with respect to which registration, qualification, or compliance has
been effected pursuant to this Agreement, and each underwriter, if any, and
each person who controls within the meaning of Section 15 of the Securities Act
any underwriter, against all expenses, claims, losses, damages, and liabilities
(or actions, proceedings, or settlements in respect thereof) arising out of or
based on
-5-
<PAGE> 6
any untrue statement (or alleged untrue statement) of a material fact contained
in any prospectus, offering circular, or other document (including any related
registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction
required by the Company in connection with any such registration,
qualification, or compliance, and will reimburse each such Holder, each of its
officers, directors, partners, legal counsel, and accountants and each person
controlling such Holder, each such underwriter, and each person who controls
any such underwriter, for any legal and any other expenses reasonably incurred
in connection with investigating and defending or settling any such claim,
loss, damage, liability, or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability, or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such Holder
or underwriter and stated to be specifically for use therein. It is agreed
that the indemnity agreement contained in this Section 5(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent has not been unreasonably withheld).
(b) Each Holder (an "Indemnifying Holder") will, if Registrable
Securities held by the Indemnifying Holder are included in the securities as to
which such registration, qualification, or compliance is being effected,
indemnify the Company, each of its directors, officers, partners, legal
counsel, and accountants and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, each other such Holder (an "Indemnified Holder"), and each of
their officers, directors, and partners, and each person controlling such
Indemnified Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company and such Indemnified Holders, directors, officers,
partners, legal counsel, and accountants, persons, underwriters, or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability, or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular, or other
document in reliance upon and in conformity with written information furnished
to the Company by the Indemnifying Holder and stated to be specifically for use
therein; provided, however, that the obligations of the Indemnifying Holder
hereunder shall not apply to amounts paid in settlement of any such claims,
losses, damages, or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld); and provided further that the liability of an
Indemnifying Holder pursuant to this Section 5(b) in connection with a
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<PAGE> 7
registration shall be limited to the net proceeds from the sale of the
Registrable Securities of such Indemnifying Holder pursuant to such
registration.
(c) Each party entitled to indemnification under this Section 5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and, except as provided in the following sentence, shall permit the
Indemnifying Party to assume the defense of such claim or any litigation
resulting therefrom; provided that counsel for the Indemnifying Party, who
shall conduct the defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld); provided further that the Indemnified Party may
participate in such defense at its own expense; and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement, to the
extent such failure is not materially prejudicial. After the Indemnifying Party
assumes the defense of such claim or litigation, the Indemnifying Party shall
not be liable to the Indemnified Party under this Section 5 for any legal or
other expenses subsequently incurred by such Indemnified Party in connection
with the defense thereof, other than reasonable costs of investigation, unless
the named parties to any such proceeding (including any impleaded parties)
include both the Indemnified Party and the Indemnifying Party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement that does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. Each Indemnified Party
shall furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with defense of such claim and litigation resulting
therefrom.
(d) If the indemnification provided for in this Section 5 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
-7-
<PAGE> 8
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
6. Information by Holder. Each Holder of Registrable
Securities shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Agreement.
7. Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission that may permit the
sale of the Restricted Securities to the public without registration, the
Company agrees to use its best efforts to:
(a) make and keep public information regarding the Company
available as those terms are understood and defined in Rule 144 under
the Securities Act, at all times from and after 90 days following the
effective date of the first registration under the Securities Act
filed by the Company for an offering of its securities to the general
public;
(b) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act
and the Exchange Act at any time after it has become subject to such
reporting requirements; and
(c) so long as a Holder owns any restricted Registrable
Securities, furnish to the Holder forthwith upon written request a
written statement by the Company as to its compliance with the
reporting requirements of Rule 144 (at any time from and after 90 days
following the effective date of the first registration statement filed
by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Holder may reasonably request
in availing itself of any rule or regulation of the Commission allowing
a Holder to sell any such securities without registration.
8. Allocation of Registration Opportunities. In any
circumstance in which all of the Registrable Securities requested to be
included in a registration on behalf of the Holders cannot be so included as a
result of limitations of the aggregate number of shares of Registrable
Securities that may be so included, the number of shares of Registrable
Securities that may be so included shall be allocated among the Holders
requesting inclusion of shares pro rata on the basis of the number of shares of
Registrable Securities held by such Holders. The number of Registerable
Securities to be included by the Holders may be limited to first include shares
of other stockholders exercising demand registration rights with respect to
such registration, and to include shares of other stockholders exercising
piggyback registration rights on a pro rata basis with the Holders. The
Company shall not limit the number of Registrable Securities to be included in
a registration
-8-
<PAGE> 9
pursuant to this Agreement in order to include shares held by stockholders with
no registration rights.
9. Transfer of Registration Rights. Except with the consent
of the Company, no rights hereunder shall be assignable by any Rights Holder,
and such rights shall terminate with respect to Registrable Securities of a
Rights Holder upon assignment of such securities by a Holder; provided,
however, that such Holder may assign such rights to a member of his immediate
family. To enjoy the benefits of this Agreement, any such permitted transferee
must (i) give the Company written notice at the time of or within a reasonable
time after said transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which
such registration rights are being transferred or assigned, (ii) become a
record holder of such securities and (iii) become a party hereto within 60 days
after such transfer (unless waived in writing by the Company) by executing (and
causing such transferee's spouse, if any, to execute) a counterpart of this
Agreement. Any such permitted transferee who meets such conditions shall
become, for the purposes hereof, a "Holder."
The term "immediate family" shall include (i) parents,
siblings, spouse and children (including those by adoption), (ii) the parents,
siblings, spouse and children (including those by adoption) of such family
members listed in (i) above, (iii) any trust whose principal beneficiary is
such individual Holder or one or more members of such immediate family, and
(iv) the legal representative or guardian of such individual Holder or of any
such immediate family members in the event that such individual Holder or any
such immediate family member is mentally incompetent.
10. Delay of Registration. No Holder shall have any right to
take any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation
or implementation of this Agreement.
11. Termination of Registration Rights. The right of any
Holder to request inclusion in any registration pursuant to Section 2 hereof
shall terminate on such date as all shares of Registrable Securities held or
entitled to be held upon conversion by such Holder may immediately be sold
under Rule 144 during any 90-day period.
12. Miscellaneous.
12.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL
RESPECTS BY THE INTERNAL LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO
THE CONFLICTS OF LAW PRINCIPLES THEREOF.
12.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
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<PAGE> 10
12.3 ENTIRE AGREEMENT. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subjects hereof.
12.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand
or by messenger, including Federal Express or similar courier services,
addressed (a) if to a Holder, to such Holder at 1331 Lamar, Suite 1065,
Houston, Texas 77010, or at such other address as such Holder shall have
furnished to the Company in writing, or (b) if to the Company, to 1331 Lamar,
Suite 1065, Houston, Texas 77010, or at such other address as the Company shall
have furnished to the Holders. Each such notice or other communication shall
for all purposes of this Agreement be treated as effective or having been given
when delivered if delivered personally, or, if sent by mail or courier, at the
earlier of its receipt or 48 hours after the same has been deposited in a
regularly maintained receptacle for the deposit of the United States mail,
addressed and mailed as aforesaid.
12.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which may be executed by less than all of the
Holders, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
12.6 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
such provision in any other jurisdiction, and this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provisions had never been contained herein.
12.7 TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
12.8 AMENDMENT. Except as expressly provided herein, this
Agreement may be amended only upon the written consent of the Company and the
Holders of at least seventy-five percent (75%) of the Registrable Securities
then subject to this Agreement.
-10-
<PAGE> 11
IN WITNESS WHEREOF, this Agreement has been executed effective
as of the date first set forth above.
COMPANY:
THE HOUSTON EXPLORATION COMPANY
By:_____________________________________
Robert B. Catell, Chairman of the Board
RIGHTS HOLDER:
By:_____________________________________
James G. Floyd
-11-
<PAGE> 1
EXHBIT 10.23
THE HOUSTON EXPLORATION COMPANY
SUPPLEMENTAL EXECUTIVE PENSION PLAN
<PAGE> 2
THE HOUSTON EXPLORATION COMPANY
SUPPLEMENTAL EXECUTIVE PENSION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section
-------
<S> <C>
ARTICLE I - DEFINITIONS
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 1.01
Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.02
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . 1.03
Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.04
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05
Deferred Compensation Ledger . . . . . . . . . . . . . . . . . . . 1.06
Deferred Retirement Date . . . . . . . . . . . . . . . . . . . . . 1.07
Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.08
Early Retirement Date . . . . . . . . . . . . . . . . . . . . . . 1.09
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10
Executive . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11
Good Reason . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.12
Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . 1.13
Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.15
Retirement Date . . . . . . . . . . . . . . . . . . . . . . . . . . 1.16
Year of Service . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17
ARTICLE II - ELIGIBILITY
ARTICLE III - RETIREMENT BENEFITS
Normal Retirement Benefit . . . . . . . . . . . . . . . . . . . . 3.01
Early Retirement Benefit . . . . . . . . . . . . . . . . . . . . 3.02
Time of Payment of Benefit . . . . . . . . . . . . . . . . . . . 3.03
ARTICLE IV - DEATH BENEFITS
Amount of Benefit . . . . . . . . . . . . . . . . . . . . . . . . . 4.01
Time of Payment of Benefit . . . . . . . . . . . . . . . . . . . . 4.02
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V - SEVERANCE BENEFITS
Amount of Benefit . . . . . . . . . . . . . . . . . . . . . . . . 5.01
Time of Payment of Benefit . . . . . . . . . . . . . . . . . . . 5.02
ARTICLE VI - DEATH BENEFITS
ARTICLE VII - PLAN COMMITTEE
Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01
General Rights, Powers, and Duties of Plan Committee . . . . . . . 7.02
Rules and Decisions . . . . . . . . . . . . . . . . . . . . . . . . 7.03
Committee Organization and Voting . . . . . . . . . . . . . . . . . 7.04
Committee Discretion . . . . . . . . . . . . . . . . . . . . . . . 7.05
Authorization of Benefit Payments . . . . . . . . . . . . . . . . . 7.06
Application and Forms of Benefits . . . . . . . . . . . . . . . . . 7.07
Facility of Payment . . . . . . . . . . . . . . . . . . . . . . . . 7.08
Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . 7.09
ARTICLE VIII - AMENDMENT AND TERMINATION
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01
Right to Terminate Plan . . . . . . . . . . . . . . . . . . . . . . 8.02
ARTICLE IX - FUNDING
Unfunded Arrangement . . . . . . . . . . . . . . . . . . . . . . . 9.01
Participants Must Rely Only on General Credit
of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 9.02
ARTICLE X - MISCELLANEOUS
Limitation of Rights . . . . . . . . . . . . . . . . . . . . . . 10.01
Distributions to Incompetents . . . . . . . . . . . . . . . . . . 10.02
Nonalienation of Benefits . . . . . . . . . . . . . . . . . . . . 10.03
Reliance Upon Information . . . . . . . . . . . . . . . . . . . 10.04
Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 10.05
Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.06
Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . 10.07
Duplication of Benefits . . . . . . . . . . . . . . . . . . . . . 10.08
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 10.09
</TABLE>
-ii-
<PAGE> 4
THE HOUSTON EXPLORATION COMPANY
SUPPLEMENTAL EXECUTIVE PENSION PLAN
WHEREAS, The Houston Exploration Company desires to establish
The Houston Exploration Company Supplemental Executive Pension Plan to provide
a retirement pay supplement for a select group of management or highly
compensated employees so as to retain their loyalty and to offer a further
incentive to them to maintain and increase their standard of performance;
NOW THEREFORE, The Houston Exploration Company adopts The
Houston Exploration Company Supplemental Executive Pension Plan as follows:
<PAGE> 5
ARTICLE I
DEFINITIONS
1.01 "BOARD OF DIRECTORS" shall mean the Board of Directors of the
Company.
1.02 "CAUSE" shall mean (i) any material failure of the Executive
to perform his duties for the Company (other than any such failure resulting
from the Executive's incapacity due to illness or other disability) after
written notice of such failure has been given to the Executive by the Board of
Directors and such failure shall have continued for 30 days after receipt of
such notice, (ii) gross or willful negligence or intentional wrongdoing or
misconduct, (iii) a material breach by the Executive of the confidentiality or
noncompetition provisions of his employment agreement with the Company, or (iv)
conviction of the Executive of a felony offense involving moral turpitude, any
of which has or have a material adverse effect on the Executive's ability to
perform the duties of his position or on the financial condition or
profitability of the Company.
1.03 "CHANGE OF CONTROL" shall mean:
(i) the acquisition, after the Effective Date by any
individual, entity, or group (within the meaning of Section 13(d)(3)
or 14(d)(2) of the Securities Exchange Act of 1934, as amended) (a
"Person") of beneficial ownership of 20% or more of either (i) the
then outstanding shares of common stock of the Company (the
"Outstanding Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"), provided that for purposes of this subsection (i), the
following acquisitions shall not constitute a Change of Control: (A)
any acquisition directly from the Company, (B) any acquisition by the
Company, (C) any acquisition by any employee benefit plan (or related
trust sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B), and
(C) of subsection (iii) hereof;
(ii) individuals, who, as of the Effective Date,
constitute the Board (the "Incumbent Board") ceasing for any reason to
constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the Effective Date whose
election or nomination for election by the Company's shareholders was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual was a member of the Incumbent Board but excluding, for this
purpose, any such individual whose initial assumption of office occurs
as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) the consummation after the Effective Date of a
reorganization, merger, or consolidation or sale or other disposition
of all or substantially all of the assets of the Company (a "Corporate
Transaction") in each case, unless, following such Corporate
Transaction, (A)(I) all or substantially all of the persons w ho were
the beneficial owners of the Outstanding Common Stock immediately
prior to such Corporate Transaction beneficially own, directly or
indirectly, more than 60 percent of the then outstanding shares of
common stock of the corporation resulting from such Corporate
Transaction, and (2) all or substantially all of the persons who were
the beneficial owners of the Outstanding Voting Securities immediately
prior to such Corporate Transaction beneficially own, directly or
indirectly, more than 60 percent of the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership
of the Outstanding Common Stock and the Outstanding Voting Securities
immediately prior to such Corporate Transaction, as the case may be;
(B) no Person (excluding (1) any corporation resulting from such
Corporate Transaction or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Corporate
Transaction and (2) any Person approved by the Incumbent Board)
beneficially owns, directly or indirectly, 20 percent or more of the
then outstanding shares of common
I-1
<PAGE> 6
stock of the corporation resulting from such Corporate Transaction or
the combined voting power of the then outstanding voting securities of
such corporation except to the extent that such ownership existed
prior to such Corporate Transaction; and (C) at least a majority of
the members of the board of directors of the corporation resulting
from such Corporate Transaction were members of the Incumbent Board at
the time of the execution of the initial agreement or of the action of
the Board providing for such Corporate Transaction.
1.04 "COMMITTEE" shall mean the Committee established under Article
VII to administer the Plan.
1.05 "COMPANY" shall mean The Houston Exploration Company.
1.06 "DEFERRED COMPENSATION LEDGER" means the ledger maintained by
the Committee for each Participant which reflects the amounts credited by the
Company under this Plan to the account of each Participant.
1.07 "DEFERRED RETIREMENT DATE" shall mean the first day of the
month coincident with or next following the Participant's retirement after his
Normal Retirement Date.
1.08 "DISABILITY" shall mean a physical or mental infirmity which,
in the opinion of a physician selected by the Committee, shall prevent the
Executive from earning a reasonable livelihood with the Company and which can
be expected to result in death or which has lasted or can be expected to last
for a continuous period of not less than 12 months and which: (a) was not
contracted, suffered, or incurred while the Executive was engaged in, or did
not result from having engaged in, a felonious criminal enterprise; (b) did not
result from alcoholism or addiction to narcotics; and (c) did not result from
an injury incurred while a member of the Armed Forces of the United States for
which the Executive receives a military pension.
1.09 "EARLY RETIREMENT DATE" shall mean the first day of the month
coincident with or next following the Participant's retirement prior to his
Normal Retirement Date after performing five Years of Service with the Company
following the Effective Date.
1.10 "EFFECTIVE DATE" shall mean the effective date of the
Participant's participation in the Plan.
1.11 "EXECUTIVE" means a person who is in a select group of
management or a highly compensated employee of the Company.
1.12 "GOOD REASON" shall mean: (A) the failure by the Company to
elect or re-elect or to appoint or re-appoint the Executive to his office
without Cause; (B) a material change in the powers, duties, responsibilities,
or functions of the Executive, including (without limitation) any change which
would alter the Executive's reporting responsibilities or cause the Executive's
position with the Company to be of less dignity, responsibility, importance, or
scope than the positions (and attributes thereof) of his office; (C) the
failure of the Executive to be elected or appointed, or re-elected or
re-appointed, as a director of the Company without Cause; (D) without the
Executive's prior written consent, the relocation of the Company's principal
executive offices outside the greater Houston, Texas metropolitan area or
requiring the Executive to be based other than at such principal executive
offices; (E) the failure of the Company to obtain any assumption agreement
required in his employment agreement with the Company; (F) the failure by the
Company to pay the Executive within ten days after a written demand therefor
any installment of any previous award of or deferred compensation, if any,
under any employee benefit plan or any deferred compensation program in effect
in which the Executive may have participated; (G) any other material breach of
the Executive's employment agreement by the Company; or (H) the occurrence of a
Change of Control if, within three years thereafter, the Company shall:
(1) fail to continue in effect (x) any material
benefit or compensation plan in which the Executive is
participating immediately prior to such Change of Control or
(y) a plan providing the Executive with substantially similar
benefits;
I-2
<PAGE> 7
(2) take any action that would materially
adversely affect the Executive's participation in or reduce
the Executive's benefits under any of the plans referred to in
clause (i) above but excluding any such action by the Company
that is required by law;
(3) amend, modify, or repeal any provision of its
certificate of incorporation or bylaws that was in effect
immediately prior to such Change of Control, if such
amendment, modification, or repeal would materially adversely
affect the Executive's rights to indemnification by the
Company; or
(4) violate or breach any obligation of the
Company in effect immediately prior to such Change of Control
(regardless whether such obligation shall be set forth in the
bylaws of the Company or elsewhere) to indemnify the Executive
against any claim, loss, expense, or liability sustained or
incurred by the Executive by reason, in whole or in part, of
the fact that the Executive is or was an officer, director, or
employee of the Company or any subsidiary or affiliate of the
Company.
1.13 "NORMAL RETIREMENT DATE" shall mean the first day of the month
coincident with or next following a Participant's 65th birthday.
1.14 "PARTICIPANT" shall mean an Executive of the Company who meets
the requirements of Article II.
1.15 "PLAN" shall mean The Houston Exploration Company Supplemental
Executive Pension Plan.
1.16 "RETIREMENT DATE" shall mean a Participant's Normal Retirement
Date, Early Retirement Date, or Deferred Retirement Date, as the case may be.
1.17 "YEAR OF SERVICE" shall mean 365 days of employment with the
Company, whether or not completed consecutively.
I-3
<PAGE> 8
ARTICLE II
ELIGIBILITY
The Executives who shall be eligible to participate in the Plan shall
be those Executives as the Committee shall determine from time to time. An
Executive will become a Participant effective as of the date specified in
writing by the Committee. Once the Committee has determined that an Executive
shall become a Participant, such Executive may not be determined by the
Committee to be ineligible to participate in the Plan.
II-1
<PAGE> 9
ARTICLE III
RETIREMENT BENEFITS
3.01 NORMAL RETIREMENT BENEFIT. If a Participant retires on or
after his Normal Retirement Date, he will be entitled to the receive a life
annuity of $8,333.00 per month for the duration of his life. If the
Participant retires after his Normal Retirement Date, the benefit will not be
actuarially increased to reflect the later benefit payment date or his shorter
life expectancy.
3.02 EARLY RETIREMENT BENEFIT. If a Participant retires on or
after his Early Retirement Date but before his Normal Retirement Date, he shall
be entitled to receive a life annuity of $8,333.00 per month reduced by 1/15
for each of the first five years by which his Early Retirement Date precedes
his Normal Retirement Date and by 1/30 for each of the next five years by which
his Early Retirement Date precedes his Normal Retirement Date.
3.03 TIME OF PAYMENT OF BENEFIT. The monthly annuity payments
shall commence to be paid to the Participant on his Retirement Date.
III-1
<PAGE> 10
ARTICLE IV
DISABILITY BENEFITS
4.01 AMOUNT OF BENEFIT. If a Participant's employment with the
Company is terminated due to Disability, he will be entitled to receive an
annuity of $8,333.00 per month for the duration of his life.
4.02 TIME OF PAYMENT OF BENEFIT. The monthly disability payments
shall commence to be paid to the Participant on the first day of the month
coincident with or next following his 55th birthday.
IV-1
<PAGE> 11
ARTICLE V
SEVERANCE BENEFITS
5.01 AMOUNT OF BENEFIT. Subject to Section 3.02, if a
Participant's employment with the Company is either terminated by the Company
without Cause or by the Participant for Good Reason, he shall be entitled to
receive a life annuity of $8,333.00 per month reduced by 1/15 for each of the
first five years by which his date of termination precedes his Normal
Retirement Date and by 1/30 for the next five years by which his date of
termination precedes his Normal Retirement Date.
5.02 TIME OF PAYMENT OF BENEFIT. The monthly annuity payments
shall commence to be paid to the Participant on the first day of the month
coincident with or next following his 55th birthday.
V-1
<PAGE> 12
ARTICLE VI
DEATH BENEFITS
If a Participant's death occurs before or after his Plan benefit has
begun to be paid to him, his surviving spouse shall be paid a death benefit of
$4,167.00 per month for her life. The first death benefit payment shall
commence on the first day of the month coincident with or next following the
later of (i) the Participant's death or (ii) the Retirement Date.
VI-1
<PAGE> 13
ARTICLE VII
PLAN COMMITTEE
7.01 COMMITTEE. The Plan shall be administered by a Committee
which shall have at least three members appointed by the Board of Directors.
Any person may resign from the Committee upon 30 days' prior notice to the
Board of Directors. The Board of Directors may remove any member of the
Committee at any time.
7.02 GENERAL RIGHTS, POWERS, AND DUTIES OF PLAN COMMITTEE. The
Committee shall be responsible for the management, operation, and
administration of the Plan. In addition to any powers, rights, and duties set
forth elsewhere in the Plan, it shall have the following powers and duties:
(a) to adopt such rules and regulations consistent with
the provisions of the Plan as it deems necessary for the proper and
efficient administration of the Plan;
(b) to enforce the Plan in accordance with its terms and
any rules and regulations it establishes;
(c) to maintain records concerning the Plan sufficient to
prepare reports, returns, and other information required by the Plan or
by law;
(d) to construe and interpret the Plan and to resolve all
questions arising under the Plan;
(e) to direct the Company to pay benefits under the Plan
and to give such other directions and instructions as may be necessary
for the proper administration of the Plan;
(f) to employ or retain agents, attorneys, actuaries,
accountants, or other persons who may also be employed by or represent
the Company; and
(g) to be responsible for the preparation, filing, and
disclosure on behalf of the Plan of such documents and reports as are
required by any applicable Federal or State law.
The Committee shall have no power to add to, subtract from, or modify any of
the terms of the Plan, to change or add to any benefits provided by the Plan,
or to waive or fail to apply any requirements of eligibility for benefits under
the Plan.
7.03 RULES AND DECISIONS. The Committee may adopt such rules and
actuarial tables as it deems necessary, desirable, or appropriate. All rules
and decisions of the Committee shall be uniformly and consistently applied to
all Participants in similar circumstances. When making a determination or
calculation, the Committee shall be entitled to rely upon information furnished
to it by a Participant or beneficiary, the Company, and the legal counsel,
actuary, and accountant for the Company.
7.04 COMMITTEE ORGANIZATION AND VOTING. The Committee shall select
from among its members a chairman who shall preside at all of its meetings and
shall elect a secretary without regard to whether that person is a member of
the Committee. The secretary shall keep all records, documents, and data
pertaining to the Committee's supervision and administration of the Plan. A
majority of the members of the Committee shall constitute a quorum for the
transaction of business and the vote of a majority of the members present at
any meeting shall decide any question brought before
VII-1
<PAGE> 14
the meeting. In addition, the Committee may decide any question by vote, taken
without a meeting, of a majority of its members. A member of the Committee who
is also a Participant shall not vote or act on any matter relating solely to
himself.
7.05 COMMITTEE DISCRETION. The Committee in exercising any power
or authority granted under this Plan or in making any determination under this
Plan shall perform or refrain from performing those acts using its sole
discretion and judgment. Any decision made by the Committee, any refraining to
act, or any act taken by the Committee in good faith shall be final and binding
on all parties. The Committee's decision shall never be subject to de novo
review.
7.06 AUTHORIZATION OF BENEFIT PAYMENTS. The Committee shall issue
directions to the Company concerning all benefits which are to be paid pursuant
to the provisions of the Plan. The Company shall furnish the Committee such
data and information as it may require. Participants and their spouses shall
furnish to the Committee such evidence, data, or information, and execute such
documents, as the Committee requests.
7.07 APPLICATION AND FORMS OF BENEFITS. The Committee may require
a Participant to complete and file with the Committee an application for
retirement benefits and all other forms approved by the Committee and to
furnish all pertinent information requested by the Committee. The Committee
may rely upon all such information so furnished it, including the Participant's
current mailing address.
7.08 FACILITY OF PAYMENT. Whenever, in the Committee's opinion, a
person entitled to receive any payment of a benefit or installment thereof
hereunder is under a legal disability or is incapacitated in any way so as to
be unable to manage his financial affairs, the Committee may direct the Company
to make payments to such person, his legal representative, or to a relative or
friend of such person for his benefit, or the Committee may direct the Company
to apply the payment for the benefit of such person in such manner as the
Committee considers advisable. Any payment of a benefit or installment thereof
in accordance with the provisions of this Section shall be a complete discharge
of any liabilities for the making of such payment under the provisions of the
Plan.
7.09 CLAIMS PROCEDURE. The Committee shall make all determinations
as to the right of any person to receive benefits under the Plan. Any denial
by the Committee of a claim for benefits under the Plan by a Participant,
spouse, or retired Participant (collectively referred to herein as "Claimant")
shall be stated in writing by the Committee and delivered or mailed to the
Claimant on the 90th day after receipt of the claim unless special
circumstances require an extension of time for processing the claim. If such
an extension of time is required, written notice of the extension shall be
furnished to the Claimant on the 90th day after receipt of the claim and the
claim shall thereafter be paid on the 180th day after the date of receipt of
the initial claim. Such notice shall set forth the specific reasons for the
denial, specific reference to pertinent provisions of the Plan upon which the
denial is based, a description of any additional material or information
necessary for the Claimant to perfect his claim with an explanation of why such
material or information is necessary, and an explanation of claim review
procedures under the Plan written to the best of the Committee's ability in a
manner that may be understood without legal or actuarial counsel. A Claimant
whose claim for benefits has been wholly or partially denied by the Committee
may, within 90 days following the date of such denial, request a review of such
denial in a writing addressed to the Committee. The Claimant shall be entitled
to submit such issues or comments, in writing or otherwise, as he shall
consider relevant to a determination of his claim and may include in his
request a request for a hearing in person before the Committee. Prior to
submitting his request, the Claimant shall be entitled to review such documents
as the Committee shall agree are pertinent to his claim. The Claimant may, at
all stages of review, be represented by counsel, legal or otherwise, of his
choice, provided that the fees and expenses of such counsel shall be borne by
the Claimant. All requests for review shall be promptly resolved. The
Committee's decisions with respect to any such review shall be set forth in
writing and shall be mailed to the Claimant on the 60th day following receipt
by the Committee of the Claimant's request unless special circumstances, such
as the need to hold a hearing, require an extension of time for processing, in
which case the Committee's decision shall be so mailed on the 120th day after
receipt of such request.
VII-2
<PAGE> 15
ARTICLE VIII
AMENDMENT AND TERMINATION
8.01 AMENDMENT. The Plan may be amended in whole or in part by the
Company at any time. Notice of any such amendment shall be given in writing to
the Committee and to each Participant and each spouse of a deceased
Participant. No such amendment shall have the effect of reducing that portion
of the benefit the Participant ultimately becomes entitled to below that amount
he would have received under the formula set out in the Plan prior to the
amendment. An amendment to the Plan shall be made by a written instrument
executed by an officer of the Company. The Board of Directors of the Company
must authorize the amendment in order for the amendment to be effective.
8.02 RIGHT TO TERMINATE PLAN. The Company intends to maintain the
Plan for an indefinite period of time but necessarily must, and hereby does,
reserve the right to terminate the Plan at any time. The Company shall not
have any further financial obligations under the Plan from and after such
termination of the Plan except those that have accrued up to the date of
termination and have not been satisfied. The termination of the Plan shall be
accomplished by a resolution of the Board of Directors of the Company and shall
be evidenced by a written instrument executed by an officer of the Company.
VIII-1
<PAGE> 16
ARTICLE IX
FUNDING
9.01 UNFUNDED ARRANGEMENT. It is intended that this Plan shall be
unfunded for tax purposes and for purposes of Title 1 of the Employee
Retirement Income Security Act of 1974, as amended. The Committee will
establish a bookkeeping account for each Participant in a special Deferred
Compensation Ledger which shall be maintained by the Company.
9.02 PARTICIPANTS MUST RELY ONLY ON GENERAL CREDIT OF THE COMPANY.
It is specifically recognized by both the Company and the Participants that
this Plan is only a general corporate commitment and that each Participant must
rely upon the general credit of the Company for the fulfillment of its
obligations hereunder. Under all circumstances the rights of Participants to
any asset held by the Company will be no greater than the rights expressed in
this Plan. Nothing contained in this Plan shall constitute a guarantee by the
Company that the assets of the Company will be sufficient to pay any benefits
under this Plan or would place the Participant in a secured position ahead of
general creditors of the Company; the Participants are only unsecured creditors
of the Company with respect to their Plan benefits and the Plan constitutes a
mere promise by the Company to make benefit payments in the future. No
specific assets of the Company have been or shall be set aside, shall in any
way be transferred to the trust, or shall be pledged in any way for the
performance of the Company's obligations under this Plan which would remove
such assets from being subject to the general creditors of the Company.
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<PAGE> 17
ARTICLE X
MISCELLANEOUS
10.01 LIMITATION OF RIGHTS. Nothing in this Plan shall be
construed:
(a) to give any employee of the Company any right to be
designated a Participant in the Plan;
(b) to give a Participant any right with respect to the
amounts credited in the Deferred Compensation Ledger on behalf of the
Participant, except in accordance with the terms of this Plan;
(c) to limit in any way the right of the Company to
terminate a Participant's employment with the Company at any time
(except as may be otherwise provided in the Participant's employment
agreement);
(d) to evidence any agreement or understanding, expressed
or implied, that the Company will employ a Participant in any
particular position or for any particular remuneration (except as may
be otherwise provided in the Participant's employment agreement); or
(e) to give a Participant or any other person claiming
through him any interest or right under this Plan other than that of
an unsecured general creditor of the Company.
10.02 DISTRIBUTIONS TO INCOMPETENTS. Should a Participant or his
surviving spouse become incompetent, the Committee is authorized to pay the
funds due to the guardian of the incompetent or directly to the incompetent or
to apply those funds for the benefit of the incompetent in any manner the
Committee determines in its sole discretion.
10.03 NONALIENATION OF BENEFITS. No right or benefit provided in
this Plan shall be transferable by the Participant except, upon his death, to
his surviving spouse as provided in this Plan. No right or benefit under this
Plan shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of the Participant
or the Participant's spouse. Any attempt to anticipate, alienate, sell,
assign, pledge, encumber, or charge the same shall be void. No right or
benefit under this Plan shall in any manner be liable for or subject to any
debts, contracts, liabilities, or torts of the person entitled to such
benefits. If any Participant or any spouse of a Participant becomes bankrupt
or attempts to anticipate, alienate, sell, assign, pledge, encumber, or charge
any right or benefit under this Plan, that right or benefit shall, in the
discretion of the Committee, cease. In that event, the Committee may have the
Company hold or apply the right or benefit or any part of it to the benefit of
the Participant or his spouse in any manner and in any proportion the Committee
believes to be proper in its sole and absolute discretion but is not required
to do so.
10.04 RELIANCE UPON INFORMATION. The Committee shall not be liable
for any decision or action taken in good faith in connection with the
administration of this Plan. Without limiting the generality of the foregoing,
any decision or action taken by the Committee when it relies upon information
supplied it by any officer of the Company, the Company's legal counsel, the
Company's independent accountants, or other advisors in connection with the
administration of this Plan shall be deemed to have been taken in good faith.
10.05 SEVERABILITY. If any term, provision, covenant, or condition
of the Plan is held to be invalid, void, or otherwise unenforceable, the rest
of the Plan shall remain in full force and effect and shall in no way be
affected, impaired, or invalidated.
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<PAGE> 18
10.06 NOTICE. Any notice or filing required or permitted to be
given to the Committee or a Participant shall be sufficient if in writing and
hand delivered or sent by U.S. mail to the principal office of the Company or
to the residential mailing address of the Participant. Notice will be deemed
to be given as of the date of hand delivery or, if delivery is by mail, as of
the date shown on the postmark.
10.07 GENDER AND NUMBER. If the context requires it, words of one
gender when used in this Plan will include the other genders and words used in
the singular or plural will include the other.
10.08 DUPLICATION OF BENEFITS. There shall be no duplication of
retirement, disability, severance, or death benefits payable under the Plan for
any reason.
10.09 GOVERNING LAW. The Plan will be construed, administered, and
governed in all respects by the laws of the State of Texas.
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<PAGE> 19
IN WITNESS WHEREOF, the Company has adopted this Plan on the
_________ day of ___________________ 1996.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------
Its:
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<PAGE> 1
EXHIBIT 10.24
DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
This Deed of Trust, Assignment of Production, Security
Agreement and Financing Statement (this "Mortgage"), dated as of July 2, 1996,
is from James G. Floyd, an adult resident of the State of Texas ("Mortgagor"),
to James F. Westmoreland, as Trustee (the "Trustee"), and The Houston
Exploration Company, a Delaware corporation (the "Mortgagee").
RECITALS
WHEREAS, Mortgagor has entered into a Revolving Credit Note,
attached hereto as Exhibit A, dated of even date herewith, issued by Mortgagor
in the principal sum not to exceed $4,000,000, payable to the order of
Mortgagee, bearing interest at the rate therein provided, and finally maturing
and payable on July 2, 2006 (as same may be revised, extended, amended,
replaced, modified or restated from time to time, the "Note"); and
WHEREAS, pursuant to the Note, the Mortgagee agreed to lend to
Mortgagor the principal amount not to exceed $4,000,000 for the acquisition of
certain working interests and additional amounts to be advanced on account of
such interests in the manner provided for in the Note; and
WHEREAS, Mortgagor is granting the Lien under this Mortgage to
the Trustee and the Mortgagee pursuant to the Note and for the purpose of,
among other things, securing and providing for the repayment of all amounts at
any time owing and from time to time owing by Mortgagor to the Mortgagee under
or in connection with the Note;
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms. Unless the context otherwise
requires, as used in this Mortgage and all amendments, extensions,
restatements, modifications, renewals, supplements or waivers hereof or hereto,
the following terms shall have the following meanings, which meanings shall be
equally applicable to both the singular and plural form of such terms.
<PAGE> 2
"Collateral" shall have the meaning assigned to that term in
Article VIII of this Mortgage.
"Debtor" shall have the meaning assigned to that term in
Article VIII hereof.
"Debtor Relief Law(s)" shall mean the Bankruptcy Code of the
United States, as amended from time to time, and all other applicable
dissolution, liquidation, conservatorship, Bankruptcy, moratorium, readjustment
of debt, compromise, rearrangement, receivership, insolvency, reorganization or
similar debtor relief laws from time to time in effect affecting the rights of
creditors generally.
"Default Rate" shall have the meaning assigned to that term in
the Note.
"Event of Default" shall have the meaning assigned to that
term in Article VI hereof.
"Governmental Authority" shall mean any nation or government,
any federal, state, province, city, town, municipality, county, local or other
political subdivision thereof or thereto and any court, tribunal, department,
commission, board, bureau, instrumentality, agency or other entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Highest Lawful Rate" shall have the meaning assigned to that
term in Section 9.8 hereof.
"Hydrocarbons" shall mean oil, gas, casinghead gas,
condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all
products thereof, therefrom, and all other substances produced in association
therewith.
"Indebtedness" shall mean all loans, advances, debts,
liabilities, obligations, covenants and duties owing to the Mortgagee, its
successors and assigns, from or assumed by Mortgagor, of any kind or nature,
present or future arising under this Mortgage or the Note. The term includes,
without limitation, all principal and interest accruing under the Note, and all
obligations of Mortgagor now or hereafter existing under this Mortgage, and all
interest that accrues, to the extent permitted under applicable law, on all or
any part of the obligations after the filing of any petition or pleading
against Mortgagor for a proceeding under any Debtor Relief Laws.
"Lands" shall mean the real property the descriptions of which
are incorporated by reference to another instrument described in Exhibit A and
the lands covered by the Leases.
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<PAGE> 3
"Leases" shall mean the Oil and Gas Leases and other documents
of title described in Exhibit A, together with extensions, renewals or
replacements thereof and new leases covering all or any portion of the land
covered thereby.
"Lien" means any mortgage, lien, charge, pledge, security
interest or encumbrance of any kind (whether voluntary or involuntary,
affirmative or negative, and whether imposed or created by operation of law or
otherwise).
"Mortgaged Property" shall have the meaning assigned to that
term in Article II to this Mortgage.
"Mortgagee" shall have the meaning assigned to that term in
the introduction to this Mortgage.
"Mortgagor" shall have the meaning assigned to that term in
the introduction to this Mortgage.
"Oil and Gas Leases" shall mean oil, gas and mineral leases,
oil and gas leases and shall also include subleases thereof and operating
rights thereto.
"Operating Equipment" shall mean insofar and only insofar as
attributable to the Subject Interests all personal property (excluding motor
vehicles), surface or subsurface machinery, equipment, facilities, supplies or
other property of whatsoever kind or nature now or hereafter located on or
under or affixed to any of the Lands or on a unit including all or part of the
Lands or now or hereafter used, held for use or useful in connection with the
exploration, development and operation of the Lands and the production,
treatment, storage, processing or transportation of Hydrocarbons produced or to
be produced from or attributable thereto, including, but not by way of
limitation, all oil wells, gas wells, water wells, injection wells, gas
processing plants, casing, tubing, rods, pumps, pumping units and engines,
Christmas trees, derricks, separators, gun barrels, flow lines, tanks, tank
batteries, gas systems (for gathering, treating, compression, disposal or
injection), chemicals, solutions, water systems (for treating, disposal and
injection), pipe, pipelines, meters, apparatus, boilers, compressors, liquid
extractors, connectors, valves, fittings, power plants, poles, lines, cables,
wires, transformers, starters and controllers, machine shops, tools, machinery
and parts, storage yards and equipment stored therein, buildings and camps,
telegraph, telephone and other communication systems, roads, loading docks,
loading racks and shipping facilities, fixtures, and other appurtenances,
appliances and property of every kind and character, movable or immovable,
together with all improvements, betterments and additions, accessions and
attachments thereto and replacements thereof.
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<PAGE> 4
"Permitted Encumbrances" shall mean (i) the Lien hereof; (ii)
those restrictions, exceptions, reservations, conditions, limitations,
interests and other matters, if any, set forth or referred to in Exhibit A; and
(iii) those consented to in writing by the Mortgagee.
"Requirements of Law" shall mean any federal, state or local
law, rule or regulation, permit or other binding determination of any
Governmental Authority.
"Subject Interests" shall mean each kind and character of
right, title, interest or estate, which Mortgagor has in and to the Leases and
each kind and character of right, title, interest or estate, which Mortgagor
has in and to the Lands, together with each kind and character of right, title,
interest or estate now vested in the Mortgagor in and to all oil and gas
leasehold interests, overriding royalty interests, mineral interests, royalty
interests, net profits interests, oil payments, production payments, carried
interests, operating rights, and all other properties or interests of every
kind or character which relate to any of the Lands and/or the Leases,
including, without limitation, the Mortgagor's undivided interests in those
certain wells and properties specified in the instruments listed in Exhibit A
attached hereto, whether such right, title, interest or estate be under and by
virtue of a Lease, a unitization or pooling agreement, a unitization or pooling
order, an assignment, a mineral deed, a royalty deed, an operating agreement, a
revenue sharing agreement, a division order, a transfer order, a farmout
agreement, a fee simple conveyance or any other type of contract, conveyance or
instrument or under any other type of claim or title, legal or equitable,
recorded or unrecorded, even though the Mortgagor's interest may be incorrectly
or incompletely described, all as the same shall be enlarged by the discharge
of any payments out of production or by the removal of any charges or
encumbrances to which any of same are subject.
"Subject Minerals" shall mean all Hydrocarbons in, under,
upon, produced or to be produced or which may be produced, saved and sold from
or which shall accrue and be attributable to, the Subject Interests, including
without limitation, all oil in tanks and all rents, issues, profits, proceeds,
products, revenues, and other income arising from or attributable to the
Subject Interests.
"Trustee" shall have the meaning assigned to that term in the
introduction to this Mortgage and shall include his successors as appointed by
the Mortgagee.
ARTICLE II
DEED OF TRUST
2.1 Grant of Real Property and Security Interest in
Personal Property. Mortgagor, for and in consideration of the premises and of
the debts and trusts hereinafter mentioned, and to secure the Indebtedness, has
granted, bargained, sold, mortgaged, warranted, assigned, transferred and
conveyed, and by these presents does grant, bargain, sell, mortgage, warrant,
assign, transfer and
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<PAGE> 5
convey unto the Trustee, in trust, for the use and benefit of the Mortgagee and
its successors and assigns, with power of sale, all of Mortgagor's right, title
and interest in and to the following described real and personal property,
namely:
(a) the Subject Interests;
(b) the Subject Minerals;
(c) the Operating Equipment;
(d) all unitization, communitization, operating
agreements, pooling agreements and declarations of pooled units and
the properties covered and the units created thereby (including all
units formed under orders, regulations, rules or other official acts
of any federal, state or other governmental agency providing for
pooling or unitization, spacing orders or other well permits and other
instruments) which relate to or affect all or any portion of the
Subject Interests;
(e) all accounts receivable and other accounts, contract
rights, operating rights, general intangibles, chattel paper,
documents and instruments arising under or pertaining to the Subject
Interests;
(f) insofar and only insofar as attributable to the
Subject Interests, all oil and gas produced, and/or general
intangibles, accounts and other rights to payment under any and all
contracts under which Mortgagor is entitled to share in the production
from or the proceeds of production from any oil and/or gas wells
located on the Lands;
(g) all subleases, farmout agreements, assignments of
interest, assignments of operating rights, contracts, operating
agreements, bidding agreements, advance payment agreements,
rights-of-way, surface leases, franchises, servitudes, privileges,
permits, licenses, easements, tenements, hereditaments, improvements,
appurtenances and benefits now existing or in the future obtained and
incident and appurtenant to any of the foregoing;
(h) any Liens and security interests in the Subject
Interests securing payment of proceeds from the sale of the Subject
Minerals including, but not limited to, those liens and security
interests provided for in Tex. Bus. & Com. Code Ann. Section 9.319
(Tex. UCC) (Vernon Supp. 1989), as amended;
(i) any other property not included within subparagraphs
(a) through (h) above that may from time to time hereafter be
subjected to the Lien created hereby and security
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<PAGE> 6
interest hereof by the express consent of Mortgagor, and the Mortgagee
and the Trustee are hereby authorized to receive the same as
additional security for the benefit of the Mortgagee;
(j) any and all proceeds, returns, rents, issues,
profits, products, revenues and other income arising from or by virtue
of the sale, lease or other disposition of, or from any condemnation
proceeds payable with respect to loss of the Leases or Lands, or from
any insurance payable with respect to damage, loss or destruction of,
the items described in subparagraphs (a) through (i) above;
together with any and all corrections or amendments to, or renewals,
extensions or ratifications of, any of the same, or of any instrument
relating thereto, all the aforesaid properties, rights and interests
which are hereby subjected to the Lien of this instrument, together
with any additions thereto which may be subjected to the Lien of this
instrument by means of supplements or amendments hereto, being
hereinafter called the "Mortgaged Property."
Subject, however, to (i) the assignment of production
contained in Article V hereof and (ii) the condition that neither the Trustee
nor the Mortgagee shall be liable in any respect for the performance of any
covenant or obligation of Mortgagor in respect of the Mortgaged Property. The
reference to Permitted Encumbrances in this Mortgage is made for the purpose of
giving effect to the warranties of Mortgagor contained herein, and is not
intended to limit or restrict the description of the Mortgaged Property, nor is
it intended that this Mortgage or the rights of the Trustee or the Mortgagee
hereunder shall be subject to, or encumbered by, the Permitted Encumbrances
merely because of the reference thereto.
TO HAVE AND TO HOLD the Mortgaged Property unto the Trustee
and his successors and assigns forever to secure the payment of the
Indebtedness and to secure the performance of the covenants, agreements and
obligations of Mortgagor herein contained.
ARTICLE III
PARTICULAR WARRANTIES AND REPRESENTATIONS OF MORTGAGOR
Mortgagor hereby warrants and represents to the Trustee and the Mortgagee as
follows:
3.1 Title. To the extent of Mortgagor's interests
specified in Exhibit A and subject to the Permitted Encumbrances, Mortgagor
warrants by, through and under Mortgagor, but not otherwise, that Mortgagor has
good and indefeasible title to, and is possessed of each property, right,
interest or estate constituting the Leases and interests derived therefrom.
Subject to Permitted Encumbrances, Mortgagor warrants by, through and under
Mortgagor, but not otherwise, that
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<PAGE> 7
Mortgagor has good and indefeasible title to all other Mortgaged Property. The
warranty made by Mortgagor hereunder with respect to its title or interest in
the Mortgaged Property shall not in any manner limit the quantum of interest
affected by this Mortgage. It is intended that this Mortgage shall cover and
affect Mortgagor's entire present interest in the Mortgaged Property.
3.2 No Liens. Mortgagor warrants by, through and under
Mortgagor, but not otherwise, that Mortgagor's title to the Mortgaged Property
is free of any and all claims, liens, charges, encumbrances, mortgages,
security interests, contracts, agreements, options, preferential purchase
rights or other restrictions or limitations of any nature or kind except
Permitted Encumbrances.
3.3 Power and Authority. Mortgagor has the full power
and legal right to grant, bargain, sell, mortgage, assign, transfer and convey
a security interest in all of the Mortgaged Property in the manner and form
herein provided and without obtaining the waiver, consent or approval of any
lessor, sublessor, governmental agency or entity or party whomsoever or
whatsoever.
3.5 Principal Place of Residence. The principal place of
residence of the Mortgagor is located in Harris County, Houston, Texas.
ARTICLE IV
PARTICULAR COVENANTS AND AGREEMENTS OF MORTGAGOR
Mortgagor hereby covenants to and agrees with the Trustee and the Mortgagee as
follows:
4.1 Operation of Mortgaged Property. So long as the
Indebtedness or any part thereof remains unpaid, and whether or not Mortgagor
is the operator of the Mortgaged Property, Mortgagor shall, at Mortgagor's own
expense:
(a) Do all things necessary to keep unimpaired in all
material respects Mortgagor's rights and remedies in or under the
Mortgaged Property; and
(b) Cause the Mortgaged Property or any part thereof or
the rents, issues, revenues, profits and other income therefrom to be
kept free and clear of all liens, charges, security interests and
encumbrances of every character, other than Permitted Encumbrances.
4.2 Taxes. Mortgagor will pay or cause to be paid,
before delinquent, all lawful taxes, assessments and other charges of every
kind and character imposed upon this Mortgage or upon the Mortgaged Property or
any part thereof or upon the interest of the Trustee or the Mortgagee therein,
or upon the income, rents, issues, revenues, profits or other income from the
Mortgaged
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<PAGE> 8
Property, or incident to or in connection with the production of Hydrocarbons
or other minerals therefrom, or the operation and development thereof,
including, but not limited to, all ad valorem taxes assessed against the
Mortgaged Property or any part thereof and all occupation taxes and all
production, severance, windfall profit, and/or excise and other taxes assessed
against, and/or measured by, the production of (or the value, or proceeds, of
production of) Hydrocarbons that accrue to the Mortgaged Property except those
contested in good faith in appropriate proceedings for which adequate reserves
have been established.
4.3 Sale or Mortgage of Mortgaged Property. Mortgagor
will not sell, convey, mortgage, pledge, or otherwise dispose of or encumber
the Mortgaged Property or any portion thereof, or any of Mortgagor's rights,
titles, interests or estates therein without first securing the express written
consent of the Mortgagee; and Mortgagor will not enter into any arrangement
with any purchaser of Hydrocarbons regarding the Mortgaged Property outside the
ordinary course of business whereby any such purchaser may set off any claim
against Mortgagor by withholding payment for any Hydrocarbons actually
delivered.
4.4 Payment of the Indebtedness. Mortgagor will duly and
punctually pay the principal of and interest on all of the Indebtedness,
including each and every obligation owing under the Note as the same shall
become due and payable whether at a date for payment of a fixed installment, or
contingent on other payment, or as a result of acceleration (after expiration
of all periods of notice and/or grace) or otherwise.
4.5 Further Assurances. Mortgagor will execute and
deliver such other and further instruments and will use its best efforts to do
such other and further acts as in the reasonable opinion of the Trustee or the
Mortgagee may be necessary or desirable to carry out more effectually the
purposes of this instrument, including, without limiting the generality of the
foregoing, (a) prompt correction of any defect which may hereafter be
discovered in the title to or description of the Mortgaged Property or any part
thereof or in the execution and acknowledgment of this instrument, any note, or
other document executed in connection herewith, (b) upon the occurrence and
during the continuance of an Event of Default, prompt execution and delivery of
all division or transfer orders which in the opinion of the Mortgagee are
needed to transfer effectively to the Mortgagee the assigned proceeds of
production from the Subject Interests and (c) obtain any necessary governmental
approvals.
4.6 Adverse Claims. Subject only to Permitted
Encumbrances, Mortgagor will warrant and forever defend, good and indefeasible
title to the Mortgaged Property unto the Trustee and the Mortgagee against
every Person whomsoever lawfully claiming the same or any part thereof by,
through or under Mortgagor, and Mortgagor will maintain and preserve the Lien
created hereby so long as any of the Indebtedness remains unpaid.
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<PAGE> 9
ARTICLE V
ASSIGNMENT OF PRODUCTION
5.1 Assignment of Rents. Subject to the terms of the
Note and this Mortgage, Mortgagor hereby absolutely and unconditionally assigns
and transfers to the Mortgagee, all the income, rents, royalties, revenue,
issues, profits, and proceeds of the Subject Interests, whether now due, past
due or to become due, and hereby gives to and confers upon the Mortgagee the
right, power and authority to collect such income, rents, royalties, revenue,
issues, profits and proceeds. Mortgagor irrevocably appoints the Mortgagee its
true and lawful attorney at the option of the Mortgagee at any time to demand,
receive, and enforce payment, to give receipts, releases, and satisfactions and
to sue, either in the name of Mortgagor or in the name of the Mortgagee, for
all such income, rents, royalties, revenue, issues, profits and proceeds.
5.2 Assignment of Production. As further security for
the payment of the Indebtedness and subject to the terms of the Note and this
Mortgage, Mortgagor hereby absolutely and unconditionally transfers, assigns,
warrants and conveys to the Mortgagee, and its successors and assigns, and
grants to the Mortgagee a security interest in, effective as of the date
hereof, at 7:00 o'clock a.m., local time, all Hydrocarbons which are thereafter
produced and which accrue to the Subject Interests, all products obtained or
processed therefrom and all revenues and proceeds now or hereafter attributable
to said Hydrocarbons and said products as well as any Liens and security
interests securing any sales of said Hydrocarbons, including, but not limited
to, those liens and security interests provided for in the Tex. Bus. & Com.
Code Ann. Section 9.319 (Tex. UCC) (Vernon Supp. 1989), as amended. All
parties producing, purchasing or receiving any such Hydrocarbons or products,
or having such Hydrocarbons, products, or proceeds therefrom in their
possession for which they or others are accountable to the Mortgagee by virtue
of the provisions of this Article, are authorized and directed to treat and
regard the Mortgagee as the assignee and transferee of Mortgagor and entitled
in such Mortgagor's place and stead to receive such Hydrocarbons and all
proceeds therefrom; and said parties and each of them shall be fully protected
in so treating and regarding the Mortgagee and shall be under no obligation to
see to the application by the Mortgagee of any such proceeds or payments
received by it; provided, however, Mortgagor shall be entitled to execute
division orders, transfer orders and other instruments as may be required to
direct all proceeds to Mortgagor without the necessity of joinder by the
Mortgagee in such division orders, transfer orders or other instruments.
Mortgagor agrees to perform all such acts, and to execute all such further
assignments, transfers and division orders, and other instruments as may be
required or desired by the Mortgagee or any party in order to have said
revenues and proceeds so paid to the Mortgagee. The Mortgagee is fully
authorized to receive and receipt for said revenues and proceeds, to endorse
and cash any and all checks and drafts payable to the order of such Mortgagor
or the Mortgagee for the account of Mortgagor received from or in connection
with said revenues or proceeds and apply the proceeds thereof in accordance
with the Note, and to execute transfer and division orders in the name of
Mortgagor, or otherwise, with warranties binding Mortgagor.
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<PAGE> 10
Mortgagor will execute and deliver to the Mortgagee any instruments the
Mortgagee may from time to time reasonably request for the purpose of
effectuating this assignment and the payment to the Mortgagee of the proceeds
assigned.
5.3 No Liability of the Mortgagee in Collecting. The
Mortgagee is hereby absolved from all liability for failure to enforce
collection of any proceeds so assigned and from all other responsibility in
connection therewith, except the responsibility to account to Mortgagor for
funds actually received. The Mortgagee shall have the right, at its election,
to prosecute and defend any and all actions or legal proceedings deemed
advisable by the Mortgagee in order to collect such funds and to protect the
interests of the Mortgagee and/or Mortgagor.
5.4 Assignment Not a Restriction on the Mortgagee's
Rights. Nothing herein contained shall detract from or limit the absolute
obligation of Mortgagor to make payment in full of the Indebtedness regardless
of whether the proceeds assigned by this Article are sufficient to pay the
same, and the rights under this Article shall be in addition to all other
security now or hereafter existing to secure the payment of the Indebtedness.
5.5 Status of Assignment. Notwithstanding the other
provisions of this Article V, the Trustee or the Mortgagee or any receiver
appointed in judicial proceedings for the enforcement of this instrument shall
have the right to receive all of the Hydrocarbons herein assigned and the
proceeds therefrom after the Note and other Indebtedness has been declared due
and payable in accordance with the provisions of Section 6.2 hereof and to
apply all of said proceeds as set forth herein. Upon any sale of the Subject
Interests or any part thereof pursuant to Article VII hereof, the Hydrocarbons
thereafter produced from the Subject Interests so sold, and the proceeds
therefrom, shall be included in such sale and shall pass to the purchaser free
and clear of the assignment contained in this Article.
5.6 Indemnity. MORTGAGOR SHALL INDEMNIFY THE TRUSTEE AND
THE MORTGAGEE AND THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS, REPRESENTATIVES
AND EMPLOYEES (THE "INDEMNITEES") AGAINST ALL CLAIMS, LOSSES, ACTIONS,
LIABILITIES, JUDGMENTS, COSTS, ATTORNEYS' FEES AND OTHER CHARGES OF WHATSOEVER
KIND OR NATURE, (COLLECTIVELY, "CLAIMS") MADE AGAINST OR INCURRED BY THEM OR
ANY OF THEM AS A CONSEQUENCE OF THE ASSERTION, EITHER BEFORE OR AFTER THE
PAYMENT IN FULL OF THE INDEBTEDNESS, THAT THEY OR ANY OF THEM RECEIVED
HYDROCARBONS HEREIN ASSIGNED OR THE PROCEEDS THEREOF CLAIMED BY THIRD PERSONS;
PROVIDED, THAT NO INDEMNITEE SHALL BE ENTITLED TO INDEMNIFICATION FOR ANY CLAIM
RESULTING FROM ITS OWN NEGLIGENCE OR MISCONDUCT. If any Claim is asserted
against any Indemnitee and such Indemnitee intends to claim indemnification
from Mortgagor under this Section 5.6, such Indemnitee shall promptly notify
Mortgagor, but the failure to so promptly notify Mortgagor shall not affect
Mortgagor's obligations under this Section 5.6 unless such failure materially
prejudices Mortgagor's right to participate in,
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or Mortgagor's rights in, if any, the contest of such claim, demand, action or
cause of action, as hereinafter provided.
5.7 Rights to Timely Payment. For purposes of more fully
effecting the assignment made under this Article V and continuing the rights of
the Trustee and the Mortgagee thereunder, Mortgagor hereby appoints the Trustee
and the Mortgagee as its attorneys-in-fact to pursue any and all rights,
remedies and payments in respect of the Hydrocarbons and proceeds therefrom,
including, but not limited to, proceeds accruing prior to the effective date of
the assignment contained in this Article V. The power of attorney granted to
the Trustee and the Mortgagee under this Section 5.7, being coupled with an
interest, shall be irrevocable so long as the Indebtedness or any part thereof
remains unpaid.
ARTICLE VI
EVENTS OF DEFAULT
6.1 Events of Default. The occurrence of any of the
following events shall, after the expiration of the period of notice and
opportunity to cure set forth in the Note (except for a default under
subparagraph (e) or (f) below to which such notice and cure period shall not
apply), be and constitute an event of default under this Mortgage (herein
referred to as an "Event of Default"):
(a) Mortgagor shall fail to pay when due any installment
of principal of the Note; or
(b) Mortgagor shall fail to pay any interest due under
the Note or other agreement or security document contemplated by or delivered
pursuant to or in connection with this Mortgage when due, and, in either event,
such failure shall continue for five (5) Business Days; or
(c) Mortgagor shall fail to perform any term, covenant or
agreement contained in this Mortgage or the Note (other than those referenced
in subsections (a) and (b) of this Section 6.01) and such failure shall not
have been remedied within ten (10) days after the earlier of (i) notice thereof
from Mortgagee to Mortgagor or (ii) discovery thereof by Mortgagor; or
(d) this Mortgage or the Note (other than with the
consent of Mortgagee), at any time after its execution and delivery and for any
reason, cease to be in full force and effect or to provide the liens
contemplated thereby (except for such provisions or liens that Mortgagee
determines are not material either individually or in the aggregate), or shall
be declared to be null and void, or the validity or enforceability thereof or
of the liens contemplated thereby shall be
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contested by Mortgagor or Mortgagor shall deny that it has any or further
liability or obligation under this Mortgage or the Note; or
(e) Mortgagor shall be adjudicated insolvent, or shall
generally not pay, or admit in writing its inability to pay, its debts as they
mature, or make a general assignment for the benefit of creditors, or any
proceeding shall be instituted by Mortgagor seeking to adjudicate him
insolvent, seeking liquidation, reorganization, arrangement, adjustment,
protection, relief or composition of his debts under any law relating to
Bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee, or
other similar official for him, or Mortgagor shall take any action in
furtherance of any of the actions set forth above in this Section 6.01(e); or
(f) any proceeding of the type referred to in Section
6.01(e) is filed, or any such proceeding is commenced against Mortgagor or
Mortgagor by any act indicates its approval thereof, consent thereto or
acquiescence therein, or an order for relief is entered in an involuntary case
under the Bankruptcy law of the United States, or an order, judgment or decree
is entered appointing a trustee or similar official or adjudicating Mortgagor
insolvent, or approving the petition in any such proceedings, and such order,
judgment or decree remains in effect for one hundred eighty (180) days.
6.2 Effect of Event of Default. If any Event of Default of
the type described in Section 6.1(e) or (f) above shall occur and be
continuing, the Note and all other outstanding Indebtedness secured hereby
shall automatically become and be immediately due and payable in each instance
without grace, demand, presentment for payment, protest or notice (including,
but not limited to, notice of intent to accelerate and notice of acceleration)
of any kind to Mortgagor or any other person, all of which are hereby expressly
waived, and the Mortgagee may proceed to enforce its rights hereunder. If an
Event of Default (other than an Event of Default of the type described in
Section 6.1(e) or (f) above) shall occur and be continuing:
(a) the Mortgagee may by notice in writing to Mortgagor
declare the principal of and accrued interest on the Note and all
other outstanding Indebtedness secured hereby to be immediately due
and payable whereupon the outstanding balance on the Note and all
other outstanding Indebtedness shall become and be immediately due and
payable, in each instance without grace, demand, presentment for
payment, protest or notice (including, but not limited to, notice of
intent to accelerate and notice of acceleration) of any kind (except
for grace and notice expressly provided for in the Note) to Mortgagor
or any other person, all of which are hereby expressly waived; and
(b) the Mortgagee may proceed to enforce its rights
hereunder.
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ARTICLE VII
ENFORCEMENT OF REMEDIES
7.1 Power of Sale of Real Property Constituting a Part of
the Mortgaged Property. Upon the occurrence of an Event of Default, the
Trustee or his successors or substitutes shall have the right and power to sell
(the power of sale permitted and provided for by statute being hereby expressly
granted to the Trustee by the Mortgagor), the real property constituting a part
of the Mortgaged Property.
7.2 Rights of the Trustee With Respect to Personal
Property Constituting a Part of the Mortgaged Property. Upon the occurrence
and during the continuance of an Event of Default, the Trustee or his
successors or substitutes will have all rights and remedies granted by law, and
particularly by the Uniform Commercial Code, including, but not limited to, the
right to take possession of all personal property constituting a part of the
Mortgaged Property, and for this purpose the Trustee may enter upon any
premises on which any or all of such personal property is situated and take
possession of and operate such personal property (or any portion thereof) or
remove it therefrom. The Trustee will give Mortgagor reasonable notice of the
time and place of any public sale or of the time after which any private sale
or other disposition of such personal property is to be made. This requirement
of sending reasonable notice will be met if the notice is mailed by first class
mail, postage prepaid, to Mortgagor at the address shown below the signatures
at the end of this instrument at least ten (10) days before the time of the
sale or disposition.
7.3 Rights of the Trustee With Respect to Fixtures
Constituting a Part of the Mortgaged Property. Upon the occurrence and during
the continuance of an Event of Default, the Trustee may elect to treat the
fixtures constituting a part of the Mortgaged Property as either real property
collateral or personal property collateral and proceed to exercise such rights
as apply to such type of collateral.
7.4 Judicial Proceedings. Upon occurrence and during the
continuance of an Event of Default, the Trustee or the Mortgagee, in lieu of or
in addition to exercising any power of sale hereinabove given, may proceed by a
suit or suits in equity or at law, whether for a foreclosure hereunder, or for
the sale of the Mortgaged Property, or for the specific performance of any
covenant or agreement herein contained or in aid of the execution of any power
herein granted, or for the appointment of a receiver pending any foreclosure
hereunder or the sale of the Mortgaged Property, or for the enforcement of any
other appropriate legal or equitable remedy. Upon occurrence and during the
continuance of an Event of Default, Mortgagor agrees that, to the extent
permitted by law, the appointment of a receiver shall be as a matter of right
and without proof of insolvency, fraud, insecurity or mismanagement on the part
of Mortgagor. Mortgagor agrees that such receiver may be appointed to take
possession of, hold, maintain, operate and preserve the Mortgaged Property,
including the production and sale of all Hydrocarbons therefrom, and to apply
the proceeds of the
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sale thereof in the fashion set forth in Section 7.9 hereof; and said receiver
may be authorized to sell and dispose of the Mortgaged Property under orders of
the Court appointing such receiver.
7.5 Possession of the Mortgaged Property. It shall not
be necessary for the Trustee to have physically present or constructively in
his possession at any sale held by the Trustee or by any court, receiver or
public officer any or all of the Mortgaged Property, and Mortgagor shall
deliver to the purchaser at such sale on the date of sale the Mortgaged
Property owned by Mortgagor and purchased by such purchasers at such sale, and
if it should be impossible or impracticable for any of such purchasers to take
actual delivery of the Mortgaged Property, then the title and right of
possession to the Mortgaged Property shall pass to the purchaser at such sale
as completely as if the same had been actually present and delivered.
7.6 Certain Aspects of a Sale. Subject to Section 7.10,
the Mortgagee shall have the right to become the purchaser at any sale held by
the Trustee or by any court, receiver or public officer. In making payment for
the property under any such sale, the Mortgagee shall have the right to credit
against the amount of the bid made therefor, the amount payable out of the net
proceeds of such sale to it. Recitals contained in any conveyance made to any
purchaser at any sale made hereunder shall be prima facie evidence of the truth
and accuracy of the matters therein stated, including, without limiting the
generality of the foregoing, nonpayment of the unpaid principal sum of, and the
interest accrued on, the Note after the same have become due and payable,
advertisement and conduct of such sale in the manner provided herein or
appointment of any successor Trustee hereunder.
7.7 Receipt to Purchaser. Upon any sale, whether made
under the Uniform Commercial Code, the power of sale herein granted and
conferred or by virtue of judicial proceedings, the receipt of the Trustee, or
of the officer making sale under judicial proceedings, acknowledging the
payment of purchase money with respect thereto, shall be sufficient discharge
to the purchaser or purchasers at any sale for his or their purchase money, and
such purchaser or purchasers and his or their assigns or personal
representatives, shall not, after paying such purchase money and receiving such
receipt of the Trustee or of such officer therefor, be obliged to see to the
application of such purchase money, or be in anywise answerable for any loss,
misapplication or non-application thereof.
7.8 Effect of Sale. Any sale or sales of the Mortgaged
Property or any part thereof, whether under the Uniform Commercial Code, the
power of sale herein granted and conferred or by virtue of judicial
proceedings, shall operate to divest all right, title, interest, claim and
demand whatsoever either at law or in equity, of Mortgagor of, in and to the
Mortgaged Property sold, and shall be a perpetual bar, both at law and in
equity, against Mortgagor, and Mortgagor's successors or assigns, and against
any and all persons claiming or who shall thereafter claim all or
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any of the property sold from, through or under Mortgagor, or Mortgagor's
successors or assigns.
7.9 Application of Proceeds. The proceeds of any sale of
the Mortgaged Property, or any part thereof, whether under the Uniform
Commercial Code, the power of sale herein granted and conferred or by virtue of
judicial proceedings, whose application has not elsewhere herein been
specifically provided for, shall be applied to the Indebtedness as follows:
First: To the payment of all reasonable expenses incurred by
the Trustee or the Mortgagee incident to the enforcement of
this Mortgage, the Note or any of the Indebtedness including,
without limiting the generality of the foregoing, all such
reasonable expenses of any entry or taking of possession, of
any sale, of advertisement thereof, and of conveyances, and as
well, court costs, compensation of Mortgagees and employees
and legal fees; however, in no event shall such expenses
exceed ten percent (10%) of the amount of principal and
interest outstanding under the Note;
Second: To the payment of the Note and any other Indebtedness,
with interest to the date of such payment, in such order and
manner as set forth in the Note;
Third: Any surplus thereafter remaining shall be paid to
Mortgagor or Mortgagor's successors or assigns, as their
interests shall appear or as a court of competent jurisdiction
may direct.
7.10 Appraisement, Marshaling, etc. Mortgagor agrees, to
the full extent that Mortgagor may lawfully so agree, that Mortgagor will not
at any time insist upon or plead or in any manner whatever claim the benefit of
any appraisement, valuation, stay, extension or redemption of law now or
hereafter in force, in order to prevent or hinder the enforcement or
foreclosure of this Mortgage or the absolute sale of the Mortgaged Property or
the possession thereof by any purchaser at any sale made pursuant to any
provision hereof, or pursuant to the decree of any court of competent
jurisdiction; but Mortgagor, for Mortgagor and all who may claim through or
under Mortgagor, so far as Mortgagor or those claiming through or under
Mortgagor now or hereafter lawfully may, hereby waives the benefit of all such
laws, provided Mortgagor does not waive any rights granted by Sections 51.003
or 51.004 of the Texas Property Code. Mortgagor, for Mortgagor and all who may
claim through or under Mortgagor (including, without limitation, a holder of a
Lien subordinate to the Lien created hereby, without implying that Mortgagor
has, except as expressly provided herein, a right to grant an interest in, or
subordinate a Lien on, the Mortgaged Property), hereby waives, to the fullest
extent permitted by applicable law, any and all right to have any of the
Mortgaged Property marshaled upon any foreclosure of the Lien hereof, or sold
in inverse order of alienation, and agrees that the Trustee or any court having
jurisdiction to foreclose such Lien may sell the Mortgaged Property as an
entirety. If any law in this paragraph referred to and now in force,
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of which Mortgagor or Mortgagor's successor or successors might take advantage
despite the provisions hereof, shall hereafter be repealed or cease to be in
force, such law shall not thereafter be deemed to constitute any part of the
contract herein contained or to preclude the operation or application of the
provisions of this paragraph.
7.11 Costs and Expenses. All reasonable costs and
expenses (including reasonable attorneys' fees) incurred by the Trustee or the
Mortgagee in protecting and enforcing their rights hereunder, shall, to the
extent permitted by applicable law, constitute a demand obligation owing by
Mortgagor to the party incurring such costs and expenses which costs and
expenses shall not bear interest.
7.12 Operation of Property by the Trustee. Upon the
occurrence and during the continuation of an Event of Default and in addition
to all other rights herein conferred on the Trustee, the Trustee, or any
person, firm or corporation designated by the Trustee, shall have the right and
power, but shall not be obligated, to enter upon and take possession of any of
the Mortgaged Property, and to exclude Mortgagor, and Mortgagor's agents or
servants, wholly therefrom, and to hold, use, administer, manage and operate
the same to the extent that Mortgagor shall be at the time entitled and in his
place and stead.
7.13 Sale of Property. Upon the occurrence and continuance
of an Event of Default, the Trustee is hereby authorized and empowered to sell
or offer for sale any part of the Mortgaged Property, with or without having
first taken possession of same, to the highest bidder for cash at public
auction. Such sale shall be made at the courthouse of the county in which the
Mortgaged Property or any part thereof is situated or adjacent thereto, as
herein described, between the hours of 10:00 a.m. and 4:00 p.m. on the first
Tuesday of any month, beginning within three (3) hours of the time provided in
the notices described herein, after posting a written or printed notice or
notices of the place, earliest time at which the sale will begin and the terms
of said sale, and the portion of the Mortgaged Property to be sold, by posting
(or having some person or persons acting for the Trustee post) for at least
twenty-one (21) days preceding the date of the sale, written or printed notice
of the proposed sale at the courthouse door of said county in which the sale is
to be made; and if such portion of the Mortgaged Property lies in more than one
county, one such notice of sale shall be posted at the courthouse door of each
county in which such part of the Mortgaged Property is situated and such part
of the Mortgaged Property may be sold at the courthouse door of any one of such
counties, and the notice so posted shall designate in which county such
property shall be sold. In addition to such posting of notice, the Mortgagee,
Trustee or other holder of the Indebtedness hereby secured (or some person or
persons acting for the Trustee, the Mortgagee or other such holder) shall, at
least twenty-one (21) days preceding the date of sale, file a copy of such
notice(s) in the office of the county clerk in each of such counties and serve
or cause to be served written notice of the proposed sale by certified mail on
Mortgagor and on each other debtor, if any, obligated to pay the Indebtedness
according to the records of the Mortgagee. Service of such notice shall be
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completed upon deposit of the notice, enclosed in a postpaid wrapper properly
addressed to Mortgagor and such other debtors at their most recent address or
addresses as shown by the records of the Mortgagee in a post office or official
depository under the care and custody of the United States Postal Service. The
affidavit of any person having knowledge of the facts to the effect that such a
service was completed shall be prima facie evidence of the fact of service.
Mortgagor agrees that no notice of any sale, other than as set out in this
paragraph, need be given by the Trustee, the Mortgagee or any other person.
Mortgagor hereby designates as its address for the purpose of such notice, the
address set out on the signature page hereof; and agrees that such address
shall be changed only by depositing notice of such change enclosed in a
postpaid wrapper in a post office or official depository under the care and
custody of the United States Postal Service, certified mail, postage prepaid,
return receipt requested, addressed to the Mortgagee at the address of the
Mortgagee set out herein (or to such other address as the Mortgagee may have
designated by notice given as above provided to Mortgagor and such other
debtors). Any such notice of change of address of Mortgagor or other debtors
or of the Mortgagee shall be effective three (3) business days after such
deposit if such post office or official depository is located in the State of
Texas, otherwise to be effective upon receipt. Mortgagor authorizes and
empowers the Trustee to sell the Mortgaged Property in lots or parcels or in
its entirety as the Trustee shall deem expedient; and to execute and deliver to
the purchaser or purchasers thereof good and sufficient deeds of conveyance
thereto, with evidence of warranty as given by Mortgagor to Trustee in this
Mortgage, and the title of such purchaser or purchasers when so made by the
Trustee, Mortgagor binds itself to warrant and forever defend such title, by,
through and under Mortgagor, but not otherwise. Where portions of the
Mortgaged Property lie in different counties, sales in such counties may be
conducted in any order that the Trustee may deem expedient; and one or more
such sales may be conducted in the same month, or in successive or different
months as the Trustee may deem expedient. The Trustee may postpone the sale of
all or any part of the Mortgaged Property by public announcement at the time
and place of such sale, and from time to time thereafter may further postpone
such sale by public announcement made at the time of sale fixed by the
preceding postponement. The right of sale hereunder shall not be exhausted by
one or any sale, and the Trustee may make other and successive sales until all
of the Mortgaged Property be legally sold.
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ARTICLE VIII
SECURITY AGREEMENT
Without limiting any of the provisions of this instrument, in
order to secure the Indebtedness, Mortgagor, as Debtor (referred to in this
Article VIII as "Debtor"), hereby expressly GRANTS, ASSIGNS, TRANSFERS and SETS
OVER unto the Mortgagee, as Secured Party (the Mortgagee being referred to in
this Article IX as "Secured Party"), a first Lien upon and a security interest
in all the Mortgaged Property (including, without limitation, all Mortgaged
Property that constitutes equipment, accounts, contract rights, goods,
instruments, general intangibles, inventory, Hydrocarbons, fixtures and other
personal property of any kind or character (including both those now and those
hereafter existing)) to the full extent that such Mortgaged Property may be
subject to the Uniform Commercial Code of the state or states where such
Mortgaged Property is located, including all products and proceeds of such
Mortgaged Property (said Mortgaged Property, products and proceeds being
hereinafter collectively referred to as the "Collateral" for the purposes of
this Article VIII). The Lien and security interest created by this Mortgage
attaches upon the delivery hereof. Debtor covenants and agrees with Secured
Party that:
(a) In addition to and cumulative of any other remedies
granted in this instrument to Secured Party or to the Trustee, Secured
Party may, upon the occurrence and during the continuance of an Event
of Default, proceed under said Uniform Commercial Code as to all or
any part of the Collateral and shall have and may exercise with
respect to the Collateral all the rights, remedies and powers of a
secured party after default under said Uniform Commercial Code,
including, without limitation, the right and power to sell, at public
or private sale or sales, or otherwise dispose of, lease or utilize
the Collateral and any part or parts thereof in any manner authorized
or permitted under said Uniform Commercial Code after default by a
debtor, and to apply the proceeds thereof toward payment of the
Indebtedness in such order or manner as set forth in this Mortgage.
(b) Upon the occurrence and during the continuance of an
Event of Default, Secured Party shall have the right (without
limitation) to take possession of the Collateral and to enter upon any
premises where same may be situated for such purpose without being
deemed guilty of trespass and without liability for damages thereby
occasioned, and to take any action deemed necessary or appropriate or
desirable by Secured Party, at its option and in its discretion, to
repair, refurbish or otherwise prepare the Collateral for sale, lease
or other use or disposition as herein authorized.
(c) Any public sale of the Collateral shall be held at
such time or times within ordinary business hours and at such places
as Secured Party may fix in the notice of such sale. At any such sale
the Collateral may be sold in one lot as an entirety or in separate
parcels, as Secured Party may determine.
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(d) Secured Party shall not be obligated to make any sale
pursuant to any such notice. Secured Party may, without notice or
publication, adjourn any public or private sale or cause the same to
be adjourned from time to time by announcement at the time and place
fixed for the sale, and such sale may be made at any time or place to
which the same shall be so adjourned.
(e) In case of any sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold
may be retained by Secured Party until the selling price is paid by
the purchaser thereof, but Secured Party shall not incur any liability
in case of the failure of such purchaser to take up and pay for the
Collateral so sold and, in case of any such failure, such Collateral
may again be sold upon like notice.
(f) Upon the occurrence and during the continuance of an
Event of Default, Secured Party is expressly granted the right to hold
the Collateral as security for the Indebtedness, and to receive the
monies, income, proceeds or benefits attributable or accruing thereto
and to apply the same toward payment of the Indebtedness in such order
or manner as Secured Party may elect. All rights to marshaling of
assets of Debtor, including any such right with respect to the
Collateral, are hereby waived.
(g) All recitals in any instrument of assignment or any
other instrument executed by Secured Party incident to sale, transfer,
assignment, lease or other disposition or utilization of the
Collateral or any part thereof hereunder shall be prima facie evidence
of the matter stated therein, no other proof shall be required to
establish full legal propriety of the sale or other action or of any
fact, condition or thing incident thereto, and all prerequisites of
such sale or other action and of any fact, condition or thing incident
thereto shall be presumed conclusively to have been performed or to
have occurred.
(h) Should Secured Party elect to exercise its rights
under said Uniform Commercial Code as to part of the personal property
and fixtures described herein, this election shall not preclude
Secured Party or the Trustee from exercising the rights and remedies
granted by the preceding paragraphs of this instrument as to the
remaining personal property and fixtures.
(i) Secured Party may, at its election, at any time after
delivery of this instrument, sign one or more photocopies hereof in
order that such photocopies may be used as a financing statement under
said Uniform Commercial Code. Such signature by Secured Party may be
placed between the last sentence of this instrument and Debtor's
acknowledgment or may follow Debtor's acknowledgment. Secured Party's
signature need not be acknowledged and is not necessary to the
effectiveness hereof as a deed of trust, mortgage, assignment, pledge
or security agreement.
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(j) So long as any amount remains unpaid on the
Indebtedness, Debtor will not execute or file in any public office any
financing statement(s) affecting the Collateral other than financing
statements in favor of Secured Party hereunder, unless the prior
written specific consent and approval of Secured Party shall have
first been obtained which consent and approval shall not be
unreasonably withheld with respect to financing statements in favor of
operators required to be executed by Mortgagor under operating
agreements pertaining to the Mortgaged Property.
(k) Secured Party is authorized to file, in any
jurisdiction where Secured Party deems it necessary, a financing
statement or statements, and at the request of Secured Party, Debtor
will join Secured Party in executing one or more financing statements
pursuant to said Uniform Commercial Code in form satisfactory to
Secured Party, and will pay the cost of filing or recording this or
any other instrument, as a financing statement, in all public offices
at any time and from time to time whenever filing or recording of any
financing statement or of this instrument is deemed by Secured Party
to be necessary or desirable.
(l) Without in any manner limiting the generality of any
of the other provisions of this Mortgage: (i) some portions of the
goods described or to which reference is made herein are or are to
become fixtures on the Lands; (ii) the security interests created
hereby under applicable provisions of the Uniform Commercial Code of
one or more of the jurisdictions in which the Mortgaged Property is
situated will attach to Hydrocarbons or the accounts resulting from
the sale thereof at the wellhead or minehead located on the Lands;
(iii) this instrument is to be filed or filed of record in the real
estate records as a financing statement; (iv) Debtor is the record
owner of the real estate or interests in the real estate comprised of
the Leases and the Lands described in Exhibit A and (v) the name and
address of each of the Secured Party and Debtor is set forth on the
cover page hereof.
(m) Debtor hereby irrevocably designates and appoints
Secured Party as its attorney-in-fact, with full power of
substitution, for the purposes of carrying out the provisions of this
Mortgage and taking any action and executing any instrument that
Secured Party may deem necessary or advisable to accomplish the
purposes hereof, which appointment as attorney-in-fact effective upon
the occurrence and during the continuance of an Event of Default (but
the determination of an Event of Default by the Secured Party shall as
to all parties for the purposes hereof be conclusive as to the
occurrence of an Event of Default) and is irrevocable and coupled with
an interest.
(n) Without limiting the generality of the foregoing,
Debtor hereby irrevocably authorizes and empowers Secured Party, upon
the occurrence and during the continuance of an Event of Default, at
the expense of Debtor, either in Secured Party's own name or in the
name of Debtor, at any time and from time to time (a) to ask, demand,
receive, receipt, give
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acquittance for, settle and compromise any and all monies which may be
or become due or payable or remain unpaid at any time or times to
Debtor under or with respect to the Collateral; (b) to endorse any
drafts, checks, orders or other instruments for the payment of money
payable to Debtor on account of the Collateral (including any such
draft, check, order or instrument issued by an insurance company
payable jointly to Debtor and Secured Party); and (c) in the
discretion of Secured Party, to settle, compromise, prosecute or
defend any action, claim or proceeding, or take any other action, all
either in its own name or in the name of Debtor or otherwise, which
Secured Party may deem to be necessary or advisable for the purpose of
exercising and enforcing its powers and rights under this Mortgage or
in furtherance of the purposes hereof, including any action which by
the terms of this Mortgage is to be taken by Debtor. Nothing in this
Mortgage shall be construed as requiring or obligating Secured Party
to make any demand or to make any inquiry as to the nature or
sufficiency of any payment received by it or to present or file any
claim or notice, or to take any other action with respect to any of
the Collateral or the amounts due or to become due under any thereof,
or to collect or enforce the payment of any amounts assigned to it or
to which it may otherwise be entitled hereunder at any time or times.
(o) Secured Party shall incur no liability as a result of
the sale of the Collateral, or any part thereof, at any private sale.
Subject to Section 7.10, Debtor hereby waives, to the extent permitted
by applicable law, any claims against Secured Party arising by reason
of the fact that the price at which the Collateral may have been sold
at such a private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate amount of the
Indebtedness, even if Secured Party accepts the first offer received
and does not offer such Collateral to more than one offeree if such
sale is otherwise commercially reasonable.
(p) Without precluding any other methods of sale, Debtor
acknowledges that the sale of the Collateral shall have been made in a
commercially reasonable manner if conducted in conformity with
reasonable commercial practices of Mortgagee disposing of similar
property. Secured Party shall not be liable for any depreciation in
the value of the Collateral.
ARTICLE IX
MISCELLANEOUS
9.1 Successor Trustees. The Trustee may resign in
writing addressed to the Mortgagee or be removed at any time with or without
cause by an instrument in writing duly executed by the Mortgagee. In case of
the death, resignation or removal of a Trustee, a successor Trustee or Trustees
may be appointed by the Mortgagee from time to time by instrument of
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substitution complying with any applicable requirements of law, and in the
absence of any such requirement without other formality than appointment and
designation in writing. Such appointment and designation shall be full
evidence of the right and authority to make the same and of all facts therein
recited, and upon the making of any such appointment and designation, this
conveyance shall vest in the named successor Trustee or Trustees all the estate
and title of the prior Trustee or Trustees in all of the Mortgaged Property and
such successor Trustee or Trustees shall thereupon succeed to all the rights,
powers, privileges, immunities and duties hereby conferred upon the Trustee
named herein. All references herein to the Trustee shall be deemed to refer to
the Trustees from time to time acting hereunder.
9.2 Legal Proceedings By and Against Trustee. The
Trustee shall not be required to take any action for the enforcement of this
instrument or the exercise of any rights or remedies hereunder or to appear in
or defend any action, suit or other proceeding in connection therewith, where,
in the opinion of the Trustee, such action will be likely to involve him in
expense or liability, unless the Trustee be tendered security and indemnity
satisfactory to him against cost, expense or liability in connection therewith.
9.3 Responsibilities of Trustee. It shall be no part of
the duty of the Trustee to see to any recording, filing or registration of this
instrument or of any instrument supplemental hereto, or to see to the payment
of or be under any duty in respect of any tax or assessment or other
governmental charge which may be levied or assessed on the Mortgaged Property
or against Mortgagor or to see to the performance or observance by Mortgagor of
any of the covenants or agreements herein contained. The Trustee shall not be
responsible for the execution, acknowledgment or validity of this instrument or
of any instrument supplemental hereto, or for the sufficiency of the security
purported to be created hereby, and the Trustee makes no representation in
respect thereof. The Trustee shall have the right to consult with counsel upon
any matters arising hereunder and shall be fully protected in relying as to
legal matters on the advice of such counsel. The Trustee shall not incur any
personal liability hereunder except for his own willful misconduct; and the
Trustee shall have the right to rely on any instrument, document or signature
authorizing or supporting any action taken or proposed to be taken by him
hereunder which is believed by him in good faith to be genuine.
9.4 Advances by the Mortgagee or Trustee. Each and every
covenant herein contained shall be performed and kept by Mortgagor solely at
Mortgagor's expense. If Mortgagor shall fail to perform or keep any of the
covenants of whatsoever kind or nature contained in this instrument and any
applicable cure period has expired, the Mortgagee, the Trustee or any receiver
appointed hereunder, may, but shall not be obligated to, make advances to
perform the same in Mortgagor's behalf. The Mortgagee shall notify Mortgagor
as soon as practicable of any such action taken by the Mortgagee, provided that
the failure of the Mortgagee to so notify Mortgagor shall not relieve Mortgagor
of any of its obligations hereunder. Mortgagor hereby agrees to repay such
sums
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<PAGE> 23
within thirty (30) days of demand plus interest until paid at the Variable
Rate; provided, however, that in no event shall such interest rate ever exceed
the Highest Lawful Rate. No such advance shall be deemed to relieve Mortgagor
from any default hereunder.
9.5 Defense of Claims. Mortgagor will notify the Trustee
and the Mortgagee, in writing, promptly of the commencement of any legal
proceedings affecting the Lien hereof or any material legal proceeding
affecting the Mortgaged Property, or any part thereof, and will take such
action, employing attorneys agreeable to the Mortgagee, as may be necessary to
preserve Mortgagor's, the Trustee's and the Mortgagee's rights affected
thereby; and should the Mortgagor fail or refuse to take any such action, the
Trustee or the Mortgagee may, upon giving prior written notice thereof to
Mortgagor, take such action on behalf and in the name of Mortgagor. Moreover,
the Mortgagee, or the Trustee on behalf of the Mortgagee, may take such
independent action in connection therewith as they may in their discretion deem
proper.
9.6 Releases. If the Indebtedness shall be fully paid
and the covenants herein contained shall be well and truly performed, then the
Mortgagee (without the joinder of the Trustee or the Mortgagee, which shall not
be required) in such case shall, upon the request of Mortgagor, deliver to
Mortgagor, proper instruments acknowledging release and satisfaction of this
Mortgage. Any partial release of Mortgaged Property from the Lien created by
this Mortgage shall be effective upon execution thereof by the Mortgagee
without the joinder of the Trustee or the Mortgagee.
9.7 Instrument an Assignment, etc. This instrument shall
be deemed to be and may be enforced from time to time as an assignment, chattel
mortgage, hypothecation, contract, deed of trust, conveyance, financing
statement, pledge or security agreement, and from time to time as any one or
more thereof in order fully to effectuate the lien and security interest
granted hereby and the purposes and agreements herein set forth.
9.8 Usury Savings. In no event shall any provision of
this instrument, the Note, the Note, or any other instrument evidencing or
securing the Indebtedness ever obligate Mortgagor to pay or allow the Mortgagee
to collect interest on the Note or any other indebtedness secured hereby at a
rate greater than the maximum non-usurious rate permitted by applicable law
(herein referred to as the "Highest Lawful Rate"), or obligate Mortgagor to pay
any amounts that would be held or deemed to constitute interest under
applicable law which, when added to the interest payable on the Note or any
other indebtedness secured hereby, would be held to constitute the payment by
Mortgagor of interest at a rate greater than the Highest Lawful Rate; and this
provision shall control over any provision to the contrary. To the extent the
Highest Lawful Rate is determined by reference to the laws of the State of
Texas, same shall be determined by reference to the indicated (weekly) rate
ceiling (as defined and described in Texas Revised Civil Statutes Article
5069-1.04, as amended) at the applicable time in effect.
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<PAGE> 24
9.9 Separability. If any provision hereof or of the Note
is invalid or unenforceable, the other provisions hereof or of the Note shall
remain in full force and effect, and the remaining provisions hereof shall be
liberally construed in favor of the Trustee and the Mortgagee in order to
effectuate the provisions hereof, and the invalidity of any provision hereof.
9.10 Rights Cumulative. Each and every right, power and
remedy herein given to the Trustee or the Mortgagee shall be cumulative and not
exclusive; and every right, power and remedy whether specifically herein given
or otherwise existing may be exercised from time to time, and so often and in
such order as may be deemed expedient by the Trustee or the Mortgagee as the
case may be, and the exercise, or the beginning of the exercise, of any such
right, power or remedy shall not be deemed a waiver of the right to exercise,
at the same time or thereafter, any other right, power or remedy. No delay or
omission by the Trustee or the Mortgagee in the exercise of any right, power or
remedy shall impair any such right, power or remedy or operate as a waiver
thereof or of any other right, power or remedy then or thereafter existing.
9.11 Binding Effect. This instrument is binding upon
Mortgagor and Mortgagor's successors and assigns and shall inure to the benefit
of the Trustee, his successors and assigns, the Mortgagee, its successors and
assigns, and the provisions hereof shall likewise constitute covenants running
with the land.
9.12 Article and Section Headings. The article and
section headings in this instrument are inserted for convenience and shall not
be considered a part of this instrument or used in its interpretation.
9.13 Counterparts. This instrument may be executed in any
number of counterparts, each of which shall for all purposes be deemed to be an
original.
9.14 Notices. Any notice, request, demand or other
instrument which may be required or permitted to be given or served upon
Mortgagor or the Mortgagee shall be in writing (including telegraphic
communications) and mailed, telegraphed, telecopied, facsimile transmitted or
delivered as follows:
if to Mortgagor --
Mr. James G. Floyd
1331 Lamar, Suite 1065
Houston, Texas 77010
Telecopier: (713) 652-4017
if to Mortgagee--
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<PAGE> 25
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attention: Mr. James F. Westmoreland
Telecopier: (713) 652-4017
or as to each party, at such other address as such party shall designate in a
written communication to each of the other parties hereto. All such
communications shall be effective, in the case of written or telegraphed
communications, when deposited in the mails or delivered to the telegraph
company, respectively, and, in the case of a communication by telecopy or
facsimile transmission, when telecopied or transmitted against receipt of a
confirmation, in each case addressed as aforesaid.
9.15 Amendments, Modifications and Waivers, etc. This
instrument may be amended, modified, revised, discharged, released or
terminated only by a written instrument or instruments executed by Mortgagor
and the Mortgagee, but without the joinder of the Trustee which shall not be
required. Any alleged amendment, revision, discharge, release or termination
which is not so documented shall not be effective as to any party. No waiver
of any provision of this Mortgage nor consent to any departure by Mortgagor
therefrom shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given.
9.16 Survival of Agreements. All representations and
warranties of Mortgagor herein and all covenants and agreements herein not
fully and finally performed before the effective date or dates of this Mortgage
shall survive such date or dates. All covenants and obligations in this
Mortgage are intended by the parties to be, and shall be construed as,
covenants running with the Lands.
9.17 Governing Law. THIS MORTGAGE SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE
OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
9.18 Note. To the fullest extent possible, the terms and
provisions of the Note shall be read together with the terms and provisions of
this Mortgage so that the terms and provisions of this Mortgage do not conflict
with the terms and provisions of the Note; provided, however, if any of the
terms and provisions of this Mortgage conflict with any terms or provisions of
the Note, the terms or provisions of the Note shall govern and control for all
purposes, provided that (i) the inclusion of additional terms, provisions,
covenants and warranties, supplemental rights or remedies in favor of the
Trustee or Mortgagee in this Mortgage shall not be deemed to be a conflict with
the
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<PAGE> 26
Note and (ii) the provisions of this Mortgage shall govern and control for all
purposes in the event of a conflict with the Note to the extent that any
provision contained in the Note would negate or adversely affect the
enforceability, validity, perfection or priority of the Lien and security
interest created by this Mortgage.
IN WITNESS WHEREOF, Mortgagor has executed or caused to be
executed this Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement in multiple originals on the date set forth in the
acknowledgment below, to be effective, however, as of the 2nd day of July,
1996.
MORTGAGOR:
________________________________________
James G. Floyd, Individually
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<PAGE> 27
STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on August ___, 1996
by James G. Floyd.
________________________________________
Notary Public in and for
State of Texas
Printed Name:___________________________
My Commission Expires:
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<PAGE> 28
DEED OF TRUST, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
DATED AS OF JULY 2, 1996
FROM
JAMES G. FLOYD
(MORTGAGOR AND DEBTOR)
TO
JAMES F. WESTMORELAND, TRUSTEE
AND
THE HOUSTON EXPLORATION COMPANY
(MORTGAGEE AND SECURED PARTY)
________________________________________________________________________________
The mailing address of the above-named Mortgagee and Secured Party is 1331
Lamar, Suite 1065, Houston, Texas 77010, the mailing address of Mortgagor and
Debtor is 11534 Shadow Way, Houston, Texas 77024 and the mailing address of the
Trustee is 1331 Lamar, Suite 1065, Houston, Texas 77010.
This instrument secures payment of future advances.
The oil and gas interests included in the Mortgaged Property will be financed
at the wellheads of the wells located on the properties described in Exhibit A
hereto, and this financing statement is to be filed or filed for record, among
other places, in the real estate records.
The Mortgagor has an interest of record in the real estate concerned, which is
described in by reference to the Leases in Exhibit A hereto.
ATTENTION OF RECORDING OFFICERS: This instrument is a Mortgage and Deed of
Trust of both real and personal property and is, among other things, a Security
Agreement and Financing Statement under the Uniform Commercial Code. Some of
the personal property constituting a portion of the Mortgaged Property is or is
to be affixed to the Lands covered by the Leases described in Exhibit A hereto,
and this financing statement is to be filed or filed for record, among other
places, in the real estate records. THIS INSTRUMENT CREATES A LIEN ON RIGHTS
IN, OR RELATING TO, LANDS OF THE MORTGAGOR WHICH ARE COVERED BY THE LEASES
DESCRIBED IN EXHIBIT A HERETO AND, WHERE APPLICABLE, IS TO BE TRACT INDEXED
WITH RESPECT TO ALL LANDS DESCRIBED IN SAID EXHIBIT A.
Recorded counterparts should be returned to:
Jeffrey L. Wade
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
<PAGE> 29
REVOLVING CREDIT NOTE
$4,000,000 July 2, 1996
FOR VALUE RECEIVED, James G. Floyd, a resident of the State of
Texas ("Borrower"), promises to pay to the order of The Houston Exploration
Company, a Delaware corporation ("Lender"), at 1331 Lamar, Suite 1065, Houston,
Harris County, Texas, the principal sum equal to the lesser of (i) Four Million
and No/100 Dollars ($4,000,000.00) or (ii) so much thereof as may be advanced
under the terms hereof, together with interest on said principal, or so much
thereof as may be from time to time advanced and outstanding, at the variable
rate (the "Variable Rate") equal to the Company Rate (as hereinafter defined),
except as otherwise hereinbelow provided, each change in the Variable Rate to
be effective, without notice to Borrower, on the effective date of each change
in the Company Rate; provided, however, that in no event shall the Variable
Rate exceed the Maximum Rate (defined below). As used herein, the term
"Maximum Rate" means the maximum rate of nonusurious interest allowed to be
charged by Lender to Borrower under applicable law. The term "Company Rate" as
used herein shall mean the rate per annum actually charged to Lender (excluding
bank fees and other similar charges) on loans under that certain Revolving
Credit Facility dated as of July 2, 1996, between Lender and Texas Commerce
Bank National Association (the "Bank"), as amended from time to time, or any
successor or replacement credit facility automatically without notice to
Borrower, fluctuating upward or downward on the day of each such change in
Lender's cost of funds under the above referenced Revolving Credit Facility
(the "Bank Credit Facility"), not to exceed, however, notwithstanding any
change in Lender's cost of funds under the Bank Credit Facility (as may be
subsequently agreed to by Lender) the greater of either (a) a fluctuating rate
per annum equal to the higher of the Bank's Federal Funds Rate as set forth in
the Bank Credit Facility plus one-half of one percent (.5%) or the Bank's
"prime rate" from time to time in effect, or (b) the published LIBOR rate as
set forth in the Bank Credit Facility plus one and one eighth percent (1.125%).
This Revolving Credit Note, together with any and all
renewals, extensions or amendments hereto (this "Note"), has been executed and
delivered in connection with the agreement and commitment of Lender to lend up
to the principal sum hereof to Borrower for Borrower's acquisition of an
undivided five percent (5%) of the interest acquired by Lender from TransTexas
Gas Corporation under the terms of that certain Purchase and Sale Agreement
dated June 21, 1996 (such undivided five percent working interest is sometimes
referred to herein as the "TransTexas Interest"), and for all other costs and
expenses of Borrower's owning and developing the TransTexas Interest,
including, without limitation, all leasehold costs, including, as applicable,
delay rentals, and any and all exploration, seismic, drilling, completion,
testing, operating, maintenance, development or plugging and abandonment costs
or expenses, and any capital costs attributable thereto (but only if Borrower
has consented to such costs and expenses under the Joint Operating Agreement).
Lender agrees, under the terms and conditions hereof, to make revolving loans
to Borrower (collectively, the "Loans," individually, a "Loan") on an ongoing
basis as costs or expenses related to the TransTexas Interest are incurred by
Borrower, from time to time until the maturity hereof, in an aggregate amount
outstanding not to exceed at any time an amount equal to $4,000,000. Each
advance by Lender to Borrower shall constitute a Loan. Borrower may borrow,
repay and re-borrow under the terms of this Note, so long as the aggregate
outstanding principal balance from time to time does not exceed $4,000,000, and
each Loan made by Lender to Borrower and all payments made on account of the
principal amount hereof shall be entered by Lender in its records or on a
schedule (or a continuation thereof) attached to this Note, provided, however,
that prior to any transfer of this Note, Lender shall endorse
<PAGE> 30
the amount and maturity of any outstanding Loans on the schedule (or a
continuation thereof) and shall attach same to this Note.
Lender is hereby authorized to collect and receive all
proceeds or other amounts due Borrower in respect of the TransTexas Interest.
After deducting Borrower's proportionate share of the lease operating expenses
attributable to the TransTexas Interest from any proceeds received by Lender
(which lease operating expenses shall be paid by Lender out of such proceeds),
Lender shall apply sixty-five percent (65%) of the resulting net proceeds due
Borrower each month to the payment of Loans made hereunder, first to interest
accrued hereunder, then to principal. Lender shall pay the remaining
thirty-five percent (35%) of the net proceeds to Borrower on or before
forty-five (45) days after the end of the month in which production occurred.
On July 2, 2006, the unpaid principal amount of this Note, together with all
unpaid accrued interest hereon, shall be fully and finally due and payable.
Borrower may prepay all or any part of the unpaid principal balance and unpaid
accrued interest owing on this Note at any time without penalty.
This Note is secured by that certain Deed of Trust, Assignment
of Production, Security Agreement and Financing Statement (the "Mortgage") of
even date herewith executed by Borrower in favor of James F. Westmoreland, as
Trustee, evidencing a lien on the TransTexas Interest more particularly
described therein, and evidencing a security interest in certain personal
property described therein and related to the TransTexas Interest (the
"Mortgaged Property"). Reference is hereby made to the Mortgage for a
description of the Mortgaged Property covered thereby and the nature and extent
of the security and the rights and powers of the holder of this Note with
regard to such security. All instruments securing this Note are hereafter
referred to collectively as the "Loan Documents."
No security taken for the payment of this Note shall affect
the liability of any person liable for payment of this Note. Lender may
require payment by Borrower and any surety, endorser or guarantor hereof
without first resorting to any security for this Note, and no judgment taken
against any such person shall terminate any lien of Lender in said security.
Borrower consents to the release or discharge of any person liable for payment
of this Note, whether such liability is direct or collateral, and to the
release or impairment by Lender of any collateral for this Note.
Interest charges will be calculated on amounts advanced
hereunder on the actual number of days that said amounts are outstanding on the
basis of a 365 or 366 day year, as applicable. Borrower and the holder of this
Note specifically intend and agree to limit contractually the amount of
interest payable under this Note, the Mortgage and any other instruments
evidencing or securing the indebtedness evidenced hereby to the Maximum Rate.
Therefore, none of the terms of this Note, the Mortgage or any other
instruments evidencing or securing the indebtedness evidenced hereby shall ever
be construed to create a contract to pay interest at a rate in excess of the
Maximum Rate, and neither Borrower nor any other party liable or to become
liable for the indebtedness evidenced hereby, or under any other instruments
and agreements related thereto, shall ever be liable for interest in excess of
the Maximum Rate, and the provisions of this paragraph shall control over all
other provisions of this Note and the other Loan Documents. If any amount of
interest taken or received by the holder of this Note shall be in excess of the
Maximum Rate, then such excess shall be deemed to have been the result of a
mathematical error by all parties hereto and shall, at the election of the
holder of this Note, either be applied as credit against the then unpaid
principal amount of this Note or refunded promptly to the party paying such
amount. All amounts paid or agreed to be paid in connection with such
transactions which would under applicable law be deemed "interest" shall, to
the extent permitted by such applicable law, be amortized, prorated,
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<PAGE> 31
allocated, and spread throughout the stated term of this Note. The term
"applicable law" as used in this paragraph means that law in effect from time
to time which lawfully permits the charging and collection of the highest
permissible lawful, nonusurious rate of interest on the transactions herein
contemplated, including laws of the State of Texas and of the United States of
America. In the event applicable law provides for a ceiling under Tex. Rev.
Civ. Stat. Ann., art. 5069-1.04, that ceiling shall be the highest permitted
rate based upon the "indicated rate ceiling."
Interest shall accrue from the date Loan proceeds are advanced
to the date that payment in immediately available funds is actually received by
Lender. All past-due principal and interest on this Note shall bear interest
from maturity of such principal or interest at the Variable Rate as defined
herein, plus two percent (2%) per annum (the "Default Rate"). In the event that
there is a default in any payment of this Note or upon the occurrence of any
other Event of Default (as defined in the Mortgage), then, upon the expiration
of thirty (30) days prior written notice and opportunity to cure in the event
of a monetary default, or sixty (60) days prior written notice and opportunity
to cure in the event of a non-monetary default, Lender shall be entitled to all
remedies provided in the Mortgage.
THIS NOTE, THE MORTGAGE AND ANY OTHER INSTRUMENTS EXECUTED IN
CONNECTION WITH THE LOAN EVIDENCED BY THIS NOTE REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED EFFECTIVE as of the day and year written above.
________________________________________
James G. Floyd, Individually
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<PAGE> 1
EXHIBIT 10.25
CONTRIBUTION AGREEMENT
This Contribution Agreement, dated as of July ___, 1996 (this
"Agreement"), is entered into by and between The Houston Exploration Company, a
Delaware corporation ("Houex"), and James G. Floyd, a resident of the State of
Texas ("Floyd") whose is married to Glenna S. Floyd.
R E C I T A L S:
WHEREAS, Houex (formerly known as Brooklyn Union Exploration
Company, Inc.) and Floyd are parties to that certain Conveyance of After
Program Payout Working Interests dated January 13, 1994 (the "Conveyance
Agreement") whereby Houex assigned to Floyd an undivided six and three-fourths
percent (6.75%) working interest in Houex's interest in certain leases
described on Exhibit A attached hereto (the "Leases") which are part of the
1993 Program (as defined in the Conveyance Agreement) (the "Conveyed
Interests");
WHEREAS, Houex intends to offer and sell shares of its Common
Stock, $0.01 par value (the "Stock"), in a registered initial public offering
(the "Offering");
WHEREAS, Floyd desires to convey, and Houex desires to accept,
all of the Conveyed Interests in exchange for shares of restricted Stock, upon
the terms and subject to the conditions set forth below; and
WHEREAS, the parties expect the contribution of properties by
Floyd hereunder in exchange for stock shall be treated for federal income tax
purposes as a non-taxable contribution under Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code").
A G R E E M E N T:
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, Seller and Floyd agree as follows:
1. Subscription. Upon execution of this Agreement and the
compliance by the parties hereto with the applicable terms and conditions
hereof (a) Houex shall (i) issue and deliver one or more certificates
registered in the name of Floyd, containing the legend referred to below, which
certificate(s) shall collectively represent the number of shares of Stock
which, based upon the initial offering price in the Offering, have a value of
TWO MILLION TWO HUNDRED FIFTY THOUSAND AND NO/100 Dollars ($2,250,000.00) (such
certificates(s) referred to herein collectively as the "Certificate") and (b)
in consideration for the issuance to Floyd of the shares of the Stock, Floyd
shall contribute, assign and deliver to Houex all of the Conveyed Interests and
all other rights of Floyd with respect to the Leases described in Exhibit A
attached hereto or any other rights with respect to the 1993 Program. Each
Certificate shall bear the following legend:
<PAGE> 2
"No sale, offer to sell, transfer or other disposition of the shares
represented by this certificate shall be made unless a Registration
Statement under the Securities Act of 1933, as amended (the "Act"),
with respect to such shares is then in effect or unless the holder
obtains an opinion of counsel in form and substance reasonably
acceptable to the Corporation that such disposition is exempt from
registration under the Act or any applicable state "Blue Sky" law.
The Corporation will furnish to any stockholder, upon request and
without charge a full statement of the designation, preferences,
limitations and relative rights of the shares of each class of shares
authorized to be issued by the Corporation."
2. Assignment of Conveyed Interests. Floyd hereby grants,
bargains, sells, conveys and assigns to Houex, effective upon closing of the
Offering, all of his right, title and interest in and to the Conveyed Interests
and any and all other interests related to the 1993 Program which were
previously conveyed to Floyd under the Conveyance Agreement.
3. Assumption of Liabilities. Houex hereby assumes and agrees to
satisfy all obligations under the Leases related to the Conveyed Interests.
4. Representations and Warranties of the Houex. Houex represents
and warrants to and agrees with Floyd as follows:
(a) Houex is a corporation duly organized and validly
existing under the laws of the State of Delaware.
(b) The shares of Stock to be issued as provided herein
have been duly authorized and, when issued and paid for as provided herein,
will be validly issued, fully paid and non-assessable.
(c) Houex has the full corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
Houex has taken all corporate action necessary or appropriate for it to
authorize the execution, delivery and performance of this Agreement. This
Agreement constitutes a legal, valid and binding obligation of Houex,
enforceable in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and by general principles of
equity.
(d) The execution, delivery and performance by Houex of
this Agreement are within Houex's corporate powers, have been duly authorized
by all necessary corporate action of Houex, require, in respect of Houex, no
action by or in respect of, or filing with, any governmental body, agency or
official and do not contravene, or constitute a default under, any provision of
law or regulation applicable to Houex or under the Charter or Bylaws of Houex
or any judgment,
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<PAGE> 3
injunction, order, decree or material agreement binding upon Houex or result in
the creation or imposition of any lien, security interest or other charge or
encumbrance on any asset of Houex.
5. Representations and Warranties of the Floyd. Floyd represents
and warrants to and agrees with Houex as follows:
(a) Floyd has full power and authority to execute and
deliver this Agreement and to perform his obligations hereunder. This Agreement
constitutes a legal, valid and binding obligation of Floyd, enforceable in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and by general principles of equity.
(b) The execution, delivery and performance by Floyd of
this Agreement require, in respect of Floyd, no action by or in respect of, or
filing with, any governmental body, agency or official and do not contravene,
or constitute a default under, any provision of law or regulation applicable to
Floyd or result in the creation or imposition of any lien, security interest or
other charge or encumbrance on the Conveyed Interests.
(c) Floyd (i) understands that upon issuance, the shares
of Stock to be issued to Floyd will not be registered under the Act, or under
any state securities laws, and such shares are being offered and sold in
reliance upon federal and state exemptions, (ii) is a sophisticated investor
with knowledge and experience in business and financial matters, and (iii) is
the President and Chief Executive Officer of Houex and has access to
information concerning Houex necessary or desirable in order to evaluate the
merits and the risks inherent in holding the Stock.
6. Other Interests Not Affected. Houex acknowledges that Floyd
may have, and this Agreement shall not affect, (i) other net profit or
overriding royalty interests with respect the Leases obtained by virtue of
Floyd's employment with Houex and (ii) after program payout working interests
for years other than 1993.
7. Further Assurances. Floyd agrees to execute and deliver such
other and further instruments and will use his best efforts to do such other
and further acts as in the reasonable opinion of the Houex may be necessary or
desirable to carry out more effectually the purposes of this instrument,
including, without limiting the generality of the foregoing, (a) prompt
correction of any defect which may hereafter be discovered in the title to or
description of the assigned interests or any part thereof or in the execution
and acknowledgment of this instrument or other document executed in connection
herewith, (b) prompt execution and delivery of all division or transfer orders
which in the opinion of Houex are needed to transfer effectively to Houex the
proceeds of production from the Conveyed Interests and (c) obtain any necessary
governmental approvals.
-3-
<PAGE> 4
8. Tax Free Contribution. The parties hereto agree that the
contribution of the Conveyed Interests by Floyd shall be treated as a tax free
contribution in exchange for stock under Section 351 of the Code.
9. Miscellaneous.
9.1. Notices. Any notice, request, instruction,
correspondence or other document to be given hereunder by any party to another
(herein collectively called "Notice") shall be in writing and delivered
personally or mailed by certified mail, postage prepaid and return receipt
requested, or by telegram or telecopier, as follows:
If to Houex to:
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attention: James F. Westmoreland
If to Floyd to:
Mr. James G. Floyd
1331 Lamar, Suite 1065
Houston, Texas 77010
Notice given by personal delivery or mail shall be effective upon actual
receipt. Notice given by telegram or telecopier shall be effective upon actual
receipt if received during the recipient's normal business hours, or at the
beginning of the recipient's next business day after receipt if not received
during the recipient's normal business hours. All Notices by telegram or
telecopier shall be confirmed promptly after transmission in writing by
certified mail or personal delivery. Any party may change any address to which
Notice is to be given to it by giving notice as provided above of such change
of address.
9.2. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
9.3. Headings. The section headings herein are for
convenience only and shall not affect the construction hereof.
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9.4. No Assignment. The rights and obligations of the
parties hereunder may not be assigned without the prior written consent of the
other party.
9.5. No Third Party Beneficiaries. Each party hereto
intends that this Agreement shall not benefit or create any right or cause of
action in or on behalf of any party other than the parties hereto.
9.6. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law, but if any provision of this Agreement, or the
application thereof to any person or under any circumstances, shall be invalid
or unenforceable to any extent under applicable law, and the extent of such
invalidity or unenforceability does not destroy the basis for the bargain
between the parties as expressed herein, then such provision shall be deemed
severed from this Agreement with respect to such person or such circumstance,
without invalidating the remainder of this Agreement or the application of such
provision to other persons or circumstances, and a new provision shall be
deemed substituted in lieu of the provision so severed which new provision
shall, to the extent possible, accomplish the intent of the parties hereto as
evidenced by the provision so severed.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first written above.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
James G. Floyd, Individually
--------------------------------------
Glenna S. Floyd, Individually
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EXHIBIT A
See Attachments A-1, A-2, A-3 and A-4 attached hereto.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
August 26th, 1996
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EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-4437) of our report dated July 2, 1996, on our audits of the
Historical Summaries of the interests in the oil and gas revenues and direct
operating expenses of the properties to be acquired by the Houston Exploration
Company from TransTexas Gas Corporation for the three years ended December 31,
1995. We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 26th, 1996
