<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-4437
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
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 MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO OFFERING PRICE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per 8,050,000
share........................... shares $16.00 $128,800,000 $44,414(3)
==================================================================================================
</TABLE>
(1) Includes 1,050,000 shares subject to purchase by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act.
(3) Of such amount, $31,645 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 JULY 3, 1996
<TABLE>
<S> <C> <C>
LOGO 7,000,000 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 71% of the outstanding shares of Common Stock
(approximately 69% 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 $14.00 and $16.00. 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.
Application has been made to list the Common Stock on the New York Stock
Exchange.
---------------------
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 1,050,000 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 3.11 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. As of
May 31, 1996, net production from the Company's Gulf of Mexico properties was
approximately 52,400 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 22
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 169,575 gross
(96,780 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. As of May 31,
1996, net production from the Company's onshore properties was approximately
72,500 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 net 95% working interest in the approximately 156
wells on such properties. The net purchase price of $59.1 million 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 closing date. The purchase price for the
TransTexas Acquisition was paid in cash, financed by borrowings under the
Company's credit facility.
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
5
<PAGE> 8
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 787,800 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 71% of the outstanding shares of Common
Stock (approximately 69% 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.................... 7,000,000 shares
Common Stock to be outstanding after this Offering..... 27,200,000 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>
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(1) Assumes 787,800 shares to be issued in connection with the Soxco Acquisition
(based upon an assumed initial public offering price of $15.00 per share).
Does not include (i) 1,360,000 shares of Common Stock (1,412,500 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 three months ended March 31, 1995 and 1996 and as of
March 31, 1996 are derived from unaudited financial statements of the Company.
The results for the three months ended March 31, 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, THREE MONTHS ENDED MARCH 31,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- --------- ------- ------- ---------
(IN THOUSANDS)
<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 $ 9,498 $ 9,980 $19,999
Other............................ 799 467 1,778 1,778 253 233 233
------- ------- ------- --------- ------- ------- ---------
Total revenues............ 38,261 42,222 41,209 77,041 9,751 10,213 20,232
Expenses:
Lease operating.................. 4,477 5,344 5,468 11,580 1,418 1,828 3,608
Depreciation, depletion and
amortization................... 23,225 25,365 21,969 45,859 5,626 5,674 10,037
General and administrative,
net............................ 2,454 3,460 3,486 3,926 869 1,492 1,537
Nonrecurring charge(2)........... -- -- 12,000 12,000 -- -- --
------- ------- ------- --------- ------- ------- ---------
Total operating
expenses................ 30,156 34,169 42,923 73,365 7,913 8,994 15,182
------- ------- ------- --------- ------- ------- ---------
Income (loss) from operations...... 8,105 8,053 (1,714) 3,676 1,838 1,219 5,050
Interest expense, net.............. 1,764 2,102 2,398 1,924 621 461 343
------- ------- ------- --------- ------- ------- ---------
Income (loss) before income taxes.. 6,341 5,951 (4,112) 1,752 1,217 758 4,707
Income tax provision (benefit)..... 1,790 597 (3,809) (1,757) 61 (218) 1,164
------- ------- ------- --------- ------- ------- ---------
Net income (loss).................. $ 4,551 $ 5,354 $ (303) $ 3,509 $ 1,156 $ 976 $ 3,543
======= ======= ======= ======== ======= ======= ========
Pro forma net income per share..... $ 0.13 $ 0.13
Pro forma shares outstanding....... 27,200 27,200
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------
PRO
HISTORICAL FORMA(3)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Property, plant and equipment, net........................................... $228,406 $ 333,734
Total assets................................................................. 262,344 370,995
Long-term debt............................................................... 74,964 64,719
Stockholders' equity......................................................... 110,284 220,355
</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 March 31, 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.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- ----------------------------
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 4,882 5,735 10,418
Oil (Mbbls)................ 101 102 100 130 30 23 29
Total (Mmcfe).............. 23,161 23,049 21,677 46,720 5,062 5,873 10,592
Average sales prices:
Natural gas (per Mcf)(2)... $ 1.58 $ 1.79 $ 1.79 $ 1.59 $ 1.84 $ 1.67 $ 1.87
Oil (per Bbl).............. 16.96 15.85 16.54 16.65 17.39 16.26 16.49
Expenses (per Mcfe):
Lease operating............ $ 0.19 $ 0.23 $ 0.25 $ 0.25 $ 0.28 $ 0.31 $ 0.34
Depreciation, depletion and
amortization............ 1.00 1.10 1.01 0.98 1.11 0.97 0.95
General and administrative,
net..................... 0.11 0.15 0.16 0.08 0.17 0.25 0.15
</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 71% of the outstanding
shares of Common Stock (approximately 69% 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'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."
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
10
<PAGE> 13
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."
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
11
<PAGE> 14
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 dependent upon its ability to evaluate and select suitable properties
and to consummate transactions in this highly competitive environment.
12
<PAGE> 15
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
19,262,200 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 787,800 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 1,360,000 shares of Common Stock
(1,412,500 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
freely tradeable, subject to certain requirements of Rule 144. See "Shares
Eligible for Future Sale" and "Soxco Acquisition."
13
<PAGE> 16
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 41% of the Company's
natural gas production at market prices, based upon historical production as of
May 31, 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' 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.
14
<PAGE> 17
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 787,800 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 $15.00 per share are expected to be approximately $96.2
million, after deducting estimated underwriting discounts and offering expenses
($111.3 million if the Underwriters' over-allotment option is exercised in
full). Of such net proceeds, (i) approximately $72.5 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 July 3, 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 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
15
<PAGE> 18
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 March 31, 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 March 31, 1996 was approximately $122.1 million, or $6.09 per share of
Common Stock. After giving effect to the receipt of $96.2 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 $15.00 per share, the net tangible book value of the Common Stock outstanding
at March 31, 1996 would have been $8.10 per share, representing an immediate
increase in net tangible book value of $2.01 per share to the existing
stockholder and an immediate dilution of $6.09 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............................ $15.00
Pro forma net tangible book value per share before this Offering......... $ 6.09
Increase in net tangible book value per share attributable to the sale of
Common Stock in this Offering......................................... $ 2.01
Net tangible book value per share after giving effect to this Offering..... $ 8.10
Dilution in net tangible book value to the purchasers of Common Stock
offered hereby........................................................... $ 6.90
</TABLE>
The following table sets forth, as of March 31, 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.................. 19,262,200 71% $107,154,000 48% $ 5.56
Management............................ 150,000 * 2,250,000 * 15.00
Soxco................................. 787,800 3 11,817,000 5 15.00
New investors......................... 7,000,000 26 105,000,000 47 15.00
---------- --- -------- --- ------
Total....................... 27,200,000 100% $226,221,000 100% $ 8.32
========== === ======== === ======
</TABLE>
- ---------------
* Less than 1%.
The foregoing computations do not include (i) 1,360,000 shares of Common
Stock (1,412,500 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 $15.00 per share), the net tangible book value per share
before this Offering would be $6.66, the net tangible book value per share after
this Offering would be $8.47 and the dilution per share to new investors would
be $6.53.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 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 certain executive officers 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>
MARCH 31, 1996
-------------------------
HISTORICAL PRO FORMA(1)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current maturities)...................... $ 74,964 $ 64,719
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; 19,262,200 shares issued and outstanding;
27,200,000 shares issued and outstanding, as adjusted(2)(3)... 193 272
Additional paid in capital......................................... 106,961 217,099
Retained Earnings.................................................. 3,130 2,984
-------- --------
Total stockholders' equity............................... 110,284 220,355
-------- --------
Total capitalization................................... $185,248 $285,074
======== ========
</TABLE>
- ---------------
(1) Gives effect to the Offering, the TransTexas Acquisition, the Soxco
Acquisition and the issuance of shares of Common Stock to certain executive
officers of the Company, including the assumed issuance of 7,937,800 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) 1,360,000 shares of Common Stock (1,412,500 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."
17
<PAGE> 20
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 three
months ended March 31, 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 three months ended March 31, 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>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Natural gas and oil revenues............. $ 17,566 $ 21,980 $ 37,462 $ 41,755 $ 39,431 $ 9,498 $ 9,980
Other.................................... 1,295 841 799 467 1,778 253 233
-------- -------- -------- -------- -------- -------- --------
Total revenues..................... 18,861 22,821 38,261 42,222 41,209 9,751 10,213
-------- -------- -------- -------- -------- -------- --------
Expenses:
Lease operating.......................... 3,192 3,123 4,477 5,344 5,468 1,418 1,828
Depreciation, depletion and
amortization........................... 10,252 14,440 23,225 25,365 21,969 5,626 5,674
General and administrative, net.......... 3,460 2,840 2,454 3,460 3,486 869 1,492
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 7,913 8,994
Income (loss) from operations.............. 1,957 (17,279) 8,105 8,053 (1,714) 1,838 1,219
Interest expense, net...................... 1,700 1,469 1,764 2,102 2,398 621 461
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.......... 257 (18,748) 6,341 5,951 (4,112) 1,217 758
Income tax provision (benefit)............. (673) (7,440) 1,790 597 (3,809) 61 (218)
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......................... $ 930 $(11,308) $ 4,551 $ 5,354 $ (303) $ 1,156 $ 976
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Property, plant and equipment, net......... $ 92,863 $ 92,698 $127,911 $169,714 $216,678 $ 183,825 $228,406
Total assets............................... 125,491 130,154 165,031 201,678 247,496 211,459 262,344
Long-term debt............................. 34,500 40,800 46,600 65,650 71,862 66,259 74,964
Stockholder's equity....................... 40,252 48,466 65,575 88,866 103,236 100,393 110,284
</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.
18
<PAGE> 21
PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statements of operations for the year
ended December 31, 1995 and the three months ended March 31, 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 March 31,
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 March 31, 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.
19
<PAGE> 22
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
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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) 225(5) 3,926
Nonrecurring charge................... 12,000 -- -- -- 12,000
------- ------- ------- ------- -------
Total operating expenses......... 42,923 21,082 9,135 225 73,365
INCOME (LOSS) FROM OPERATIONS........... (1,714) 4,378 1,237 (225) 3,676
Interest expense, net................... 2,398 -- -- (474)(6) 1,924
------- ------- ------- ------- -------
Income (loss) before income taxes....... (4,112) 4,378 1,237 249 1,752
Provision (benefit) for federal income
taxes................................. (3,809) 1,532(7) 433(7) 87(8) (1,757)
------- ------- ------- ------- -------
NET INCOME (LOSS)....................... $ (303) $ 2,846 $ 804 $ 162 $ 3,509
======= ======= ======= ======= =======
Pro forma net income per share.......... $ 0.13
Pro forma average shares outstanding.... 27,200
</TABLE>
- ---------------
(1) Adjustment to reflect 95% of the historical revenues and direct 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 the compensation expense recognized pursuant to the
grant of 15,000 shares of Common Stock to certain executive officers of the
Company, based upon an assumed initial public offering price of $15.00 per
share.
(6) Adjustment to interest expense to reflect the repayment of $72.5 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 and other
adjustments.
20
<PAGE> 23
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON TRANSTEXAS SOXCO PRO FORMA
EXPLORATION ACQUISITION ACQUISITION OFFERING COMBINED
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
----------- ------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES:
Natural gas and oil revenues.......... $ 9,980 $7,216(1) $ 2,803(2) $19,999
Other................................. 233 -- -- 233
------- ------ ------ -------
Total revenues................... 10,213 7,216 2,803 20,232
EXPENSES:
Lease operating....................... 1,828 1,404(1) 376(2) 3,608
Depreciation, depletion and
amortization....................... 5,674 2,996(3) 1,367(3) 10,037
General and administrative, net....... 1,492 --(4) 45(4) 1,537
------- ------ ------ ----- -------
Total operating expenses......... 8,994 4,400 1,788 15,182
INCOME FROM OPERATIONS.................. 1,219 2,816 1,015 5,050
Interest expense, net................... 461 -- -- (118)(5) 343
------- ------ ------ ----- -------
Income before income taxes.............. 758 2,816 1,015 118 4,707
Provision (benefit) for federal income
taxes................................. (218) 986(6) 355(6) 41(7) 1,164
------- ------ ------ ----- -------
NET INCOME.............................. $ 976 $1,830 $ 660 $ 77 $ 3,543
======= ====== ====== ===== =======
Pro forma net income per share.......... $ 0.13
Pro forma average shares outstanding.... 27,200
</TABLE>
- ---------------
(1) Adjustment to reflect 95% of the historical revenues and direct 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 interest expense to reflect the repayment of the $72.5 million
of debt under the Credit Facility with proceeds from the Offering, excluding
any interest income that would be earned from the Note Receivable from the
Company's President.
(6) Adjustment to income tax expense to reflect the respective TransTexas
Acquisition and the Soxco Acquisition adjustments.
(7) Adjustment to income tax expense to reflect the Offering adjustments.
21
<PAGE> 24
PRO FORMA COMBINED BALANCE SHEETS
AS OF MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HOUSTON TRANSTEXAS SOXCO OFFERING PRO FORMA
EXPLORATION ACQUISITION ACQUISITION PRO FORMA AND OTHER COMBINED
HISTORICAL ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- --------- ----------- -----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets........... $ 32,835 $ -- $ 134(1) $ 32,969 79(2) $ 33,048
Net property, plant and
equipment............. 228,406 59,095(3) 44,208(4) 331,709 2,025(5) 333,734
Other assets............. 1,103 3,110(6) -- 4,213 -- 4,213
-------- ------- ------- -------- -------- --------
TOTAL ASSETS........ $ 262,344 $62,205 $44,342 $368,891 $ 2,104 $ 370,995
======== ======= ======= ======== ======== ========
LIABILITIES:
Current liabilities...... 29,457 -- 23,700(7) 53,157 (23,700)(9) 29,457
Long-term debt........... 74,964 62,205(8) -- 137,169 (72,450)(9) 64,719
Deferred federal income
tax................... 47,607 -- -- 47,607 -- 47,607
Other deferred
liabilities........... 32 -- 8,825(10) 8,857 -- 8,857
-------- ------- ------- -------- -------- --------
TOTAL LIABILITIES... 152,060 62,205 32,525 246,790 (96,150) 150,640
STOCKHOLDER'S EQUITY:
Common stock............. 193(11) -- 8(12) 201 70 (13) 272
1
Additional paid-in
capital............... 106,961(11) -- 11,809(12) 118,770 96,080 (13) 217,099
2,249 (5)
Retained earnings........ 3,130 -- -- 3,130 (146)(14) 2,984
-------- ------- ------- -------- -------- --------
TOTAL STOCKHOLDER'S
EQUITY........... 110,284 -- 11,817 122,101 98,254 220,355
-------- ------- ------- -------- -------- --------
TOTAL LIABILITIES
AND STOCKHOLDER'S
EQUITY........... $ 262,344 $62,205 $44,342 $368,891 $ 2,104 $ 370,995
======== ======= ======= ======== ======== ========
</TABLE>
- ---------------
(1) Adjustment to reflect the assumption of Soxco's tubular inventory and gas
imbalance receivable.
(2) Adjustment to reflect the tax benefit of the compensation expense
recognized pursuant to the grant of 15,000 shares of Common Stock to
certain executive officers of the Company, based upon an assumed initial
public offering price of $15.00 per share.
(3) Adjustment to reflect the amount of the purchase price for the TransTexas
Acquisition.
(4) 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.
(5) Adjustment to reflect the issuance of 135,000 shares of Common Stock to the
Company's President in exchange for certain after program-payout working
interests and the grant of 15,000 shares of Common Stock to certain other
executive officers in exchange for services previously rendered, in each
case based upon an assumed initial public offering price of $15.00 per
share.
(6) 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.
(7) Adjustment to reflect the accrual of $23.7 million for the cash portion of
the purchase price for the Soxco Acquisition.
22
<PAGE> 25
(8) Adjustment to reflect incremental borrowings under the Credit Facility for
the TransTexas Acquisition.
(9) 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 $72.5 million of debt under the Credit Facility.
(10) Adjustment to reflect the minimum deferred purchase price for the Soxco
Acquisition.
(11) Reflects the number of shares issued and outstanding immediately prior to
the completion of the Offering.
(12) Adjustment to reflect the issuance of 787,800 shares of Common Stock to
Soxco, based upon an assumed initial public offering price of $15.00 per
share.
(13) Adjustment to reflect the estimated net proceeds from the sale of 7,000,000
shares of Common Stock in this Offering at an assumed initial public
offering price of $15.00 per share.
(14) Adjustment to reflect the compensation expense, net of the current tax
benefit, recognized pursuant to the grant of 15,000 shares of Common Stock
to certain executive officers of the Company, based upon an assumed initial
public offering price of $15.00 per share.
23
<PAGE> 26
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 three
months ended March 31, 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. As a result, the Company expects a reduction in 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
24
<PAGE> 27
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. As of May 31, 1996, the
Company had entered into contracts covering an average of approximately 41,500
Mmbtu per day (approximately 40,000 Mcf/d) of its 1996 natural gas production
through late 1997 at weighted average prices of $1.89 per Mmbtu, before
transaction and transportation costs. As of May 31, 1996, the Company had net
production of approximately 69,900 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
liability associated with the remuneration to which its former employees were
entitled and 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. 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 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."
25
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and oil
production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf)............................... 22,555 22,437 21,077 4,882 5,735
Oil (Mbbls)...................................... 101 102 100 30 23
Total (Mmcfe).................................... 23,161 23,049 21,677 5,062 5,873
Average sales prices:
Natural gas (per Mcf)(1)......................... $ 1.58 $ 1.79 $ 1.79 $ 1.84 $ 1.67
Oil (per Bbl).................................... 16.96 15.85 16.54 17.39 16.26
Expenses (per Mcfe):
Lease operating.................................. $ 0.19 $ 0.23 $ 0.25 $ 0.28 $ 0.31
Depreciation, depletion and amortization......... 1.00 1.10 1.01 1.11 0.97
General and administrative, net.................. 0.11 0.15 0.16 0.17 0.25
</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
$1.44 and $2.29 per Mcf for the three months ended March 31, 1995 and 1996,
respectively.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF QUARTER ENDED MARCH 31, 1995 AND 1996
General. Houston Exploration's production increased 16% or 811 Mmcfe from
5,062 Mmcfe for the first quarter of 1995 to 5,873 Mmcfe for the first quarter
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 from additional properties.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased 5% or
$0.5 million from $9.5 million for the first quarter of 1995 to $10.0 million
for the first quarter of 1996 as a result of the 16% increase in production,
offset in part by a decrease in average realized natural gas prices of 9% or
$0.17 per Mcf from $1.84 per Mcf in the first quarter of 1995 to $1.67 per Mcf
in the first quarter of 1996.
As a result of hedging activities, the Company realized an average gas
price of $1.67 per Mcf compared to an average price of $2.29 per Mcf that
otherwise would have been received for the first quarter of 1996, resulting in a
$3.5 million decrease in natural gas revenues for the three month period. For
the first quarter of 1995, the average realized gas price was $1.84 per Mcf
compared to an unhedged average gas price of $1.44, resulting in an increase to
natural gas revenues of $1.9 million for the quarter.
Lease Operating Expenses. Lease operating expenses increased 29% or $0.4
million from $1.4 million for the first quarter of 1995 to $1.8 million for the
first quarter of 1996. On an Mcfe basis, lease operating expenses increased 11%
from $0.28 for the first quarter of 1995 to $0.31 for the first quarter of 1996.
The increase in costs for the first quarter 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 quarter of 1995
and the first quarter of 1996. Depreciation, depletion and amortization expense
per Mcfe decreased from $1.11 for the first quarter of 1995 to $0.97 for the
first quarter of 1996. The lower rate for the first quarter of 1996 reflects
added reserves.
26
<PAGE> 29
General and Administrative Expenses. General and administrative expenses,
net of overhead reimbursements received from other working interest owners of
$0.4 million and $0.3 million for the first quarters of 1995 and 1996,
respectively, increased 72% or $0.6 million from $0.9 million for the first
quarter of 1995 to $1.5 million for the first quarter of 1996. The Company
capitalized general and administrative expenses directly related to oil and gas
exploration and development activities of $0.8 million and $1.1 million,
respectively for the first quarters of 1995 and 1996. The increase in net
general and administrative expenses for the first quarter of 1996 as compared to
the first quarter of 1995 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 $0.17 for the first
quarter of 1995 to $0.25 for the first quarter of 1996, reflecting the increased
expenses incurred during the first quarter of 1996.
Income Tax Provision. Income tax expense decreased from an expense of $0.1
million for the first quarter of 1995 to a benefit of $0.2 million for the first
quarter 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 from $1.2 million for the first quarter of
1995 to $1.0 million for the first quarter of 1996. Although production
increased for the first quarter of 1996 as compared to the first quarter of
1995, operating income decreased $0.6 million from $1.8 million for the first
quarter of 1995 to $1.2 million for the first quarter of 1996 as a result of a
decline in natural gas revenues of $3.5 million due to hedging activities,
higher lease operating costs associated with new properties and an increase in
general and administrative expense during the first quarter of 1996 as compared
to the first quarter in 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995
General. Houston Exploration's production decreased 6% or 1,372 Mmcfe 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 by $9.4 million, more than two
times year earlier levels, and 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% or
$2.3 million 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.
Lease Operating Expenses. Lease operating expense for the year ended 1995
increased 2% or $0.1 million from $5.3 million in 1994 to $5.4 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
27
<PAGE> 30
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 $0.9
million or 19% from 1993 to 1994. On an Mcfe basis, lease operating costs
increased by 21% from $0.19 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 $2.2 million or 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.
28
<PAGE> 31
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
an $8.6 million working capital deficit as of March 31, 1996, which includes the
$12.0 million accrual for the nonrecurring charge. See "-- General" and
"Business -- Legal Proceedings."
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 three
months of 1996 was $10.5 million compared to $8.6 million for the same period of
1995.
The Company's capital expenditures 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>
OFFSHORE
Acquisitions of properties..................... $ 7,472 $ 9,796 $ 12,890 $ 18,236
Development.................................... 12,146 10,058 9,351 32,228
Exploration.................................... 3,930 5,983 15,370 6,355
-------- -------- -------- --------
23,548 25,837 37,611 56,819
ONSHORE
Acquisitions of properties..................... $ 3,519 $ 31,446 $ 22,886 $ 2,803
Development.................................... 5,463 1,274 2,439 8,935
Exploration.................................... -- -- 2,060 869
-------- -------- -------- --------
8,982 32,720 27,385 12,607
-------- -------- -------- --------
Total................................ $ 32,530 $ 58,557 $ 64,996 $ 69,426
======== ======== ======== ========
</TABLE>
29
<PAGE> 32
The Company's capital expenditures for the first three months of 1996
consisted of $1.0 million, $8.5 million and $6.4 million for acquisitions of
properties, development and exploration, respectively, offshore, and $0.3
million, $1.7 million and $0.2 million for acquisitions of properties,
development and exploration, respectively, onshore.
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 July 3, 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 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."
30
<PAGE> 33
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
31
<PAGE> 34
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. As of May 31,
1996, net production from the Company's Gulf of Mexico properties was
approximately 52,400 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 22
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 169,575 gross
(96,780 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. As of May 31,
1996, net production from the Company's onshore properties was approximately
72,500 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.
32
<PAGE> 35
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 88% 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.
1994 AND 1995 OFFSHORE DRILLING ACTIVITY
Since the beginning of 1994, the Company has drilled seven successful
exploratory wells and 11 successful development wells on its Gulf of Mexico
properties. During this same period, the Company drilled four 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 following is a summary of the Company's most significant exploration
and development activities since the beginning of 1994 as well as additional
exploration and development prospects identified on such properties:
33
<PAGE> 36
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 is presently installing production
facilities. The three completed wells have been production tested at a combined
rate of 26,000 Mcf/d of gas and 527 Bbls/d of condensate. The Company expects
that initial production will begin in July 1996. 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.
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 32,000 Mcf/d (6,400
Mcf/d net) of gas and 200 Bbls/d (40 Bbls/d net) of condensate.
East Cameron 82/83. The Company purchased a 100% 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, and producing wells which are
producing approximately 6,000 Mcf/d of gas. In connection with its purchase of
the field, the Company committed to drill 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
8,300 Mcf/d (5,600 Mcf/d net) of gas and 43 Bbls/d (28 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.
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. The Company drilled a deep well during the
first quarter of 1996 and encountered no commercial amounts of hydrocarbons.
Initial production began in the first quarter of 1996. The field is currently
producing 23,000 Mcf/d (11,500 Mcf/d net) of gas and 55 Bbls/d (28 Bbls/d net)
of oil.
1996 OFFSHORE DRILLING PROGRAM
During 1996, the Company intends to focus on exploratory drilling and has
identified at least seven exploratory wells to be drilled, along with limited
development drilling. The Company's exploratory projects are located in East
Cameron Block 82, East Cameron Block 185, West Bayou
34
<PAGE> 37
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 during 1996 to date 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.
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.
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 plans to participate in a deep exploratory test on this
prospect during the 3rd quarter of 1996.
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 second quarter of
1996.
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 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 680. The Company holds a 100% working interest in
Matagorda Island Block 680. The Company is preparing to begin drilling 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
in Mustang Island Block 759, one of the Company's properties, located to the
southwest of Mustang Island Block 736.
Mustang Island Block 807. The Company intends to drill an additional
development well in Mustang Island Block 807 to further develop the reserves
discovered by the Company's exploratory well on such block in 1995. The Company
plans to 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 intends to participate in additional
development drilling in Mustang Island Block 759 to further develop this
property.
Vermilion Block 203. 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.
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 169,575 gross (96,780
net) acres.
35
<PAGE> 38
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 three successful
development wells in Arkansas and one successful development well in West
Virginia. The Company participated in an unsuccessful exploratory test well in
Oklahoma during the same period. For the remaining seven months 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. As of May 31, 1996, the Company's Charco Area properties had
production of 43,000 Mcfe/d net to the Company's interest. The Company
anticipates undertaking an active drilling program 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 66 active wells, of which it operates 56 wells. Working interests
range from 11% to 100% and average approximately 73%. As of May 31, 1996,
production was 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 56 active wells, of which
it operates 21 wells. Working interests range from 3% to 100% and average
approximately 53%. As of May 31, 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 42
active wells, of which it
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<PAGE> 39
operates 12 wells. Working interests range from 1% to 63% and average
approximately 22%. As of May 31, 1996, production was 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%.
As of May 31, 1996, production was 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 pro forma
proved reserves as of December 31, 1995, consisting of all of the Company's
Gulf of Mexico properties. 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
pro forma proved reserves as of December 31, 1995, consisting of
substantially all of the Company's onshore properties.
(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.
(3) The standardized measure of discounted future net cash flows represents the
present value of future net revenues after income tax discounted at 10%.
37
<PAGE> 40
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."
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 three
months ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------- THREE MONTHS ENDED
1995 MARCH 31, 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 2 0.8 .8
Non-productive............... 2 0.5 3 1.5 -- -- -- 1 0.5 .5
-- -- -- --
--- --- ---- ---- ---- ----
Total.................. 5 1.5 7 3.8 1 1.0 1.0 3 1.3 1.3
Development:
Productive................... 6 1.8 4 1.3 7 2.8 3.5 -- -- --
Non-productive............... -- -- 1 0.3 -- -- -- -- -- --
-- -- -- --
--- --- ---- ---- ---- ----
Total.................. 6 1.8 5 1.6 7 2.8 3.5 -- -- --
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 4 2.2 2.2
Non-productive............... -- -- 2 1.7 5 2.5 2.5 -- -- --
-- -- -- --
--- --- ---- ---- ---- ----
Total.................. 3 3.0 8 4.8 17 9.9 9.9 4 2.2 2.2
</TABLE>
- ---------------
(1) Gives effect to the Soxco Acquisition as if such transaction had been
consummated at the beginning of the period presented.
38
<PAGE> 41
PRODUCTIVE WELLS
The following table sets forth the number of productive wells in which the
Company owned an interest as of March 31, 1996.
<TABLE>
<CAPTION>
COMPANY OPERATED WELLS NON-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 March 31, 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.
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
March 31, 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................................... 103,800 60,101 135,052 85,547 27,694 4,789 34,523 11,232
------- ------- ------- ------- ------- ------ ------- ------
Total............................. 234,306 117,826 265,558 159,376 127,718 63,769 134,547 84,583
======= ======= ======= ======= ======= ====== ======= ======
</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 March 31, 1996.
MARKETING AND CUSTOMERS
Substantially all of the Company's production is sold at market prices. As
of May 31, 1996, the Company sold approximately 41% of its gas production and
has agreed to sell substantially all of its subsequently developed gas
production, to PennUnion Energy Services, L.L.C. ("PennUnion"), an affiliate of
Brooklyn Union. The 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
48%, 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.
39
<PAGE> 42
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. As of May
31, 1996, the Company had entered into futures and swap contracts for an average
of 41,500 Mmbtu per day (approximately 40,000 Mcf/d) of its natural gas
production through late 1997 at a weighted average price of $1.89 per Mmbtu. 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.
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
40
<PAGE> 43
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 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.
41
<PAGE> 44
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 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
42
<PAGE> 45
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 gas industry under
Order No. 636 will have on the Company and its natural gas marketing efforts. In
addition, numerous petitions seeking judicial review of Order Nos. 636 are
pending. Numerous parties have also sought review of FERC orders implementing
Order No. 636 on individual pipeline systems. Order No. 636 could be reversed in
whole or in part as a result. Because the restructuring requirements that emerge
from this lengthy administrative and judicial review process may be
significantly different from those of Order No. 636 as originally promulgated,
it is not possible to predict what effect, if any, the final rule resulting from
Order No. 636 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 has recently 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, and the use of market-based rates for
interstate gas transmission. 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 a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement 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. The Company cannot predict what action
the FERC will take on these requests.
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;
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<PAGE> 46
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 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.
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<PAGE> 47
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 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
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<PAGE> 48
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.
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
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<PAGE> 49
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 77 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. 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.
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 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. As a result of such arrangements, the Company believes
that the properties
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<PAGE> 50
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.............. 59 President and Chief Executive Officer and Director
(Class III)
Randall J. Fleming.......... 53 Senior Vice President -- Exploration and
Production
Thomas W. Powers............ 51 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............. 53 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> 52
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> 53
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> 54
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 $1,016,700,
$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> 55
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.
To comply with the requirements of Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, and 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 "disinterested persons" within the meaning of Rule 16b-3 and
"outside directors" within the meaning of the Treasury Regulations promulgated
under Section 162(m) of the Code. To the extent permitted under Rule 16b-3, 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. The Committee may grant any option which is intended to be
performance based for purposes of Section 162(m) based on the attainment over a
specified period of performance targets or parameters, including, but not
limited to the attainment of target levels of net income, cash flows, reserve
additions or revisions, acquisitions, total capitalizations, total or
comparative shareholder return, assets, exploration successes, production
volumes, finding and development costs, cost reductions and savings, reportable
incidents in safety or environmental matters, return on equity, profit margin or
sales, and/or earnings per share, as may be specified by the Committee. Which
factors and how much weight may be accorded each factor for a particular grant
will be determined by the Committee. In addition, the Committee may, in its
discretion, accelerate the vesting of any award upon such circumstances as it
deems appropriate, provided the award continues to qualify as performance based
compensation for purposes of the Code if intended to so qualify on its date of
grant.
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 Committee, 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.
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<PAGE> 56
Upon completion of the Offering, options with respect to an aggregate of
1,360,000 shares of Common Stock will be granted to certain key employees of the
Company, including options for 391,680 shares to Mr. Floyd, options for 204,000
shares to Mr. Fleming, options for 122,400 shares to Mr. Powers and options for
97,920 shares to Mr. Westmoreland. All of these options will have an exercise
price 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 $548,000 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 $10.1 million during the
period from January 1, 1996 to May 1, 1996. Brooklyn Union has received shares
of Common Stock in consideration of such capital contributions.
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<PAGE> 57
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 48% 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
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
311,000 shares of Common Stock to three officers of Brooklyn Union, including
Messrs. Catell and Matthews, with an exercise price of $8.91 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
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<PAGE> 58
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 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 its other liabilities,
including any liabilities associated with the remuneration for the increase in
the value of the transferred properties prior to the reorganization to which
certain former FRI employees were entitled and 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 secure such
indemnification obligation.
TRANSACTIONS BETWEEN THE COMPANY AND MANAGEMENT
In , 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 funds. Mr. Floyd's obligations under the
agreement are secured by a pledge of his working interest in 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
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<PAGE> 59
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.
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 $2.0
million.
The Company has agreed to grant shares of Common Stock with a value (at the
initial offering price) of $112,500, $56,250 and $56,250 to Messrs. Fleming,
Powers and Westmoreland, respectively, concurrently with the completion of the
Offering.
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, 14,000 initial shares of
Common Stock and additional shares of Common Stock with a value between $100,000
and $200,000.
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<PAGE> 60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 30, 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........................... 19,262,200 100% 71%
James G. Floyd........................................... 135,000(2) * *
Randall J. Fleming....................................... 7,500(2) * *
Thomas W. Powers......................................... 3,750(2) * *
Sammye L. Dees........................................... -- -- --
James F. Westmoreland.................................... 3,750(2) * *
Charles W. Adcock........................................ -- -- --
Robert B. Catell(1)...................................... 155,500 * *
Craig G. Matthews(1)..................................... 108,850 * *
Gordon F. Ahalt.......................................... -- -- --
Russell D. Gordy......................................... -- -- --
James Q. Riordan......................................... -- -- --
Lester H. Smith(3)....................................... 14,000(4) -- *
All directors and officers as a group
(11 persons)(1)(2)(3).................................. % *
</TABLE>
- ---------------
* Less than 1%.
(1) Represents shares issuable upon exercise of outstanding stock options that
will be terminated upon completion of the Offering. See "Related
Transactions -- Transactions between the Company and Brooklyn Union and
Affiliates."
(2) Represents shares issuable upon completion of the Offering, based upon an
assumed initial public offering price of $15.00 per share.
(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 14,000
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 787,800 shares of Common Stock to Soxco
pursuant to the Soxco Acquisition.
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<PAGE> 61
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
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<PAGE> 62
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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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 27,200,000 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 20,200,000
outstanding shares, consisting of 19,262,200 shares of Common Stock owned by
Brooklyn Union, 787,800 shares to be issued to Soxco in the Soxco Acquisition
and 150,000 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
61
<PAGE> 64
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
1,360,000 shares of Common Stock (1,412,500 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.
62
<PAGE> 65
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.
63
<PAGE> 66
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.
64
<PAGE> 67
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.
65
<PAGE> 68
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)
March 31, 1996..................................................................... F-3
Combined Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995 and (unaudited) the Three Months Ended March 31, 1995 and 1996................ F-4
Combined Statement of Stockholder's Equity for the Years Ended December 31, 1993,
1994 and 1995 and (unaudited) the Three Months Ended March 31, 1996................ F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and (unaudited) the Three Months Ended March 31, 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) March 31, 1996....... F-25
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and
(unaudited) the Three Months Ended March 31, 1995 and 1996......................... F-26
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and
(unaudited) the Three Months Ended March 31, 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
Three Months Ended March 31, 1996.................................................. F-43
Notes to the Historical Summaries.................................................... F-44
</TABLE>
F-1
<PAGE> 69
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.
ARTHUR ANDERSEN LLP
Houston, Texas
July 3, 1996
F-2
<PAGE> 70
THE HOUSTON EXPLORATION COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 668 $ 598 $ 2,849
Accounts receivable....................................... 17,995 18,660 21,214
Accounts receivable -- Parent............................. 8,605 6,963 6,365
Inventories............................................... 1,296 963 979
Prepayments and other..................................... 1,557 1,141 1,428
---------- ---------- ----------
Total current assets.............................. 30,121 28,325 32,835
Natural gas and oil properties, full cost method
Unevaluated properties................................. 25,911 42,286 45,686
Properties subject to amortization..................... 257,102 309,378 323,369
Other property and equipment.............................. 7,378 7,707 7,729
---------- ---------- ----------
290,391 359,371 376,784
Less: Accumulated depreciation, depletion and
amortization........................................... (120,677) (142,693) (148,378)
---------- ---------- ----------
169,714 216,678 228,406
Other assets.............................................. 1,843 2,493 1,103
---------- ---------- ----------
TOTAL ASSETS...................................... $ 201,678 $ 247,496 $ 262,344
========== ========== ==========
LIABILITIES:
Accounts payable and accrued expenses..................... $ 18,767 $ 28,657 $ 29,457
---------- ---------- ----------
Total current liabilities......................... 18,767 28,657 29,457
Long-term debt............................................ 65,650 71,862 74,964
Deferred federal income tax............................... 28,314 43,681 47,607
Other deferred liabilities................................ 81 60 32
---------- ---------- ----------
TOTAL LIABILITIES................................. 112,812 144,260 152,060
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDER'S EQUITY:
Common Stock, $.01 par value, 2,000, 4,000 and 4,000
shares authorized and 2,000, 2,858 and 2,858 issued and
outstanding at December 31, 1994 and 1995 and March 31,
1996, respectively..................................... 20 29 29
Additional paid-in capital................................ 86,389 101,053 107,125
Retained earnings......................................... 2,457 2,154 3,130
---------- ---------- ----------
TOTAL STOCKHOLDER'S EQUITY........................ 88,866 103,236 110,284
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $ 201,678 $ 247,496 $ 262,344
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 71
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Natural gas and oil revenues.... $ 37,462 $ 41,755 $ 39,431 $ 9,498 $ 9,980
Other........................... 799 467 1,778 253 233
------- -------- -------- -------- --------
Total revenues.......... 38,261 42,222 41,209 9,751 10,213
OPERATING COSTS AND EXPENSES
Lease operating................. 4,477 5,344 5,468 1,418 1,828
Depreciation, depletion and
amortization................. 23,225 25,365 21,969 5,626 5,674
General and administrative,
net.......................... 2,454 3,460 3,486 869 1,492
Nonrecurring charge (Note 10)... -- -- 12,000 -- --
------- -------- -------- -------- --------
Total operating
expenses.............. 30,156 34,169 42,923 7,913 8,994
INCOME (LOSS) FROM OPERATIONS..... 8,105 8,053 (1,714) 1,838 1,219
Interest expense, net............. 1,764 2,102 2,398 621 461
------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 6,341 5,951 (4,112) 1,217 758
Provision (benefit) for federal
income taxes.................... 1,790 597 (3,809) 61 (218)
------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ 4,551 $ 5,354 $ (303) $ 1,156 $ 976
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 72
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................ $ -- $ 55,830 $ (7,448) $ 48,382
Capital contributions from Parent........... -- 12,558 -- 12,558
Net income.................................. -- -- 4,551 4,551
--- -------- ------ --------
Balance at December 31, 1993................ -- 68,388 (2,897) 65,491
Capital contributions from Parent........... 20 18,001 -- 18,021
Net income.................................. -- -- 5,354 5,354
--- -------- ------ --------
Balance at December 31, 1994................ 20 86,389 2,457 88,866
Capital contributions from Parent........... 9 14,664(1) -- 14,673
Net loss.................................... -- -- (303) (303)
--- -------- ------ --------
Balance at December 31, 1995................ 29 101,053 2,154 103,236
Capital contributions from Parent
(unaudited)............................... -- 6,072 -- 6,072
Net income (unaudited)...................... -- -- 976 976
--- -------- ------ --------
Balance at March 31, 1996 (unaudited)....... $ 29 $ 107,125 $ 3,130 $ 110,284
=== ======== ====== ========
</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> 73
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
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) $ 1,156 $ 976
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization.......... 23,225 25,365 21,969 5,626 5,674
Deferred income tax expense....................... 3,028 5,847 12,832 1,273 3,926
Nonrecurring charge............................... -- -- 12,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........ 672 4,551 977 4,836 (1,956)
Decrease (increase) in inventories................ 78 (229) 333 51 (16)
Decrease (increase) in prepayments and other...... (472) (450) 416 (1,475) (287)
Decrease (increase) in other assets............... 722 (1,188) (2,336) 1,175 1,362
Increase (decrease) in accounts payable and
accrued expenses............................... 9,092 (13,176) 9,890 (4,076) 800
-------- -------- -------- -------- --------
Net cash provided by operating activities........... 40,896 26,074 55,778 8,566 10,479
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures
Acquisitions...................................... (41,242) (35,776) (21,039) (10,039) (1,289)
Exploration and development....................... (17,315) (29,220) (48,387) (11,293) (16,860)
Dispositions and other............................ (53) (63) 493 1,594 747
-------- -------- -------- -------- --------
Net cash used in investing activities............... (58,610) (65,059) (68,933) (19,738) (17,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term borrowings.............. 5,800 19,050 6,212 609 3,102
Capital contributions from Parent................... 12,558 18,021 6,873 10,371 6,072
-------- -------- -------- -------- --------
Net cash provided by financing activities........... 18,358 37,071 13,085 10,980 9,174
Increase (decrease) in cash and cash equivalents.... 644 (1,914) (70) (192) 2,251
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 $ 476 $ 2,849
======== ======== ======== ======== ========
Cash paid for interest.............................. $ 2,259 $ 3,318 $ 4,658 $ 1,139 $ 1,212
======== ======== ======== ======== ========
Cash paid for income taxes.......................... $ 5,423 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 74
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.
Interim Financial Statements
The financial statements for the three months ended March 31, 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 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
F-7
<PAGE> 75
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-8
<PAGE> 76
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-9
<PAGE> 77
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Earnings Per Share.
Through December 31, 1995, the Company was an indirect wholly-owned
subsidiary of Brooklyn Union; thus, income (loss) per share amounts are not
meaningful and, accordingly, not presented.
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 and at
March 31, 1996. 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 and March 31, 1996, $65.7 million,
$71.9 million and $74.9 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 and at March 31, 1996. 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.
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 New 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
F-10
<PAGE> 78
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the stock of the Company and the stock of FRI together with a negative pledge on
all the Company's assets.
Interest was payable on borrowings under the New 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 3, 1996, the Company was in compliance with
all such covenants.
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
F-11
<PAGE> 79
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 100,000 shares of common stock to certain officers and directors
of the Parent, with an exercise price of $27.71 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.............. 100,000 $ 27.71
Options granted during 1995........................... -- --
Options outstanding at December 31, 1995.............. 100,000 $ 27.71
======= ======
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) $(16,641)
Deferred............................... 3,028 5,847 12,832
------- ------- --------
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> 80
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
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 $12,832
======= ======= =======
</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> 81
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.
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> 82
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> 83
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 48%,
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> 84
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> 85
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 funds. Mr. Floyd's obligations under the
agreement are secured by a pledge of his working interest in 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 787,800 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 Company will pay Soxco a deferred purchase price of up to
$17.6 million payable in two
F-18
<PAGE> 86
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 30% 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 19,262,200
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 $2.0 million.
Concurrently, with the completion of the Offering, the Company has agreed
to grant shares of Common Stock with a value (at the initial offering price) of
$112,500, $56,250 and $56,250 to Messrs. Fleming, Powers and Westmoreland,
respectively.
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 (assuming a purchase price of $2.70 per option).
F-19
<PAGE> 87
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 were 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>
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.
F-20
<PAGE> 88
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-21
<PAGE> 89
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-22
<PAGE> 90
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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> 91
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> 92
SMITH OFFSHORE EXPLORATION COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
--------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................ $ 494 $ 785 $ 1,640
Short-term investments................................... 100 100 100
Accounts receivable
Oil and gas sales..................................... 2,748 1,857 1,612
Gas sales imbalance................................... 135 44 60
Affiliates and other.................................. 12 43 70
Inventory................................................ 131 74 74
Prepaid associated costs and well costs.................. 146 -- --
Prepaid expenses and other assets........................ 84 36 22
-------- --------- ---------
Total current assets............................. 3,850 2,939 3,578
-------- --------- ---------
Oil and gas properties, full-cost method
Evaluated properties.................................. 122,610 130,963 131,324
Unevaluated properties................................ 4,766 5,335 5,391
Less: Accumulated depreciation, depletion and
amortization.......................................... (94,540) (101,418) (102,712)
-------- --------- ---------
32,836 34,880 34,003
-------- --------- ---------
Furniture, fixtures and other, net......................... 151 108 99
Other assets, net.......................................... 63 57 51
-------- --------- ---------
TOTAL ASSETS..................................... $ 36,900 $ 37,984 $ 37,731
======== ========= =========
LIABILITIES:
Current portion of long-term debt........................ $ 7,614 $ 7,956 $ 10,272
Accounts payable and accrued liabilities................. 2,558 744 754
Accrued interest payable................................. 58 175 151
-------- --------- ---------
Total current liabilities........................ 10,230 8,875 11,177
-------- --------- ---------
Long-term debt............................................. 7,718 10,569 7,375
Zero coupon notes payable.................................. 80,195 92,184 95,435
-------- --------- ---------
TOTAL LIABILITIES................................ 98,143 111,628 113,987
-------- --------- ---------
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) (91,449)
-------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY....................... (61,243) (73,644) (76,256)
-------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 36,900 $ 37,984 $ 37,731
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 93
SMITH OFFSHORE EXPLORATION COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales...................... $26,123 $18,536 $10,372 $ 2,343 $ 2,803
Interest income and other income....... 70..... 89 73 18 14
------- ------- ------- ------- -------
Total Revenues................. 26,193 18,625 10,445 2,361 2,817
------- ------- ------- ------- -------
COSTS AND EXPENSES:
General and administrative............. 569 586 837 167 212
Outside professional services.......... 313 499 501 76 50
Production............................. 2,634 2,654 2,012 546 421
Depreciation, depletion and
amortization........................ 20,317 15,618 6,931 1,604 1,303
Impairment of oil and gas properties... 4,000 20,000 -- -- --
Interest............................... 11,477 11,107 12,550 2,859 3,437
Other.................................. 52 46 15 9 6
------- ------- ------- ------- -------
Total costs and expenses....... 39,362 50,510 22,846 5,261 5,429
------- ------- ------- ------- -------
Loss before income taxes ($0 for all
periods) and cumulative effect of
change in accounting principle......... 13,169 31,885 12,401 2,900 2,612
Cumulative effect of change in accounting
principle (SFAS No. 109)............... 716 -- -- -- --
------- ------- ------- ------- -------
Net loss................................. $12,453 $31,885 $12,401 $ 2,900 $ 2,612
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 94
SMITH OFFSHORE EXPLORATION COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- --------------------
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) $ (2,900) $ (2,612)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Interest..................................... 10,817 10,339 11,566 2,674 3,098
Depreciation, depletion and amortization..... 20,317 15,618 6,931 1,604 1,303
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 1,232 203
Decrease (Increase) in prepaid expenses and
other assets............................... (23) (4) 10 34 14
-------- -------- -------- ------- -------
Net cash provided by operating activities....... 24,355 15,247 7,057 2,644 2,006
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in prepaid associated costs and well
costs........................................ 597 639 146 75 --
Additions to oil and gas properties............. (14,812) (9,888) (8,351) (2,879) (279)
Increase (Decrease) in amounts owed for oil and
gas property additions....................... 1,530 (2,324) (1,814) (75) 9
Purchases of furniture, fixtures and other...... (46) (97) (10) (8) --
Transfers of inventory.......................... 92 34 95 (1) --
-------- -------- -------- ------- -------
Net cash used in investing activities........ (12,639) (11,636) (9,934) (2,888) (270)
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........ 15,506 5,180 8,268 3,400 51
Repayment of long-term debt..................... (11,500) (10,153) (5,076) (2,538) (929)
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) 3,168 862 (881)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (325) (1,418) 291 618 855
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 1,112 1,640
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 95
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 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 $215,000, $7,779,000 and $8,746,000 for prospect acquisition,
evaluation and drilling costs billed by HOUEX during the three months ended
March 31, 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").
F-28
<PAGE> 96
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
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 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.
F-29
<PAGE> 97
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
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,
- 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 three months ended March 31, 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
F-30
<PAGE> 98
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
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.
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 $164,000, $674,000, $226,000 and
$674,000 during the three months ended March 31, 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> 99
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 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 three months
ended March 31, 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> 100
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 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 March 31, 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
F-33
<PAGE> 101
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
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.
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 3/31/96 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 23,246,924 22,558,615
January 15, 1994...... January 15, 1997 32,093,750 46,260,949 41,991,930 40,748,677
July 1, 1996.......... March 15, 1998 16,046,875 19,753,553 15,330,430 14,660,751
September 4, 1996..... March 15, 1998 16,046,875 19,336,948 14,865,510 14,216,140
----------- ------------ ----------- -----------
$ 96,281,250 $ 124,528,805 $ 95,434,794 $ 92,184,183
=========== ============ =========== ===========
</TABLE>
F-34
<PAGE> 102
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
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 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 zero coupon noteholders are reflected as long-term at March 31, 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 three months ended March 31, 1996 and the years ended December
31, 1995, 1994, and 1993 interest of approximately $3,251,000, $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,
MARCH 31, ------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Development Credit Agreement......... $ 3,760,000 $ 3,760,000 $ 7,520,000
Preferred Shareholders Development
Loans.............................. 987,000 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 --
------------ ----------- -----------
17,647,000 18,525,000 15,332,000
Less: Current Portion of Long-term
Debt............................... (10,272,000) (7,956,000) (7,614,000)
------------ ----------- -----------
Long-term Debt....................... $ 7,375,000 $ 10,569,000 $ 7,718,000
============ =========== ===========
</TABLE>
The current portion of long-term debt at December 31, 1995 and March 31,
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>
F-35
<PAGE> 103
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
Development Credit Agreement
As of March 31, 1996, $3,760,000 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 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 three months ended March 31, 1996 and
the years ended December 31, 1995, 1994 and 1993, the weighted average interest
rate was 7.30% and 5.94%, 4.17% and 3.61%, respectively. Also during the three
months ended March 31, 1996 and the years ended December 31, 1995, 1994 and
1993, the Company accrued interest of approximately $68,000, $308,000, $522,000
and $535,000, respectively, on the borrowings under the Development Credit
Agreement, with approximately $92,000, $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 March 31, 1996 and December 31, 1995, the Company was in compliance
with all covenants.
Preferred Shareholders Development Loans
As of March 31, 1996, the Company had $987,000 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
March 31, 1996. The weighted average interest rate for the three months ended
March 31, 1996 and the years ending December 31, 1995, 1994 and 1993, was 6.32%,
6.86%, 5.10% and 4.20%, respectively. The Company accrued interest on these
loans of approximately
F-36
<PAGE> 104
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
$22,000, $125,000, $215,000 and $221,000 and paid interest of approximately
$46,000, $120,000, $205,000 and $213,000 during the years ended December 31,
1995, 1994 and 1993, respectively.
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 March 31, 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 converted to a term loan on May 29, 1996 to be paid in eight equal
quarterly installments beginning August 1, 1996. The Exploration Credit
Agreement is being amended to extend the revolving period by one additional
year.
Interest rates on borrowings are based on whichever of the following
methods, as defined in the Exploration Credit Agreement, the Company elects 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 the debt converts to a term
loan on May 29, 1996, 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 three
months ended March 31, 1996 and the years ended December 31, 1995 and 1994, the
weighted average interest rates were 7.44%, 7.43% and 5.48%. Also during the
three months ended March 31, 1996 and the years ended December 31, 1995 and
1994, the Company accrued interest of approximately $220,000, $719,000 and
$73,000 on the borrowings under the Exploration Credit Agreement with payments
of approximately $229,000, $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 three months ended March 31, 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 March 31, 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 March 31, 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 $33,000, and $33,000, respectively, and
paid no interest during the three months ended March 31, 1996 and the year ended
December 31, 1995.
F-37
<PAGE> 105
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 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 three months ended March 31, 1996 and the years
ended December 31, 1995, 1994 and 1993, pursuant to the management agreement,
the Company paid or accrued approximately $208,000, $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
$38,000, $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
three months ended March 31, 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 three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993, the Company paid or accrued approximately $7,000,
$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 three months ended March 31,
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> 106
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 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> 107
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 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> 108
SMITH OFFSHORE EXPLORATION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 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> 109
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> 110
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>
YEAR ENDED DECEMBER 31, THREE MONTHS
--------------------------- ENDED MARCH
1993 1994 1995 31, 1996
------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Oil and gas revenues............................... $27,728 $34,119 $26,800 $7,596
Direct operating expenses.......................... 3,562 4,258 4,542 1,478
------- ------- ------- ------
Revenues in excess of direct operating expenses.... $24,166 $29,861 $22,258 $6,118
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE> 111
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. The Historical
Summaries do not include depreciation, depletion and amortization, general and
administrative, litigation, interest or federal income tax expenses.
Accordingly, the accompanying Historical Summaries are not intended to represent
the financial position or results of operations in conformity with generally
accepted accounting principles.
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> 112
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....................................... 108,253 106,800 111,631
Revisions of previous estimates........................... (2,299) 3,099 21,559
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> 113
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> 114
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....................................................... 7,000,000
=========
</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 1,050,000
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 7,000,000 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> 115
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> 116
[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> 117
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> 118
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> 119
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> 120
[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> 121
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> 122
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> 123
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> 124
[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> 125
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> 126
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> 127
June 25, 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 19,857 41,964,570 $ 51,169,700 $41,777,000
Non-Producing 13,350 14,363,908 15,042,900 5,912,900
Proved Undeveloped 17,873 62,067,414 53,635,300 32,870,700
---------- ----------- ------------ -----------
Total Proved 51,080 118,395,892 $119,847,900 $80,560,600
</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
<PAGE> 128
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.
<PAGE> 129
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
<PAGE> 130
June 26, 1996
The Houston Exploration Company
Attention: Mr. Jim Westmoreland
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 combined future oil and gas
reserves and projected revenues for the subject properties owned by The Houston
Exploration Company (THEC) and Smith Offshore Exploration Company (SOXCO) and
operated by 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> <C>
Oil/Cond., bbl 5,825 7,020 12,845
Gas, MMcf 3,544.5 4,401.3 7,945.8
Future Gross Revenue, $ 7,465 9,267 16,731
Operating Expenses, $ 1,517 1,403 2,919
Net Profit Expenses, $ 200 225 424
Other Costs, $ 0 1,292 1,292
Future Net Revenue (FNR), $ 5,749 6,347 12,096
FNR, Disc. at 10%, $ 5,082 3,972 9,054
Projected Reserves and Revenues - Estimated Revenues, $
- -------------------------------------------------------
1996 3,035 0 3,035
1997 1,550 130 1,680
1998 738 560 1,298
Thereafter 425 5,657 6,083
Total 5,749 6,347 12,096
Estimated Production - Annualized
- ---------------------------------
Oil/Cond., bbl 2,870 0 2,870
Gas, MMcf 1,730.7 0.0 1,730.7
</TABLE>
Columns may not add to equal totals because of computer rounding.
<PAGE> 131
The Houston Exploration Company
June 26, 1996
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.
REPORT PREPARATION
This report is the result of a summation of two previously prepared reports
rendered for individual clients. Each client owned a different interest in the
same properties. Each client requested a slightly different price assumption
which is described in the "Product Prices" that follows.
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 for THEC 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
heating value of 1.040 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.
<PAGE> 132
The Houston Exploration Company
June 26, 1996
Page Three
The projections for SOXCO 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 projected product prices, weighted as a composite for all
reserve categories, follows:
<TABLE>
<CAPTION>
Smith Offshore Exploration Company The Houston Exploration Company
---------------------------------- -------------------------------
Oil/Cond. Gas Oil/Cond. Gas
$/bbl $/Mcf $/bbl $/Mcf
------------ ------- ------------ --------
<S> <C> <C> <C> <C>
1996 17.70 2.110 17.35 2.041
Maximum 17.70 2.110 17.35 2.041
Average Over Life 17.70 2.110 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 THEC 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 31, 1995. The "net
profits" interests paid by SOXCO have been included as an expense item and
subtracted from the revenue stream owned by SOXCO. 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. The combined operating expenses are equal to 17.5% 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.
<PAGE> 133
The Houston Exploration Company
June 26, 1996
Page Four
THE ESTIMATED FUTURE NET REVENUES AND PRESENT WORTH OF FUTURE NET REVENUES ARE
NOT REPRESENTED TO BE MARKET VALUES FOR THE SUBJECT PROPERTIES.
Platform abandonment costs have not been included in the projections shown
herein at the request of THEC and SOXCO; 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,
Erle E.Kellogg, P.E.
EEK:ek
<PAGE> 134
[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> 135
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> 136
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> 137
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> 138
===============================================================================
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
Soxco Acquisition....................... 14
Use of Proceeds......................... 15
Dividend Policy......................... 15
Dilution................................ 16
Capitalization.......................... 17
Selected Historical Financial Data...... 18
Pro Forma Combined Financial
Information........................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 23
Business................................ 31
Management.............................. 48
Related Party Transactions.............. 53
Security Ownership of Certain Beneficial
Owners and Management................. 56
Description of Capital Stock............ 57
Shares Eligible for Future Sale......... 59
Legal Matters........................... 60
Experts................................. 60
Available Information................... 61
Glossary of Oil and Gas Terms........... 62
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.
===============================================================================
===============================================================================
7,000,000 SHARES
THE HOUSTON
EXPLORATION COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
[THE HOUSTON EXPLORATION COMPANY LOGO]
------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS
===============================================================================
<PAGE> 139
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> 140
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 shares of Common Stock
to THEC Holdings Corp. in June 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
II-2
<PAGE> 141
<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 , 1996 between The Houston
Exploration Company and James G. Floyd.
**10.9 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Randall J. Fleming.
**10.10 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Thomas W. Powers.
**10.11 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and James F. Westmoreland.
**10.12 -- 1996 Stock Option Plan.
**10.13 -- Registration Rights Agreement dated as of , 1996
between The Houston Exploration Company and The Brooklyn Union Gas
Company.
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.
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.
**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.
</TABLE>
II-3
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
*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.
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 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-4
<PAGE> 143
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. 1 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 July 3,
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
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 July 3, 1996
- --------------------------------------------- Officer and Director
James G. Floyd (Principal Executive Officer)
/s/ JAMES F. WESTMORELAND Vice President, Chief Accounting July 3, 1996
- --------------------------------------------- Officer, Comptroller and
James F. Westmoreland Secretary (Principal Financial
Officer and Principal
Accounting Officer)
/s/ ROBERT B. CATELL* Chairman of the Board of July 3, 1996
- --------------------------------------------- Directors
Robert B. Catell
/s/ CRAIG G. MATTHEWS* Director July 3, 1996
- ---------------------------------------------
Craig G. Matthews
/s/ RUSSELL D. GORDY* Director July 3, 1996
- ---------------------------------------------
Russell D. Gordy
/s/ GORDON F. AHALT* Director July 3, 1996
- ---------------------------------------------
Gordon F. Ahalt
/s/ JAMES Q. RIORDAN* Director July 3, 1996
- ---------------------------------------------
James Q. Riordan
/s/ LESTER H. SMITH* Director July 3, 1996
- ---------------------------------------------
Lester H. Smith
*By: /s/ JAMES G. FLOYD
- ---------------------------------------------
James G. Floyd
Attorney-in-fact
</TABLE>
II-5
<PAGE> 144
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 , 1996 between The Houston
Exploration Company and James G. Floyd.
**10.9 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Randall J. Fleming.
**10.10 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and Thomas W. Powers.
**10.11 -- Employment Agreement dated , 1996 between The Houston
Exploration Company and James F. Westmoreland.
**10.12 -- 1996 Stock Option Plan.
**10.13 -- Registration Rights Agreement dated as of , 1996
between The Houston Exploration Company and The Brooklyn Union Gas
Company.
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.
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 between The Brooklyn Union Gas
Company and its subsidiaries.
**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.
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
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.
<PAGE> 1
Exhibit 1.1
THE HOUSTON EXPLORATION COMPANY
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
-------------------------
UNDERWRITING AGREEMENT
, 1996
Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette
Securities Corporation
PaineWebber Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004.
Ladies and Gentlemen:
The Houston Exploration Company, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 7,000,000 shares (the "Firm Shares") and, at
the election of the Underwriters, up to 1,050,000 additional shares (the
"Optional Shares") of Common Stock, par value $0.01 per share ("Stock") of the
Company (the Firm Shares and the Optional Shares that the Underwriters elect to
purchase pursuant to Section 2 hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(a) A registration statement on Form S-l (File No. 333-4437) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the
-1-
<PAGE> 2
other Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size of the
offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated
or threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act, is
hereinafter called a "Preliminary Prospectus," the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if any,
including all exhibits thereto and including the information contained in the
form of final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed by virtue of
Rule 430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, each as amended at
the time such part of the registration statement became effective, is
hereinafter collectively called the "Registration Statement"; such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain 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 under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration Statement
and any amendment thereto, and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain 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 not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(d) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus any material loss or interference with
-2-
<PAGE> 3
its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any change in
the capital stock, long-term debt or short term debt of the Company or any of
its subsidiaries or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations
of the Company and its subsidiaries, taken as a whole, otherwise than as set
forth or contemplated in the Prospectus;
(e) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware with
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction, except where the failure to so qualify would not have
a material adverse effect on the condition, financial or otherwise, or on the
earnings, business affairs or business prospects of the Company and its
subsidiaries taken as a whole (such an adverse effect to be hereinafter referred
to as a "Material Adverse Effect") and each subsidiary of the Company has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation;
(f) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Stock contained in the
Prospectus under the caption "Description of Capital Stock" and all of the
issued shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or indirectly by
the Company free and clear of all liens, encumbrances, equities or claims;
(g) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus under the caption
"Description of Capital Stock";
(h) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of the
Company's subsidiaries, Brooklyn Union or any of Brooklyn Union's subsidiaries
is a party or by which the Company, any of the Company's subsidiaries, Brooklyn
Union or any of Brooklyn Union's
- 3 -
<PAGE> 4
subsidiaries is bound or to which any of the property or assets of the Company,
any of the Company's subsidiaries, Brooklyn Union or any of Brooklyn Union's
subsidiaries is subject other than such breaches, violations or defaults that
would not, individually or in the aggregate, have a Material Adverse Effect, nor
will such action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company, any of the Company's subsidiaries, Brooklyn Union or any of
Brooklyn Union's subsidiaries or any of their respective properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act, and the
Securities Exchange Act of 1934, as amended (the "Exchange Act") of the Shares
and such consents, approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(i) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws or other organizational documents
or in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound other than, with
respect to any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument, such defaults that would not, individually or in
the aggregate, have a Material Adverse Effect;
(j) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting", insofar as they
purport to describe the provisions of the laws and documents referred to
therein, are accurate and complete;
(k) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a Material
Adverse Effect; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(l) Except as described in the Prospectus, the Company and its
subsidiaries have (1) generally satisfactory or good and indefeasible title to
all its interests in its oil and gas properties, title investigations having
been carried out by or on behalf of such person in accordance with good
practice in the oil and gas industry in the areas in which the Company and its
subsidiaries operate and (2) good and indefeasible title to all other real
property and good and marketable title to all other material properties and
assets described in the Prospectus as owned by the Company or its subsidiaries
and valid, subsisting and enforceable leases for all of the properties and
assets, real or personal, described in the Prospectus as leased by them, in
each case free and clear of any security interests, mortgages, pledges, liens,
encumbrances or charges of any kind, other than those described
- 4 -
<PAGE> 5
in the Prospectus and those that could not, individually or in the aggregate,
have a Material Adverse Effect;
(m) Except as described in the Prospectus, as of the date hereof,
(i) all royalties, rentals, deposits and other amounts due on the oil and gas
properties of the Company and its subsidiaries have been properly and timely
paid, and no proceeds from the sale or production attributable to the oil and
gas properties of the Company and its subsidiaries are currently being held in
suspense by any purchaser thereof, except where such amounts due could not,
singly or in the aggregate, have a Material Adverse Effect and (ii) there are
no claims under take-or-pay contracts pursuant to which natural gas purchasers
have any make-up rights affecting the interest of the Company and its
subsidiaries in its oil and gas properties, except where such claims could not,
singly or in the aggregate, have a Material Adverse Effect;
(n) As of the date hereof, the aggregate undiscounted monetary
liability of the Company and its subsidiaries for petroleum taken or received
under any operating or gas balancing and storage agreement relating to its oil
and gas properties that permits any person to receive any portion of the
interest of the Company or any of its subsidiaries in any petroleum or to
receive cash or other payments to balance any disproportionate allocation of
petroleum could not, singly or in the aggregate, have a Material Adverse
Effect;
(o) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(p) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(q) Each of Arthur Andersen LLP, who have certified certain
financial statements of the Company and Smith Offshore Exploration Company
("Soxco"), and Coopers & Lybrand L.L.P., who certified certain historical
summaries of the interests in the oil and gas revenues and direct expenses of
the properties acquired by the Company from TransTexas Gas Corporation
("TransTexas") are independent public accountants as required by the Act and the
rules and regulations of the Commission thereunder;
(r) Each of Ryder Scott Company, Netherland, Sewell & Associates,
Inc., Huddleston & Co., Inc. and Miller & Lents, Ltd. are independent petroleum
engineers with respect to the Company, Soxco and TransTexas, as applicable;
(s) The Company (A) is in compliance with any and all applicable
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
waste, pollutants or contaminants ("Environmental Laws"), (B) has received all
permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (C) is in compliance with all
terms and conditions of any such permit, license or approval, except for such
noncompliance with Environmental Laws, failure to receive
- 5 -
<PAGE> 6
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals that would not,
singly or in the aggregate, have a Material Adverse Effect. There has been no
storage, disposal, generation, transportation, handling or treatment of
hazardous substances or solid wastes by the Company (or to the knowledge of the
Company, any of its predecessors in interest) at, upon or from any of the
property now or previously owned or leased by the Company in violation of any
applicable law, ordinance, rule, regulation, order, judgment, decree or permit
or which would require remedial action by the Company under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not result in, or which would not be
reasonably likely to result in, singularly or in the aggregate with all such
violations and remedial actions, a Material Adverse Effect; there has been no
spill, discharge, leak, emission, injection, escape, dumping or release of any
kind onto such property or into the environment surrounding such property of any
solid wastes or hazardous substances due to or caused by the Company, except for
any such spill, discharge, leak, emission, injection, escape, dumping or release
which would not result in or would not be reasonably likely to result in,
singularly or in the aggregate with all such spills, discharges, leaks,
emissions, injections, escapes, dumpings and releases, a Material Adverse
Effect; and the terms "hazardous substances" and "solid wastes" shall have the
meanings specified in any applicable local, state and federal laws or
regulations with respect to environmental protection;
(t) There are no persons with registration or similar rights to
require registration of any securities of the Company under the Act because of
the filing of the Registration Statement or the sale of the shares by the
Company to the Underwriters, other than such rights as are described in the
Prospectus and have been duly and effectively waived;
(u) Brooklyn Union has taken all necessary corporate action to
authorize the sale of the Shares by the Company to the Underwriters;
(v) This Agreement has been duly authorized, executed and
delivered by the Company;
(w) The reorganization of Brooklyn Union's exploration and
production assets, including the transfer to the Company of certain onshore
producing properties and developed and undeveloped acreage, on substantially the
terms described in the Registration Statement and in the Contribution Agreement
dated July ___, 1996 between the Company and Fuel Resources, Inc. (the
"Contribution Agreement") has been completed. The Tax Sharing Agreement, the
Brooklyn Union Registration Rights Agreement and the Indemnification Agreement
(each as defined in the Registration Statement) have been executed and delivered
by and the Company and each other party thereto in substantially the form
described and filed as an exhibit to the Registration Statement, and such
agreements constitute valid and binding agreements of such parties enforceable
against them in accordance with their respective terms. Brooklyn Union and each
of its subsidiaries has taken all necessary corporate action to authorize the
reorganization of its exploration and production assets and to authorize such
Contribution Agreement, Tax Sharing Agreement, Brooklyn Union Registration
Rights Agreement and Indemnification Agreement; and
- 6 -
<PAGE> 7
(x) All of the conditions to closing set forth in the asset
purchase agreement between the Company and Soxco, dated July 1, 1996 (the "Soxco
Asset Purchase Agreement"), other than the sale of the Firm Shares, have been
satisfied.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $_________, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I
hereto and the denominator of which is the maximum number of Optional Shares
that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 1,050,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering over
allotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Company shall be delivered by or on behalf of the Company
to Goldman, Sachs & Co., for the account of such Underwriter, against payment
by or on behalf of such Underwriter of the purchase price therefor by wire
tranfer of immediately available funds. The Company will cause the
certificates representing the Shares to be made available for checking and
packaging at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of Goldman, Sachs & Co., 85 Broad
Street, New York, New York 10004 (the "Designated Office"). The time and date
of such delivery and payment shall be, with respect to the Firm Shares, 9:30
a.m., New York City time, on ____________________________, 1996
- 7 -
<PAGE> 8
or such other time and date as Goldman, Sachs & Co. and the Company may agree
upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree in writing. Such time and date for delivery of the Firm Shares is herein
called the "First Time of Delivery", such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery," and each such time and date for delivery is herein
called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Andrews & Kurth L.L.P., 4200 Texas Commerce Tower, Houston, Texas 77002 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location
at 2:00 p.m., Houston time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by
the parties hereto. For purposes of this Agreement, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering
or sale in any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein
- 8 -
<PAGE> 9
in such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City Time, on the New York
Business Day next succeeding the date of this Agreement and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date
of this Agreement, and the Company shall at the time of filing either pay to
the Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule ll
l(b) under the Act;
(e) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company and its subsidiaries (which need
not be audited) complying with Section 11 (a) of the Act and the rules and
regulations thereunder (including, at the option of the Company, Rule 158);
(f) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
not to offer, sell, contract to sell or otherwise dispose of, except as
provided hereunder any securities of the Company that are substantially similar
to the Shares, including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to receive, Stock or any
such substantially similar securities (other than pursuant to employee stock
option plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent;
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<PAGE> 10
(g) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and
its consolidated subsidiaries certified by independent public accountants) and,
as soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the effective
date of the Registration Statement), consolidated summary financial information
of the Company and its subsidiaries for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver
to you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(i) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds;"
(j) To use its best efforts to list, subject to notice of
issuance, the Shares on the New York Stock Exchange (the "Exchange"); and
(k) To file with the Commission such reports on Form SR as may be
required by Rule 463 under the Act.
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the Shares on the
Exchange; (v) the filing fees incident to, and the fees and disbursements of
counsel for the Underwriters in connection with, securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the
sale of the Shares; (vi) the cost of preparing stock certificates; (vii) the
cost and charges of any
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<PAGE> 11
transfer agent or registrar; and (viii) all other costs and expenses incident
to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however, that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees
of their counsel, stock transfer taxes on resale of any of the Shares by them,
and any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company and Brooklyn Union herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company shall have
performed all of its obligations hereunder theretofore to be performed, and the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on
the part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Vinson & Elkins L.L.P., counsel for the Underwriters, shall
have furnished to you such opinion (a draft of such opinion is attached as
Annex II(a) hereto), dated such Time of Delivery, with respect to the matters
covered in paragraphs (i), (ii), (vii), (xi) and (xiv) of subsection (c) below
as well as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Andrews & Kurth L.L.P., counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached as
Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capital stock as set
forth in the Prospectus, and all of the issued shares of such capital
stock (including the Shares being delivered to you at such Time of
Delivery against payment therefor in accordance with this Agreement)
have been duly and validly authorized and issued and are fully paid
and non-assessable; and insofar as such description relates to legal
matters or descriptions of provisions of governing instruments, the
Shares conform in all material respects to the description of the
Stock
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<PAGE> 12
contained in the Prospectus under the caption "Description of Capital
Stock" which such description insofar as it purports to describe the
provisions of the laws and documents referred to therein is accurate
in all material respects;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of the State of Texas [and other specified
jurisdictions where the Company is qualified to do business], which
such jurisdictions are all of the jurisdictions identified by
management of the Company to such counsel in which the Company owns
property, has operations or conducts business;
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisidiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary have been duly
and validly authorized and issued, are fully paid and non-assessable,
and (except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(v) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries would individually or in the
aggregate have a Material Adverse Effect; and, to the best of such
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the Certificate
of Incorporation or By-laws of the Company or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or
any of its properties;
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<PAGE> 13
(viii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act
and the Exchange Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(ix) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default
in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound;
(x) The statements set forth in the Prospectus under the
caption "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, are accurate
in all material respects;
(xi) The Company is not an "investment company" or an
entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act;
(xii) To the best of such counsel's knowledge, except as
have been waived at the Time of Delivery, there are no persons with
registration or similar rights to have any securities of the Company
registered pursuant to the Registration Statement; and
(xiii) Such counsel's opinion shall also state the
following: "The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements, reserve
reports and other financial or reserve information included therein,
as to which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Act and the rules
and regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus,
except for those referred to in the opinion in subsection (xi) of this
section 7(c), they have no reason to believe that, as of its effective
date, the Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the
financial statements, reserve reports and other financial or reserve
information included therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its date,
the Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the financial
statements, reserve reports and other financial or reserve information
included therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted or omits
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<PAGE> 14
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein, as
to which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and they do
not know of any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character required
to be filed as an exhibit to the Registration Statement or required to
be described in the Registration Statement or the Prospectus which are
not filed or described as required;
(d) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, each of Arthur
Andersen LLP and Coopers & Lybrand L.L.P. shall have furnished to you a letter
or letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, to the effect set forth in Annex I hereto (the
executed copy of the letter delivered prior to the execution of this Agreement
is attached as Annex I(a) hereto and a draft of the form of letter to be
delivered on the effective date of any post- effective amendment to the
Registration Statement and as of each Time of Delivery is attached as Annex I(b)
hereto);
(e) Each of Rider Scott Company, Netherland, Sewell & Associates,
Inc., Huddleston & Co., Inc. and Miller & Lents, Ltd., each such firm
constituting independent petroleum engineering consultants (the "Engineering
Consultants"), shall have delivered to you on the date of this Agreement a
letter (the "Reserve Letter") and also on the Closing Date a letter dated the
Closing Date, in each case in form and substance reasonably satisfactory to you
and substantially in the form attached hereto as Annex III, stating, as of the
date of such letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified information with
respect to the oil and gas reserves is given or incorporated in the Prospectus
as of the date not more than five days prior to the date of such letter), the
conclusions and findings of such firm with respect to the oil and gas reserves
of the Company, Soxco and the properties acquired by the Company from
TransTexas;
(f) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock, short-term debt or long-term debt of the Company or any
change, or any development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case described
in Clause (i) or (ii), is in the judgment of the Representatives so material
and adverse as
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<PAGE> 15
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the Exchange; (ii) a suspension or material limitation
in trading in the Company's securities on the Exchange; (iii) a general
moratorium on commercial banking activities declared by either Federal or New
York State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
Clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been
duly listed, subject to notice of issuance, on the Exchange;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from (i) each of its officers and directors,
(ii) each of its optionholders, (iii) Soxco and (iv) Brooklyn Union,
substantially to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement;
(k) The closing of the transactions contemplated by the Soxco
Asset Purchase Agreement shall occur concurrently with the delivery of the Firm
Shares hereunder; and
(l) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and warranties of
the Company herein at and as of such Time of Delivery, as to the performance by
the Company of all of its obligations hereunder to be performed at or prior to
such Time of Delivery, as to the matters set forth in subsections (a) and (e)
of this Section and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the
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<PAGE> 16
statements therein not misleading, and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such action or
claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an
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<PAGE> 17
unconditional release of the indemnified party from all liability arising out
of such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 1l(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
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<PAGE> 18
(e) The obligations of the Company under this Section 8 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company
(including any person who, with his or her consent, is named in the
Registration Statement as about to become a director of the Company) and to
each person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or
the Company shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any person substituted under this Section with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the aggregate
number of all the Shares to be purchased at such Time of Delivery, then the
Company shall have the right to require each non-defaulting Underwriter to
purchase the number of shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all the Shares to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with
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<PAGE> 19
respect to the Second Time of Delivery, the obligations of the Underwriters to
purchase and of the Company to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter or
the Company, except for the expenses to be borne by the Company and the
Underwriters as provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
any Shares are not delivered by or on behalf of the Company as provided herein,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives .
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives in care of Goldman,
Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; and if to the Company shall be delivered or sent by
mail to the address of the Company set forth in the Registration Statement,
Attention: Secretary; provided, however, that any notice to an Underwriter
pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or
facsimile transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company by you upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their
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<PAGE> 20
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used
herein, the term "business day" shall mean any day when the Commission's office
in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
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<PAGE> 21
If the foregoing is in accordance with your understanding, please sign
and return to us (one for the Company and each of the Representatives plus one
for each counsel) counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
THE HOUSTON EXPLORATION COMPANY
By:
------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
PaineWebber Incorporated
By:
------------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
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<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").
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<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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<PAGE> 5
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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<PAGE> 6
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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<PAGE> 7
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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<PAGE> 10
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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<PAGE> 1
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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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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<PAGE> 25
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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<PAGE> 1
EXHIBIT 4.1
SPECIMEN COMMON STOCK CERTIFICATE
The common stock certificate indicates that the corporation is
incorporated under the laws of the State of Delaware, the par value of the
shares is $.01 and that the shares are denominated Common Stock. The
certificate further states that it is transferable in New York, New York and
lists the CUSIP number. The certificate states that the shares are fully paid
and non-assessable shares, and the certficate bears the seal of the corporation
along with the signatures of the president and the secretary of the
corporation.
The reverse side of the certificate is as follows:
The Houston Exploration Company
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designation, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof of the Corporation and the justifications, limitations or
restrictions of such preferences and/or rights. Such request may be made to
the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN END -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT -- _____________ Custodian _______________
(Cust) (Minor)
under Uniform Gift to Minors Act ______________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received________________________________ hereby sell, assign
and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE _____________________________________________________________________
_______________________________________________________________________________
<PAGE> 2
[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE]
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint_____________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises
Dated________________________________
NOTICE: The signatures to this Assignment must correspond with the name(s) as
written upon the face of the certificate in every particular without
alternation or enlargement or any change whatever.
[SIGNATURE]
[SIGNATURE]
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<PAGE> 1
EXHIBIT 10.1
GAS SALES AGREEMENT
THIS AGREEMENT is made and entered by and between THE HOUSTON
EXPLORATION COMPANY a Delaware corporation, hereinafter referred to as "Seller"
and PENNUNION ENERGY SERVICES, L.L.C., a Delaware limited liability company,
hereinafter referred to as "Buyer," to be effective as of the 1st day of April,
1995.
W I T N E S S E T H:
WHEREAS, Seller desires to sell and Buyer desires to purchase natural
gas as specified in this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, Seller and Buyer do hereby contract and agree with each other as
follows:
ARTICLE I.
DEFINITIONS
For the purposes hereof, the following words, phrases and terms shall
have meanings as defined below:
1.1 The word "gas" shall mean any mixture of hydrocarbons and
noncombustible gases in a gaseous state, consisting essentially of methane.
1.2 The word "day" shall mean a period of twenty-four (24) consecutive
hours commencing at 7:00 a.m. Central Time ("C.T.") on one calendar day and
ending at 7:00 a.m. C.T. on the following calendar day.
1.3 The word "month" shall mean the period beginning at 7:00 a.m. C.T.
on the first day of a calendar month and ending at 7:00 a.m. C.T. on the first
day of the next succeeding calendar month.
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1.4 A "year" shall be a period of twelve (12) consecutive months.
1.5 The word "tariff" shall mean the applicable rate schedules, terms
and conditions and other provisions filed with the agency having jurisdiction
over the service provided by a transporter of gas sold and purchased hereunder.
1.6 A "transporter" of gas (or a "pipeline") shall mean an interstate
or intrastate pipeline transporting gas sold and purchased hereunder.
1.7 The abbreviation "BTU" shall mean British Thermal Unit. One (1) BTU
shall mean one British Thermal Unit, and is defined as the quantity of heat
required to raise the temperature of one (1) pound avoirdupois of pure water
from fifty-eight and five-tenths degrees Fahrenheit (58.5 F) to fifty-nine and
five-tenths degrees Fahrenheit (59.5F).
1.8 The abbreviation "MMBtu" shall mean one million (1,000,000) British
Thermal Units.
1.9 An "affiliate" shall mean, in relation to any entity, another
entity which controls, is controlled by or is under common control with such
entity. For purposes of this Agreement, Buyer and Seller shall not be deemed
affiliates.
1.10 The term "Contract Price" shall have the meaning set forth in
Section 7.1.
ARTICLE II.
SUBJECT MATTER
2.1 Subject to the terms and conditions of this Agreement, Seller
hereby agrees to sell to Buyer and Buyer hereby agrees to purchase from Seller
quantities of gas in accordance with the terms and conditions herein stipulated.
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<PAGE> 3
2.2 The parties understand and agree that Buyer intends to make
arrangements for the resale and possibly the transportation of gas sold
hereunder, and Seller agrees to provide reasonable cooperation as may be
necessary to effectuate such resale and transportation.
ARTICLE III.
QUANTITY
3.1 During the term hereof and subject to any limitations herein set
forth, Seller shall sell to Buyer and Buyer shall purchase from Seller all gas
production owned or controlled by Seller (as defined in Article XIII hereof) in
the United States of America (the lower 48 states only) on the date hereof
(except the gas described on Exhibit "A" hereto as may be amended from time to
time) together with all gas production subsequently developed therefrom
("later-developed production"), in addition to gas production ("after-acquired
production") acquired or obtained by Seller (as defined in Article XIII hereof)
in the United States of America (the lower 48 states only) after the effective
date hereof, to the extent the after-acquired production is not burdened or
committed prior to or in connection with its acquisition; provided, however,
that after-acquired production attributable to a single acquisition of
properties producing in the aggregate in excess of 25,000 MMBtu of gas per day
shall be committed for sale hereunder only at such time as the parties agree
upon the Contract Price of those volumes pursuant to Section 7.3 hereof. Seller
shall give Buyer notice as early as possible, but not less than thirty (30) days
in advance, of Seller's intent to commit to the performance of this Agreement
later-developed production or after-acquired production of 5,000 MMBtu or more
of gas per day per Delivery Point.
3.2 Gas which is covered hereby shall no longer be committed to the
performance of this Agreement upon the disposition, to a third party which is
not an affiliate of Seller, of the property(ies) from which the gas is produced.
A disposition of property(ies) shall include a sale, trade, exchange or other
disposition of property(ies) which will exclude from Seller's commitment
hereunder the gas produced from the property(ies) (excluding, however, any
disposition which diminishes committed gas volumes by less than 1,000 MMBtu of
gas per day). Seller shall notify Buyer at least ninety (90) days before (or, if
later, Seller shall
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<PAGE> 4
notify Buyer on the date on which Seller becomes aware of a disposition pursuant
to an outstanding contractual obligation) any such disposition. In connection
with any disposition of property(ies) committed hereunder producing in the
aggregate in excess of 5,000 MMBtu of gas per day, Seller shall request of any
third-party purchaser of property(ies) that Buyer be given the right to meet the
initial offer made to the purchaser of the property(ies) to buy gas attributable
to the property(ies) being disposed of. Upon the disposition of any
property(ies) producing in the aggregate in excess of 25,000 MMBtu of gas per
day, Buyer shall have the right pursuant to Section 7.5 to initiate
renegotiation of the Contract Price applicable to the remaining volumes
committed for sale hereunder.
3.3 At least seven (7) business days prior to the applicable pipeline
nomination deadline for the first of each month, and at least twenty-four (24)
hours prior to the applicable pipeline nomination deadline for other than
first-of-the-month, Seller shall provide a good faith estimate of volumes
available each day for sale hereunder at the Delivery Point(s). Such estimates,
together with other relevant operational information available to each party,
shall be provided for use in making arrangements for the transportation and
disposition of gas purchased hereunder. The parties shall meet at either party's
initiative to refine such estimates or the procedures by which such estimates
are made. Seller shall advise Buyer of its intention to shut in gas due to
unfavorable market conditions by the deadline set forth in Section 4.1(v). Each
party shall promptly notify the other of any changes in the information provided
to the other for such purpose, as well as any event reasonably calculated to
change the information previously provided. Either party notified of any such
change shall be obligated to take all reasonable action consistent with
applicable pipeline tariffs to avoid the imposition of imbalance, cash-out and
similar penalties which might be imposed by any transporter of gas sold and
purchased hereunder.
ARTICLE IV.
RESERVATIONS
4.1 Seller reserves unto itself, its successors, assigns and affiliates
the following rights and a quantity of gas sufficient to satisfy such rights:
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<PAGE> 5
(i) To operate Seller's leaseholds, lands and/or interests therein,
free from any control by Buyer, in such manner as Seller deems
advisable, including the right (but never the obligation) to
drill new wells, to repair and rework old wells, to renew and
extend (in whole or in part) any lease, to abandon any well or
surrender any lease (in whole or in part) for any reason, and to
abandon, modify, extend or dispose of any facilities owned or
installed (in whole or in part) by Seller.
(ii) To deliver gas to lessors in quantities sufficient to fulfill
Seller's lease obligations from time to time including, without
limitation, the right to deliver gas to satisfy take-in-kind
lease provisions.
(iii) To use gas for the development and operation of Seller's leases.
(iv) To produce gas without waste and in accordance with prudent oil
and gas field practices. Seller shall not be required to produce
any well at a rate in excess of the rate fixed by law or
regulation or in excess of the rate of flow which Seller
determines, in its sole discretion, exercised in good faith,
should be produced from such well.
(v) To shut in gas due to unfavorable market conditions or for
operational reasons. Seller shall notify Buyer at least
twenty-four (24) hours prior to any applicable deadline in the
transporter(s)' tariffs for nominations (or nomination changes)
of Seller's decision to shut in gas, the volume of gas affected
by such decision and the estimated shut-in period. Gas reserved
pursuant to this Subsection 4.1(v) shall not be sold to a third
party during any shut-in period. For gas volumes shut in due to
unfavorable market conditions, Seller shall reimburse Buyer the
difference, if any, between the cost of gas which must be
purchased to satisfy Buyer's term sales commitments which are
specific to particular Delivery Point(s) hereunder and the
Contract Price for such gas. Seller also shall reimburse Buyer
for any charges Buyer incurs for firm transportation
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<PAGE> 6
which is specific to particular Delivery Points hereunder and
which Buyer is unable to utilize as a result of Seller's
decision to shut in gas due to unfavorable market conditions.
For purposes of this subsection, Buyer's term sales commitments
shall be those pursuant to which Buyer is obligated to furnish
gas for a period exceeding thirty (30) days. Buyer shall
furnish, at Seller's request, a list of Buyer's firm sales and
transportation commitments which are specific to particular
Delivery Point(s) hereunder. Buyer shall be obligated to use its
best efforts to obtain replacement supplies at the lowest
available price consistent with those term sales commitments.
(vi) To encumber gas production pursuant to prepayment, production
payment or other financing arrangements, including the right to
deliver gas that is subject to the provisions of this Agreement
to any third party in connection with such arrangements;
provided, however, that in the case of "gas production owned and
controlled by Seller" and "later developed production" (as
defined in Section 3.1), but not in the case of "after acquired
production" (as defined in Section 3.1), no such encumbrance may
be effected if it would result (at the time it is effected) in
less than sixty-six and two-thirds percent (66-2/3%) of such
production, in the aggregate remaining subject to either (i)
Seller's obligations under this Agreement or (ii) the agreement
of third parties to whom such production is delivered in
connection with prepayments, production payments or other
financing arrangements to be subject to and bound by the same
obligations as Seller under this Agreement, including without
limitation the obligation to sell such gas to Buyer under the
terms of this Agreement. The foregoing limitation shall not
apply to "after acquired production" if the encumbrance of such
after acquired production occurs in connection with its
acquisition by Seller. For purposes of this subsection, after
acquired production shall be treated as gas owned and controlled
by Seller and later developed production in the case of
encumbrances not occurring in connection with the acquisition of
such production by Seller. Any third party to whom gas is
delivered pursuant to this Subsection 4.1(vi) shall also have
the right to
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<PAGE> 7
deliver gas to any other third party in accordance with the
terms of this subsection.
(vii) Subject to the provisions of Article III, to dispose of
properties the production from which is committed to the
performance of this Agreement.
(viii) To process gas to be delivered hereunder for the extraction of
substances contained therein. Such processing shall occur at the
point or points as Seller may designate (which may be downstream
of the Delivery Point(s)), for the recovery and disposition of
liquids, liquefiable hydrocarbons (including only such methane
as is necessarily or unavoidably removed in processing) and
nonhydrocarbons (including sulphur, helium, carbon dioxide or
other substances which can be extracted from the gas sold or to
be sold and purchased hereunder).
4.2 If gas purchased hereunder is processed downstream of any Delivery
Point, volumes delivered and paid for pursuant to this Agreement shall be
adjusted by Seller for plant volume and Btu reductions pursuant to Seller's
processing agreements. Invoices or statements submitted by Seller hereunder
shall reflect Seller's best estimate of plant volume and Btu reductions for the
period covered by the invoice or statement, and subsequent billings shall
include an adjustment to reflect any difference between Seller's original
estimates of plant volume and Btu reductions and the actual amount of such
reductions as finally determined by Seller and agreed to by Buyer, such
reductions to be derived from statements provided by plant operators. Seller at
its option may account to Buyer for such reductions by restoring the difference
in MMBtu from other sources of gas meeting the quality specifications hereof at
a mutually agreed location. Seller shall reimburse Buyer for any costs or Btu
reductions incurred by Buyer which are associated with the transportation of
plant volume. Buyer shall cooperate with Seller and shall provide, pursuant to
one or more ancillary agreements, such assistance as Seller may reasonably
request to facilitate the exercise of Seller's processing rights, including,
without limitation, assistance in accounting
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<PAGE> 8
for and handling plant volume and Btu reductions, condensate removal and
transportation and any other matters arising in connection with the processing
of gas by Seller.
ARTICLE V.
DELIVERY POINT AND INDEX PRICE MATRIX
5.1 Gas shall be delivered at the points set forth on Exhibit "B"
hereto (the "Delivery Point(s)") as such Exhibit "B" may be updated from time to
time by agreement of the parties.
ARTICLE VI.
QUALITY, PRESSURE AND MEASUREMENT
6.1 Unless otherwise provided elsewhere in this Agreement, all gas sold
and purchased hereunder shall be of the same quality, delivered at the same
pressure and measured in the same manner as provided in the effective filed
tariff of the first pipeline transporting gas sold or to be sold pursuant to
this Agreement ("First Transporting Pipeline") or, if applicable, as provided
pursuant to contractual specifications of any third party gatherer.
6.2 As to gas covered hereunder which fails to meet the quality or
pressure specifications above set forth, either party may, but neither shall be
obligated to, install and operate facilities to bring the gas into conformity
with such specifications. Any such facilities shall be installed, operated and
maintained at the sole cost, risk and expense of the party which elected to
install such facilities. Either party may discontinue the operation of such
facilities if, in the sole judgment of the party installing same, such operation
is uneconomical. If neither party elects to install or continue the operation of
such facilities, nonconforming gas shall be released from the terms hereof
within thirty (30) days of Buyer's or Seller's written request for such a
release.
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ARTICLE VII.
PRICE
7.1 After delivery of gas has commenced, Buyer shall pay Seller for gas
delivered hereunder the applicable first of the month Inside FERC delivered to
pipeline index price for the locations listed on Exhibit "B" hereto (the
"Pricing Point(s)"), less the gathering and transportation costs and any other
costs set forth in Exhibit "B", [Confidential Treatment Requested] (the
"Contract Price"). The Contract Price shall remain in effect unless the
parties agree in writing to a different Contract Price. In the event the
relevant Inside FERC index price is no longer published, the parties will
choose a mutually acceptable alternative index price.
7.2 The index prices, gathering and transportation costs and other
deductions reflected on Exhibit "B" shall be reviewed and updated monthly by the
parties, to be representative of the market including the addition to Exhibit
"B" of the index prices, gathering and transportation costs and other deductions
applicable to after acquired production or later developed production added to
Exhibit "B" of this Agreement subsequent to the last update of Exhibit "B".
7.3 After-acquired production attributable to a single acquisition of
properties producing in the aggregate in excess of 25,000 MMBtu of gas per day,
to the extent not burdened or committed prior to or in connection with its
acquisition, shall be offered for sale hereunder. If Buyer and Seller reach
agreement upon the Contract Price for those incremental volumes, such volumes
shall be committed by Seller to the performance of this Agreement.
7.4 The index price component of the Contract Price to be applied for
the month in which (i) later-developed production or (ii) after-acquired
production of 25,000 MMBtu or less per day or (iii) production which has been
shut in due to unfavorable market conditions pursuant to Subsection 4.1(v) is
committed hereunder shall be [Confidential Treatment Requested] of the index
price (based on a mutually acceptable price index which is published daily) in
effect on the date on which such production is made available for sale, if
that date is after the first of any month, and shall remain in effect through
the end of the month.
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7.5 In the event of a disposition of property producing in the
aggregate in excess of 25,000 MMBtu of gas per day, Buyer may request
renegotiation of the Contract Price applicable to the remaining volumes
committed for sale hereunder. Such request shall be made within thirty (30) days
following Seller's notice of a property disposition pursuant to Section 3.2.
7.6 Any transportation rate refunds received by Buyer which are
attributable to volumes sold hereunder and transported under Buyer's
transportation arrangements upstream of the Pricing Points set forth in Exhibit
"B" shall be reimbursed to Seller within thirty (30) days of receipt by Buyer
thereof. Buyer's payment shall be accompanied by documentation sufficient to
identify the rate refund and the specific volumes to which it relates. Interest
at the rate set forth in Section 8.2 shall accrue and be payable in addition to
the principal amount not paid under this Section 7.6 within such thirty (30)-day
period.
7.7 All existing and future transportation rate discounts received by
Buyer arising out of pipeline regulatory proceedings to which Seller is an
active party, attributable to volumes sold hereunder and transported under
either party's transportation arrangements, shall be reflected in the
transportation component of the Contract Price appearing in Exhibit "B", where
the discount relates to transportation of gas upstream of any Pricing Point, and
shall be added to the Contract Price where the discount relates to
transportation of gas downstream of any Pricing Point; provided, however, that
if Buyer is able to demonstrate that a specific transportation alternative was
available involving the same transportation receipt and delivery points at a
rate ("alternative rate") lower than the undiscounted rate charged by the
discounting pipeline ("undiscounted rate"), then the amount of the discount to
be attributed to Seller shall be reduced by an amount equal to the difference
between the undiscounted rate and the alternative rate. Discounted
transportation arrangements shall be shown on Exhibit "B" and adjustments to
Exhibit "B" to track such rate discounts shall be made by Seller from time to
time and shall not require the agreement of Buyer.
7.8 Transportation rate refunds attributable to volumes sold and
purchased hereunder which are transported pursuant to transportation
arrangements of Seller or its affiliates shall remain the property of Seller.
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ARTICLE VIII.
BILLING AND PAYMENT
8.1 Seller shall render an invoice or invoices to Buyer reflecting the
quantity of gas delivered hereunder at each Delivery Point during the preceding
month, the estimated Contract Price in effect for such gas and the total amount
due therefor. Buyer shall pay, by wire transfer of funds to the account
specified in Section 14.5 hereof, the amount due as reflected in Seller's
invoice(s) on the later of ten (10) days following receipt of invoice or the
last day of the month following the month of production. Seller may base its
invoices on the best information known at a billing date, followed by
adjustments reflecting actual volumes delivered. The invoices shall include such
documentation as may be agreed upon by the parties. To the extent practicable,
revised invoices shall be sent in the month following any month in which an
invoice was prepared upon the basis of estimated volumes and estimated
deductions for gathering, transportation and other costs reflected in the
Contract Price. Buyer may adjust its payment of Seller's invoice to account for
volume information received by Buyer following the date of invoice, provided
that supporting documentation for the adjustment is furnished with payment. To
reflect experience gained hereunder which might suggest more efficient
procedures, Buyer and Seller shall review and, if needed, revise the billing and
payment terms set forth in this Section within four (4) months from the
effective date hereof. Such review shall take place at least fourteen (14) days
prior to the end of said four (4)-month period. At the time of such review the
parties shall agree whether an additional three (3)-month period is necessary
for review of billing procedures. At the end of the second such review period,
payment shall be required by the later of ten (10) days after receipt of
Seller's invoice or the twenty-sixth (26th) day of the month.
8.2 If payment is not made on the date due, Buyer shall be liable for
the principal amount due plus interest accruing on the unpaid balance from the
due date to the date of payment at the then current prime rate of interest
(Chase Manhattan, N.A.) plus 2% per annum (or, if less, the maximum rate
permitted by law). In addition, if Seller initiates legal action to recover
amounts owed by Buyer and is successful in recovering such amounts, Buyer shall
reimburse Seller for Seller's court costs and reasonable attorneys' fees
incurred
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in recovering such amounts. If Buyer prevails in such legal action, Seller shall
reimburse Buyer its court costs and reasonable attorneys' fees incurred in
defending against Seller's claim.
8.3 If Buyer in good faith disputes the amount of any statement or
invoice rendered by Seller, Buyer shall pay to Seller such amounts as it
concedes to be correct and shall notify Seller of the amounts in dispute not
later than the due date for payment established pursuant to the provisions of
this Article VIII. Buyer and Seller shall use all reasonable efforts to resolve
the disputed amounts. Upon such resolution, Buyer shall be liable for payment of
interest in accordance with Section 8.2 only upon such amounts not timely paid
by Buyer as are ultimately determined to be payable to Seller. Neither party
shall be liable for interest on amounts as to which a dispute arises due to
actions of third parties beyond the control of a party.
8.4 No adjustment shall be made concerning a disputed billing unless a
claim is made therefor prior to the expiration of two (2) years from the date of
such disputed billing. Each party will have the right at reasonable times and
upon reasonable notice to examine the books and records of the other party to
verify the accuracy of any statement, charge or computation hereunder.
8.5 [Confidential Treatment Requested]
12
<PAGE> 13
8.6 In the event of any regulatory action, pending litigation or other
occurrence which in Seller's good faith opinion indicates that a change is about
to take place in the standards by which Royalty is assessed on gas covered by
this Agreement, Seller shall have the right to require Buyer to account to
Seller for the Royalty portion of such gas sold and purchased hereunder at the
price Seller determines will satisfy the changed royalty standards, subject to
each party's right to release gas pursuant to Section 8.7.
8.7 If (a) [Confidential Treatment Requested] if Buyer receives a
request from Seller for price adjustment pursuant to Section 8.6, or if Buyer
becomes aware of any regulatory action, pending litigation or other occurrence
which in Buyer's good faith opinion indicates that a change is about to take
place in the standards by which Royalty is assessed on gas covered hereunder, or
(b) [Confidential Treatment Requested] if Seller becomes aware of any regulatory
action, pending litigation or other occurrence which in Seller's good faith
opinion indicates that a change is about to take place in the standards by which
Royalty is assessed on gas covered hereunder, then, in the case of (a) above,
Buyer shall have the right and, in the case of (b) above, Seller shall have the
right, at any time thereafter, to release gas that is the subject of the
potential indemnity or price adjustment claim ("Released Gas").
13
<PAGE> 14
Buyer shall not be entitled to release gas if Seller executes a written
agreement in form satisfactory to Buyer in which Seller agrees not to exercise
its indemnity or price adjustment rights with respect to the potential claims
relating to the Released Gas and agrees to indemnify Buyer against all claims,
damages, losses, liabilities, costs, and expenses (including attorneys' fees)
relating directly or indirectly to any such potential claims, INCLUDING ANY OF
THE FOREGOING RESULTING FROM BUYER'S OWN NEGLIGENCE.
8.8 If any gas is released from this Agreement pursuant to Section 8.7,
Buyer agrees that, at the request of Seller, Buyer shall market such gas on
behalf of and as the agent for Seller for a fee of [Confidential Treatment
Requested] per MMBtu, provided that Buyer shall not be obligated to market such
gas as agent for Seller unless Seller executes a written agreement in form
satisfactory to Buyer in which Seller agrees to indemnify Buyer against all
claims, damages, losses, liabilities, costs, and expenses (including reasonable
attorneys' fees) relating directly or indirectly to any [Confidential Treatment
Requested] relating to the Released Gas, INCLUDING ANY OF THE FOREGOING
RESULTING FROM BUYER'S OWN NEGLIGENCE.
ARTICLE IX.
EFFECTIVE DATE AND TERM
9.1 This Agreement shall be effective as of the date first hereinabove
written and shall continue and remain in full force and effect for a primary
term ending three (3) years from the effective date hereof, and year to year
thereafter unless terminated by either party as of the end of the primary term
upon notice delivered no later than one (1) year preceding the end of the
primary term, or as of any annual anniversary of such date upon notice given no
later than one year in advance of such anniversary.
ARTICLE X.
FORCE MAJEURE
10.1 In the event of either party hereto being rendered unable wholly
or in part by force majeure to carry out its obligations under this Agreement,
other than the obligation to
14
<PAGE> 15
make payments due hereunder, such party shall notify the other party by
telephone as soon as possible of the force majeure event and thereafter provide
full particulars of such force majeure in writing or by telegraph or telex to
the other party within ten (10) days after the occurrence of the cause relied
on. The obligations of the parties, so far as they are affected by such force
majeure, shall be suspended from the inception of such force majeure during the
continuance of any inability so caused but for no longer period, and such cause
shall be remedied with all reasonable dispatch.
The term "force majeure" as employed herein shall mean acts of God,
strikes, lockouts or other industrial disturbances, acts of the public enemy,
wars, blockades, insurrection, riots, epidemics, landslides, lightning,
earthquakes, fires, storms, floods, washouts, arrests and restraints of the
government (federal, state or local), inability of any party hereto to obtain
necessary materials, supplies or permits due to existing or future rules, orders
and laws of governmental authorities (federal, state or local), interruptions by
government or court orders, present and future orders of any regulatory body
having proper jurisdiction, civil disturbances, explosions, sabotage, breakage
or accident to machinery or lines of pipe, the necessity for making repairs or
alterations to machinery or lines of pipe, freezing of wells or lines of pipe,
partial or entire failure of wells, inability of any transporter of gas to
receive, transport or deliver gas sold and purchased hereunder (provided,
however, that loss of interruptible transportation on all pipelines transporting
gas after the first pipeline transporting gas downstream of any Pricing Point
shall not constitute an event of force majeure hereunder, provided further that
loss of interruptible transportation upstream of any Pricing Point shall
constitute an event of force majeure hereunder unless Seller has specified on
Exhibit "B" the use of firm transportation and such firm service on the affected
pipeline system is not similarly curtailed by the force majeure event), and any
other causes, whether of the kind herein enumerated or otherwise, not within the
control of the party claiming suspension and which by the exercise of due
diligence such party is unable to overcome. Such term shall also include the
inability to acquire, or the delays in acquiring, at reasonable cost and after
the exercise of reasonable diligence, any servitudes, right-of-way grants,
permits or licenses required to be obtained to enable a party hereto to fulfill
its obligations hereunder.
15
<PAGE> 16
10.2 Failure of Buyer's resale market shall not constitute a force
majeure event excusing performance hereunder.
10.3 Increases or decreases in Seller's gas supply due to allocation or
reallocation of past production by well operators shall not constitute events of
force majeure hereunder.
10.4 It is understood and agreed that the settlement of strikes or
lockouts shall be entirely within the discretion of the party having the
difficulty.
ARTICLE XI
IMBALANCE RESOLUTION
11.1 Seller agrees that gas will be delivered as nearly as practicable
at a relatively constant daily rate over the month, but each party shall be
entitled to operate within the tolerances specified by either a third-party
gatherer or in the effective filed gas tariff of the First Transporting
Pipeline.
11.2 The parties recognize that imbalances may occur on transporters.
Accordingly, Buyer and Seller agree to make every reasonable effort to promptly
clear such imbalances, with primary responsibility placed on the party which is
the shipper under the transportation agreement ("Shipper"). Further, the party
without a transportation agreement with the transporter ("Non-Shipper") agrees
to provide reasonable cooperation with the Shipper in its efforts to clear any
imbalance. (Where Buyer is not a shipper but instead resells to the shipper,
Buyer shall be deemed a "Shipper" for purposes of this Agreement.)
11.3 If any of the transporter(s) of gas sold and purchased hereunder
elects to transport in accordance with the General Terms and Conditions of its
current tariff which allow the transporter(s) to impose penalties, charges or
additional transportation charges for imbalance, scheduling, violation of orders
or directives of the transporter or any other reason allowed in its tariff,
including cash-outs and overrun charges, Buyer and Seller shall be obligated to
take such reasonable action as may be necessary in order to avoid imposition of
16
<PAGE> 17
such charges. If, during any month, Seller or Buyer receives an invoice from a
transporter which includes such a charge, the validity as well as the cause of
such charge shall be determined. If it is determined that the charge was imposed
as a result of acts or omissions of Buyer or Buyer's resale customer, then Buyer
shall pay such charge and/or shall indemnify Seller for any such charge or cost
as may be incurred by Seller. If it is determined that the charge was imposed as
a result of acts or omissions of Seller (including, without limitation, errors
made by Seller in the volume estimates provided under Section 3.3 which are not
corrected in time to permit Buyer to adjust nominations within any pipeline
tariff deadline), then Seller shall pay such charge and/or shall indemnify Buyer
for any such charge or cost as may be incurred by Buyer. Notwithstanding the
foregoing, it is agreed that neither party hereto shall be required to pay such
charges to the other party hereto incurring such charges unless: (i) the latter
party has provided the former with all imbalance notices within two (2) working
days of the time such notices are first received from the transporter by any
person or entity, whether or not such person or entity is a party to this
Agreement, and (ii) the latter party has used every reasonable effort to cure
the imbalance within the grace period, if any, permitted by the transporter's
tariff.
11.4 Notwithstanding anything to the contrary in Section 11.3, Seller
and Buyer agree that if the actual deliveries of gas are within three percent
(3%) (plus or minus) of the estimates provided by Seller pursuant to Section 3.3
(as timely corrected), then Seller will be paid the Contract Price for all
actual deliveries, without any adjustments for shortfalls or excess deliveries
(including cash-outs and overrun charges). If the actual deliveries, when
compared to the estimates, are outside such tolerance, then: (i) in the case of
any delivery shortfalls, Seller shall reimburse Buyer for the difference between
the Contract Price and the price paid by Buyer for substitute gas (if more than
the Contract Price), multiplied by the amount that such delivery shortfall
exceeds the three percent (3%) tolerance; and (ii) in the case of any excess
deliveries, Seller and Buyer will agree upon a mutually acceptable price
applicable to deliveries in excess of the three percent (3%) tolerance. Seller
and Buyer agree to review the procedures set forth in this Section 11.4 within
three (3) months from the effective date of this Agreement, and every three
months thereafter, and to amend such procedures if Seller and Buyer agree that
any changes are required in order to ensure fairness to either party.
17
<PAGE> 18
XII.
DEFAULT
12.1 If any of the following events shall occur and be continuing:
(i) Buyer shall fail to pay or cause to be paid any amount owing
under this Agreement when due (unless Buyer is in compliance
with Section 8.3 with respect to such unpaid amount); or
(ii) Either party shall fail to perform or observe any term,
covenant, or agreement contained in this Agreement
(including, without limitation, Buyer's failure to take gas
made available by Seller in accordance with the terms
hereof), and any such failure shall remain unremedied for
ten (10) days after written notice thereof shall have been
given by the other party; or
(iii) Either party shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay
its debts generally, or shall make a general assignment for
the benefit of creditors, or any proceeding shall be
instituted by or against that party seeking to adjudicate it
as bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protestation,
relief, or composition of it or its debts under any
proceeding relating to bankruptcy, insolvency, or
reorganization or relief of debtors, or seeking the entry of
any order for relief or the appointment of a receiver,
trustee, or other similar official for it or for any
substantial part of its property; or the party shall take
any corporate action to authorize any of the actions set
forth above in this subsection (iii);
then, and in any such event (and in addition to rather than in lieu of all other
remedies available to it), the non-defaulting party: (A) in the case of Seller
(a) may, by notice to
18
<PAGE> 19
Buyer, declare its obligation to deliver gas to Buyer hereunder to be
terminated, whereupon the same shall forthwith terminate, and (b) may, by notice
to Buyer, declare all amounts owing to Seller under this Agreement to be
forthwith due and payable, whereupon all such amounts shall become and be
forthwith due and payable, without demand, protest, or further notice of any
kind, all of which are hereby expressly waived by Buyer; and (B) in the case of
either party may, by notice to the defaulting party, declare this Agreement to
be terminated.
12.2 If at any time during the term hereof Seller reasonably believes
Buyer's ability to perform its obligations hereunder may be impaired, Seller
shall have the right, upon written request therefor, to receive adequate
assurance of Buyer's performance. If such assurance is not provided within five
(5) business days following Seller's notice, Seller may suspend delivery of gas
to Buyer hereunder. The rights granted in this Section shall be in addition to
the rights and remedies set forth in Section 12.1 hereof.
ARTICLE XIII.
NON-OWNED GAS
13.1 The phrases "gas production owned or controlled by Seller" and
"gas production acquired or obtained by Seller," as used in this Agreement
(including, but not limited to, in Section 3.1 hereof), shall mean only gas that
is either: (i) owned by Seller as and when it is produced at the wellhead,
because Seller owned the gas in place prior to production, or (ii) gas for which
Seller has the written authority of the third party owner(s) thereof to act as
such owner's Seller's representative, agent, or attorney-in-fact, with the
exclusive authority to commit such gas for sale under this Agreement for the
term hereof remaining at the time of such commitment. Such phrases "gas
production owned or controlled by Seller" and "gas production acquired or
obtained by Seller" do not include, by way of example, but not by limitation,
either: (a) gas purchased by Seller at or beyond the wellhead subsequent to the
date of this Agreement (provided, however, that gas sold by Seller as operator
on behalf of third-party owners, as described elsewhere in this Section 13.1,
shall not be considered "gas purchased by Seller at or beyond the wellhead"), or
(b) gas produced from wells operated by Seller that is attributable to the
interest(s) of the non-
19
<PAGE> 20
operator(s) in such wells, which Seller has the right to sell, if any such sale
by Seller is limited to agreements for a term of less than the term of this
Agreement remaining at the time of the commitment for sale, or (c) Seller's
non-operated gas from wells producing less than 500 MMBtu per day per Delivery
Point. All gas that is not "owned or controlled by Seller" or "acquired or
obtained by Seller," as defined above, is referred to herein as "Non-Owned Gas."
If, as and when Seller desires to make any Non-Owned Gas available for sale
under this Agreement, or to sell any Non-Owned Gas under this Agreement, it
shall provide to Buyer all of the same notifications as are required hereunder
with respect to gas owned or controlled by Seller, except that such
notifications shall expressly include a statement identifying the quantities of
Non-Owned Gas covered thereby, the owner(s) thereof, and the source(s) thereof.
Buyer agrees to purchase any such Non-Owned Gas, and it shall be sold by Seller
and paid for by Buyer pursuant to all of the other terms and provisions of this
Agreement, except that the price to be paid by Buyer to Seller for such
Non-Owned Gas shall be determined by mutual agreement of the parties hereto at
the time Seller notifies Buyer of the availability of such Non-Owned Gas;
provided, however, that if the parties do not agree on a price, Buyer shall not
be obligated to purchase the gas.
13.2 Notwithstanding anything to the contrary in this Article XIII,
Seller shall be permitted until August 1, 1995 to sell under this Agreement all
gas which Seller is authorized, as of the effective date of this Agreement, to
sell in its capacity as operator on behalf of non-operator(s). Beginning August
1, 1995, "gas production owned or controlled by Seller" and "gas production
acquired or obtained by Seller" shall not include gas sold by Seller in its
capacity as operator on behalf of non-operators unless Seller is legally
required to sell such gas and Seller has been provided with written
authorization by the non-operator(s) to commit their gas for sale under the
terms of this Agreement for the term hereof remaining at the time of such
commitment.
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<PAGE> 21
ARTICLE XIV.
MISCELLANEOUS
14.1 Seller hereby warrants title to the gas delivered hereunder,
Seller's right to sell the same, and that same is free from all liens and
adverse claims. Seller shall be responsible for all production, severance or
similar taxes and all royalties due and payments to mineral and royalty owners
under Seller's leases; provided, however, that where Buyer is required by law to
be responsible for the payment of production, severance or similar taxes, Buyer
shall make such payment and shall, in addition, pay to Seller an amount equal to
such payment if Seller is able to demonstrate that the amount of such payment is
reflected in the applicable pricing index. Seller does hereby indemnify Buyer,
its successors and assigns and save them harmless from all suits, actions,
debts, accounts, damages, costs, losses and expenses arising from or out of
adverse claims of any or all parties to said gas which are applicable before
title to the gas passes to Buyer.
14.2 As between the parties hereto, Seller shall be responsible for any
damage or injury caused by the gas until it has been delivered to Buyer at the
Delivery Point(s), after which Buyer shall be responsible for any damage or
injury caused thereby; provided, however, that if Seller causes gas to be
processed downstream of any Delivery Point, Buyer shall not be responsible for
any damage or injury caused by the gas while it is processed. Title to the gas
shall pass to Buyer at the Delivery Point(s).
14.3 The waiver by either party of any breach of any of the provisions
of this Agreement shall not constitute a continuing waiver of other breaches of
the same or other provisions of this Agreement.
14.4 This Agreement is subject to all present and future valid laws,
orders, rules and regulations of any regulatory body of the Federal Government
or any State having jurisdiction.
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<PAGE> 22
14.5 All notices provided for herein shall be in writing and shall be
deemed to be delivered when deposited in the United States mail, postage
prepaid, and addressed as follows, or at such other address as either party may
by like notice give to the other party.
SELLER: Wire Transfer Payments:
-----------------------
Nations Bank of Texas, N.A.
ABA #111000025
Acount #4140259241
The Houston Exploration Company
Confirmation of Transfer:
-------------------------
Celeste Vick
1331 Lamar, Suite 1065
Houston, Texas 77010
Telephone: (713) 652-2847
Telefax: (713) 652-4017
Notices and Correspondence:
---------------------------
Lester Lipperdt
1331 Lamar, Suite 1065
Houston, Texas 77010
Telephone: (713) 652-2847
Telefax: (713) 652-4017
22
<PAGE> 23
BUYER: Invoices:
PennUnion Energy Services, L.L.C.
Attention: Accounting Department
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
NOTICES AND CORRESPONDENCE
Kenneth L. Douglass
PennUnion Energy Services, L.L.C.
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
(713) 622-4170
14.6 This Agreement shall not be assigned by either party without the
prior written consent of the other party.
14.7 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS PRINCIPLES OF
CONFLICTS OF LAWS. Any dispute concerning the rights and obligations of Buyer
and Seller hereunder, or the interpretation of any provision of this Agreement,
shall be litigated in the state or federal courts of Harris County, Texas.
14.8 This Agreement sets forth all understandings of Buyer and Seller
with respect to the purchase and sale of gas covered herein. All other
agreements, oral or written, concerning such purchase and sale are merged into
and superseded by this Agreement. No modification or amendment hereof shall be
effective unless in writing and signed by both parties.
23
<PAGE> 24
14.9 The terms of this Agreement shall be kept confidential by Buyer
and Seller except to the extent that any information is required to be disclosed
by law or must be disclosed to a third party for the purpose of arranging
transportation of gas subject to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed in duplicate
originals by the parties hereto as of the day and year first herein written.
THE HOUSTON EXPLORATION COMPANY
By: /s/ James G. Floyd
-------------------------------------
SELLER
Name:
-----------------------------------
Title: President & CEO
----------------------------------
PENNUNION ENERGY SERVICES, L.L.C.
By: /s/ L.E. Maddox
-------------------------------------
BUYER
Name: L.E. Maddox
-----------------------------------
Title: President
----------------------------------
24
<PAGE> 25
EXHIBIT A
To Gas Sales Agreement Dated April 1,1995 Between Houston Exploration
Company and PennUnion Energy Services, L.L.C.
GAS EXCLUDED BY SELLER
SUPPLY DESIGNATION PIPELINE
Vermilion 95 Columbia Gulf
S. Marsh Island 253 Tennessee
S. Marsh Island 252 Tennessee
Blue Bayou Bel #1 Transco
Galveston Island 272 Dow
High Island 138 Black Marlin
West Cameron 76 HIOS
Main Pass 107 Southern Natural
Galveston Island 252 Dow
All gas other than The Houston Exploration working
Interest gas listed on Exhibit B to this Agreement
<PAGE> 26
EXHIBIT B
To Gas Sales Agreement Dated April 1,1995 Between Houston Exploration Company
and PennUnion Energy Services, L.L.C.
<TABLE>
<CAPTION>
RECEIPT
POINT GATHERING TRANSPORTATION
SUPPLY DESIGNATION DESCRIPTION PIPELINE RATE RATE PRICING POINT INDEX
- ------------------ ----------- -------- ---- ---- -------------------
<S> <C> <C> <C> <C> <C>
Mustang Island 785 58129 NNG(MOPS) NNG-$.1836(Note 1) [.2(IF HSC-$0.09)+.6(IF FGT Z1)+.2(IF NGPL TX)]
Eugene Island 48 0121611 Tennessee IF TENNESSEE - LA
Matagorda Island 650,671 Tomcat Terminus Tomcat [.75(IF TETCO-STX)+.25(IF HSC-$.0.06)]
</TABLE>
Note 1: Excludes the deduct for fuel which will be based on the netback wellhead
price which changes each month.
<PAGE> 1
EXHIBIT 10.2
GAS SALES AGREEMENT
THIS AGREEMENT is made and entered by and between FUEL RESOURCES INC.
AND FUEL RESOURCES PRODUCTION AND DEVELOPMENT INC. both Delaware corporations,
hereinafter referred to as "Seller" and PENNUNION ENERGY SERVICES, L.L.C., a
Delaware limited liability company, hereinafter referred to as "Buyer," to be
effective as of the 1st day of April, 1995.
W I T N E S S E T H:
WHEREAS, Seller desires to sell and Buyer desires to purchase natural
gas as specified in this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, Seller and Buyer do hereby contract and agree with each other as
follows:
ARTICLE I.
DEFINITIONS
For the purposes hereof, the following words, phrases and terms shall
have meanings as defined below:
1.1 The word "gas" shall mean any mixture of hydrocarbons and
noncombustible gases in a gaseous state, consisting essentially of methane.
1.2 The word "day" shall mean a period of twenty-four (24) consecutive
hours commencing at 7:00 a.m. Central Time ( C.T. ) on one calendar day and
ending at 7:00 a.m. C.T. on the following calendar day.
1.3 The word "month" shall mean the period beginning at 7:00 a.m. C.T.
on the first day of a calendar month and ending at 7:00 a.m. C.T. on the first
day of the next succeeding calendar month.
1
<PAGE> 2
1.4 A "year" shall be a period of twelve (12) consecutive months.
1.5 The word "tariff" shall mean the applicable rate schedules, terms
and conditions and other provisions filed with the agency having jurisdiction
over the service provided by a transporter of gas sold and purchased hereunder.
1.6 A "transporter" of gas (or a "pipeline") shall mean an interstate
or intrastate pipeline transporting gas sold and purchased hereunder.
1.7 The abbreviation "BTU" shall mean British Thermal Unit. One (1) BTU
shall mean one British Thermal Unit, and is defined as the quantity of heat
required to raise the temperature of one (1) pound avoirdupois of pure water
from fifty-eight and five-tenths degrees Fahrenheit (58.5 F) to fifty-nine and
five-tenths degrees Fahrenheit (59.5F).
1.8 The abbreviation "MMBtu" shall mean one million (1,000,000) British
Thermal Units.
1.9 An "affiliate" shall mean, in relation to any entity, another
entity which controls, is controlled by or is under common control with such
entity. For purposes of this Agreement, Buyer and Seller shall not be deemed
affiliates.
1.10 The term "Contract Price" shall have the meaning set forth in
Section 7.1.
ARTICLE II.
SUBJECT MATTER
2.1 Subject to the terms and conditions of this Agreement, Seller
hereby agrees to sell to Buyer and Buyer hereby agrees to purchase from Seller
quantities of gas in accordance with the terms and conditions herein stipulated.
2
<PAGE> 3
2.2 The parties understand and agree that Buyer intends to make
arrangements for the resale and possibly the transportation of gas sold
hereunder, and Seller agrees to provide reasonable cooperation as may be
necessary to effectuate such resale and transportation.
ARTICLE III.
QUANTITY
3.1 During the term hereof and subject to any limitations herein set
forth, Seller shall sell to Buyer and Buyer shall purchase from Seller all gas
production owned or controlled by Seller (as defined in Article XIII hereof) in
the United States of America (the lower 48 states only) on the date hereof
(except the gas described on Exhibit "A" hereto as may be amended from time to
time), together with all gas production subsequently developed therefrom
("later-developed production"), in addition to gas production ("after-acquired
production") acquired or obtained by Seller (as defined in Article XIII hereof)
in the United States of America (the lower 48 states only) after the effective
date hereof, to the extent the after-acquired production is not burdened or
committed prior to or in connection with its acquisition; provided, however,
that after-acquired production attributable to a single acquisition of
properties producing in the aggregate in excess of 20,000 MMBtu of gas, per day
shall be committed for sale hereunder only at such time as the parties agree
upon the Contract Price of those volumes pursuant to Section 7.3 hereof. Seller
shall give Buyer notice as early as possible, but not less than thirty (30)
days in advance, of Seller's intent to commit to the performance of this
Agreement later-developed production or after-acquired production of 5,000
MMBtu or more of gas per day per Delivery Point.
3.2 Gas which is covered hereby shall no longer be committed to the
performance of this Agreement upon the disposition, to a third party which is
not an affiliate of Seller, of the property(ies) from which the gas is produced.
A disposition of property(ies) shall include a sale, trade, exchange or other
disposition of property(ies) which will exclude from Seller's commitment
hereunder the gas produced from the property(ies) (excluding, however, any
disposition which diminishes committed gas volumes by less than 1,000 MMBtu of
gas per day). Seller shall notify Buyer at least ninety (90) days before (or, if
later, Seller shall notify Buyer on the date on which Seller becomes aware of a
disposition pursuant to an outstanding
3
<PAGE> 4
contractual obligation) any such disposition. In connection with any disposition
of property(ies) committed hereunder producing in the aggregate in excess of
5,000 MMBtu of gas per day, Seller shall request of any third-party purchaser of
property(ies) that Buyer be given the right to meet the initial offer made to
the purchaser of the property(ies) to buy gas attributable to the property(ies)
being disposed of. Upon the disposition of any property(ies) producing in the
aggregate in excess of 20,000 MMBtu of gas per day, Buyer shall have the right
pursuant to Section 7.5 to initiate renegotiation of the Contract Price
applicable to the remaining volumes committed for sale hereunder.
3.3 At least seven (7) business days prior to the applicable pipeline
nomination deadline for the first of each month, and at least twenty-four (24)
hours prior to the applicable pipeline nomination deadline for other than
first-of-the-month, Seller shall provide a good faith estimate of volumes
available each day for sale hereunder at the Delivery Point(s). Such estimates,
together with other relevant operational information available to each party,
shall be provided for use in making arrangements for the transportation and
disposition of gas purchased hereunder. The parties shall meet at either party's
initiative to refine such estimates or the procedures by which such estimates
are made. Seller shall advise Buyer of its intention to shut in gas due to
unfavorable market conditions by the deadline set forth in Section 4.1(v). Each
party shall promptly notify the other of any changes in the information provided
to the other for such purpose, as well as any event reasonably calculated to
change the information previously provided. Either party notified of any such
change shall be obligated to take all reasonable action consistent with
applicable pipeline tariffs to avoid the imposition of imbalance, cash-out and
similar penalties which might be imposed by any transporter of gas sold and
purchased hereunder.
ARTICLE IV.
RESERVATIONS
4.1 Seller reserves unto itself, its successors, assigns and affiliates
the following rights and a quantity of gas sufficient to satisfy such rights:
4
<PAGE> 5
(i) To operate Seller's leaseholds, lands and/or interests therein,
free from any control by Buyer, in such manner as Seller deems
advisable, including the right (but never the obligation) to
drill new wells, to repair and rework old wells, to renew and
extend (in whole or in part) any lease, to abandon any well or
surrender any lease (in whole or in part) for any reason, and to
abandon, modify, extend or dispose of any facilities owned or
installed (in whole or in part) by Seller.
(ii) To deliver gas to lessors in quantities sufficient to fulfill
Seller's lease obligations from time to time including, without
limitation, the right to deliver gas to satisfy take-in-kind
lease provisions.
(iii) To use gas for the development and operation of Seller's leases.
(iv) To produce gas without waste and in accordance with prudent oil
and gas field practices. Seller shall not be required to produce
any well at a rate in excess of the rate fixed by law or
regulation or in excess of the rate of flow which Seller
determines, in its sole discretion, exercised in good faith,
should be produced from such well.
(v) To shut in gas due to unfavorable market conditions or for
operational reasons. Seller shall notify Buyer at least
twenty-four (24) hours prior to any applicable deadline in the
transporter(s)' tariffs for nominations (or nomination changes)
of Seller's decision to shut in gas, the volume of gas affected
by such decision and the estimated shut-in period. Gas reserved
pursuant to this Subsection 4.1(v) shall not be sold to a third
party during any shut-in period. For gas volumes shut in due to
unfavorable market conditions, Seller shall reimburse Buyer the
difference, if any, between the cost of gas which must be
purchased to satisfy Buyer's term sales commitments which are
specific to particular Delivery Point(s) hereunder and the
Contract Price for such gas. Seller also shall reimburse Buyer
for any charges Buyer incurs for firm
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transportation which is specific to particular Delivery Points
hereunder and which Buyer is unable to utilize as a result of
Seller's decision to shut in gas due to unfavorable market
conditions. For purposes of this subsection, Buyer's term sales
commitments shall be those pursuant to which Buyer is obligated
to furnish gas for a period exceeding thirty (30) days. Buyer
shall furnish, at Seller's request, a list of Buyer's firm sales
and transportation commitments which are specific to particular
Delivery Point(s) hereunder. Buyer shall be obligated to use its
best efforts to obtain replacement supplies at the lowest
available price consistent with those term sales commitments.
(vi) To encumber gas production pursuant to prepayment, production
payment or other financing arrangements, including the right to
deliver gas that is subject to the provisions of this Agreement
to any third party in connection with such arrangements;
provided, however, that in the case of "gas production owned and
controlled by Seller" and "later developed production" (as
defined in Section 3.1), but not in the case of "after acquired
production" (as defined in Section 3.1), no such encumbrance may
be effected if it would result (at the time it is effected) in
less than sixty-six and two-thirds percent (66-2/3%) of such
production, in the aggregate remaining subject to either (i)
Seller's obligations under this Agreement or (ii) the agreement
of third parties to whom such production is delivered in
connection with prepayments, production payments or other
financing arrangements to be subject to and bound by the same
obligations as Seller under this Agreement, including without
limitation the obligation to sell such gas to Buyer under the
terms of this Agreement. The foregoing limitation shall not apply
to "after acquired production" if the encumbrance of such after
acquired production occurs in connection with its acquisition by
Seller. For purposes of this subsection, after acquired
production shall be treated as gas owned and controlled by Seller
and later developed production in the case of encumbrances not
occurring in connection with
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the acquisition of such production by Seller. Any third party
to whom gas is delivered pursuant to this Subsection 4.1(vi)
shall also have the right to deliver gas to any other third
party in accordance with the terms of this subsection.
(vii) Subject to the provisions of Article III, to dispose of
properties the production from which is committed to the
performance of this Agreement.
(viii) To process gas to be delivered hereunder for the extraction of
substances contained therein. Such processing shall occur at
the point or points as-Seller may designate (which may be
downstream of the Delivery Point(s)), for the recovery and
disposition of liquids, liquefiable hydrocarbons (including
only such methane as is necessarily or unavoidably removed in
processing) and nonhydrocarbons (including sulphur, helium,
carbon dioxide or other substances which can be extracted from
the gas sold or to be sold and purchased hereunder).
4.2 If gas purchased hereunder is processed downstream of any Delivery
Point, volumes delivered and paid for pursuant to this Agreement shall be
adjusted by Seller for plant volume and Btu reductions pursuant to Seller's
processing agreements. Invoices or statements submitted by Seller hereunder
shall reflect Seller's best estimate of plant volume and Btu reductions for the
period covered by the invoice or statement, and subsequent billings shall
include an adjustment to reflect any difference between Seller's original
estimates of plant volume and Btu reductions and the actual amount of such
reductions as finally determined by Seller and agreed to by Buyer, such
reductions to be derived from statements provided by plant operators. Seller at
its option may account to Buyer for such reductions by restoring the difference
in MMBtu from other sources of gas meeting the quality specifications hereof at
a mutually agreed location. Seller shall reimburse Buyer for any costs or Btu
reductions incurred by Buyer which are associated with the transportation of
plant volume. Buyer shall cooperate with Seller and shall provide, pursuant to
one or more ancillary agreements, such assistance as Seller may reasonably
request to facilitate the exercise
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of Seller's processing rights, including, without limitation, assistance in
accounting for and handling plant volume and Btu reductions, condensate removal
and transportation and any other matters arising in connection with the
processing of gas by Seller.
ARTICLE V.
DELIVERY POINT AND INDEX PRICE MATRIX
5.1 Gas shall be delivered at the points set forth on Exhibit "B"
hereto (the "Delivery Point(s)") as such Exhibit "B" may be updated from time to
time by agreement of the parties.
ARTICLE VI.
QUALITY, PRESSURE AND MEASUREMENT
6.1 Unless otherwise provided elsewhere in this Agreement, all gas sold
and purchased hereunder shall be of the same quality, delivered at the same
pressure and measured in the same manner as provided in the effective filed
tariff of the first pipeline transporting gas sold or to be sold pursuant to
this Agreement ("First Transporting Pipeline") or, if applicable, as provided
pursuant to contractual specifications of any third party gatherer.
6.2 As to gas covered hereunder which fails to meet the quality or
pressure specifications above set forth, either party may, but neither shall be
obligated to, install and operate facilities to bring the gas into conformity
with such specifications. Any such facilities shall be installed, operated and
maintained at the sole cost, risk and expense of the party which elected to
install such facilities. Either party may discontinue the operation of such
facilities if, in the sole judgment of the party installing same, such operation
is uneconomical. If neither party elects to install or continue the operation of
such facilities, nonconforming gas shall be released from the terms hereof
within thirty (30) days of Buyer's or Seller's written request for such a
release.
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ARTICLE VII.
PRICE
7.1 After delivery of gas has commenced, Buyer shall pay Seller for gas
delivered hereunder the applicable first of the month Inside FERC delivered to
pipeline index price for the locations listed on Exhibit "B" hereto (the
"Pricing Point(s)"), less the gathering and transportation costs and any other
costs set forth in Exhibit "B", [Confidential Treatment Requested] per MMBtu
(the "Contract Price"). The Contract Price shall remain in effect unless the
parties agree in writing to a different Contract Price. In the event the
relevant Inside FERC index price is no longer published, the parties will
choose a mutually acceptable alternative index price.
7.2 The index prices, gathering and transportation costs and other
deductions reflected on Exhibit "B" shall be reviewed and updated monthly by the
parties, to be representative of the market including the addition to Exhibit
"B" of the index prices, gathering and transportation costs and other deductions
applicable to after acquired production or later developed production added to
Exhibit "B" of this Agreement subsequent to the last update of Exhibit "B".
7.3 After-acquired production attributable to a single acquisition of
properties producing in the aggregate in excess of 20,000 MMBtu of gas per day,
to the extent not burdened or committed prior to or in connection with its
acquisition, shall be offered for sale hereunder. If Buyer and Seller reach
agreement upon the Contract Price for those incremental volumes, such volumes
shall be committed by Seller to the performance of this Agreement.
7.4 The index price component of the Contract Price to be applied for
the month in which (i) later-developed production or (ii) after-acquired
production of 20,000 MMBtu or less per day or (iii) production which has been
shut in due to unfavorable market conditions pursuant to Subsection 4.1(v) is
committed hereunder shall be [Confidential Treatment Requested] of the index
price (based on a mutually acceptable price index which is published daily) in
effect on the date on which such production is made available for sale, if that
date is after the first of any month, and shall remain in effect through the end
of the month.
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7.5 In the event of a disposition of property producing in the
aggregate in excess of 25,000 MMBtu of gas per day, Buyer may request
renegotiation of the Contract Price applicable to the remaining volumes
committed for sale hereunder. Such request shall be made within thirty (30) days
following Seller's notice of a property disposition pursuant to Section 3.2.
7.6 Any transportation rate refunds received by Buyer which are
attributable to volumes sold hereunder and transported under Buyer's
transportation arrangements upstream of the Pricing Points set forth in Exhibit
"B" shall be reimbursed to Seller within thirty (30) days of receipt by Buyer
thereof. Buyer's payment shall be accompanied by documentation sufficient to
identify the rate refund and the specific volumes to which it relates. Interest
at the rate set forth in Section 8.2 shall accrue and be payable in addition to
the principal amount not paid under this Section 7.6 within such thirty (30)-day
period.
7.7 All existing and future transportation rate discounts received by
Buyer arising out of pipeline regulatory proceedings to which Seller is an
active party, attributable to volumes sold hereunder and transported under
either party's transportation arrangements, shall be reflected in the
transportation component of the Contract Price appearing in Exhibit "B", where
the discount relates to transportation of gas upstream of any Pricing Point, and
shall be added to the Contract Price where the discount relates to
transportation of gas downstream of any Pricing Point; provided, however, that
if Buyer is able to demonstrate that a specific transportation alternative was
available involving the same transportation receipt and delivery points at a
rate ("alternative rate") lower than the undiscounted rate charged by the
discounting pipeline ("undiscounted rate"), then the amount of the discount to
be attributed to Seller shall be reduced by an amount equal to the difference
between the undiscounted rate and the alternative rate. Discounted
transportation arrangements shall be shown on Exhibit "B" and adjustments to
Exhibit "B" to track such rate discounts shall be made by Seller from time to
time and shall not require the agreement of Buyer.
7.8 Transportation rate refunds attributable to volumes sold and
purchased hereunder which are transported pursuant to transportation
arrangements of Seller or its affiliates shall remain the property of Seller.
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ARTICLE VIII.
BILLING AND PAYMENT
8.1 Seller shall render an invoice or invoices to Buyer reflecting the
quantity of gas delivered hereunder at each Delivery Point during the preceding
month, the estimated Contract Price in effect for such gas and the total amount
due therefor. Buyer shall pay, by wire transfer of funds to the account
specified in Section 14.5 hereof, the amount due as reflected in Seller's
invoice(s) on the later of ten (10) days following receipt of invoice or the
last day of the month following the month of production. Seller may base its
invoices on the best information known at a billing date, followed by
adjustments reflecting actual volumes delivered. The invoices shall include such
documentation as may be agreed upon by the parties. To the extent practicable,
revised invoices shall be sent in the month following any month in which an
invoice was prepared upon the basis of estimated volumes and estimated
deductions for gathering, transportation and other costs reflected in the
Contract Price. Buyer may adjust its payment of Seller's invoice to account for
volume information received by Buyer following the date of invoice, provided
that supporting documentation for the adjustment is furnished with payment. To
reflect experience gained hereunder which might suggest more efficient
procedures, Buyer and Seller shall review and, if needed, revise the billing and
payment terms set forth in this Section within four (4) months from the
effective date hereof. Such review shall take place at least fourteen (14) days
prior to the end of said four (4)-month period. At the time of such review the
parties shall agree whether an additional three (3)-month period is necessary
for review of billing procedures. At the end of the second such review period,
payment shall be required by the later of ten (10) days after receipt of
Seller's invoice or the twenty-sixth (26th) day of the month.
8.2 If payment is not made on the date due, Buyer shall be liable for
the principal amount due plus interest accruing on the unpaid balance from the
due date to the date of payment at the then current prime rate of interest
(Chase Manhattan, N.A.) plus 2% per annum (or, if less, the maximum rate
permitted by law). In addition, if Seller initiates legal action to recover
amounts owed by Buyer and is successful in recovering such amounts, Buyer shall
reimburse Seller for Seller's court costs and reasonable attorneys' fees
incurred in
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recovering such amounts. If Buyer prevails in such legal action, Seller shall
reimburse Buyer its court costs and reasonable attorneys' fees incurred in
defending against Seller's claim.
8.3 If Buyer in good faith disputes the amount of any statement or
invoice rendered by Seller, Buyer shall pay to Seller such amounts as it
concedes to be correct and shall notify Seller of the amounts in dispute not
later than the due date for payment established pursuant to the provisions of
this Article VIII. Buyer and Seller shall use all reasonable efforts to resolve
the disputed amounts. Upon such resolution, Buyer shall be liable for payment of
interest in accordance with Section 8.2 only upon such amounts not timely paid
by Buyer as are ultimately determined to be payable to Seller. Neither party
shall be liable for interest on amounts as to which a dispute arises due to
actions of third parties beyond the control of a party.
8.4 No adjustment shall be made concerning a disputed billing unless a
claim is made therefor prior to the expiration of two (2) years from the date of
such disputed billing. Each party will have the right at reasonable times and
upon reasonable notice to examine the books and records of the other party to
verify the accuracy of any statement, charge or computation hereunder.
8.5 [Confidential Treatment Requested]
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8.6 In the event of any regulatory action, pending litigation or other
occurrence which in Seller's good faith opinion indicates that a change is about
to take place in the standards by which Royalty is assessed on gas covered by
this Agreement, Seller shall have the right to require Buyer to account to
Seller for the Royalty portion of such gas sold and purchased hereunder at the
price Seller determines will satisfy the changed royalty standards, subject to
each party's right to release gas pursuant to Section 8.7.
8.7 If (a) [Confidential Treatment Requested] if Buyer receives a
request from Seller for price adjustment pursuant to Section 8.6, or if Buyer
becomes aware of any regulatory action, pending litigation or other occurrence
which in Buyer's good faith opinion indicates that a change is about to take
place in the standards by which Royalty is assessed on gas covered hereunder, or
(b) [Confidential Treatment Requested] if Seller becomes aware of any
regulatory action, pending litigation or other occurrence which in Seller's good
faith opinion indicates that a change is about to take place in the standards by
which Royalty is assessed on gas covered hereunder, then, in the case of (a)
above, Buyer shall have the right and, in the case of (b) above, Seller shall
have the right, at any time thereafter, to release gas that is the subject of
the potential indemnity or price adjustment claim ("Released Gas"). Buyer shall
not be entitled to release gas if Seller executes a written agreement in form
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satisfactory to Buyer in which Seller agrees not to exercise its indemnity or
price adjustment rights with respect to the potential claims relating to the
Released Gas and agrees to indemnify Buyer against all claims, damages, losses,
liabilities, costs, and expenses (including attorneys' fees) relating directly
or indirectly to any such potential claims, INCLUDING ANY OF THE FOREGOING
RESULTING FROM BUYER'S OWN NEGLIGENCE.
8.8 If any gas is released from this Agreement pursuant to Section 8.7,
Buyer agrees that, at the request of Seller, Buyer shall market such gas on
behalf of and as the agent for Seller for a fee of [Confidential Treatment
Requested] per MMBtu, provided that Buyer shall not be obligated to market such
gas as agent for Seller unless Seller executes a written agreement in form
satisfactory to Buyer in which Seller agrees to indemnify Buyer against all
claims, damages, losses, liabilities, costs, and expenses (including reasonable
attorneys' fees) relating directly or indirectly to any [Confidential Treatment
Requested] Royalty Claims relating to the Released Gas, INCLUDING ANY OF THE
FOREGOING RESULTING FROM BUYER'S OWN NEGLIGENCE.
ARTICLE IX.
EFFECTIVE DATE AND TERM
9.1 This Agreement shall be effective as of the date first hereinabove
written and shall continue and remain in full force and effect for a primary
term ending three (3) years from the effective date hereof, and year to year
thereafter unless terminated by either party as of the end of the primary term
upon notice delivered no later than one (1) year preceding the end of the
primary term, or as of any annual anniversary of such date upon notice given no
later than one year in advance of such anniversary.
ARTICLE X.
FORCE MAJEURE
10.1 In the event of either party hereto being rendered unable wholly
or in part by force majeure to carry out its obligations under this Agreement,
other than the obligation to make payments due hereunder, such party shall
notify the other party by telephone as soon as possible of the force majeure
event and thereafter provide full particulars of such force
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majeure in writing or by telegraph or telex to the other party within ten (10)
days after the occurrence of the cause relied on. The obligations of the
parties, so far as they are affected by such force majeure, shall be suspended
from the inception of such force majeure during the continuance of any inability
so caused but for no longer period, and such cause shall be remedied with all
reasonable dispatch.
The term "force majeure" as employed herein shall mean acts of
God, strikes, lockouts or other industrial disturbances, acts of the public
enemy, wars, blockades, insurrection, riots, epidemics, landslides, lightning,
earthquakes, fires, storms, floods, washouts, arrests and restraints of the
government (federal, state or local), inability of any party hereto to obtain
necessary materials, supplies or permits due to existing or future rules, orders
and laws of governmental authorities (federal, state or local), interruptions by
government or court orders, present and future orders of any regulatory body
having proper jurisdiction, civil disturbances, explosions, sabotage, breakage
or accident to machinery or lines of pipe, the necessity for making repairs or
alterations to machinery or lines of pipe, freezing of wells or lines of pipe,
partial or entire failure of wells, inability of any transporter of gas to
receive, transport or deliver gas sold and purchased hereunder (provided,
however, that loss of interruptible transportation on all pipelines transporting
gas after the first pipeline transporting gas downstream of any Pricing Point
shall not constitute an event of force majeure hereunder, provided further that
loss of interruptible transportation upstream of any Pricing Point shall
constitute an event of force majeure hereunder unless Seller has specified on
Exhibit "B" the use of firm transportation and such firm service on the affected
pipeline system is not similarly curtailed by the force majeure event), and any
other causes, whether of the kind herein enumerated or otherwise, not within the
control of the party claiming suspension and which by the exercise of due
diligence such party is unable to overcome. Such term shall also include the
inability to acquire, or the delays in acquiring, at reasonable cost and after
the exercise of reasonable diligence, any servitudes, right-of-way grants,
permits or licenses required to be obtained to enable a party hereto to fulfill
its obligations hereunder.
10.2 Failure of Buyer's resale market shall not constitute a force
majeure event excusing performance hereunder.
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10.3 Increases or decreases in Seller's gas supply due to allocation or
reallocation of past production by well operators shall not constitute events of
force majeure hereunder.
10.4 It is understood and agreed that the settlement of strikes or
lockouts shall be entirely within the discretion of the party having the
difficulty.
ARTICLE XI
IMBALANCE RESOLUTION
11.1 Seller agrees that gas will be delivered as nearly as practicable
at a relatively constant daily rate over the month, but each party shall be
entitled to operate within the tolerances specified by either a third-party
gatherer or in the effective filed gas tariff of the First Transporting
Pipeline.
11.2 The parties recognize that imbalances may occur on transporters.
Accordingly, Buyer and Seller agree to make every reasonable effort to promptly
clear such imbalances, with primary responsibility placed on the party which is
the shipper under the transportation agreement ("Shipper"). Further, the party
without a transportation agreement with the transporter ("Non-Shipper") agrees
to provide reasonable cooperation with the Shipper in its efforts to clear any
imbalance. (Where Buyer is not a shipper but instead resells to the shipper,
Buyer shall be deemed a "Shipper" for purposes of this Agreement.)
11.3 If any of the transporter(s) of gas sold and purchased hereunder
elects to transport in accordance with the General Terms and Conditions of its
current tariff which allow the transporter(s) to impose penalties, charges or
additional transportation charges for imbalance, scheduling, violation of orders
or directives of the transporter or any other reason allowed in its tariff,
including cash-outs and overrun charges, Buyer and Seller shall be obligated to
take such reasonable action as may be necessary in order to avoid imposition of
such charges. If, during any month, Seller or Buyer receives an invoice from a
transporter which includes such a charge, the validity as well as the cause of
such charge shall be determined. If it is determined that the charge was imposed
as a result of acts or omissions of Buyer or Buyer's resale customer, then Buyer
shall pay such charge and/or shall indemnify
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Seller for any such charge or cost as may be incurred by Seller. If it is
determined that the charge was imposed as a result of acts or omissions of
Seller (including, without limitation, errors made by Seller in the volume
estimates provided under Section 3.3 which are not corrected in time to permit
Buyer to adjust nominations within any pipeline tariff deadline), then Seller
shall pay such charge and/or shall indemnify Buyer for any such charge or cost
as may be incurred by Buyer. Notwithstanding the foregoing, it is agreed that
neither party hereto shall be required to pay such charges to the other party
hereto incurring such charges unless: (i) the latter party has provided the
former with all imbalance notices within two (2) working days of the time such
notices are first received from the transporter by any person or entity, whether
or not such person or entity is a party to this Agreement, and (ii) the latter
party has used every reasonable effort to cure the imbalance within the grace
period, if any, permitted by the transporter's tariff.
11.4 Notwithstanding anything to the contrary in Section 11.3, Seller
and Buyer agree that if the actual deliveries of gas are within three percent
(3%) (plus or minus) of the estimates provided by Seller pursuant to Section 3.3
(as timely corrected), then Seller will be paid the Contract Price for all
actual deliveries, without any adjustments for shortfalls or excess deliveries
(including cash-outs and overrun charges). If the actual deliveries, when
compared to the estimates, are outside such tolerance, then: (i) in the case of
any delivery shortfalls, Seller shall reimburse Buyer for the difference between
the Contract Price and the price paid by Buyer for substitute gas (if more than
the Contract Price), multiplied by the amount that such delivery shortfall
exceeds the three percent (3%) tolerance; and (ii) in the case of any excess
deliveries, Seller and Buyer will agree upon a mutually acceptable price
applicable to deliveries in excess of the three percent (3%) tolerance. Seller
and Buyer agree to review the procedures set forth in this Section 11.4 within
three (3) months from the effective date of this Agreement, and every three
months thereafter, and to amend such procedures if Seller and Buyer agree that
any changes are required in order to ensure fairness to either party.
XII.
DEFAULT
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12.1 If any of the following events shall occur and be continuing:
(i) Buyer shall fail to pay or cause to be paid any amount owing
under this Agreement when due (unless Buyer is in compliance
with Section 8.3 with respect to such unpaid amount); or
(ii) Either party shall fail to perform or observe any term,
covenant, or agreement contained in this Agreement
(including, without limitation, Buyer's failure to take gas
made available by Seller in accordance with the terms
hereof), and any such failure shall remain unremedied for
ten (10) days after written notice thereof shall have been
given by the other party; or
(iii) Either party shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay
its debts generally, or shall make a general assignment for
the benefit of creditors, or any proceeding shall be
instituted by or against that party seeking to adjudicate it
as bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protestation,
relief, or composition of it or its debts under any
proceeding relating to bankruptcy, insolvency, or
reorganization or relief of debtors, or seeking the entry of
any order for relief or the appointment of a receiver,
trustee, or other similar official for it or for any
substantial part of its property; or the party shall take
any corporate action to authorize any of the actions set
forth above in this subsection (iii);
then, and in any such event (and in addition to rather than in lieu of all other
remedies available to it), the non-defaulting party: (A) in the case of Seller
(a) may, by notice to Buyer, declare its obligation to deliver gas to Buyer
hereunder to be terminated, whereupon the same shall forthwith terminate, and
(b) may, by notice to Buyer, declare all amounts owing to Seller under this
Agreement to be forthwith due and payable, whereupon all such amounts shall
become and be forthwith due and payable, without demand, protest, or further
notice of
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any kind, all of which are hereby expressly waived by Buyer; and (B) in the case
of either party may, by notice to the defaulting party, declare this Agreement
to be terminated.
12.2 If at any time during the term hereof Seller reasonably believes
Buyer's ability to perform its obligations hereunder may be impaired, Seller
shall have the right, upon written request therefor, to receive adequate
assurance of Buyer's performance. If such assurance is not provided within five
(5) business days following Seller's notice, Seller may suspend delivery of gas
to Buyer hereunder. The rights granted in this Section shall be in addition to
the rights and remedies set forth in Section 12.1 hereof.
ARTICLE XIII.
NON-OWNED GAS
13.1 The phrases "gas production owned or controlled by Seller" and
"gas production acquired or obtained by Seller," as used in this Agreement
(including, but not limited to, in Section 3.1 hereof), shall mean only gas that
is either: (i) owned by Seller as and when it is produced at the wellhead,
because Seller owned the gas in place prior to production, or (ii) gas for which
Seller has the written authority of the third party owner(s) thereof to act as
such owner's Seller's representative, agent, or attorney-in-fact, with the
exclusive authority to commit such gas for sale under this Agreement for the
term hereof remaining at the time of such commitment. Such phrases "gas
production owned or controlled by Seller" and "gas production acquired or
obtained by Seller" do not include, by way of example, but not by limitation,
either: (a) gas purchased by Seller at or beyond the wellhead subsequent to the
date of this Agreement (provided, however, that gas sold by Seller as operator
on behalf of third-party owners, as described elsewhere in this Section 13.1,
shall not be considered "gas purchased by Seller at or beyond the wellhead"), or
(b) gas produced from wells operated by Seller that is attributable to the
interest(s) of the non-operator(s) in such wells, which Seller has the right to
sell, if any such sale by Seller is limited to agreements for a term of less
than the term of this Agreement remaining at the time of the commitment for
sale, or (c) Seller's non-operated gas from wells producing less than 500 MMBtu
per day per Delivery Point. All gas that is not "owned or controlled by Seller"
or "acquired or obtained by Seller," as defined above, is referred to herein as
"Non-Owned Gas."
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If, as and when Seller desires to make any Non-Owned Gas available for sale
under this Agreement, or to sell any Non-Owned Gas under this Agreement, it
shall provide to Buyer all of the same notifications as are required hereunder
with respect to gas owned or controlled by Seller, except that such
notifications shall expressly include a statement identifying the quantities of
Non-Owned Gas covered thereby, the owner(s) thereof, and the source(s) thereof.
Buyer agrees to purchase any such Non-Owned Gas, and it shall be sold by Seller
and paid for by Buyer pursuant to all of the other terms and provisions of this
Agreement, except that the price to be paid by Buyer to Seller for such
Non-Owned Gas shall be determined by mutual agreement of the parties hereto at
the time Seller notifies Buyer of the availability of such Non-Owned Gas;
provided, however, that if the parties do not agree on a price, Buyer shall not
be obligated to purchase the gas.
13.2 Notwithstanding anything to the contrary in this Article XIII,
Seller shall be permitted until August 1, 1995 to sell under this Agreement all
gas which Seller is authorized, as of the effective date of this Agreement, to
sell in its capacity as operator on behalf of non-operator(s). Beginning August
1, 1995, "gas production owned or controlled by Seller" and "gas production
acquired or obtained by Seller" shall not include gas sold by Seller in its
capacity as operator on behalf of non-operators unless Seller is legally
required to sell such gas and Seller has been provided with written
authorization by the non-operator(s) to commit their gas for sale under the
terms of this Agreement for the term hereof remaining at the time of such
commitment.
20
<PAGE> 21
ARTICLE XIV.
MISCELLANEOUS
14.1 Seller hereby warrants title to the gas delivered hereunder,
Seller's right to sell the same, and that same is free from all liens and
adverse claims. Seller shall be responsible for all production, severance or
similar taxes and all royalties due and payments to mineral and royalty owners
under Seller's leases; provided, however, that where Buyer is required by law to
be responsible for the payment of production, severance or similar taxes, Buyer
shall make such payment and shall, in addition, pay to Seller an amount equal to
such payment if Seller is able to demonstrate that the amount of such payment is
reflected in the applicable pricing index. Seller does hereby indemnify Buyer,
its successors and assigns and save them harmless from all suits, actions,
debts, accounts, damages, costs, losses and expenses arising from or out of
adverse claims of any or all parties to said gas which are applicable before
title to the gas passes to Buyer.
14.2 As between the parties hereto, Seller shall be responsible for any
damage or injury caused by the gas until it has been delivered to Buyer at the
Delivery Point(s), after which Buyer shall be responsible for any damage or
injury caused thereby; provided, however, that if Seller causes gas to be
processed downstream of any Delivery Point, Buyer shall not be responsible for
any damage or injury caused by the gas while it is processed. Title to the gas
shall pass to Buyer at the Delivery Point(s).
14.3 The waiver by either party of any breach of any of the provisions
of this Agreement shall not constitute a continuing waiver of other breaches of
the same or other provisions of this Agreement.
14.4 This Agreement is subject to all present and future valid laws,
orders, rules and regulations of any regulatory body of the Federal Government
or any State having jurisdiction.
21
<PAGE> 22
14.5 All notices provided for herein shall be in writing and shall be
deemed to be delivered when deposited in the United States mail, postage
prepaid, and addressed as follows, or at such other address as either party may
by like notice give to the other party.
SELLER: Wire Transfer Payments:
Fuel Resources Inc.
Account No. 0010 0036 3200
Texas Commerce Bank
Houston, Texas
ABA No. 113 000 609
Confirmation of Transfer:
Patsy N. Lewis
Fuel Resources Inc.
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
(713) 297-9510
Notices and Correspondence:
Ronnie M. Botkin
Fuel Resources Inc.
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
(713) 297-9503
22
<PAGE> 23
BUYER: Invoices:
PennUnion Energy Services, L.L.C.
Attention: Accounting Department
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
NOTICES AND CORRESPONDENCE
Kenneth L. Douglass
PennUnion Energy Services, L.L.C.
1330 Post Oak Blvd., Suite 2000
Houston, Texas 77056
(713) 622-4170
14.6 This Agreement shall not be assigned by either party without the
prior written consent of the other party.
14.7 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS PRINCIPLES OF
CONFLICTS OF LAWS. Any dispute concerning the rights and obligations of Buyer
and Seller hereunder, or the interpretation of any provision of this Agreement,
shall be litigated in the state or federal courts of Harris County, Texas.
14.8 This Agreement sets forth all understandings of Buyer and Seller
with respect to the purchase and sale of gas covered herein. All other
agreements, oral or written, concerning such purchase and sale are merged into
and superseded by this Agreement. No modification or amendment hereof shall be
effective unless in writing and signed by both parties.
23
<PAGE> 24
14.9 The terms of this Agreement shall be kept confidential by Buyer
and Seller except to the extent that any information is required to be disclosed
by law or must be disclosed to a third party for the purpose of arranging
transportation of gas subject to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed in duplicate
originals by the parties hereto as of the day and year first herein written.
FUEL RESOURCES, INC.
By: /s/ MARVIN L. STEAKLEY
---------------------------------------
SELLER
Name:
-------------------------------------
Title: Vice President
------------------------------------
FUEL RESOURCES PRODUCTION AND
DEVELOPMENT INC.
By: /s/ MARVIN L. STEAKLEY
---------------------------------------
SELLER
Name:
-------------------------------------
Title: Vice President
------------------------------------
PENNUNION ENERGY SERVICES, L.L.C.
By: /s/ L. E. MADDOX
---------------------------------------
BUYER
Name:
-------------------------------------
Title: President
------------------------------------
24
<PAGE> 25
EXHIBIT A
To Gas Sales Agreement Dated April 1,1995
Between Fuel Resources Inc., Fuel Resources Production and Development Inc.
and PennUnion Energy Services, L.L.C.
GAS EXCLUDED BY SELLER
<TABLE>
<CAPTION>
SUPPLY DESIGNATION PIPELINE BUYER
- ------------------ -------- -----
Reason for Exception
--------------------
<S> <C> <C> <C>
Bridgeport Eastern Long sales term contract Eastern American
Thrasher #4 Cowboy Pipeline(Koch) Long sales term contract Koch
Thrasher #5 Cowboy Pipeline(Koch) Long sales term contract Koch
Delhi Long sales term contract Delhi
ONG Long sales term contract ONG
Equitrans Long sales term contract Equitable Gas
Corhart Direct connected to industrial market Cohart
Ethyl Corp. Casinghead Gas
</TABLE>
<PAGE> 26
EXHIBIT B
To Gas Sales Agreement Dated April 1,1995
Between Fuel Resources Inc., Fuel Resources Production and Development Inc.
and PennUnion Energy Services, L.L.C.
<TABLE>
<CAPTION>
RECEIPT
POINT GATHERING TRANSPORTATION
SUPPLY DESIGNATION DESCRIPTION PIPELINE RATE RATE Pricing Point Index
- ------------------ ----------- -------- ---- ---- -------------------
<S> <C> <C> <C> <C> <C>
FRPD
Bridgeport Pooling Point #50002 CNG IF CNG - APP
Hastings Pooling Point #50001 CNG IF CNG - APP
IPP Pool Pooling Point #37182 COLT IF COLT
FRI
Tanner 1-15 NGPL Lawrence Co. (G11) NGPL (Note 1) IF Noram East
R. Smother 1-24 NGPL Lawrence Co. (G11) NGPL (Note 1) IF Noram East
Phillips 1-20 NGPL Lawrence Co. (G11) NGPL (Note 1) IF Noram East
McWhorter 1 1562 Koch Koch - $.0592 IF Koch - TX
Stevens #4 10457 Koch Koch - $.0592 IF Koch - TX
Stevens & Duncan 10312 Koch Koch - $.0592 IF Koch - TX
Toler #1 9525 Koch Koch - $.0592 IF Koch - TX
Toler #2 9582 Koch Koch - $.0592 IF Koch - TX
Bayou South -ETX Into Koch, TETCO, Noram Koch/Noram/TETCO [(IFKoch-Tx)+(IFTETCO-ETX)+
(IFNoram East)]/3
Dubach Plant 2632 TGT,TETCO [(IF TETCO - ETX)+(TGT Z1)]/2
E. Wheeler Panola into Noram Noram IF Noram East
Bobcat Ridge Panola into Noram Noram IF Noram East
J. Bauman Panola into Noram Noram IF Noram East
Nicholson A-1 Panola into Noram Noram IF Noram East
R. Smith Panola into Noram Noram IF Noram East
Watts A-1 Choctaw into Noram Noram IF Noram East
Scott Unit #1 Choctaw into Noram Noram IF Noram East
Massard NGPL Lawrence Co. (G11) NGPL (Note 1) (Note 2) IF Noram East
ANGI Blue Mountain ANGI into Noram Noram IF Noram East
Williams CP Noram into Noram Noram IF Noram East
Limestone Ridge Limestone into Noram Noram IF Noram East
Noram Pool various into Noram Noram IF Noram East
</TABLE>
Note 1 : To recognize the fact that the delivery point is downstream of the
pricing point the actual transportation back to the
pricing point will be deducted from the contract price
including all discounts.
Note 2 : It is recognized that during periods of shut-in Arkansas Oklahoma Gas
Corporation (AOG) has the right to purchase the Massard
Field gas and FRI has the obligation to sell such gas to
AOG under the Gas Transportation Agreement dated September
25, 1991 between FRI and AOG.
<PAGE> 1
EXHIBIT 10.14
ASSET PURCHASE AGREEMENT
dated as of July 1, 1996
by and between
THE HOUSTON EXPLORATION COMPANY
and
SMITH OFFSHORE EXPLORATION COMPANY
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
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
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
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
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C>
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
- ----------
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
- ---------
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
</TABLE>
-iv-
<PAGE> 6
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).
<PAGE> 7
"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> 1
EXHIBIT 10.15
APPENDIX D
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 Smith Offshore Exploration
Company, a Delaware corporation ("Soxco").
W I T N E S S E T H
WHEREAS, the Company has entered into an Asset Purchase
Agreement dated July 1, 1996 (the "Purchase Agreement") with Soxco providing
for the purchase by the Company of substantially all of the assets of Soxco and
the issuance by the Company of shares of its Common Stock, par value $0.01 per
share ("Common Stock"), to Soxco; and
WHEREAS, the obligations of Soxco under the Purchase Agreement
are conditioned upon the execution and delivery of this Agreement by the
Company;
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 settlement of any action, suit or proceeding
involving such person to the extent necessary or appropriate to effect the
relevant action.
<PAGE> 2
(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 Soxco 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 pursuant to the Purchase Agreement, 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 fees and disbursements of counsel for the
Holders (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 (other than the
fees and disbursements of counsel included in Registration Expenses or
paid by the Company pursuant to Section 4).
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 15% of the aggregate number of shares of Common Stock
(as adjusted for any stock dividends, combinations or splits with respect to
such shares) issued pursuant to the Purchase Agreement, 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.
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(b) The Company shall not be obligated to effect, or to
take any action to effect, any such registration pursuant to this Section 2:
(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 January 31, 1997, after the Company has
initiated one such registration pursuant to this Section 2.1, (B)
prior to January 31, 1998, after the Company has initiated two such
registrations pursuant to this Section 2.1, (C) prior to the
expiration of a period of six months after the Company has initiated
any registration pursuant to this Section 2.1, or (D) after the
Company has initiated a total of three such registrations 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.
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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 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.
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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:
(i) promptly give to each Holder written notice thereof; and
(ii) 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
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<PAGE> 7
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
incurred in connection with any registration, qualification or compliance
pursuant to Section 3 hereof, and all Registration Expenses and reasonable fees
of one counsel for the selling stockholders in the case of the first
registration pursuant to Section 2, shall be borne by the Company. All
Registration Expenses and expenses of counsel for the selling stockholders in
any subsequent registration 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 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.
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
requirements 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
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<PAGE> 8
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.
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
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<PAGE> 9
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).
(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
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<PAGE> 10
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, 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:
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<PAGE> 11
(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.
9. Transfer or Assignment of Registration Rights. The rights
to cause the Company to register securities granted to Soxco by the Company
under this Agreement may be transferred or assigned by Soxco with the related
securities (a) to one or more liquidating trusts established by Soxco for the
benefit of its creditors or stockholders (each a "Trust"), (b) to any person
who was at the date of this Agreement a stockholder or a holder of Zero Coupon
Notes of Soxco (a "Soxco Holder") or (c) to Lester H. Smith ("Smith") in
respect of his transfer to Soxco of certain net profit interests that are to be
sold to the Company pursuant to the Purchase Agreement. In addition, a Trust
to which such rights under this Agreement have been transferred may retransfer
them with the related securities to one or more Soxco Holders. A Soxco Holder,
Smith or any other person to which such rights under this Agreement have been
transferred may retransfer them only to a transferee or assignee of Registrable
Securities representing no less than 5% of the aggregate number of shares of
Common Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares) issued pursuant to the Purchase Agreement (or, if less,
100% of the Registrable Securities originally transferred to such Soxco Holder,
Smith or each other person). 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
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<PAGE> 12
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 the earlier of (i) January 31, 2001
and (ii) 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.
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 Soxco at 811 Dallas, Suite
800, Houston, Texas 77002, 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.
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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.
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
SOXCO:
SMITH OFFSHORE EXPLORATION COMPANY
By:_____________________________________
Lester H. Smith, President
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<PAGE> 1
EXHIBIT 10.16
CREDIT AGREEMENT
Dated as of July 2, 1996
Among
THE HOUSTON EXPLORATION COMPANY,
as the Company,
and
TEXAS COMMERCE BANK NATIONAL ASSOCIATION,
as Administrative Agent
and
THE BANKS SIGNATORY HERETO
$150,000,000 Revolving Credit Facility
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.03 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE II
Commitments
Section 2.01 Loans and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 2.02 Borrowings, Continuations, Conversions, and Issuances. . . . . . . . . . . . . . . . . . . 16
Section 2.03 Changes of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.04 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.05 Applicable Lending Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.06 Several Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.07 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.08 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2.09 Borrowing Base; Threshold Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE III
Payments of Principal and Interest
Section 3.01 Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 3.02 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc.
Section 4.01 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.02 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.03 Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.04 Non-receipt of Funds by the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.05 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 4.06 Assumption of Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.07 Obligation to Reimburse and to Repay . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.08 Obligations for Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE V
Yield Protection; Illegality; Etc.
Section 5.01 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.02 Limitation on Types of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 5.03 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 5.04 Certain Base Rate Loans pursuant to Sections 5.01 and 5.03 . . . . . . . . . . . . . . . . 32
Section 5.05 Certain Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VI
Conditions Precedent
Section 6.01 Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 6.02 Initial and Subsequent Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 6.03 Conditions Relating to Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 6.04 Subsequent Environmental Audits--New Acquisitions . . . . . . . . . . . . . . . . . . . . . 35
Section 6.05 Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
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<TABLE>
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ARTICLE VII
Representations and Warranties
Section 7.01 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 7.02 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 7.03 Liabilities; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.04 No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.05 Corporate Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.06 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.07 Use of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.08 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.09 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.10 Titles, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 7.11 No Material Misstatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.12 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.13 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.14 Subsidiaries and Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.15 Location of Business and Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.16 Gas Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.17 Rate Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 7.18 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 7.19 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.20 Compliance with the Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.22 Credit Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 7.23 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE VIII
Affirmative Covenants
Section 8.01 Financial Statements and Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 8.02 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 8.03 Corporate Existence, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 8.04 Engineering and Other Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 8.05 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
Section 8.06 Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 8.07 Title Opinions--TransTexas Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE IX
Negative Covenants
Section 9.01 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 9.02 Guaranties, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 9.03 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 9.04 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 9.05 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 9.06 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.07 Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.08 Stock of Subsidiaries, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.09 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 9.10 Mergers, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 9.11 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 9.12 Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 9.13 Debt to Total Capitalization Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 9.14 Negative Pledge Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 9.15 Sale of Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 9.16 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 9.17 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 9.18 Hedging Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 9.19 Subsidiaries and Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ARTICLE X
Events of Default
Section 10.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 10.02 Cash Collateral for Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>
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<PAGE> 6
<TABLE>
<S> <C>
ARTICLE XI
The Agent
Section 11.01 Appointment, Powers and Immunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 11.02 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 11.03 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 11.04 Rights as a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 11.05 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 11.06 Non-Reliance on Agent and other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 11.07 Failure to Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 11.08 Resignation or Removal of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ARTICLE XII
Miscellaneous
Section 12.01 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 12.03 Payment of Expenses, Indemnities, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 12.04 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 12.05 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 12.06 Assignments and Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 12.07 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 12.08 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 12.09 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 12.10 Termination of Agreement; Survival of Obligations . . . . . . . . . . . . . . . . . . . . . 65
Section 12.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 12.12 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 12.13 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Section 12.14 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Section 12.15 Exculpation Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 12.16 No Oral Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
</TABLE>
Exhibit A - Form of Letter of Credit Agreement -- Agent
Exhibit B - Form of Revolving Credit Note
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Opinion
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<PAGE> 7
Exhibit E - Form of Borrowing, Continuation or Conversion Form
Exhibit F - Form of Assignment and Acceptance
Schedule 1.02(b) - Existing Letters of Credit
Schedule 7.03 - Litigation and Liabilities
Schedule 7.08 - ERISA Obligations
Schedule 7.10 - Disclosure of Liens other than Excepted Liens
Schedule 7.14 - Listing of Subsidiaries and Partnerships
Schedule 7.16 - Gas Imbalances
Schedule 7.18 - Environmental Matters
Schedule 7.21 - Insurance
Schedule 7.22 - Credit Agreements, Etc.
Schedule 9.01 - Debt not reflected in Financial Statements
Schedule 9.17 - Accumulated Funding Deficiencies
Schedule 9.18 - Hedging Agreements
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<PAGE> 8
THIS CREDIT AGREEMENT dated as of July 2, 1996, is among THE HOUSTON
EXPLORATION COMPANY, a corporation duly organized and validly existing under
the laws of the State of Delaware (the "Company"); each of the banks that is a
signatory hereto, including the hereinafter defined "TCB" (together with their
respective successors or assigns, individually, a "Bank" and, collectively, the
"Banks"); and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as administrative agent
for the Banks (in such capacity, together with its successors in such capacity,
the "Agent").
RECITALS
WHEREAS, the Company has requested that the Banks provide certain
loans to and extensions of credit on behalf of the Company; and
WHEREAS, the Banks have agreed to make such loans and extensions of
credit subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and of the loans and commitments hereinafter
referred to, the parties hereto hereby agree as follows:
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above. As used in this Credit
Agreement, the terms "Agent", "Bank", "Banks" and "Company" shall have the
meanings indicated above.
Section 1.02 Certain Defined Terms. As used herein, the
following terms shall have the following meanings (all terms defined in this
Article I or in other provisions of this Credit Agreement in the singular to
have the same meanings when used in the plural and vice versa):
"Additional Costs" shall have the meaning assigned to that term in
Section 5.01.
"Affected Loans" shall have the meaning assigned to that term in
Section 5.04.
"Affiliate" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, and (ii) any director, officer, partner or stockholder of such first
Person or of any Person referred to in clause (i) above.
"Agreement" shall mean this Credit Agreement, as the same may from
time to time be amended or supplemented.
<PAGE> 9
"Alternate Reserve Report" shall have the meaning provided in
Subsection 8.04(c).
"Applicable Lending Office" shall mean, for each Bank and for each
type of Loan, the lending office of such Bank (or an affiliate of such Bank)
designated for such type of Loan on the signature pages hereof or such other
offices of such Bank (or of an affiliate of such Bank) as such Bank may from
time to time specify to the Agent and the Company as the office by which its
Loans of such type are to be made and maintained.
"Applicable Margin" shall mean at the time of calculation, with
respect to any Loan, calculated as a function of the type of such Loan, the
following rate per annum as applicable:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Threshold Amount Fixed Rate Loan Applicable Base Rate Loan Applicable
Utilization Margin Percentage Margin Percentage
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than 25% .50% 0%
- ---------------------------------------------------------------------------------------------------------
Greater than or equal to 25.0% but .625% 0%
less than 50%
- ---------------------------------------------------------------------------------------------------------
Greater than or equal to 50.0% but .75% 0%
less than 75.0%
- ---------------------------------------------------------------------------------------------------------
Greater than or equal to 75% but .875% 0%
less than 100%
- ---------------------------------------------------------------------------------------------------------
Greater than or equal to 100% 1.125% 0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
"Assignment and Acceptance" shall have the meaning assigned such term
in Section 12.06(b).
"Base Rate" shall mean, with respect to any Base Rate Loan, for any
day, the higher of (a) the Federal Funds Rate for such day plus 1/2 of 1%, or
(b) the Prime Rate for such day. Each change in any interest rate provided for
herein based upon the Base Rate resulting from a change in the Base Rate shall
take effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
upon the Base Rate.
"Borrowing Base" shall mean at any time an amount equal to the amount
determined as the Borrowing Base in accordance with Section 2.09.
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<PAGE> 10
"BUG" shall mean The Brooklyn Union Gas Company.
"Business Day" shall mean any day on which commercial banks are not
authorized or required to close in the State of Texas and, where such term is
used in the definition of "Quarterly Dates" in this Section 1.02 or if such day
relates to a borrowing of, a payment or prepayment of principal of or interest
on, or a conversion of or into, or the Interest Period for, a Fixed Rate Loan
or a notice by the Company with respect to any such borrowing, payment,
prepayment, conversion or Interest Period, any day which is also a day on which
dealings in Dollar deposits are carried out in the London Interbank Market.
"Capital Lease" shall mean any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP.
"Change in Control" shall mean any change in ownership of the shares
of stock of (a) THEC Holdings such that a Person (or group of Persons acting
together) other than BUG acquires shares of stock of THEC Holdings, or (b) the
Company such that a Person (or group of Persons acting together) other than
THEC Holdings acquires a direct or indirect interest in more than 40% of the
voting power of the voting stock of the Company.
"Closing Date" shall mean July 2, 1996.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commitment" shall mean, as to each Bank, the obligation of such Bank
to make Loans to the Company or of the Agent to issue, reissue, renew or extend
Letters of Credit on behalf of such Bank for the account of the Company, in an
aggregate amount at any one time outstanding equal to the amount set forth
opposite such Bank's name on the signature pages hereof under the caption
"Commitment" (as the same may be reduced from time to time pursuant to Section
2.03 hereof); provided, however, the total Commitments of all Banks shall be
subject to the Borrowing Base pursuant to the terms of this Agreement
including, without limitation, Sections 2.01(a) and (b).
"Consolidated Net Income" shall mean, for any period, the amount
which, in conformity with GAAP, would be set forth opposite the caption "net
income or loss" (or any like caption) on a consolidated income statement of the
Company and its Subsidiaries for such period.
"Consolidated Net Worth" shall mean, at a particular date, all amounts
which would be included under shareholder's equity on a consolidated balance
sheet of the Company and its Subsidiaries, as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Total Capitalization" shall mean the sum of (a)
Consolidated Total Debt and (b) the total capital represented by the capital
stock of the Company at such time outstanding based,
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<PAGE> 11
in the case of stock having a par value, upon its par value, and, in the case
of stock of no par value, upon the value stated on the books of the Company,
plus the total amount of paid-in capital surplus and earned surplus of the
Company, or less the amount of any net deficit in the surplus account of the
Company and plus the amount of any premium on capital stock of the Company not
included in surplus and less the amount, if any, by which capital surplus has
at any time been increased as a result of a restatement of the amount at which
any assets of the Company are recorded on the books of the Company.
"Consolidated Total Debt" shall mean Total Debt of the Company and its
Subsidiaries, as determined on a consolidated basis in accordance with GAAP.
"Debt" shall mean, for any Person, the sum of the following (without
duplication): (a) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or other similar instruments; (b) all
obligations of such Person (whether contingent or otherwise) in respect of
letters of credit, bankers' acceptances, surety or other bonds and similar
instruments; (c) all obligations of such Person to pay the deferred purchase
price of Property or services, except trade accounts payable (other than for
borrowed money) arising in the ordinary course of business of such Person; (d)
all obligations under Capital Leases; (e) all Debt and other obligations
secured by a Lien on any asset of such Person, whether or not such Debt is
assumed by such Person; (f) guaranties, endorsements (other than for collection
in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any
Person, or otherwise to assure a creditor against loss; (g) all obligations or
undertakings of such Person to maintain or cause to be maintained the financial
position or covenants of other Persons; and (h) all obligations of such Person
under or in connection with Hedging Agreements once such obligations become
"debt" according to GAAP.
"Default" shall mean the occurrence of any event which with notice or
lapse of time or both would become an Event of Default.
"Designated Borrowing Base" shall have the meaning assigned to that
term in Section 2.09.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Drawdown Termination Date" shall mean the date which is four (4)
years after the Closing Date, unless the Commitment shall be sooner terminated
pursuant to Section 2.03(a) or Section 10.01, or unless extended pursuant to
Section 2.01(c).
"Engagement Letter" shall mean that certain letter dated of even date
herewith from the Agent to and accepted by the Company relating to certain fees
payable by the Company to the Agent.
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<PAGE> 12
"Engineering Reports" shall have the meaning assigned to that term in
Section 2.09(c).
"Environmental Laws" shall mean any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations, whether now existing
or hereafter existing or rendered, of any Governmental Authority pertaining to
the environment applicable to the Company or its Subsidiaries or any of their
respective Property in effect in any and all jurisdictions in which the Company
or its Subsidiaries are conducting or at any time have conducted business, or
where the Properties of the Company and its Subsidiaries are located, or where
any hazardous substances generated by or disposed of by the Company or its
Subsidiaries are located, including but not limited to the Oil Pollution Act of
1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, and other environmental conservation
or protection laws. The terms "hazardous substance," "release" and "threatened
release" shall have the meanings specified in CERCLA, and the terms "solid
waste" and "disposal" (or "disposed") shall have the meanings specified in RCRA
and the term "oil" shall have the meaning specified in OPA; provided, however,
that (i) in the event either CERCLA, RCRA or OPA is amended so as to broaden
the meaning of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment with respect to all
provisions of this Agreement other than Article VII hereof, (ii) to the extent
the laws of the state or states in which any Property of the Company or its
Subsidiaries is located establish a meaning for "hazardous substance,"
"release," "threatened release," "solid waste", "disposal" or "oil" which is
broader than that specified in CERCLA, RCRA or OPA, such broader meaning shall
apply.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
which is a member of the same controlled group of corporations (within the
meaning of Section 414(b) of the Code) as the Company or a Subsidiary or is
under common control (within the meaning of Section 414(c) of the Code) with
the Company or a Subsidiary.
"Event of Default" shall have the meaning assigned to that term in
Article X.
"Excepted Liens" shall mean: (i) Liens for taxes, assessments or
other governmental charges or levies not yet due and payable or, if due and
payable, being contested in good faith by appropriate action and for which
appropriate reserves are maintained; (ii) Liens in connection with workmen's
compensation, unemployment insurance or other social security, old age pension
or public liability obligations not yet due or which are being contested in
good faith by appropriate action;
-5-
<PAGE> 13
(iii) operator's, vendors', carriers', warehousemen's, repairmen's, mechanics',
workmen's, materialmen's, construction or other like Liens arising by operation
of law in the ordinary course of business or incident to the exploration,
development, operation and maintenance of Oil and Gas Properties of the Company
and its Subsidiaries and statutory landlord's liens in respect of obligations
none of which shall remain unpaid more than 90 days or which are being
contested in good faith by appropriate proceedings; (iv) any Liens securing
indebtedness, neither assumed nor guaranteed by the Company or any Subsidiary
nor on which the Company or any Subsidiary pays interest, existing upon real
estate or rights in or relating to real estate acquired by the Company or any
Subsidiary for substation, metering station, pump station, storage, gathering
line, transmission line, transportation line, distribution line or right of way
purposes, and any Liens reserved in leases for rent and for compliance with the
terms of the leases in the case of leasehold estates, to the extent that any
such Lien referred to in this clause (iv) does not materially impair the use of
the Property covered by such Lien for the purposes for which such Property is
held by the Company or a Subsidiary; and (v) encumbrances (other than to secure
the payment of borrowed money or the deferred purchase price of Property or
services), easements, restrictions, servitudes, permits, conditions, covenants,
exceptions or reservations in any rights of way or other Property of the
Company or its Subsidiaries for the purpose of roads, pipelines, transmission
lines, transportation lines, distribution lines for the removal of gas, oil,
coal or other minerals or timber, and other like purposes, or for the joint or
common use of real estate, rights of way, facilities and equipment, and
defects, irregularities and deficiencies in title of any rights of way or other
Property which in the aggregate do not materially impair the use of such rights
of way or other Property for the purposes of which such rights of way and other
Property are held by the Company or a Subsidiary.
"Existing Credit Agreement" shall mean that certain Credit Agreement
dated as of April 23, 1996, by and among the Company, TCB and the other banks
and lending institutions party thereto, and TCB, as Agent.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of Dallas on the Business Day
next succeeding such day, provided that (i) if the date for which such rate is
to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next succeeding Business Day,
and (ii) if such rate is not so published for any day, the Federal Funds Rate
for such day shall be the average rate charged to TCB on such day on such
transactions as determined by the Agent.
"Financial Statements" shall mean the financial statement or
statements of the Company described or referred to in Section 7.02.
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<PAGE> 14
"Fixed Base Rate" shall mean with respect to any Fixed Rate Loan, the
rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
quoted by the Agent at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) two Business Days prior to the first day of the
Interest Period for such Loan for the offering by the Agent to leading banks in
the London interbank market as determined by the Agent in its sole discretion
of Dollar deposits having a term comparable to such Interest Period and in an
amount comparable to the principal amount of the Fixed Rate Loan to be made by
the Agent for such Interest Period.
"Fixed Rate" shall mean, for any Fixed Rate Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Agent to be equal to the quotient of (i) the Fixed Base Rate for such Loan for
the Interest Period therefor, divided by (ii) one minus the Reserve Requirement
for such Loan for such Interest Period.
"Fixed Rate Loans" shall mean any Loan when and to the extent the
interest rate therefor is determined on the basis of rates referred to in the
definition of "Fixed Base Rate".
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the Financial Statements
(except for changes concurred in by the Company's independent public
accountants).
"Governmental Authority" shall include the United States, the state,
county, parish, province, municipal and political subdivisions in which any
Property of the Company or the Subsidiaries is located or which exercises
jurisdiction over any such Property, and any court, agency, department,
commission, board, bureau or instrumentality of any of them which exercises
jurisdiction over any such Property.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other direction or requirement
(including, without limitation, Environmental Laws, energy regulations and
occupational, safety and health standards or controls) of any Governmental
Authority.
"Guarantors" shall mean each Significant Subsidiary, if any, which may
execute a Guaranty Agreement after the date hereof pursuant to Section 9.19
hereof.
"Guaranty Agreements" shall mean the guaranty agreements, if any,
dated as of the date of their respective execution, executed by each of the
Guarantors after the date hereof pursuant to Section 9.19 hereof, as same may
be amended from time to time, guaranteeing prompt payment and/or performance of
the Indebtedness.
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<PAGE> 15
"Hedging Agreement" shall mean (i) any interest or currency rate swap,
rate cap, rate floor, rate collar, exchange transaction, put or call option,
forward agreement, foreign exchange or other exchange or rate protection
agreement or any option with respect to any such transaction and (ii) any cap,
floor, collar, exchange transaction, contract for sale for future delivery of
oil or gas (whether or not the subject oil or gas is to be delivered), hedging
contract, forward contract, swap agreement, futures contract, call or put
option or any other similar agreement or other exchange or protection agreement
relating to Hydrocarbons or any option with respect to any such transaction
(whether or not any of the foregoing contemplates physical deliveries or only
financial contracts).
"Highest Lawful Rate" shall mean, with respect to each Bank, the
maximum nonusurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the Notes
or on other Indebtedness under laws applicable to such Bank which are presently
in effect or, to the extent allowed by law, under such applicable laws which
may hereafter be in effect and which allow a higher maximum nonusurious
interest rate than applicable laws now allow.
"Hydrocarbon Interests" shall mean all rights, titles, interests and
estates now owned or hereafter acquired in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests and
production payment interests, including any reserve or residual interest of
whatever nature.
"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined therefrom and all other minerals
customarily produced in association therewith.
"Indebtedness" shall mean (i) any and all amounts owing or to be owing
by the Company to the Agent and/or the Banks in connection with the Notes, any
Letter of Credit or Letter of Credit Agreement, any Security Instrument,
including this Agreement, or any Hedging Agreement (to the extent of net
obligations owed in connection therewith), between the Company and the Agent or
any Bank or any Affiliate of any Bank, and (ii) all renewals, extensions,
replacements, amendments and/or rearrangements thereof.
"Indemnity Matters" shall have the meaning assigned to that term in
Section 12.03(c).
"Initial Funding" shall mean the funding of the initial Loans pursuant
to Section 6.01 hereof.
"Initial Reserve Report" shall mean, collectively, the reports of
Huddleston and Company dated as of December 31, 1995; Netherland, Sewell and
Associates dated as of December 31, 1995; Ryder Scott Company dated as of
December 31, 1995; and Miller & Lents dated December 31, 1995, with respect to
Oil and Gas Properties of the Company, a copy of which has been delivered to
the Banks.
-8-
<PAGE> 16
"Interest Period" shall mean the period commencing on the date a Loan
is made and ending, as the Company may select pursuant to Section 2.02: (a) in
the case of Base Rate Loans, on the next succeeding Quarterly Date; and (b) in
the case of Fixed Rate Loans, on the numerically corresponding day in the
first, second, third, or sixth calendar month thereafter, provided that each
such Interest Period which commences on the last Business Day of a calendar
month (or on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Business Day of
the appropriate calendar month. Notwithstanding the foregoing: (i) no
Interest Period may commence before and end after the scheduled maturity of the
Notes; (ii) each Interest Period which would otherwise end on a day which is
not a Business Day shall end on the next succeeding Business Day (or, if such
next succeeding Business Day falls in the next succeeding calendar month, on
the next preceding Business Day); and (iii) no Interest Period on Fixed Rate
Loans shall have a duration of less than one month.
"IPO" shall mean the initial public offering of stock of the Company,
which is scheduled to occur on or before August 31, 1996, the gross proceeds of
which shall be at least $90,000,000.
"LC Exposure" shall mean at any time the aggregate undrawn face amount
of all outstanding Letters of Credit and the aggregate of all amounts drawn
under Letters of Credit and not yet reimbursed or funded as a Loan pursuant to
Section 4.07(b).
"Letter of Credit Agreements" shall mean the written agreements
between the Company and the Agent executed or hereafter executed in connection
with the issuance by the Agent of the Letters of Credit, such agreements to be
in substantially the form attached hereto as Exhibit A, or on any other
customary form for letters of credit of comparable amount and purpose, as from
time to time agreed to by the Company and the Agent.
"Letters of Credit" shall mean (i) the letters of credit outstanding
on the Closing Date and described on Schedule 1.02(b) hereof, together with all
renewals, replacements, extensions and substitutions thereof, (ii) the letters
of credit hereafter issued by the Agent on behalf of the Banks pursuant to
Section 2.01(b), and (iii) all reimbursement obligations pertaining to any such
letters of credit; and "Letter of Credit" shall mean any one of the Letters of
Credit and the reimbursement obligation pertaining thereto.
"Liens" shall mean, with respect to any asset, any mortgage, lien,
pledge, charge (including, without limitation, production payments and the like
payable out of Oil and Gas Properties), security interest or encumbrance of any
kind in respect of such asset. For the purposes of this Agreement, the Company
and the Subsidiaries shall be deemed to own subject to a Lien any asset which
they have acquired or hold subject to the interest of a vendor or lessor under
any conditional sale agreement, Capital Lease or other title retention
agreement relating to such asset.
"Loans" shall mean the Revolving Credit Loans.
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<PAGE> 17
"Majority Banks" shall mean, at any time, Banks having at least
sixty-six and two thirds percent (66 2/3%) of the aggregate principal amount of
all outstanding Loans or, if no Loans are outstanding, of the aggregate amount
of the Commitments.
"Material Adverse Effect" shall mean any material and adverse effect
on (i) the assets, liabilities, financial condition, business, operations,
affairs or circumstances of the Company and its Subsidiaries on a combined
basis from those reflected in the Financial Statements or from the facts
represented or warranted in this Agreement or any other Security Instrument, or
(ii) the ability of the Company and its Subsidiaries on a combined basis to
carry out their respective business as at the date of this Agreement or as
proposed at the date of this Agreement to be conducted or meet their respective
obligations under the Notes, the Letters of Credit and Letter of Credit
Agreements, this Agreement or the other Security Instruments on a timely basis.
"Material Change" shall mean a Change in Control.
"Multiemployer Plan" shall mean a Plan defined as such in Section
3(37) of ERISA to which contributions have been made by the Company or any
ERISA Affiliate and which is covered by Title IV of ERISA.
"Notes" shall mean the Revolving Credit Notes.
"Oil and Gas Properties" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and declarations
of pooled units and the units created thereby (including without limitation all
units created under orders, regulations and rules of any governmental body or
agency having jurisdiction) which may affect all or any portion of the
Hydrocarbon Interests; all operating agreements, contracts and other agreements
which relate to any of the Hydrocarbon Interests or the production, sale,
purchase, exchange or processing of Hydrocarbons from or attributable to such
Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced
and saved or attributable to the Hydrocarbon Interests, the lands covered
thereby and all oil in tanks and all rents, issues, profits, proceeds,
products, revenues and other income from or attributable to the Hydrocarbon
Interests; all tenements, hereditaments, appurtenances and Properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Interests, Properties, rights, titles, interests and estates described or
referred to above, including any and all Property, real or personal, now owned
or hereinafter acquired and situated upon, used, held for use or useful in
connection with the operating, working or development of any of such
Hydrocarbon Interests or Property (excluding drilling rigs, automotive
equipment or other personal property which may be on such premises for the
purpose of drilling a well or for other similar temporary uses) and including
any and all oil wells, gas wells, injection wells or other wells, buildings,
structures, fuel separators, liquid extraction plants, plant compressors,
pumps, pumping units, field gathering systems, tanks and tank batteries,
fixtures, valves, fittings, machinery and parts, engines, boilers, meters,
apparatus, equipment,
-10-
<PAGE> 18
appliances, tools, implements, cables, wires, towers, casing, tubing and rods,
surface leases, rights-of-way, easements and servitudes together with all
additions, substitutions, replacements, accessions and attachments to any and
all of the foregoing.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
"Phase I Audit" shall mean an inspection of property and an evaluation
of operations conducted thereon of a scope and in such detail as would be
conducted by a reasonably prudent purchaser, lender, or investor in light of
all relevant facts and circumstances to identify adverse environmental
conditions or violations of Environmental Laws that would subject a past,
present, or future owner or operator of such property to liabilities under
applicable Environmental Laws as a result of such environmental conditions
and/or violations of Environmental Laws; provided, however, that the scope and
detail of the inspection and evaluation shall be no less extensive than the
minimum standards set forth in the most recent version of ASTM Standard E 1527,
as adopted by the American Society for Testing and Materials.
"Plan" shall mean an employee pension benefit or other plan
established or maintained by the Company or any Subsidiary or any ERISA
Affiliate and which is covered by Title IV of ERISA, other than a Multiemployer
Plan.
"Pledgor" has the meaning given such term in the Security Agreement.
"Post-Default Rate" shall mean, with respect to the principal of any
Loan and, to the extent permitted by law, any other amount payable by the
Company under this Agreement or any Note or any Letter of Credit Agreement that
is not paid when due (whether at stated maturity, by acceleration or
otherwise), a rate per annum during the period from and including the due date,
to, but excluding the date on which such amount is paid in full equal to 2%
above the Base Rate as in effect from time to time plus the Applicable Margin
(if any) (provided that, if the amount so in default is principal of a Fixed
Rate Loan and the due date thereof is a day other than the last day of the
Interest period therefor, the "Post-Default Rate" for such principal shall be,
for the period from and including the due date and to but excluding the last
day of the Interest period therefor, 2% above the interest rate for such Loan
as provided in Section 3.02 hereof and, thereafter, the rate provided for above
in this definition).
"Prime Rate" shall mean the rate of interest from time to time
determined by TCB at the Principal Office as its prime commercial lending rate.
Such rate is set by TCB as a general reference
-11-
<PAGE> 19
rate of interest, taking into account such factors as TCB may deem appropriate,
it being understood that many of TCB's commercial or other loans are priced in
relation to such rate, that it is not necessarily the lowest or best rate
actually charged to any customer and that TCB may make various commercial or
other loans at rates of interest having no relationship to such rate. Changes
in the rate of interest on that portion of any Loans maintained as Base Rate
Loans will take effect simultaneously with each change in the Prime Rate. The
Agent will give notice promptly to the Company of changes in the Prime Rate.
"Principal Office" shall mean the principal office of the Agent and
TCB, presently located at 712 Main Street, Houston, Texas 77002.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Quarterly Dates" shall mean the last day of each March, June,
September, and December in each year, the first of which shall be the first
such day after the Closing Date; provided that if any such day is not a
Business Day, then such Quarterly Date shall be the next succeeding Business
Day.
"Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
"Regulatory Change" shall mean, with respect to any Bank, any change
after the date of this Agreement in United States Federal, state or foreign law
or regulations (including Regulation D) or the adoption or making after such
date of any interpretations, directives or requests applying to a class of
lenders or insurance companies (including such Bank or its Applicable Lending
Office) of or under any United States Federal, state or foreign law or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Required Payment" shall have the meaning assigned to that term in
Section 4.04.
"Reserve Report" shall have the meaning assigned to that term in
Section 8.04(a).
"Reserve Requirement" shall mean, for any Interest Period for any
Fixed Rate Loan, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during the Interest Period for such Loan under Regulation D by member banks of
the Federal Reserve System in Dallas with deposits exceeding $1,000,000,000
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
also reflect any other reserves required to be maintained by such member banks
by reason of any Regulatory Change against (i) any category of liabilities
which includes deposits by reference to which the Fixed Base Rate for
-12-
<PAGE> 20
Fixed Rate Loans is to be determined as provided in the definition of "Fixed
Base Rate" in this Section 1.01, or (ii) any category of extensions of credit
or other assets which include Fixed Rate Loans.
"Revolving Credit Loans" shall mean the revolving credit loans as
provided for by Section 2.01(a).
"Revolving Credit Notes" shall mean the promissory notes of the
Company provided for in Section 2.07 and being in the form of Exhibit B hereto,
together with any and all renewals, extensions for any period, increases or
rearrangements thereof.
"Security Agreement" shall mean the security agreement executed by
THEC Holdings in favor of the Agent dated as of the Closing Date and granting a
security interest in the stocks and other securities of the Company as same may
be amended from time to time.
"Security Instruments" shall mean this Agreement, the Notes, the
Letter of Credit Agreements, the Security Agreement and related assignment
separate from stock certificate and financing statement, the original stock
certificate or certificates evidencing the stock of the Company pledged by the
Security Agreement, and any and all other agreements or instruments now or
hereafter executed and delivered by the Company, a Subsidiary or any other
Person (other than participation or similar agreements between any Bank and any
other bank or creditor with respect to any Indebtedness pursuant to this
Agreement) in connection with, or as security for the payment or performance
of, the Notes, any Letter of Credit or Letter of Credit Agreement, or this
Agreement, as such instruments or agreements may be amended or supplemented
from time to time.
"Significant Subsidiary" shall mean a "significant subsidiary" as
defined in Section 1-02(y) of Regulation S-X under the Securities and Exchange
Act of 1934, as amended.
"Solvent" shall mean with respect to any Person on a particular date,
the condition that, on such date, (a) the fair value of the Property of such
Person is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person, (b) the present fair
salable value of the assets of such Person is not less than the amount that
will be required to pay the probable liability of such Person on its debts as
they become absolute and matured, (c) such Person does not intend to, and does
not believe that it will, incur debts or liabilities beyond such Person's
ability to pay as such debts and liabilities mature, and (d) such Person is not
engaged in business or a transaction, and is not about to engage in business or
a transaction, for which such Person's Property would constitute an
unreasonably small amount of capital.
"Subsidiary" shall mean any corporation, partnership, joint venture or
other entity of which at least a majority of the outstanding shares of stock or
other equity interests having by the terms thereof ordinary voting power or
economic interests to elect a majority of the board of directors or
-13-
<PAGE> 21
other managers of such corporation, partnership, joint venture or other entity
(irrespective of whether or not at the time stock or other equity interests of
any other class or classes of such corporation, partnership, joint venture or
other entity shall have or might have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned or controlled
by the Company or one or more of the Subsidiaries, or by the Company and one or
more of the Subsidiaries.
"TCB" shall mean Texas Commerce Bank National Association,
individually and not as Agent.
"THEC Holdings" shall mean THEC Holdings Corp., a Delaware
corporation.
"Threshold Amount" shall mean at any time, for purposes of determining
the Applicable Margin, commitment fees pursuant to Section 2.04(a) and Letter
of Credit fees pursuant to Section 2.04(b), the amount announced by the Agent
as the Threshold Amount pursuant to Section 2.09.
"Threshold Amount Utilization" shall mean the quotient of (i) the sum
of (A) the aggregate principal amount of Loans outstanding hereunder, plus (B)
the LC Exposure, divided by (ii) the lesser of (A) the Threshold Amount in
effect at the time of calculation, or (B) the aggregate amount of the
Commitments.
"Total Debt" means (a) all Debt for money borrowed or for the purchase
price of Property, (b) trade Debt incurred in the ordinary course of business
which is not paid when due, (c) liabilities under any bond, note, security,
letter of credit (other than Letters of Credit issued for trade credit but
including Letters of Credit issued as performance guarantees), acceptance
facility, or similar agreement, (d) all obligations under direct or indirect
guaranties in respect of, and obligations (contingent or otherwise) to purchase
or otherwise acquire, or otherwise to assure a creditor against loss in respect
of, Debt or obligations of other Persons, (e) Capital Lease obligations, and
(f) all obligations under or in connection with Hedging Agreements once such
obligations become "debt" according to GAAP.
"TransTexas Acquisition" shall mean the acquisition of certain
Property consisting of, inter alia, Oil and Gas Properties by the Company from
TransTexas Gas Corporation and TransTexas Transmission Corporation pursuant to
that certain Purchase and Sale Agreement dated June 21, 1996.
Section 1.03 Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all determinations with respect to accounting matters hereunder
shall be made, and all financial statements and certificates and reports as to
financial matters required to be furnished to the Agent or the Banks hereunder
shall be
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<PAGE> 22
prepared, in accordance with GAAP, applied on a basis consistent with the
Financial Statements (except for changes concurred with by the Company's
independent public accountants).
ARTICLE II
Commitments
Section 2.01 Loans and Letters of Credit. Each Bank severally
agrees, on the terms of this Agreement, to make the following Loans to the
Company, and the Agent on behalf of the Banks agrees to issue, reissue, renew
and extend Letters of Credit for the account of the Company in accordance with
the following:
(a) Revolving Credit Loans - during the period from and including
the Closing Date to and including the Drawdown Termination Date, Revolving
Credit Loans in an aggregate principal amount at any one time outstanding up
to, but not exceeding, the amount of such Bank's Commitment as then in effect;
provided, however, that the aggregate principal amount of all Revolving Credit
Loans made by all Banks hereunder at any one time outstanding shall not exceed,
in the aggregate (A) the lesser of (1) the Borrowing Base or (2) the aggregate
Commitments, as then in effect, minus (B) the LC Exposure. Subject to the
terms of this Agreement, during the period from the Closing Date to and
including the Drawdown Termination Date, the Company may borrow, repay and
reborrow the amount of the Commitments, as then in effect.
Subject to the other terms and provisions of this Agreement, at the option of
the Company unless otherwise provided herein, the Loans may be Base Rate Loans
or Fixed Rate Loans (each a "type" of Loan). For purposes of this Section
2.01(a), Fixed Rate Loans having different Interest Periods, regardless of
whether they commence on the same date, shall be considered separate Loans.
(b) Letters of Credit:
(i) During the period from and including the Closing Date
to and including the Drawdown Termination Date, the Banks agree to
extend credit to the Company at any time and from time to time by
participating in the issuance, renewal, extension or reissuance of
Letters of Credit pursuant to this Agreement; provided, that all such
Letters of Credit issued on or after the Closing Date shall be issued
by the Agent; and further provided, however, the aggregate amount of
all Letters of Credit at any one time outstanding shall not exceed (A)
the lesser of (1) $5,000,000, or (2) the lesser of (x) the Borrowing
Base, or (y) the aggregate Commitments, as then in effect, minus (B)
the aggregate principal amount of all Loans then outstanding.
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<PAGE> 23
(ii) Each of the Letters of Credit issued after the
Closing Date shall (A) be issued by the Agent, (B) contain such terms
and provisions as are required by the Letter of Credit Agreement
executed in connection therewith and (to the extent not in conflict
with the Letter of Credit Agreement) those then customarily used by
the Agent in letters of credit, (C) be for the account of the Company,
(D) be issued to support trade payables and performance guarantees,
and (E) expire not later than the Drawdown Termination Date.
(iii) In conjunction with the issuance of a Letter of
Credit, the Company shall execute a Letter of Credit Agreement. In
the event of any conflict between any provision of a Letter of Credit
Agreement and this Agreement, the Company, the Agent and the Banks
hereby agree that the provisions of this Agreement shall govern.
(c) Extensions - With the unanimous written consent of the Banks,
which may or may not be granted in the discretion of the Banks, the Company
may, on an annual basis, obtain one year extensions of the Drawdown Termination
Date by delivering a written request for same to the Agent not more than four
(4) months and not less than sixty (60) days prior to the Drawdown Termination
Date.
Section 2.02 Borrowings, Continuations, Conversions, and
Issuances.
(a) The Company shall give the Agent (which shall promptly notify
the Banks) advance notice as hereinafter provided of each borrowing,
continuation, and conversion and each request for issuance, renewal or
extension of a Letter of Credit hereunder which request shall be in the form of
Exhibit E hereto, which shall specify the aggregate amount of such Loan or such
Letter of Credit, the date (which shall be a Business Day) of the Loans to be
borrowed, continued or converted, or the Letters of Credit to be issued,
renewed or extended, the type of Loan to be borrowed, continued or converted,
the beneficiary and other terms of such Letter of Credit, and in the case of
Fixed Rate Loans, the duration of the Interest Period therefor, all of which
(other than the beneficiary) must not conflict with the other terms and
provisions of this Agreement.
(b) All Base Rate Loans (as part of the same borrowing) shall be
in aggregate amounts among all Banks of at least $5,000,000 (or increments of
$1,000,000 in excess thereof) or the remaining unused portion of the
Commitments, or the amount disbursed under a Letter of Credit and advanced
hereunder pursuant to Section 4.07(b) hereof, if less. All Fixed Rate Loans
(as part of the same borrowing) shall be in aggregate amounts among all Banks
of at least $5,000,000 (or increments of $1,000,000 in excess thereof).
(c) All borrowings, continuations and conversions of Loans, or
requests for issuance, renewal, extension or reissuance of Letters of Credit
shall require advance written notice from the Company to the Agent, which in
each case (other than the issuance, renewal, extension or reissuance of Letters
of Credit) shall be irrevocable and effective only upon receipt by the Agent
and shall be
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<PAGE> 24
received by the Agent not later than 10:00 a.m. Houston time on a day which is
not less than the number of Business Days prior to the date of such borrowing,
continuation or conversion specified below opposite the type of such Loans:
<TABLE>
<CAPTION>
Number of
Type Business Days
---- -------------
<S> <C>
Base Rate Loans 0
Fixed Rate Loans 3;
</TABLE>
and four (4) Business Days prior to the date such Letter of Credit is to be
issued, renewed, extended or reissued.
(d) Not later than 12:00 noon Houston time on the date specified
for each borrowing hereunder, each Bank shall make available in immediately
available funds the amount of the Loan to be made by such Bank on such date to
the Agent, to an account which the Agent shall specify for the account of the
Company. The amounts so received by the Agent shall, subject to the terms and
conditions of this Agreement, be made available to the Company by depositing
the same, in immediately available funds, in an account of the Company
designated by the Company and maintained with TCB at the Principal Office.
(e) On the date specified for the issuance, renewal or extension
of a Letter of Credit, the Agent shall issue such Letter of Credit to the
beneficiary thereof.
(f) Subject to the terms of this Agreement, the Company may elect
to continue all or any part of any Fixed Rate Loan beyond the expiration of the
then current Interest Period relating thereto by giving advance notice to the
Agent of such election, specifying the amount of such Loan to be continued and
the Interest Period therefor. In the absence of such a timely and proper
election in accordance with the terms of Section 2.02(a) and (c), the Company
shall be deemed to have elected to convert such Fixed Rate Loan to a Base Rate
Loan. All or any part of any Fixed Rate Loan may be continued as provided
herein, provided that (i) any continuation of any such Loan shall be (as to
each Loan as continued for an applicable Interest Period) in the principal
amount of at least $5,000,000 (or increments of $1,000,000 in excess thereof),
and (ii) no Event of Default shall have occurred and be continuing. If an
Event of Default shall have occurred and be continuing, each Fixed Rate Loan
shall be converted to a Base Rate Loan on the last day of the Interest Period
applicable thereto.
(g) Subject to the terms of this Agreement:
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<PAGE> 25
(i) The Company may elect to convert any Fixed Rate Loan
on the last day of the then current Interest Period relating thereto
to a Base Rate Loan by giving advance notice to the Agent of such
election.
(ii) The Company may elect to convert all or any part of a
Base Rate Loan at any time and from time to time to a Fixed Rate Loan
by giving advance notice to the Agent of such election. All or any
part of any outstanding Loan may be converted as provided herein,
provided that any conversion of any Base Rate Loan into a Fixed Rate
Loan shall be (as to each such Loan into which there is a conversion
for an applicable Interest Period) in the principal amount not less
than $1,000,000. If no Event of Default shall have occurred and be
continuing, each Loan may be converted as provided in this Section.
If an Event of Default shall have occurred and be continuing, no Loan
may be converted into a Fixed Rate Loan.
Section 2.03 Changes of Commitments.
(a) The Company shall have the right to terminate or to reduce the
amount of the Commitments at any time or from time to time upon not less than
three (3) Business Day's prior written notice to the Agent (which shall
promptly notify the Banks) of each such termination or reduction, which notice
shall specify the effective date thereof and the amount of any such reduction
(which shall not be less than $1,000,000 or any increment of $1,000,000 in
excess thereof) and shall be irrevocable and effective only upon receipt by the
Agent.
(b) The Commitments once terminated or reduced may not be
reinstated.
Section 2.04 Fees.
(a) The Company shall pay to the Agent, for the account of each
Bank, the following commitment fees:
(i) A commitment fee on the daily average of the amount
by which the Designated Borrowing Base exceeds the sum of (A) the LC
Exposure, plus (B) the aggregate principal amount of all outstanding
Loans, for the period from and including the last Borrowing Base
determination date to the earlier of the date the Commitments are
terminated or the date of the next effective Borrowing Base
determination date at the following rate per annum as applicable:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Threshold Amount
Utilization Commitment Fee
- -------------------------------------------------------------------------
<S> <C>
Less than 50% .20%
- -------------------------------------------------------------------------
</TABLE>
-18-
<PAGE> 26
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
Greater than or equal to 50% but less than 75% .25%
- -------------------------------------------------------------------------
Greater than or equal to 75% but less than 100% .30%
- -------------------------------------------------------------------------
Greater than or equal to 100% .375%
- -------------------------------------------------------------------------
</TABLE>
(ii) An unavailable commitment fee on the daily average
difference between the Designated Borrowing Base and the lesser of (A)
the Commitments or (B) the Borrowing Base for the period from and
including the last Borrowing Base determination date to the earlier of
the date the Commitments are terminated or the date of the next
Borrowing Base determination at a rate per annum equal 33% of the
applicable rate per annum outlined in clause (i) above.
(iii) If the Designated Borrowing Base is increased
pursuant to the proviso of Section 2.09(d), an additional commitment
fee for the period beginning on the most recent semi-annual regularly
scheduled Borrowing Base determination date (pursuant to Section 2.09)
to the date on which the Designated Borrowing Base is so increased at
the applicable rate per annum set forth in clause (i) above.
All such commitment fees shall be calculated on the basis of a year of
365 (or, in a leap year, 366) days for the actual number of days elapsed. The
accrued commitment fees shall be due and payable in arrears upon any reduction
or termination of the Commitments and on the last Business Day of each
December, March, June and September and on the Drawdown Termination Date,
commencing on the first such date after the Closing Date.
(b) The Company shall pay to the Agent a fee for the issuance of
Letters of Credit (calculated separately for each Letter of Credit) under this
Agreement at the following rate per annum as applicable, computed on the
aggregate amount available to be drawn under each Letter of Credit:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Threshold Amount
Utilization Issuance Fee
- ----------------------------------------------------------------------
<S> <C>
Less than 25% .50%
- ----------------------------------------------------------------------
Greater than or equal to 25% but less than 50% .625%
- ----------------------------------------------------------------------
Greater than or equal to 50% but less than 75% .75%
- ----------------------------------------------------------------------
</TABLE>
-19-
<PAGE> 27
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Greater than or equal to 75% but less than .875%
100%
- ----------------------------------------------------------------------
Greater than or equal to 100% 1.125%
- ----------------------------------------------------------------------
</TABLE>
provided, however, each Letter of Credit shall bear a minimum fee of $300.00.
Such fees shall be payable semi-annually in advance, commencing on the date of
issuance of such Letter of Credit and shall be non-refundable. 1/8% of 1% of
each such fee shall be retained by the Agent for its own account, with the
remaining portion of each such fee being shared pro rata by the Banks.
(c) For the period from and including the Closing Date to the
Drawdown Termination Date, the Company agrees to pay to the Agent on the date
which is one (1) year after on the Closing Date and on the same day of each
calendar year thereafter an engineering fee of $18,000. $8,000 of each such
engineering fee shall be retained by the Agent with the balance being shared by
the Banks (excluding TCB, unless TCB is the only Bank) pro rata in proportion
to their Commitments.
(d) If the Company exercises its option to cause the Banks to
redetermine the Borrowing Base pursuant to Section 2.09(e), then for each
exercise of such option, the Company shall pay (i) a fee to the Agent, the
amount of which to be negotiated by the Agent and the Company at the time of
each exercise of such option, and (ii) a fee of $1,250 to each Bank (excluding
TCB).
(e) The Company shall pay to the Agent as compensation for its
services hereunder an administrative fee in cash or such other type of
compensation as may be mutually agreed in the amount heretofore mutually
agreed and any and other fees heretofore mutually agreed upon, all as set forth
in the Engagement Letter. The administrative fee shall be due and payable on
the date which is one (1) year after the Closing Date and on each anniversary
thereof during the term of this Agreement. Upon termination of this Agreement,
such fee shall be appropriately pro rated based on the fraction of a year that
has elapsed between the latest anniversary of the Closing Date and the date the
Commitments and all other obligations of the Banks and the Agent under this
Agreement are terminated.
Section 2.05 Applicable Lending Offices. The Loans of each type
made by each Bank shall be made and maintained at such Bank's Applicable
Lending Office for Loans of such type.
Section 2.06 Several Obligations. The failure of any Bank to make
any Loan to be made by it or to provide funds for disbursements under Letters
of Credit on the date specified therefor shall not relieve any other Bank of
its obligation to make its Loan or provide such funds on such date, but no Bank
shall be responsible for the failure of any other Bank to make a Loan to be
made by such other Bank or to provide such funds to be provided by such other
Bank.
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Section 2.07 Notes.
(a) The Revolving Credit Loans made by each Bank shall be
evidenced by a single promissory note of the Company in substantially the form
of Exhibit B hereto, dated (i) the Closing Date or (ii) the effective date of
an Assignment pursuant to Section 12.06(b), payable to the order of such Bank
in a principal amount equal to the maximum amount of its Commitment as
originally in effect and otherwise duly completed. The date, amount, type,
interest rate and maturity date of each Loan made by each Bank, and all
payments made on account of the principal thereof, shall be recorded by such
Bank on its books and, prior to any transfer of a Note held by it, endorsed by
such Bank on the schedule attached to such Note or any continuation thereof;
provided, however, such Bank shall have no liability to the Company if it fails
to record any such information and in no event shall such failure diminish or
impair the Company's obligation to repay all amounts owing to such Bank under
such Note.
(b) No Bank shall be entitled to have its Note subdivided, by
exchange for promissory notes of lesser denominations or otherwise, except in
connection with a permitted assignment of all or any portion of such Bank's
Commitment, Loans and Note pursuant to Subsection 12.06(b).
Section 2.08 Prepayments.
(a) The Company may prepay Loans on any Business Day upon notice
to the Agent (which shall promptly notify the Banks), which notice shall be
given by the Company not later than 10:00 a.m. Houston time three (3) Business
Days' prior to the date of such prepayment, shall specify the amount of the
prepayment (which shall be not less than $1,000,000 (or increments of
$1,000,000 in excess thereof) or the remaining balance of any Loans
outstanding, if less) and shall be irrevocable and effective only upon receipt
by the Agent, provided that interest on the principal prepaid, accrued to the
prepayment date, shall be paid on the next quarterly interest payment date
unless the prepayment is of the remaining balance of all Loans outstanding.
Any prepayment of any Fixed Rate Loans shall be subject to the provisions of
Section 5.05 hereof.
(b) If at any time the sum of the outstanding aggregate principal
amount of the Loans and the LC Exposure exceeds the lesser of the then
effective Borrowing Base or the aggregate amount of the Commitments, then the
Company shall (i) within 30 days following such event, pay or prepay the amount
of such excess amount for application first, towards reduction of all amounts
previously drawn under Letters of Credit, but not yet funded as a Revolving
Credit Loan pursuant to Section 4.07(b) or reimbursed, second, if necessary,
towards reduction of the outstanding principal balance of the Notes by
prepaying Base Rate Loans, if any, then outstanding, and third, if necessary,
at the election of the Company, either toward a reduction of the outstanding
principal balance of the Notes by prepaying Fixed Rate Loans, if any, then
outstanding or by paying such amount to the Agent as cash collateral for
outstanding Letters of Credit, which amount shall be held by the Agent as cash
collateral to secure the Company's obligation to reimburse the Agent and the
Banks for
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drawings under the Letters of Credit, or (ii) within 30 days following such
event, provide the Banks with additional collateral acceptable to the Banks to
eliminate such Borrowing Base deficiency. The Company shall also pay any
amounts payable pursuant to Section 5.05 in connection with any payment or
prepayment made pursuant to this Section 2.08(b).
(c) Promptly upon the Company's receipt of the proceeds of the
IPO, the Company shall prepay the Loans in an amount equal to or greater than
70% of the proceeds so received by the Company, net of expenses and costs
related to the IPO, which shall be at least $63,000,000.
Section 2.09 Borrowing Base; Threshold Amount.
(a) During the period from and after the Closing Date of this
Agreement to and including the effective date of the next redetermination of
the Borrowing Base and the Threshold Amount in accordance with this Section
2.09, the amount of (i) the Borrowing Base shall be $150,000,000, and (ii) the
Threshold Amount shall be $120,000,000.
(b) On the effective date of the redetermination of the Borrowing
Base and the Threshold Amount immediately following the Closing Date and on the
first day of each January and July thereafter, the Agent shall redetermine the
amount of the Borrowing Base in accordance with this Section 2.09.
(c) Upon receipt of the reports required by Section 8.04 and such
other reports, data, and supplemental information as may, from time to time, be
reasonably requested by the Agent (the "Engineering Reports"), together with a
certificate from the President or chief financial officer of the Company that,
to the best of his knowledge and in all material respects, (i) the information
upon which the Engineering Reports are based is true and correct, (ii) the
certificate identifies the properties covered by the Engineering Reports that
have not been previously included in any prior Engineering Reports, and (iii)
no Oil and Gas Properties of the Company, its Affiliates or its Subsidiaries
have been sold since the date of the last Borrowing Base and Threshold Amount
determination except as set forth on an exhibit to the certificate, which
certificate shall list all Oil and Gas Properties of the Company, its
Affiliates and its Subsidiaries sold in compliance with Section 9.16 and in
such detail as reasonably required by the Agent, the Banks will evaluate the
Properties covered by the Engineering Reports. Based upon such information and
such other information as the Agent deems appropriate, the Agent will
redetermine the Borrowing Base and the Threshold Amount. Such redetermination
shall be accomplished not later than the first day of each February and August
commencing on August 1, 1996 (provided that the Company shall have furnished
the Engineering Reports in a timely and complete manner). Each redetermination
of the Borrowing Base and the Threshold Amount must be approved by the Majority
Banks.
Each redetermination of the Borrowing Base and the Threshold Amount
shall be effective and applicable for all purposes of this Agreement until the
effective date of the next redetermination,
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except as provided elsewhere in this Agreement and except for such
redetermination as the Majority Banks may conduct in good faith and at their
sole discretion, after notice to the Company of their intention to so
redetermine the Borrowing Base and the Threshold Amount, upon the occurrence of
any event or change having a Material Adverse Effect or a material change in
the value or nature of the Property included in the Borrowing Base. The Agent
will promptly notify the Company in writing of each redetermination of the
Borrowing Base and the Threshold Amount made in accordance with this Section
2.09. Until such notification, the Borrowing Base and the Threshold Amount
established for the directly preceding period shall remain in effect, and
thereafter the new Borrowing Base and the new Threshold Amount as set forth in
such notification shall be in effect.
(d) Upon the Company's receipt of written notice from the Agent of
the amount of the Borrowing Base then in effect, the Company may accept all or
a lesser amount of such Borrowing Base (the "Designated Borrowing Base") by
providing written notice to the Agent of the amount of the Designated Borrowing
Base within 5 Business Days following receipt of said notice from the Agent;
provided, however, the Designated Borrowing Base shall not be less than the
lower of (i) the amount of the Borrowing Base then in effect, or (ii)
$75,000,000, and shall not be greater than (iii) the Borrowing Base then in
effect, or (iv) the aggregate amount of the Commitments. If the Company does
not provide such written notice to the Agent within such 5 Business Day period,
the Designated Borrowing Base shall be equal to the Threshold Amount as set
forth in the aforementioned written notice from the Agent to the Company;
provided, however, that during each Borrowing Base period and after the
expiration of such 5 Business Day period, the Company shall have an opportunity
to adjust the Designated Borrowing Base by providing the Agent with written
notice anytime at least 5 Business Days in advance of its intent to designate a
different Designated Borrowing Base based upon the Agent's most recent written
notice to the Company of the Borrowing Base. During the period from and after
the Closing Date to and including the effective date of the next designation of
the Designated Borrowing Base in accordance with this Section 2.09, the amount
of the Designated Borrowing Base shall be $150,000,000.
(e) The Company shall have the option to cause the Banks to
redetermine the Borrowing Base and the Threshold Amount once between each
scheduled semi-annual Borrowing Base determination; provided, however, any such
redetermination must be approved by the Majority Banks, and each request for
such redetermination must be accompanied by such information, reports and
certificates as the Agent shall reasonably require to support such redetermined
Borrowing Base and Threshold Amount.
(f) At no time shall the Threshold Amount exceed the Borrowing
Base.
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ARTICLE III
Payments of Principal and Interest
Section 3.01 Repayment of Loans. The Company will pay to the
Agent for account of each Bank the then outstanding principal amount of each
Loan made by such Bank on or before the Drawdown Termination Date.
Section 3.02 Interest.
(a) The Company will pay to the Agent for account of each Bank
interest on the unpaid principal amount of each Loan made by such Bank for the
period commencing on the date of such Loan to but excluding the date such Loan
shall be paid in full, at the following rates per annum:
(i) if such Loan is a Base Rate Loan, the Base Rate (as
in effect from time to time) plus the Applicable Margin, if any, but
in no event to exceed the Highest Lawful Rate; and
(ii) if such Loan is a Fixed Rate Loan, for each Interest
Period relating thereto (excluding the last day thereof), the Fixed
Rate for such Loan plus the Applicable Margin, but in no event to
exceed the Highest Lawful Rate.
Notwithstanding the foregoing, the Company will pay to the Agent for
the account of each Bank interest at the applicable Post-Default Rate on any
principal of any Loan made by such Bank and, to the fullest extent permitted by
law, on any other amount payable by the Company hereunder, under any Note or
under any other Security Instrument, which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full, but in no
event to exceed the Highest Lawful Rate.
(b) Accrued interest on each Base Rate Loan shall be payable
quarterly on each Quarterly Date and accrued interest on each Fixed Rate Loan
shall be payable on the last day of the Interest Period therefor and, if an
Interest Period is longer than three months or 90 days, at three month
intervals following the first day of such Interest Period, except that interest
payable at the Post-Default Rate shall be payable from time to time on demand
and interest on any Fixed Rate Loan that is converted into a Base Rate Loan
(pursuant to Section 5.04) shall be payable on the date of conversion (but only
to the extent so converted).
(c) Promptly after the determination of any interest rate provided
for herein or any change therein, the Agent shall notify the Banks to which
such interest is payable and the Company thereof.
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ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc.
Section 4.01 Payments. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by the
Company under this Agreement, the Notes and the Letter of Credit Agreements
shall be made in Dollars, in immediately available funds, to the Agent at such
account as the Agent shall specify by notice to the Company from time to time,
not later than 10:00 a.m. Houston time on the date on which such payments shall
become due (each such payment made after such time on such due date to be
deemed to have been made on the next succeeding Business Day). The Company
shall, at the time of making each payment under this Agreement, any Note or any
Letter of Credit Agreement, specify to the Agent the Loans or other amounts
payable by the Company hereunder to which such payment is to be applied (and in
the event that it fails to so specify, or if an Event of Default has occurred
and is continuing, the Agent may distribute such payment to the Banks in such
manner as it or the Majority Banks determine to be appropriate, subject to
Section 4.02). Each payment received by the Agent under this Agreement or any
Note for account of a Bank shall be paid promptly to such Bank, in immediately
available funds, for account of such Bank's Applicable Lending Office for the
Loan in respect of which such payment is made. If the due date of any payment
under this Agreement, any Note or any Letter of Credit Agreement, would
otherwise fall on a day which is not a Business Day, such due date shall be
extended to the next succeeding Business Day and interest shall be payable for
any principal so extended for the period of such extension.
Section 4.02 Pro Rata Treatment. Except to the extent otherwise
provided herein: (a) each borrowing from the Banks under Section 2.01 shall be
made from the Banks, each payment of commitment fee or other fees under Section
2.04 shall be made for account of the Banks unless otherwise provided in
Section 2.04, and each termination or reduction of the amount of the
Commitments under Section 2.03 shall be applied to the Commitments of the
Banks, pro rata according to the amounts of their respective unused
Commitments, (b) each payment of principal of Loans by the Company shall be
made for account of the Banks pro rata in accordance with the respective unpaid
principal amount of the Loans held by the Banks and (c) each payment of
interest on Loans by the Company shall be made for account of the Banks pro
rata in accordance with the amounts of interest due and payable to the
respective Banks.
Section 4.03 Computations. Interest on Fixed Rate Loans shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which
payable, unless such calculation would result in a usurious rate, in which case
interest shall be calculated on the per annum basis of a year of 365 or 366
days, as the case may be. Interest on Base Rate Loans and fees shall be
computed on the basis of (a) a year of 365 or 366 days, as the case may be, and
actual days elapsed (including the first day but excluding
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the last day) occurring in the period for which payable with respect to the
Prime Rate, and (b) a year of 360 days and actual days elapsed (including the
first day but excluding the last day) occurring in the period for which
payable, unless such calculation would result in a usurious rate, in which case
interest shall be calculated on a per annum basis of a year of 365 or 366 days,
as the case may be, with respect to the Federal Funds Rate.
Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent
shall have been notified by a Bank or the Company prior to the date on which
such notifying party is scheduled to make payment to the Agent of (in the case
of a Bank) the proceeds of a Loan to be made by it hereunder or (in the case of
the Company) a payment to the Agent for account of one or more of the Banks
hereunder (such payment being herein called the "Required Payment"), which
notice shall be effective upon receipt, that it does not intend to make the
Required Payment to the Agent, the Agent may assume that the Required Payment
has been made and may, in reliance upon such assumption (but shall not be
required to), make the amount thereof available to the intended recipient(s) on
such date and, if such Bank or the Company (as the case may be) has not in fact
made the Required Payment to the Agent, the recipient(s) of such payment shall,
on demand, repay to the Agent the amount so made available together with
interest thereon in respect of each day during the period commencing on the
date such amount was so made available by the Agent until the date the Agent
recovers such amount at a rate per annum equal to (i) the Federal Funds Rate
(but not to exceed the Highest Lawful Rate), for Required Payments required to
be made by any Bank, or (ii) the Post-Default Rate (but not to exceed the
Highest Lawful Rate), for Required Payments required to be made by the Company.
Section 4.05 Sharing of Payments, Etc. The Company agrees that,
in addition to (and without limitation of) any right of set-off, bankers' lien
or counterclaim a Bank may otherwise have, each Bank shall be entitled (upon
consent of the Agent), at its option, to offset balances held by it for account
of the Company at any of its offices, in Dollars or in any other currency,
against any principal of or interest on any of such Bank's Loans, or any other
amount payable to such Bank hereunder or under any Letter of Credit Agreement,
which is not paid when due (regardless of whether such balances are then due to
the Company), in which case such Bank shall promptly notify the Company and the
Agent thereof, provided that such Bank's failure to give such notice shall not
affect the validity thereof. If any Bank shall obtain payment of any principal
of or interest on any Loan made by it to the Company under this Agreement or
payment of any reimbursement obligation under a Letter of Credit Agreement
through the exercise of any right of set-off, banker's lien or counterclaim or
similar right or otherwise, and, as a result of such payment, such Bank shall
have received a greater percentage of the principal or interest then due
hereunder or under the respective Letter of Credit Agreement, as the case may
be, by the Company to such Bank than the percentage received by any other
Banks, such Bank shall promptly rebate such excess amount to the Agent for
distribution in accordance with the terms of Section 4.02 hereof, and the Banks
shall make such other adjustments from time to time as shall be equitable, to
the end that all the Banks shall share the benefit of such excess payment (net
of any expenses which may be incurred by such Bank in
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obtaining or preserving such excess payment) pro rata in accordance with the
unpaid principal and/or interest on the Loans held by each of the Banks or pro
rata in accordance with the unpaid reimbursement obligation owed to each of the
Banks. To such end, all the Banks shall make appropriate adjustments among
themselves if such payment is rescinded or must otherwise be restored. Nothing
contained herein shall require any Bank to exercise any such right or shall
affect the right of any Bank to exercise any such right with respect to any
other indebtedness or obligation of the Company to such Bank; provided,
however, with respect to the Indebtedness or any other indebtedness owed by the
Company or any Subsidiary to any Bank or any Affiliate of a Bank, all the Banks
shall share the benefit of any set-off pertaining to the Indebtedness or such
other indebtedness pro rata in accordance with the unpaid principal and/or
interest on the Loans held by each of the Banks and the aforementioned other
indebtedness or pro rata in accordance with the unpaid reimbursement owed to
each of the Banks and the aforementioned other indebtedness. If under any
applicable bankruptcy, insolvency or other similar law, any Bank receives a
secured claim in lieu of a set-off to which this Section 4.05 applies, such
Bank shall, to the extent practicable, exercise its rights in respect of such
secured claim in a manner consistent with the rights of the Banks entitled
under this Section 4.05 to share the benefits of any recovery on such secured
claim.
Section 4.06 Assumption of Risks. The Company assumes all risks
of the acts or omissions of beneficiaries of any of the Letters of Credit with
respect to its use of the Letters of Credit. Except in the case of gross
negligence or willful misconduct on the part of the Agent or any of its
employees, neither the Agent, the Agent's correspondent banks, nor any Bank
shall be responsible: (i) for the validity or genuineness of certificates or
other documents, even if such certificates or other documents should in fact
prove to be invalid, fraudulent or forged; (ii) for errors, omissions,
interruptions or delays in transmissions or delivery of any messages by mail,
telex, or otherwise, whether or not they be in code; (iii) for errors in
translation or for errors in interpretation of technical terms; or (iv) for any
other consequences arising from causes beyond the Agent's control. In
addition, neither the Agent nor any Bank shall be responsible for any error,
neglect, or default of any of the Agent's correspondent banks; and none of the
above shall affect, impair or prevent the vesting of any of the Agent's rights
or any Bank's rights or powers hereunder or under the Letter of Credit
Agreements, all of which rights shall be cumulative. The Agent and the Agent's
correspondent banks may accept certificates or other documents that appear on
their face to be in order, without responsibility for further investigation.
In furtherance and not in limitation of the foregoing provisions, the Company
agrees that any action, inaction or omission taken or not taken by the Agent or
any correspondent bank in absence of gross negligence or willful misconduct by
the Agent or any correspondent bank in connection with any Letter of Credit, or
any related drafts, certificates, documents or instruments, shall be binding on
the Company and shall not put the Agent or the Agent's correspondent banks or
any Bank under any resulting liability to the Company. The Agent agrees to use
reasonable judgment in its selection of correspondent banks.
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<PAGE> 35
Section 4.07 Obligation to Reimburse and to Repay.
(a) If any draft or claim shall be presented for payment under a
Letter of Credit, after confirming that such draft or claim complies with all
requirements of the relevant Letter of Credit, the Agent shall promptly notify
the Company of the date and the amount of the draft or claim presented for
payment and shall promptly notify each Bank thereof and of the Business Day on
which such draft or claim is to be honored and the ratable share of such draft
or claim attributable to such Bank on the basis of its Commitment.
(b) If a disbursement by the Agent is made under any Letter of
Credit and no Event of Default under this Agreement shall have occurred and be
continuing, the Company may elect to have the amount of such disbursement up to
the amount of the Commitments then available treated as a Revolving Credit Loan
to the Company as provided in Section 2.01(a) hereof, subject to the terms and
conditions set forth in this Agreement. To evidence such election, the Company
shall (promptly after receipt of notice that a Letter of Credit has been drawn
upon) give written notice of same to the Agent contemporaneously with delivery
of the notice of borrowing (in the form attached as Exhibit E hereto). With
respect to any disbursement under a Letter of Credit for which no such election
is made or after and during the continuance of an Event of Default, the Company
shall pay to the Agent promptly after notice of any such disbursement is
received by the Company in federal or other immediately available funds, the
amount of each such disbursement made by the Agent under the Letter of Credit
(if such payment is not sooner effected as may be required hereunder or under
other provisions of the Letter of Credit Agreement), together with interest on
the amount disbursed from and including the date of disbursement until payment
in full of such disbursed amount at a varying rate per annum equal to (x) the
Base Rate (as in effect from time to time) plus the Applicable Margin for Base
Rate Loans (but in no event to exceed the Highest Lawful Rate) for the first
Business Day following the date of such disbursement and (y) the Post-Default
Rate for Base Rate Loans (but in no event to exceed the Highest Lawful Rate)
for the period from and including the second Business Day following the date of
such disbursement to and including the date of repayment in full of such
disbursed amount.
(c) The Company's obligation to make each such payment shall be
absolute and unconditional and shall not be subject to any defense or be
affected by any right of setoff, counterclaim or recoupment which the Company
may now or hereafter have against any beneficiary of any Letter of Credit, the
Agent, any Bank, or any other Person for any reason whatsoever (but, without
prejudice to any other provisions hereof, any such payment shall not waive,
impair or otherwise adversely affect any claim, if any, that the Company may
have against any beneficiary of a Letter of Credit, the Agent, any Bank or any
other Person).
(d) In the event of the occurrence of any Event of Default, upon
request of the Majority Banks made during the continuation of such occurrence,
an amount equal to the entire remaining obligation of the Agent under each
outstanding Letter of Credit shall be deemed to be forthwith due
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<PAGE> 36
and owing by the Company to the Agent as of the date of any such occurrence to
be held by the Agent as cash collateral, and the Company's obligation to pay
such amount shall be absolute and unconditional, without regard to whether any
beneficiary of any such Letter of Credit has attempted to draw down all or a
portion of such amount under the terms of a Letter of Credit. In addition, the
Company's obligation shall not be subject to any defense or be affected by a
right of setoff, counterclaim or recoupment which the Company may now or
hereafter have against any such beneficiary, the Agent, any Bank, or any other
Person for any reason whatsoever (but, without prejudice to any other
provisions hereof, any such payment shall not waive, impair or otherwise
adversely affect any claim, if any, that the Company may have against any
beneficiary of a Letter of Credit, the Agent, any Bank or any other Person).
The Company hereby grants a security interest in any such amounts to the Agent
for the benefit of the Banks as security for all Indebtedness now or hereafter
owing hereunder. In the event of any such deposit (or prepayment of Letters of
Credit pursuant to Section 2.08) by the Company of amounts contingently owing
under outstanding Letters of Credit and in the event that thereafter drafts or
other demands for payment complying with the terms of such Letters of Credit
are not made prior to the respective expiration dates thereof, the Agent
agrees, if no Event of Default has occurred and is continuing or if no other
amounts are then due and payable under this Agreement, any Note or the Security
Instruments, to remit to the Company amounts of such cash collateral, deposits
or prepayments for which the contingent obligations evidenced by such Letters
of Credit have ceased.
Section 4.08 Obligations for Letters of Credit.
(a) Immediately upon issuance of any Letter of Credit by the
Agent, each Bank shall be deemed to be a participant through the Agent in the
obligation of the Agent under such Letter of Credit. Upon the delivery by such
Bank to the Agent of funds requested for a disbursement pursuant to Section
4.08(c) hereof, such Bank shall be deemed as having purchased a participating
interest in the Company's reimbursement obligations with respect to such Letter
of Credit in an amount equal to such funds delivered to the Agent.
(b) Each Bank severally agrees with the Agent and the Company that
it shall be unconditionally liable, without regard to the occurrence of any
Event of Default, for its pro-rata share based upon the ratio of its Commitment
to the total Commitments of all Banks, to reimburse on demand, the Agent for
the amount of each disbursement under a Letter of Credit; provided, however,
notwithstanding anything to the contrary contained in this Section 4.08(b), if
due to the gross negligence or willful misconduct of the Agent a Letter of
Credit is improperly issued or improperly honored, the Banks shall not be
liable to reimburse the Agent for their pro rata share of any disbursement
under such Letter of Credit.
(c) The Agent shall promptly request from each Bank its ratable
share of any disbursement under any Letter of Credit that the Company has not
elected hereunder to treat as a Revolving Credit Loan pursuant to Section 4.07,
which amount shall be made available by each
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Bank to the Agent at its Principal Office in immediately available funds no
later than 2:00 p.m. Houston time on the date requested. If such amount due to
the Agent is made available later than 2:00 p.m. Houston time on the date
requested, then such Bank shall pay to the Agent such amount with interest
thereon in respect of each day during the period commencing on the date such
amount was requested until the date the Agent receives such amount at a rate
per annum equal to the Federal Funds Rate (but not to exceed the Highest Lawful
Rate).
ARTICLE V
Yield Protection; Illegality; Etc.
Section 5.01 Additional Costs.
(a) The Company shall pay directly to each Bank from time to time
on demand such amounts as such Bank may reasonably determine to be necessary to
compensate it for any costs which such Bank determines are attributable to its
making or maintaining any Loans under this Agreement or its Note or the
participation in Letters of Credit, or its obligation to make any such Loans or
participate in Letters of Credit hereunder, or any reduction in any amount
receivable by such Bank hereunder in respect of any such Loans or Letters of
Credit or such obligation (such increases in costs and reductions in amounts
receivable being herein called "Additional Costs"), resulting from any
Regulatory Change which: (i) changes the basis of taxation of any amounts
payable to such Bank under this Agreement or its Note in respect of any Loans
or Letters of Credit (other than taxes imposed on the overall net income of
such Bank or of its Applicable Lending Office); or (ii) imposes or modifies any
reserve, special deposit, deposit insurance or assessment, minimum capital,
capital ratio or similar requirements relating to any extensions of credit or
other assets of, or any deposits with or other liabilities of, such Bank
(including any Loans or any deposits referred to in the definition of "Fixed
Base Rate" in Section 1.01); or (iii) imposes any other condition affecting
this Agreement or its Note (or any of such extensions of credit or
liabilities). Each Bank will notify the Company of any event occurring after
the date of this Agreement which will entitle such Bank to compensation
pursuant to this Section 5.01(a) as promptly as practicable after it obtains
knowledge thereof, if it determines to request such compensation, and will set
forth in reasonable detail the basis for and manner of determining such
compensation. If any Bank requests compensation from the Company under this
Section 5.01(a), or under Section 5.01(c), the Company may, by notice to such
Bank (with a copy to the Agent), suspend the obligation of such Bank to make
Loans of the type with respect to which such compensation is requested.
(b) Without limiting the effect of the foregoing provisions of
this Section 5.01, in the event that, by reason of any Regulatory Change, any
Bank either (i) incurs Additional Costs based on or measured by the excess
above a specified level of the amount of a category of deposits or other
liabilities of such Bank which includes deposits by reference to which the
interest rate on Fixed Rate
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Loans is determined as provided in this Agreement or a category of extensions
of credit or other assets of such Bank which includes Fixed Rate Loans or (ii)
becomes subject to restrictions on the amount of such a category of liabilities
or assets which it may hold, then, if such Bank so elects by notice to the
Company (with a copy to the Agent), the obligation of such Bank to make Loans
of such type hereunder shall be suspended until the earlier to occur of (y) the
date such Bank is no longer within the restrictions of such Regulatory Change
or (z) the date such Regulatory Change ceases to be in effect (in which case
the provisions of Section 5.04 shall be applicable).
(c) Without limiting the effect of the foregoing provisions of
this Section 5.01 (but without duplication), the Company shall pay directly to
each Bank from time to time on request such amounts as such Bank may reasonably
determine to be necessary to compensate such Bank for any increased costs which
it determines are attributable to the maintenance by it or any of its
affiliates pursuant to any law or regulation of any jurisdiction or any
interpretation, directive or request (whether or not having the force of law
and whether in effect on the date of this Agreement or thereafter) of any court
or governmental or monetary authority of capital in respect of its Loans or
Letters of Credit hereunder or its obligation to make Loans or participate in
Letters of Credit hereunder (such compensation to include, without limitation,
an amount equal to any reduction in return on assets or equity of such Bank to
a level below that which it could have achieved but for such law, regulation,
interpretation, directive or request). Each Bank will notify the Company if it
is entitled to compensation pursuant to this Section 5.01(c) as promptly as
practicable after it obtains knowledge of the facts that entitled it to such
compensation, if it determines to request such compensation, and will set forth
in reasonable detail the basis for and manner of determining such compensation.
(d) Determinations and allocations by a Bank for purposes of this
Section 5.01 of the effect of any Regulatory Change pursuant to subsections (a)
or (b), or of the effect of capital maintained pursuant to subsection (c), on
its costs of making or maintaining Loans or its obligation to make Loans or
participate in Letters of Credit, or on amounts receivable by, or the rate of
return to, it in respect of Loans, Letters of Credit or such obligation, and of
the additional amounts required to compensate such Bank under this Section
5.01, shall be conclusive, provided that such determinations and allocations
are made on a reasonable basis.
Section 5.02 Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if:
(a) the Agent reasonably determines that quotations of interest
rates for the relevant deposits referred to in the definition of "Fixed Base
Rate" in Section 1.02 are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining the rate of interest for Fixed
Rate Loans as provided in this Agreement; or
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(b) the Majority Banks determine (which determination shall be
conclusive) and notify the Agent that the relevant rates of interest referred
to in the definition of "Fixed Rate" in Section 1.02 upon the basis of which
the rate of interest for Fixed Rate Loans is to be determined do not adequately
cover the cost to the Banks of making or maintaining such Loans;
then the Agent shall give the Company and each Bank prompt notice thereof, and
so long as such condition remains in effect, the Banks shall be under no
obligation to make Fixed Rate Loans of such type; provided, however, such Loans
shall be made as Base Rate Loans. Notwithstanding the foregoing, the Banks
shall maintain until the end of the Interest Period then in effect such Fixed
Rate Loans then outstanding.
Section 5.03 Illegality. Notwithstanding any other provision in
this Agreement, in the event that it becomes unlawful, as the result of
circumstances not reasonably within the control of any Bank, for such Bank or
its Applicable Lending Office to honor its obligation to make or maintain Fixed
Rate Loans hereunder, then such Bank shall promptly notify the Company thereof
(with a copy to the Agent) and such Bank's obligation to make or maintain Fixed
Rate Loans hereunder shall be suspended until such time as such Bank may again
make and maintain such affected Loans (in which case the provisions of Section
5.04 shall be applicable).
Section 5.04 Certain Base Rate Loans pursuant to Sections 5.01 and
5.03. If the obligations of any Bank to make Fixed Rate Loans ("Affected
Loans") shall be suspended pursuant to Section 5.01 or 5.03, all Affected Loans
which would otherwise be made by such Bank shall be made instead as Base Rate
Loans and, if an event referred to in Section 5.01(b) or 5.03 has occurred and
such Bank so requests by notice to the Company (with a copy to the Agent), all
Affected Loans of such Bank then outstanding shall be automatically converted
into Base Rate Loans on the date specified by such Bank in such notice, and, to
the extent that Affected Loans are so made as (or converted into) Base Rate
Loans, all payments of principal which would otherwise be applied to such
Bank's Affected Loans shall be applied instead to its Base Rate Loans.
Section 5.05 Certain Compensation. The Company shall pay to the
Agent for the account of each Bank, upon the request of such Bank through the
Agent, such amount or amounts as shall be sufficient (in the reasonable opinion
of such Bank) to compensate it for any loss, cost or expense which such Bank
reasonably determines is attributable to:
(a) any payment of a Fixed Rate Loan made by the Company on a date
other than the last day of an Interest Period for such Loan (whether by reason
of acceleration or otherwise); or
(b) any failure by the Company to borrow a Fixed Rate Loan to be
made by such Bank on the date specified therefor in the relevant notice under
Section 2.02.
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Without limiting the foregoing, such compensation shall include an
amount equal to the excess, if any, of: (i) the amount of interest which
otherwise would have accrued on the principal amount so paid or not borrowed
for the period from and including the date of such payment or failure to borrow
to but excluding the last day of the Interest Period for such Loan (or, in the
case of a failure to borrow, to but excluding the last day of the Interest
Period for such Loan which would have commenced on the date specified therefor
in the relevant notice) at the applicable rate of interest for such Loan
provided for herein; over (ii) the amount of interest (as reasonably determined
by such Bank) such Bank would have bid in the London interbank market for
Dollar deposits for amounts comparable to such principal amount and maturities
comparable to such period. A determination of any Bank as to the amounts
payable pursuant to this Section 5.05 shall be prima facie evidence of the
correctness of such determination.
ARTICLE VI
Conditions Precedent
Section 6.01 Initial Loan.
The obligation of the Banks to make the initial Loans hereunder is
subject to the receipt by the Agent of all fees payable pursuant to Section
2.04 or otherwise under this Agreement and the following documents and
satisfaction of the other conditions provided in this Article VI, each of which
shall be satisfactory to the Agent in form and substance:
(a) Certificates of the Secretary or Assistant Secretary of the
Company and THEC Holdings, setting forth (i) resolutions of its board of
directors in form and substance satisfactory to the Agent with respect to the
authorization of the Notes, Letters of Credit and Letter of Credit Agreements,
this Agreement and the other Security Instruments provided herein, (ii) the
officers of the Company and THEC Holdings (y) who are authorized to sign this
Agreement, the Notes, Letter of Credit Agreement and the other Security
Instruments and request Letters of Credit hereunder, and (z) who will, until
replaced by another officer or officers duly authorized for that purpose, act
as its representative for the purposes of signing documents and giving notices
and other communications in connection with this Agreement and the transactions
contemplated hereby, and (iii) specimen signatures of the officers so
authorized. The Agent and the Banks may conclusively rely on such certificate
until the Agent receives notice in writing from the Company to the contrary.
(b) A copy, certified as true by the Secretary or Assistant
Secretary of the Company and THEC Holdings of the articles or certificate of
incorporation and the bylaws of the Company and THEC Holdings.
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(c) Certificates of the appropriate state agencies with respect to
the valid existence and good standing of the Company and THEC Holdings and the
qualification of each to do business as a foreign corporation in any
jurisdiction in which the ownership of Property or the nature of activities
requires such qualification except where the failure to so qualify would not
have a Material Adverse Effect.
(d) A compliance certificate which shall be true and correct in
the form of Exhibit C, duly and properly executed by an executive officer of
the Company, and dated as of the date of the funding of the first Loan provided
for in Section 2.01 of this Agreement.
(e) The Notes, duly completed and executed.
(f) A favorable opinion of Andrews & Kurth L.L.P., counsel to the
Company and THEC Holdings, substantially in the form of Exhibit D hereto.
(g) A favorable opinion of Cullen & Dykman concerning the Public
Utility Holding Company Act.
(h) The Security Agreement duly executed by THEC Holdings,
covering the stock of the Company, together with related assignments separate
from stock certificate and the original certificate or certificates evidencing
the stock of the Company pledged by the Security Agreement.
(i) A Financing Statement naming THEC Holdings, as Debtor, and the
Agent, as Secured Party, relating to the Security Agreement.
(j) Such other documents as the Agent or any Bank or special
counsel to the Agent may reasonably request.
(k) Engineering Reports evaluating the value of the Company's and
each Subsidiary's producing and non- producing Oil and Gas Properties as of
January 1, 1996.
Section 6.02 Initial and Subsequent Loans. The obligation of the
Banks to make, convert or continue Loans (other than Base Rate Loans which are
made pursuant to the terms hereof solely to convert existing Loans in the
normal course on the last day of an Interest Period therefor) to the Company
upon the occasion of each borrowing hereunder (including the initial borrowing)
or of the Agent to issue, renew, extend or reissue Letters of Credit is subject
to the further conditions precedent that, as of the date of such Loans,
conversions or continuations or issuance, renewal, extension or reissuance of
such Letter of Credit and after giving effect thereto: (i) no Event of Default
shall have occurred and be continuing; (ii) no condition causing a Material
Adverse Effect shall have occurred and be continuing; and (iii) the
representations and warranties made by the Company in Article VII shall be true
in material respects on and as of the date of the making,
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conversion or continuation of such Loans or the issuance, renewal, extension or
reissuance of such Letters of Credit with the same force and effect as if made
on and as of such date and following such new borrowing, conversion or
continuation or issuance, renewal, extension or reissuance except as such
representations and warranties are modified to give effect to transactions
expressly permitted hereby. Each request for a borrowing, conversion or
continuation and selection of an Interest Period (other than Base Rate Loans
which are made pursuant to the terms hereof solely to convert existing Loans in
the normal course on the last day of an Interest Period therefor) or request
for the issuance, renewal, extension or reissuance of a Letter of Credit by the
Company hereunder shall constitute a certification by the Company to the effect
set forth in the preceding sentence (both as of the date of such notice and,
unless the Company otherwise notifies the Agent prior to the date of and
immediately following such borrowing, conversion or continuation, or issuance,
renewal, extension or reissuance as of the date thereof).
Section 6.03 Conditions Relating to Letters of Credit. In
addition to the satisfaction of all other conditions precedent set forth in
this Article VI, the issuance, renewal, extension or reissuance of the Letters
of Credit referred to in Section 2.01(b) is subject to the following conditions
precedent:
(a) At least four (4) Business Days prior to the date of the
issuance, renewal, extension or reissuance of each Letter of Credit, the Agent
shall have received a written request for a Letter of Credit as described in
Section 2.02.
(b) The Company shall have duly and validly executed and delivered
to the Agent a Letter of Credit Agreement pertaining to the Letter of Credit.
Section 6.04 Subsequent Environmental Audits--New Acquisitions.
Prior to each acquisition of Oil and Gas Properties or other real property
interests by the Company or any Subsidiary after the Closing Date, the Company
shall have prepared (and shall timely deliver to the Agent) a Phase I Audit
pertaining to the Property being acquired. The Phase I Audit may be prepared
by the Company, unless the value of the Oil and Gas Properties or other real
property interests being acquired is greater than $1,000,000, in which case,
the Banks may require the Company to engage an environmental consulting or
engineering firm to conduct the Phase I Audit. Such Phase I Audit shall be
completed and received by the Agent on or before 45 days following the date the
Company begins or engages said environmental consulting or engineering firm.
Section 6.05 Guarantors. In the event a Guarantor shall have
executed a Guaranty Agreement pursuant to Section 9.19, the Banks' obligation
to make subsequent Loans shall be subject to the Agent's receipt of the
following documents:
(a) certificates of the Secretary or Assistant Secretary of such
Guarantor setting forth:
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(i) resolutions of its board of directors in form and
substance reasonably satisfactory to the Agent with respect to the
authorization of the Guaranty Agreements;
(ii) the officers of the Company who are authorized to
sign such Guaranty Agreement and who will, until replaced by another
officer or officers duly authorized for the purpose, act as a
representative for the purposes of signing documents and giving
notices and other communications in connection with such Guaranty
Agreement and the transactions contemplated thereby; and
(iii) specimen signatures of the officers so authorized.
The Agent and the Banks may conclusively rely on such certificate until the
Agent receives notice in writing from such Guarantor to the contrary;
(b) a copy, certified as true by the Secretary or Assistant
Secretary of such Guarantor;
(c) certificates of the appropriate state agencies with respect to
the valid existence and good standing of such Guarantor and the qualification
of each to do business as a foreign corporation in any jurisdiction in which
the ownership of Property or the nature of activities requires such
qualification, except where the failure so to qualify would not have a Material
Adverse Effect;
(d) a Guaranty Agreement duly executed by such Guarantor; and
(e) an opinion of counsel to such Guarantor in form and substance
reasonably acceptable to the Agent.
ARTICLE VII
Representations and Warranties
The Company represents and warrants to the Banks that (each
representation and warranty herein is given as of the date of this Agreement
and shall be deemed repeated and reaffirmed on the dates provided in Section
6.02):
Section 7.01 Corporate Existence. The Company and each
Subsidiary: (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdictions in which it is incorporated (b)
has all requisite corporate power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on
its business as now being or as proposed to be conducted; and (c) is qualified
to do business in all jurisdictions in which the nature of the business
conducted by it makes such qualification necessary and where failure so to
qualify would have a Material Adverse Effect.
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Section 7.02 Financial Condition.
(a) The unaudited financial statements of the Company for the
period ended December 31, 1995, heretofore furnished to each of the Banks, are
complete and correct and fairly present the financial condition of the Company
and the results of its operations as at said date and for the period stated
(subject only to normal year-end audit adjustments with respect to such
unaudited interim statements), all in accordance with GAAP applied on a
consistent basis.
(b) Neither the Company nor any Subsidiary have had, on the
respective dates set forth above, any material contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments or unrealized
or anticipated losses from any unfavorable commitments, except as referred to
or reflected or provided for in such Financial Statements or otherwise provided
to the Agent and the Banks in writing. Since the date of the most recent
financial statements of the Company delivered to the Agent, there has been no
change or event having a Material Adverse Effect, except as otherwise disclosed
to the Agent and the Banks in writing on or before the Closing Date.
Section 7.03 Liabilities; Litigation. Except for liabilities
incurred in the normal course of business, neither the Company nor any
Subsidiary has any material (individually or in the aggregate) liabilities,
direct or contingent, except as disclosed or referred to in the most recent
financial statements of the Company delivered to the Agent or as disclosed to
the Banks in Schedule 7.03 hereto. Except as disclosed in Schedule 7.03, to
the best of the Company's knowledge and belief, as of the Closing Date, there
is no litigation, legal, administrative or arbitral proceeding, investigation
or other action of any nature pending or, to the knowledge of the Company
threatened against or affecting the Company or any Subsidiary which involves
the possibility (other than customary deductibles) of any judgment or liability
not fully covered by insurance, and which would have a Material Adverse Effect.
Section 7.04 No Breach. Except for waivers or consents obtained
in writing by the Company prior to the Closing Date, neither the execution and
delivery by the Company of this Agreement, the Notes, or the other Security
Instruments, nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent under, the respective
charter or by-laws of the Company or any Subsidiary, or any applicable law or
regulation, or any order, writ, injunction or decree of any court or
governmental authority or agency, or any agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
is bound or to which the Company or any Subsidiary is subject, or constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or assets of the Company or any
Subsidiary pursuant to the terms of any such agreement or instrument.
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Section 7.05 Corporate Action. The Company is duly authorized and
empowered to create and issue the Notes; and the Company and each Subsidiary
are duly authorized and empowered to execute, deliver and perform the Security
Instruments, including this Agreement, to which they respectively are parties;
all corporate action on the Company's part requisite for the due creation and
issuance of the Notes and on the Company's and each Subsidiary's respective
part for the due execution, delivery and performance of the Security
Instruments, including this Agreement, to which the Company and each Subsidiary
respectively are parties has been duly and effectively taken; and this
Agreement does, and the Notes and other Security Instruments to which the
Company and each Subsidiary respectively are parties upon their creation,
issuance, execution and delivery will, constitute valid and binding obligations
of the Company and each Subsidiary, respectively, enforceable in accordance
with their terms.
Section 7.06 Approvals. No authorizations, approvals or consents
of, and no filings or registrations with, any governmental or regulatory
authority or agency are necessary for the execution, delivery or performance by
the Company or any Subsidiary of this Agreement, the Notes, or the Security
Instruments to which they respectively are parties or for the validity or
enforceability thereof.
Section 7.07 Use of Loans. The proceeds of the Loans shall be
used by the Company (i) to pay in full the indebtedness of the Company under
the Existing Credit Agreement, (ii) to provide working capital for exploration
and production of Oil and Gas Properties of the Company and its Subsidiaries,
and (iii) for capital expenditures and acquisitions, including the TransTexas
Acquisition, which would otherwise be permitted by this Agreement. Neither the
Company nor any Subsidiary is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose, whether
immediate, incidental or ultimate, of buying or carrying margin stock (within
the meaning of Regulation U or X of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan hereunder will be used
to buy or carry any margin stock.
Section 7.08 ERISA. Except as set out in Schedule 7.08 hereof,
each of the Company and the ERISA Affiliates have fulfilled its obligations
under the minimum funding standards of ERISA and the Code with respect to each
Plan and are in compliance in all material respects with the presently
applicable provisions of ERISA and the Code, and have not incurred any
liability to the PBGC or any Plan or Multiemployer Plan.
Section 7.09 Taxes. To the best knowledge of the Company, BUG has
filed all United States Federal income tax returns (consolidated if required by
GAAP) and all other material tax returns which are required to be filed with
respect to the Company and its Subsidiaries and all taxes due pursuant to such
returns or pursuant to any assessment with respect to the Company and its
Subsidiaries received by BUG, THEC Holdings, the Company or any Subsidiary have
been paid, except for such assessments which are being contested in good faith
by appropriate proceedings. The charges, accruals and reserves on the books of
BUG, THEC Holdings, the Company and/or its
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Subsidiaries in respect of taxes and other governmental charges with respect to
the Company and its Subsidiaries are, in the opinion of the Company, adequate.
Section 7.10 Titles, etc. The Company has and upon the Initial
Funding will have good and indefeasible title to its material (individually or
in the aggregate) Properties, free and clear of all Liens except Excepted
Liens, Liens permitted by Section 9.03, and Liens disclosed to the Banks in
Schedule 7.10. After giving full effect to the Excepted Liens and Liens
disclosed to the Banks in Schedule 7.10, upon the Initial Funding, the Company
will acquire and own the net interests in production attributable to the wells
and units reflected in the Initial Reserve Report and the ownership of such
Properties shall not in any material respect obligate the Company to bear the
costs and expenses relating to the maintenance, development and operations of
each such Property in an amount in excess of the working interest of each
Property set forth in the Initial Reserve Report. Further, upon delivery of
each reserve report furnished to the Banks pursuant to Sections 8.04(a) or (b)
the statements made in the preceding sentence shall be true with respect to
such furnished reserve reports. All information contained in the Initial
Reserve Report is true and correct in all material respects as of the date
thereof and as of the date of the Initial Funding.
Section 7.11 No Material Misstatements. No material information,
statement, exhibit, certificate, document or report furnished to the Banks by
the Company or any Subsidiary in connection with the negotiation of this
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statement contained therein not
materially misleading.
Section 7.12 Investment Company Act. Neither the Company nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 Public Utility Holding Company Act. Neither the
Company nor any Subsidiary is a "holding company," or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," or a "public utility" within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
Section 7.14 Subsidiaries and Partnerships. The Company has no
Subsidiaries and no interest in any partnerships (excluding tax partnerships)
except those shown on Schedule 7.14 hereto, which Exhibit is complete and
accurate. The Company owns 100% of the issued and outstanding shares of stock
of each such Subsidiary, unless otherwise disclosed on Schedule 7.14.
Section 7.15 Location of Business and Offices. The Company's
principal place of business and chief executive offices are located at the
address stated on the signature page of this Agreement.
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Section 7.16 Gas Imbalances. Except as set forth on Schedule
7.16, there are no gas imbalances, take or pay or other prepayments with
respect to any of the Company's or Subsidiaries' Oil and Gas Properties which
would require the Company or its Subsidiaries to deliver Hydrocarbons produced
from their respective Oil and Gas Properties at some future time without then
or promptly thereafter receiving full payment therefor which would exceed 500
m.m.c.f. in the aggregate.
Section 7.17 Rate Filings. To the best of the Company's
knowledge, neither the Company nor any Subsidiary has violated any provisions
of The Natural Gas Act or The Natural Gas Policy Act of 1978 or any other
Federal or State law or any of the regulations thereunder (including those of
the respective Conservation Commissions and Land Offices of the various
jurisdictions having authority over the Company's and the Subsidiaries' Oil and
Gas Properties) with respect to the Company's and the Subsidiaries' Oil and Gas
Properties which have a Material Adverse Effect which is continuing or which
might in the future result in a Material Adverse Effect, and the Company and
each Subsidiary has or will have made all necessary rate filings, certificate
applications, well category filings, interim collection filings and notices,
and any other filings or certifications, and has or will have received all
necessary regulatory authorizations (including without limitation necessary
authorizations, if any, with respect to any processing arrangements conducted
by it or others respecting the Company's and the Subsidiaries' Oil and Gas
Properties or production therefrom) required under said laws and regulations
with respect to all of the Company's and the Subsidiaries' Oil and Gas
Properties or production therefrom so as not to have a Material Adverse Effect.
To the best of the Company's knowledge, said material rate filings, certificate
applications, well category filings, interim collection filings and notices,
and other filings and certifications contain no untrue statements of material
facts nor do they omit any statements of material facts necessary in said
filings.
Section 7.18 Environmental Matters. Except for those matters
disclosed in Schedule 7.18, or such other matters which would not have a
Material Adverse Effect (or with respect to (c), (d), and (e) below, where the
failure to take such actions would not have such a Material Adverse Effect):
(a) None of the Properties owned by the Company or its
Subsidiaries or the operations conducted thereon violate any Environmental Laws
or the order of any court or Governmental Authority with respect to
Environmental Laws;
(b) Without limitation of clause (a) above, none of the Properties
owned by the Company or its Subsidiaries or the operations currently conducted
thereon or by any prior owner or operator of such Property or operation, are in
violation of or subject to any existing, pending or (to the knowledge of the
Company) threatened action, suit, investigation, inquiry or proceeding by or
before any court or Governmental Authority with respect to Environmental Laws
or to any remedial obligations under Environmental Laws;
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(c) All notices, permits, licenses or similar authorizations, if
any, required to be obtained or filed in connection with the operation or use
of any and all Property of the Company and its Subsidiaries, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly
obtained or filed;
(d) All hazardous substances, if any, generated at any and all
Property of the Company and its Subsidiaries have in the past been transported,
treated and disposed of only by carriers maintaining valid permits under RCRA
and any other Environmental Law and only at treatment, storage and disposal
facilities maintaining valid permits under RCRA and any other Environmental
Law, which carriers and facilities have been and are operating in compliance
with such permits;
(e) The Company and each Subsidiary have taken all reasonable
steps necessary to determine and is determining (on a continuing basis) that no
hazardous substances or hazardous waste have been disposed of or otherwise
released and there has been no threatened release of any hazardous substances
on or to any Property of the Company and its Subsidiaries except in compliance
with Environmental Laws; and
(f) Neither the Company nor any Subsidiary has material contingent
liability in connection with any release or threatened release of any hazardous
substance or solid waste into the environment.
Each of the representations and warranties in this Section 7.18 is absolute to
the extent that it relates to any Property during the period such Property has
been owned by the Company or its Subsidiaries, and is made to the best of the
Company's knowledge as to any prior periods with respect to such Property.
Section 7.19 Defaults. Neither the Company nor any Subsidiary is
in default nor has any event or circumstance occurred which, but for the
expiration of any applicable grace period or the giving of notice, or both,
would constitute a default (in any respect which would have a Material Adverse
Effect) under any material agreement or other instrument to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary is
bound. No Event of Default hereunder has occurred and is continuing.
Section 7.20 Compliance with the Law. Neither the Company nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for
the ownership of any of their respective Properties or the conduct of their
respective business; which violation or failure would have (in the event such
violation or failure were asserted by any Person through appropriate action) a
Material Adverse Effect.
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Section 7.21 Insurance. The Company has, and has caused all
its Subsidiaries to have (a) all insurance policies sufficient for the
compliance by each of them with all Requirements of Law, and (b) insurance
coverage in at least such amounts and against such risks (including public
liability) that are usually insured against by companies engaged in the same or
a similar business under the same or similar circumstances for the assets and
operations of the Company and its Subsidiaries. Schedule 7.21 sets forth the
material insurance policies of the Company and its Subsidiaries which are in
full force and effect as of the Closing Date.
Section 7.22 Credit Agreements. Schedule 7.22 is a complete and
correct list, as of the Closing Date, of each credit agreement, loan agreement,
indenture, purchase agreement, guarantee or other arrangement providing for or
otherwise relating to any Debt of the Company, the principal or face amount of
which equals or exceeds (or may equal or exceed) $100,000, and the aggregate
principal or face amount outstanding or which may become outstanding under each
such arrangement is correctly described in such Schedule 7.22.
Section 7.23 Solvency. The Company and its Subsidiaries, taken as
a whole, and the Company and each of its material Subsidiaries are Solvent,
both before and after the execution, delivery and performance of the Security
Instruments, including this Agreement.
ARTICLE VIII
Affirmative Covenants
So long as any of the Notes shall remain unpaid or any Bank shall have
any Commitment under this Agreement or any Letter of Credit shall remain
outstanding, the Company agrees that:
Section 8.01 Financial Statements and Other Reports. The Company
shall deliver, or shall cause to be delivered, to each of the Banks:
(a) As soon as available and in any event within 90 days after the
end of each calendar year (except as otherwise provided in Section 6.05), the
audited statements of income, stockholders' equity and cash flows of the
Company and its Subsidiaries on a consolidated basis for such calendar year,
and the related balance sheet of the Company and its Subsidiaries on a
consolidated basis as at the end of such calendar year, and commencing with
respect to the calendar year ended December 31, 1995, setting forth in each
case in comparative form the corresponding figures for the preceding calendar
year, and accompanied by the related opinion of Arthur Andersen & Co. or such
other independent public accountants of recognized national standing acceptable
to the Agent which opinion shall state that said financial statements fairly
present the financial condition and results of operations of the Company and
its Subsidiaries as at the end of, and for, such calendar year, and a
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certificate of such accountants stating that, in making the examination
necessary for their opinion, they obtained no knowledge, except as specifically
stated, of any Event of Default.
(b) As soon as available and in any event within 60 days after the
end of each of the first three (3) quarterly periods of each calendar year,
unaudited statements of income, stockholders' equity and cash flows of the
Company and its Subsidiaries on a consolidated basis for such period and for
the period from the beginning of the respective calendar year to the end of
such period, and the related unaudited balance sheet of the Company and its
Subsidiaries on a consolidated basis as at the end of such period, and
commencing with respect to the quarter ending June 30, 1996, setting forth in
each case in comparative form the corresponding figures for the corresponding
period in the preceding calendar year, accompanied by the certificate of the
senior financial officer of the Company, which certificate shall state that
said financial statements fairly present the financial condition and results of
operations of the Company and its Subsidiaries in accordance with GAAP
consistently applied, as at the end of, and for, such period (subject to normal
year-end audit adjustments).
(c) As soon as possible, and in any event within 10 days after the
Company knows that any of the events or conditions specified below with respect
to any Plan or Multiemployer Plan have occurred or exist, a statement signed by
a senior financial officer of the Company setting forth details respecting such
event or condition and the action, if any, which the Company or its ERISA
Affiliate proposes to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by the Company or an ERISA
Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b)
of ERISA and the regulations issued thereunder, with respect to a
Plan, as to which PBGC has not by regulation waived the requirement of
Section 4043(a) of ERISA that it be notified within 30 days of the
occurrence of such event (provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA
shall be a reportable event regardless of the issuance of any waivers
in accordance with Section 412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a notice of
intent to terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a trustee
to administer, any Plan, or the receipt by the Company or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has
been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal by the Company or
any ERISA Affiliate under Section 4201 or 4204 of ERISA from a
Multiemployer Plan, or the receipt by the Company or any ERISA
Affiliate of notice from a Multiemployer Plan that is in
reorganization
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or insolvency pursuant to Section 4241 or 4245 of ERISA or that it
intends to terminate or has terminated under Section 4041A of ERISA;
and
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company, any Subsidiary or any ERISA
Affiliate to enforce Section 515 of ERISA, which proceeding is not
dismissed within 30 days.
(d) Promptly after the Company knows of any occurrence
constituting an Event of Default or having a Material Adverse Effect, a notice
of such Event of Default or Material Adverse Effect, describing the same in
reasonable detail and what action if any, the Company proposes to take in
response thereto.
(e) Promptly upon their becoming available, one copy of each
financial statement, report, notice or proxy statement sent by the Company or
any Subsidiary to stockholders generally, and of each regular or periodic
report and any registration statement, prospectus or written communication
(other than transmittal letters) in respect thereof filed by the Company or any
Subsidiary with or received by the Company or any Subsidiary in connection
therewith from, any securities exchange or the Securities and Exchange
Commission or any successor agency; provided, however, the foregoing shall not
require the Company to provide the Banks copies of routine business reports
sent by the Company to its parent company in the ordinary course of business.
(f) From time to time such other information regarding the
business, affairs or financial condition of the Company or any Subsidiary
(including, without limitation, any Plan or Multiemployer Plan and any reports
or other information required to be filed under ERISA) as any Bank or the Agent
may reasonably request.
(g) Promptly after the furnishing thereof, copies of any statement
or report furnished to any Person pursuant to the terms of any indenture, loan
or credit or other similar agreement (other than documents executed in
connection with this Agreement), and not otherwise required to be furnished to
the Banks pursuant to any other provision of this Section 8.01.
The Company will furnish to each Bank, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of the Company (i) to the effect that no Event of
Default has occurred and is continuing (or, if any Event of Default has
occurred and is continuing, describing the same in reasonable detail) and (ii)
setting forth in reasonable detail the computations necessary to determine
whether the Company is in compliance with all of the terms, conditions,
agreements and covenants contained in this Agreement including, without
limitation, the covenants contained in Sections 9.12 and 9.13 as of the end of
the respective fiscal quarter or calendar year.
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Section 8.02 Litigation. The Company shall promptly give to each
Bank notice of all legal or arbitral proceedings, and of all proceedings before
any Governmental Authority, affecting the Company or any Subsidiary, except
proceedings which, if adversely determined, would not have a Material Adverse
Effect.
Section 8.03 Corporate Existence, Etc.
(a) The Company shall and shall cause each Subsidiary to (i)
preserve and maintain its corporate existence and all of its material rights,
privileges and franchises; (ii) keep books of record and account in which full,
true and correct entries will be made of all dealings or transactions in
relation to its business and activities; (iii) comply with the requirements of
all applicable laws, rules, regulations and orders of governmental or
regulatory authorities if failure to comply with such requirements would have a
Material Adverse Effect; (iv) pay and discharge all taxes, assessments and
governmental charges or levies imposed on it or on its income or profits or on
any of its Property prior to the date on which penalties attach thereto, except
for any such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which adequate
reserves are being maintained; (v) permit representatives of any Bank or the
Agent, during normal business hours upon reasonable prior notice, to examine,
copy and make extracts from its books and records, to inspect its Properties,
and to discuss its business and affairs with its officers, all to the extent
reasonably requested by such Bank or the Agent (as the case may be); and (vi)
keep insured by financially sound and reputable insurers all property of a
character usually insured by corporations engaged in the same or similar
business similarly situated against loss or damage of the kinds and in the
amounts customarily insured against by such corporations and carry such other
insurance as is usually carried by such corporations.
(b) The Company will at its own expense do or cause to be done and
will cause each Subsidiary to do or cause to be done all things reasonably
necessary to preserve and keep in good repair, working order and efficiency all
Properties owned by the Company and each Subsidiary including, without
limitation, all equipment, machinery and facilities, and from time to time will
make all the reasonably necessary repairs, renewals and replacements so that at
all times the state and condition of the Properties owned by the Company and
each Subsidiary will be fully preserved and maintained. The Company will and
will cause each Subsidiary to operate their respective Properties or cause or
use best efforts to cause such Properties to be operated in accordance with the
practices of the industry and in compliance with all applicable contracts and
agreements and in compliance in all material respects with all Governmental
Requirements, except for any non-compliance that would not result in a Material
Adverse Effect.
Section 8.04 Engineering and Other Reports.
(a) As soon as available and in any event prior to December 31 of
each calendar year, commencing on or before December 31, 1996, the Company
shall furnish to the Banks a report (the
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"Reserve Report") in form and substance satisfactory to the Banks prepared by
an independent petroleum consultant(s) acceptable to the Banks, which Reserve
Report shall evaluate as of the end of the current calendar year the Oil and
Gas Property of the Company, its Affiliates and its Subsidiaries and which
shall, together with any other information reasonably requested by the Majority
Banks, set forth the proved oil and gas reserves attributable to such Property
together with a projection of the rate of production and future net income with
respect thereto as of such date, based upon the pricing assumptions consistent
with Securities and Exchange Commission reporting requirements at the time.
(b) As soon as available and in any event prior to June 30 of each
calendar year, the Company shall furnish to the Banks a production report
prepared by the Company detailing by field the oil and gas volumes produced,
product price received, and lease operating expenses by month for the interim
six month period from the preceding December through May.
(c) If requested by the Majority Banks, the Company shall furnish
to the Banks, within 45 days following such request, a report (the "Alternate
Reserve Report") in form and substance satisfactory to the Banks which may be
prepared by or under the supervision of a petroleum engineer who shall be an
employee of the Company and certified by the chief engineer of the Company as
to its truth and accuracy and shall have been reviewed by the independent
petroleum consultant referred to in Section 8.04(a) above who shall certify
such report to have been prepared using customary engineering disciplines,
which shall further evaluate the Property evaluated in the immediately
preceding Reserve Report, and which shall, together with any other information
reasonably requested by the Majority Banks, set forth the proved oil and gas
reserves attributable to such Property as of December 31 or June 30, as
applicable, of the current calendar year, together with a projection of the
rate of production and net future income with respect thereto as of such date,
based upon the pricing assumptions consistent with Securities and Exchange
Commission reporting requirements at the time.
(d) With the delivery of the reports required in Subsections (a),
(b) and (c) above, the Company shall provide to the Banks a statement
reflecting any material changes in the net revenue interest of each well or
lease as reflected in the immediately preceding report after giving effect to
all encumbrances from the net revenue interests as reflected in such report,
along with an explanation as to any material discrepancies between the two net
revenue interest disclosures.
(e) Concurrently with the delivery of the reports required in
Subsections (a), (b) and (c) above, the Company shall provide to the Banks a
report in form and substance satisfactory to the Banks prepared and certified
by the chief financial officer of the Company, which report shall, together
with any other information requested by the Majority Banks, fully set forth and
disclose the volume, estimated amount and nature of any and all gas imbalances
with respect to the Oil and Gas Properties of the Company, its Affiliates and
its Subsidiaries as of the previous quarterly date.
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Section 8.05 Further Assurances. The Company will cure and will
cause each Guarantor to cure promptly any defects in the creation and issuance
of the Notes and the execution and delivery of the Security Instruments,
including this Agreement. The Company at its expense will promptly execute and
deliver to the Agent upon request all such other and further documents,
agreements and instruments in compliance with or accomplishment of the
covenants and agreements of the Company in the Security Instruments, including
this Agreement, or to further evidence and more fully describe the collateral
intended as security for the Notes, or to correct any omissions in the Security
Instruments, or more fully state the security obligations set out herein or in
any of the Security Instruments, or to perfect, protect or preserve any Liens
created pursuant to any of the Security Instruments, or to make any recordings,
to file any notices, or obtain any consents, all as may be necessary or
appropriate in connection therewith.
Section 8.06 Performance of Obligations. The Company will pay the
Notes according to the reading, tenor and effect thereof; and the Company will
do and perform every act and discharge all of the obligations provided to be
performed and discharged by the Company under the Security Instruments,
including this Agreement, at the time or times and in the manner specified.
Section 8.07 Title Opinions--TransTexas Acquisition. On or before
60 days following the Closing Date, the Company shall deliver to the Agent
title opinions in form and substance reasonably satisfactory to the Agent,
relating to the status of title of the Company's interest in the Properties
acquired in connection with the TransTexas Acquisition. The Agent and the
Banks acknowledge the existence as of the Closing Date of the two following
described judgment liens (collectively, the "Judgment Liens") against and
affecting the Properties to be acquired in the TransTexas Acquisition and agree
that any exceptions in such title opinions in respect of the Judgment Liens
will not cause such title opinions to be unsatisfactory to the Agent or the
Banks for purposes of the Company's satisfying the foregoing condition
precedent. The Judgment Liens are described as follows:
(1) judgment lien dated April 22, 1994, to secure a judgment
against TransTexas Natural Gas Corporation and TransTexas Gas
Corporation in the sum of $2,019,920.58 (together with
interest, attorneys' fees, costs of court and other amounts
secured thereby) awarded in the suit styled Coastal Oil & Gas
Corporation vs. TransTexas Natural Gas Corporation and
TransTexas Gas Corporation vs. The Coastal Corporation,
Coastal Gas Marketing Company, recorded in Volume 206, Page
232 of the Official Records of Webb County, Texas, and also
recorded in Volume 497, Page 432 of the Official Records of
Zapata County, Texas; and
(2) judgment lien dated January 13, 1995, to secure a judgment
against TransTexas Natural Gas Corporation and TransTexas Gas
Corporation in the sum of $17,957,156.00 (together with
interest, attorneys' fees, costs of court and other amounts
secured thereby) awarded in the suit styled H.S. Finkelstein
vs. TransTexas
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Natural Gas Corporation and TransTexas Gas Corporation,
recorded in Volume 281, Page 295 of the Official Records of
Webb County, Texas, and also recorded in Volume 511, Page 651
of the Official Records of Zapata County, Texas.
ARTICLE IX
Negative Covenants
So long as any of the Notes shall remain unpaid or any Bank shall have
any Commitment under this Agreement or any Letter of Credit shall remain
outstanding, the Company shall not:
Section 9.01 Debt. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist any
Debt, except:
(a) Debt of the Company under this Agreement, the Notes, the
Letters of Credit and Letter of Credit Agreements, the other Security
Instruments and any Hedging Agreement between the Company and the Agent or any
Bank or any Affiliate of such Bank including, without limitation (i) that
certain Commodity Swap Transaction between the Company and Chemical Bank, being
that certain 25,488,000 MMBtu Commodity Swap dated effective December 1, 1992,
(ii) Chemical Swap Number 102020 between the Company and Chemical Bank, (iii)
Chemical Swap Number 102021 between the Company and Chemical Bank, (iv) that
certain Interest Rate and Currency Exchange Agreement dated April 12, 1994,
between the Company and Chemical Bank, (v) that certain Commodity Swap
transaction between the Company and Enron, being that certain 21,600,000 MMBtu
Commodity Swap dated September 22, 1994, and (vi) certain Hedging Agreements of
Fuel Resources Inc. described or referred to on Schedule 9.18;
(b) Debt described in Schedule 9.01, including renewals,
extensions or refinancings thereof, provided that the principal amount thereof
does not increase;
(c) Debt of the Company subordinated on terms satisfactory to the
Banks to the Company's obligations under this Agreement and the Notes, the
Letters of Credit and Letter of Credit Agreements and any other Security
Instrument in an aggregate principal amount not to exceed $10,000,000 at any
one time outstanding;
(d) Debt of the Company to any Guarantor or any other Subsidiary
which becomes a Guarantor prior to the incurrence of such Debt, and Debt of any
Guarantor or any such Subsidiary to the Company or to any other Guarantor or
any such Subsidiary;
(e) Debt of the Company to any Subsidiary (other than a Guarantor
or any Subsidiary which becomes a Guarantor prior to the incurrence of such
Debt) or Debt of any Subsidiary (other than a Guarantor or any Subsidiary which
becomes a Guarantor prior to the incurrence of such Debt)
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to the Company in an aggregate principal amount not exceeding $1,000,000 at any
one time outstanding;
(f) accounts payable (other than for borrowed money) to trade
creditors for goods or services incurred in the ordinary course of business and
which are not in excess of 30 days past the due date, or, if greater than 30
days past due, are being contested in good faith and by appropriate
proceedings;
(g) Debt of the Company and any Subsidiary (other than
newly-formed Subsidiaries created specifically for the purpose of investing in
project finance transactions) incurred to purchase or to finance the purchase
of, fixed assets in an aggregate principal amount not exceeding as to the
Company and its Subsidiaries $15,000,000 at any time outstanding;
(h) Debt of the Company incurred in the ordinary course of
business in connection with performance bonds required of operators by the
Minerals Management Service which the Company is required to post in connection
with its activities as operator on offshore Oil and Gas Properties up to the
aggregate amount of $3,300,000 at any one time outstanding; and
(i) the Company's pro rata portion of Debt in respect of the
Judgment Liens.
Section 9.02 Guaranties, Etc. Assume, guarantee, endorse or
otherwise be or become directly or contingently responsible or liable, or
permit any of its Subsidiaries to assume, guarantee, endorse or otherwise be or
become directly or indirectly responsible or liable (including, but not limited
to, an agreement to purchase any obligation, stock, assets, goods or services
or to supply or advance any funds, asset, goods or services, or an agreement to
maintain or cause such Person to maintain a minimum working capital or net
worth or otherwise to assure the creditors of any Person against loss) for the
obligations of any Person (except for Debt of the Company to the Agent and/or
the Banks), except for guaranties by endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business.
Section 9.03 Liens. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired, except:
(a) Liens in favor of the Agent on behalf of the Banks securing
the Indebtedness hereunder;
(b) Excepted Liens;
(c) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement),
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public or statutory obligations, surety, stay, appeal, indemnity, performance
or other similar bonds, or other similar obligations arising in the ordinary
course of business;
(d) Judgment and other similar Liens arising in connection with
court proceedings; provided that the execution or other enforcement of such
Liens is effectively stayed and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings;
(e) Liens covering real or personal property in existence at the
time of acquisition thereof by the Company or any Subsidiary after the Closing
Date, provided, that no such Lien covers, or is extended to cover, any other
property owned by the Company or any such Subsidiary after the Closing Date;
(f) Landowner's royalties, overriding royalties and other royalty
interests incurred in the ordinary course of business which, in the aggregate,
do not materially detract from the value of the Property burdened thereby or
interfere with the ordinary course of the business of the Company; and
(g) Liens in existence on the Closing Date which are listed on
Schedule 7.10, provided, that no such Lien permitted by this clause (g) is
spread to cover any additional Property after the Closing Date and that the
amount of Debt secured thereby is not increased;
provided, however, that the Company may create, assume or suffer to exist any
Lien on the proved reserves or the probable reserves included in the Borrowing
Base of the type specified in clauses (b) through (e) and clause (g) above,
provided, that the Debt secured by such Liens shall not exceed $1,000,000 in
the aggregate at any one time outstanding.
(h) purchase money Liens on any Property hereafter acquired or the
assumption of or taking subject to any Lien on Property existing at the time of
such acquisition, or a Lien incurred in connection with any conditional sale or
other title retention agreement or a Capital Lease; provided that:
(i) any Property subject to any of the foregoing is
acquired by the Company or any such Subsidiary in the ordinary course
of its business and the Lien on any such Property is created or
assumed, or such Property is taken subject to the Lien,
contemporaneously with such acquisition;
(ii) the obligation secured by any such Lien shall not
exceed 66-2/3% of the lesser of cost or fair market value as of the
time of acquisition of the Property covered thereby to the Company or
such Subsidiary acquiring the same;
(iii) each such Lien shall attach to no Property of the
Company or any Subsidiary other than the Property so acquired and
fixed improvements thereon;
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(iv) the principal amount of Debt secured by all such
Liens shall not exceed $15,000,000 at any time outstanding in the
aggregate; and
(v) the obligations secured by such Lien are permitted by
the provisions of Section 9.01(g).
Section 9.04 Leases. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property,
except: (a) leases existing on the date of this Agreement and any extensions
or renewals thereof; (b) Capital Leases; (c) leases (other than Capital Leases)
which do not in the aggregate require the Company and its Subsidiaries on a
consolidated basis to make payments (including taxes, insurance, maintenance
and similar expense which the Company or any Subsidiary is required to pay
under the terms of any lease) in any calendar year in excess of $500,000; (d)
leases between the Company and any Subsidiary or between any Subsidiaries and
(e) oil and gas leases entered into in the ordinary course of business.
Section 9.05 Investments. Make, or permit any of its Subsidiaries
to make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to,
or otherwise invest in, or acquire any interest in, any Person, except: (a)
direct obligations of the United States of America or any agency thereof with
maturities of one year or less from the date of acquisition; (b) commercial
paper of a domestic issuer rated at least "A-1" by Standard & Poor's
Corporation or "P-1" by Moody's Investors Service, Inc.; (c) certificates of
deposit with maturities of one year or less from the date of acquisition issued
by any Bank or any commercial bank operating within the United States of
America having capital and surplus in excess of $50,000,000; (d) for stock,
obligations or securities received in settlement of debts (created in the
ordinary course of business) owing to the Company or any such Subsidiary; (e)
any Acceptable Acquisition permitted by Section 9.11; (f) loans and advances to
FRI or any Subsidiary; (g) loans and advances to employees in the ordinary
course of business not to exceed $50,000 in the aggregate at any one time
outstanding; and (h) financing for interests in Properties assigned or conveyed
by the Company to executives of the Company pursuant to employment agreements
existing on the date hereof between such executives and the Company.
Section 9.06 Dividends. Declare or pay any dividends, purchase,
redeem, retire or otherwise acquire for value any of its capital stock now or
hereafter outstanding, or make any distribution of assets to its stockholders
as such whether in cash, assets or in obligations of the Company, or allocate
or otherwise set apart any sum for the payment of any dividend or distribution
on, or for the purchase, redemption or retirement of any shares of its capital
stock, or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock or permit any of its Subsidiaries to
purchase or otherwise acquire for value any stock of the Company or another
such Subsidiary, except that the Company may declare and pay cash dividends if,
after
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giving effect to such dividend, (a) no Event of Default has occurred and is
continuing, (b) no Event of Default will be caused by such action, and (c) the
Company continues to have a ratio of Consolidated Total Debt to Consolidated
Total Capitalization of less than 55%.
Section 9.07 Sale of Assets. Without the prior written consent of
all of the Banks, sell, lease, assign, transfer or otherwise dispose of, or
permit any of its Subsidiaries to sell, lease, assign, transfer or otherwise
dispose of, any of its now owned or hereafter acquired assets (including,
without limitation, shares of stock and indebtedness of such Subsidiaries,
receivables and leasehold interests); except: (a) for Oil and Gas Properties
pursuant to Section 9.15, (b) for inventory disposed of in the ordinary course
of business; (c) the sale or other disposition of assets no longer used or
useful in the conduct of its business; (d) that any such Subsidiary may sell,
lease, assign, or otherwise transfer its assets to the Company or any other
Subsidiary; and (e) any sale, lease, assignment, transfer or other disposition
of Properties pursuant to employment agreements existing on the date hereof
with executives of the Company.
Section 9.08 Stock of Subsidiaries, Etc. Sell or otherwise
dispose of any shares of capital stock of any of its Subsidiaries, except in
connection with a transaction permitted under Section 9.10, or permit any such
Subsidiary to issue any additional shares of its capital stock, except (a)
directors' qualifying shares, and (b) shares of its capital stock issued to the
Company or another Subsidiary, provided, however, any such shares shall be
pledged by the Company or such Subsidiary, as applicable, promptly upon the
issuance thereof, as security for the Indebtedness.
Section 9.09 Transactions with Affiliates. Enter into any
transaction, including, without limitation, the purchase, sale or exchange of
Property or the rendering of any service, with any Affiliate or permit any of
its Subsidiaries to enter into any transaction, including, without limitation,
the purchase, sale or exchange of property or the rendering of any service,
with any Affiliate, except (a) in the ordinary course of and pursuant to the
reasonable requirements of the Company's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Company or such Subsidiary
than would obtain in a comparable arm's length transaction with a Person not an
Affiliate, and (b) for the sale, lease, assignment, transfer or other
disposition of Properties pursuant to employment agreements existing on the
date hereof with executives of the Company.
Section 9.10 Mergers, Etc. Merge or consolidate with, or sell,
assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to, any Person, or acquire all or substantially
all of the assets or the business of any Person (or enter into any agreement to
do any of the foregoing), or permit any of its Subsidiaries to do so except
that: (a) any such Subsidiary may merge into or transfer assets to the Company;
(b) any Subsidiary may merge into or consolidate with or transfer assets to any
other Subsidiary; and (c) the Company may effect any Acceptable Acquisition
permitted by Section 9.11.
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Section 9.11 Acquisitions. Make any Acquisition other than an
Acceptable Acquisition; provided, however (a) the market value of any single
such Acceptable Acquisition shall not exceed $10,000,000 and (b) the market
value of all such Acceptable Acquisitions shall not exceed the aggregate amount
of $35,000,000 in any calendar year; provided, however, the foregoing
limitations shall not apply to the TransTexas Acquisition, but shall apply to
all other Acceptable Acquisitions.
"Acceptable Acquisition" means the TransTexas Acquisition and any
other Acquisition of (a) a corporation in the same line of business as the
Company which has been either (i) approved by the Board of Directors of the
corporation which is the subject of such Acquisition, or (ii) recommended by
such Board to the shareholders of such corporation, (b) all or substantially
all of the business or assets of any corporation or other business entity in
the same line of business as the Company, and (c) Oil and Gas Properties in the
normal course of business, so long as all other terms and conditions of this
Agreement are complied with.
"Acquisition" means any transaction pursuant to which the Company or
any of its Subsidiaries (a) acquires equity securities (or warrants, options or
other rights to acquire such securities) of any corporation other than the
Company or any corporation which is not then a Subsidiary of the Company,
pursuant to a solicitation of tenders therefor, or in one or more negotiated
block, market or other transactions not involving a tender offer, or a
combination of any of the foregoing, or (b) makes any corporation a Subsidiary
of the Company, or causes any such corporation to be merged into the Company or
any of its Subsidiaries, in any case pursuant to a merger, purchase of assets
or any reorganization providing for the delivery or issuance to the holders of
such corporation's then outstanding securities, in exchange for such
securities, of cash or securities of the Company or any of its Subsidiaries, or
a combination thereof, (c) purchases all or substantially all of the business
or assets of any corporation or (d) acquires Oil and Gas Properties in the
normal course of business, so long as all other terms and conditions of this
Agreement are complied with.
Section 9.12 Minimum Consolidated Net Worth. At any time permit
the Consolidated Net Worth of the Company and its Subsidiaries to be less than
$95,000,000, with such minimum amount to be permanently increased by an amount
equal to (i) 50% of the Consolidated Net Income for each calendar year
commencing the calendar year ending December 31, 1996, plus (ii) 75% of net
proceeds received from the issuance of stock of the Company for each calendar
quarter commencing the quarter ending March 31, 1996, plus (iii) 75% of all
capital contributions received by the Company from BUG for each calendar
quarter of the Company commencing the quarter ending December 31, 1996, all as
determined in accordance with GAAP, provided such minimum amount shall not be
decreased as a result of losses or negative Consolidated Net Income.
Section 9.13 Debt to Total Capitalization Ratio. At any time
permit the ratio of Consolidated Total Debt to Consolidated Total
Capitalization to be greater than (i) 60% at all times prior to the closing of
the IPO, and (ii) 55% at all times thereafter.
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Section 9.14 Negative Pledge Agreements. The Company will not
create, incur, assume or suffer to exist, or permit any Subsidiary to create,
incur, assume or suffer to exist, any contract, agreement or understanding
(other than this Agreement, the Security Instruments and any contract or
agreement evidencing an Excepted Lien, but only with respect to the Property
covered by such Excepted Lien) which in any way prohibits or restricts the
granting, conveying, creation or imposition of any Lien on any Property of the
Company or any Subsidiary, or which requires the consent of or notice to other
Persons in connection therewith, except customary consents to assignment
provisions contained in any instrument constituting Oil and Gas Properties, and
in any conveyance thereof in the Company's or any Subsidiaries' chain of title.
Section 9.15 Sale of Oil and Gas Properties. The Company will
not, nor permit any Subsidiary or Affiliate to sell, assign, transfer or convey
any interest in any Oil and Gas Properties except as follows:
(a) Hydrocarbons sold in the ordinary course of business as and
when produced;
(b) Routine farm-outs of non-proven acreage;
(c) Sales of Properties provided the sales of all such Properties
permitted under this clause since the date of the last redetermination of the
Borrowing Base do not have a market value in excess of $500,000 in the
aggregate; and
(d) In addition to sales permitted above, sales of Properties
included in the Borrowing Base, provided simultaneously with any such sale the
Borrowing Base is reduced by amounts agreed to at the time by the Majority
Banks and, if required by the Majority Banks, the net proceeds received in any
such sale are applied to prepay the Notes as determined by the Banks.
Section 9.16 Environmental Matters. Except as disclosed in
Schedule 7.18, neither the Company nor any Subsidiary will cause or permit any
of its Property to be in violation of, or do anything or permit anything to be
done which will subject any such Property to any remedial obligations under any
Environmental Laws, assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to such Property, and the Company will promptly notify the Agent in
writing of any existing, pending or threatened (of which the Company has
knowledge) action or investigation by any Governmental Authority in connection
with any Environmental Laws, except for any such violations or remedial
obligations (individually or in the aggregate) which would not have a Material
Adverse Effect. The Company will establish and implement such procedures as
may be necessary to continuously determine and assure that (i) no solid wastes
are disposed of on any Property owned by the Company or any Subsidiary in
quantities or locations that would require remedial action under any
Environmental Laws, (ii) no hazardous substance will be released on or to any
such Property in a quantity equal to or exceeding that quantity which requires
reporting pursuant to Section 103 of CERCLA, (iii) no
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hazardous substance is released on or to any such Property so as to pose an
imminent and substantial endangerment to public health or welfare or the
environment; (iv) all hazardous substances and solid wastes generated by the
Company or any Subsidiary or on any Property of the Company or any Subsidiary
will be transported only by carriers maintaining valid permits under RCRA and
treated, stored, and disposed of only by facilities operating in compliance
with RCRA, and (v) the Company, each Subsidiary and their respective Property
and operations will be maintained and operated in compliance with all permits,
licenses, and similar authorizations required pursuant to any Environmental
Laws, except for any non-compliance with clauses (i) through (v) of this
Section that would not have a Material Adverse Effect. The Company covenants
and agrees to keep or cause all of its and its Subsidiaries' Property to be
kept free of any hazardous waste or contaminants to the extent required by
applicable Environmental Laws, and either to remove the same (or if removal is
prohibited by law, to take whatever action is required by law) promptly upon
discovery at its sole expense or to take other appropriate response to the
extent required by applicable Environmental Laws.
Section 9.17 ERISA Compliance. The Company will not at any time
permit any Plan maintained by it or any ERISA Affiliate to:
(a) engage in any "prohibited transaction" as such term is defined
in Section 4975 of the Code;
(b) except as provided in Schedule 9.17, incur any "accumulated
funding deficiency" as such term is defined in Section 302 of ERISA; or
(c) terminate any such Plan in a manner which could result in the
imposition of a Lien on the Property of the Company or any Subsidiary pursuant
to Section 4068 of ERISA.
Section 9.18 Hedging Agreements. Except for those Hedging
Agreements described in Schedule 9.18, the Company will not enter into or
become obligated under, or permit any of its Subsidiaries to enter into or
become obligated under any Hedging Agreement except for such agreements which
in the aggregate do not cover at any time a volume of oil and gas (on a barrel
of oil equivalent basis) equal to more than 70% for any 12 month period of the
projected production for such period of oil and gas (on a barrel of oil
equivalent basis) from the Oil and Gas Properties included in the Borrowing
Base and such contracts are for delivery or settlement on or before the end of
the second calendar year after the calendar year of the date of such contract.
Section 9.19 Subsidiaries and Partnerships. The Company shall not
create any additional Subsidiaries or partnerships or permit any Subsidiary to
do so without prior written notice to the Agent and the Banks. In every such
case, each new Significant Subsidiary shall forthwith execute and deliver a
Guaranty Agreement in favor of the Agent.
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ARTICLE X
Events of Default
Section 10.01 Events of Default. If one or more of the following
events ("Events of Default") shall occur and be continuing:
(a) (i) The Company shall default in the payment when due of any
principal of any Loan or of any reimbursement obligation for disbursement made
under any Letter of Credit or other amount payable by it hereunder, or (ii) the
Company shall default in the payment of any accrued interest on any Loan or on
any reimbursement obligation for disbursement made under any Letter of Credit
or other amount payable by it hereunder, or any fees due and payable hereunder,
and such default shall continue unremedied for three (3) Business Days after
such occurrence; or
(b) The Company or any Subsidiary shall default in the payment
when due of any principal of or interest on any of its other Debt in an amount
aggregating $500,000, unless, in the case of trade creditors, such default is
being contested in good faith; or any non-monetary default specified in any
note, agreement, indenture or other document evidencing or relating to any
other Debt in an amount aggregating $1,000,000 of the Company or any Subsidiary
shall occur if the effect of such event is to cause, or to permit the holder or
holders of such Debt (or a trustee or agent on behalf of such holder or
holders) to cause, such Debt to become due prior to its stated maturity; or
(c) Any representation, warranty or certification made or deemed
made herein or in any other Security Instrument by the Company or any
Subsidiary, or any certificate furnished to any Bank or the Agent pursuant to
the provisions hereof or any other Security Instrument, shall prove to have
been false or misleading as of the time made or furnished in any material
respect; or
(d) The Company shall default in the performance of any of its
other material obligations in this Agreement or under any Security Instrument,
and such default shall continue unremedied for a period of 30 days after notice
thereof to the Company by the Agent or any Bank (through the Agent); provided,
however, that the grace period referred to in this Section 10.01(d) shall not
apply to the obligations of the Company to promptly pay principal, interest and
fees or to any of its obligations under Article IX, except for its obligations
under Sections 9.12 and 9.13 of Article IX as to which Sections 9.12 and 9.13
such 30-day grace period shall apply; or
(e) The Company shall admit in writing its inability to, or be
generally unable to, pay its Debts as such Debts become due; or
(f) The Company shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its
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Property, (ii) make a general assignment for the benefit of its creditors,
(iii) commence a voluntary case under the Federal Bankruptcy Code (as now or
hereafter in effect), (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it
in an involuntary case under the Federal Bankruptcy Code, or (vi) take any
corporate action for the purpose of effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the
application or consent of the Company, in any court of competent jurisdiction,
seeking (i) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its Debt, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of the Company or of all or
substantially all of its assets, or (iii) similar relief in respect of the
Company under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of Debt, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of 90 days; or an order for relief against the Company
shall be entered in an involuntary case under the Federal Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money in
excess of $1,000,000 in the aggregate shall be rendered by a court or courts
against the Company or any Subsidiary (which is not otherwise covered by
insurance) and the same shall not be discharged (or provision shall not be made
for such discharge), or a stay of execution thereof shall not be procured,
within 30 days from the date of entry thereof and the Company or any Subsidiary
shall not, within said period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or
(i) An event or condition specified in Section 8.01(c) shall occur
or exist with respect to any Plan or Multiemployer Plan and, as a result of
such event or condition, together with all other such events or conditions, the
Company or any ERISA Affiliate shall incur or in the opinion of the Majority
Banks shall be reasonably likely to incur a liability to a Plan, a
Multiemployer Plan or PBGC (or any combination of the foregoing) which is, in
the determination of the Majority Banks would result in a Material Advance
Effect;
(j) Any Subsidiary takes, suffers or permits to exist as to such
Subsidiary any of the events or conditions referred to in Sections 10.01 (e),
(f), (g) or (h) hereof; or
(k) The occurrence of a Material Change without the written
consent of the Banks; or
(l) The occurrence of any event having a Material Adverse Effect,
which remains unremedied for a period of 30 days after such occurrence; or
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(m) The failure of the Company to satisfy any post Initial Loan
condition specified in Section 6.04 hereof on or before the deadline specified
therein, which remains unremedied for a period of 30 days after such
occurrence; or
(n) Any Guaranty Agreement shall at any time after its execution
and delivery and for any reason cease to be in full force and effect or shall
be declared null and void and the Guarantor thereunder fails to execute an
enforceable and effective Guaranty Agreement in replacement thereof, or the
validity or enforceability thereof shall be contested by the Guarantor or the
Guarantor shall deny it has any further liability or obligation thereunder or
shall fail to perform its obligations thereunder; or
(o) The Security Agreement shall at any time after its execution
and delivery and for any reason cease: (i) to create a valid and perfected
first priority security interest in and to the property purported to be subject
thereto; or (ii) to be in full force and effect or shall be declared null and
void, or the validity or enforceability thereof shall be contested by the
Pledgor, or the Pledgor shall deny it has any further liability or obligation
under the Security Agreement or the Pledgor shall fail to perform any of its
obligations thereunder.
THEREUPON: (i) in the case of an Event of Default other than one referred to
in clause (e), (f) or (g), or clause (j) to the extent it refers to clauses
(e), (f) or (g) of this Section 10.01, the Agent may and, upon request of the
Majority Banks, shall, by notice to the Company, cancel the Commitments and/or
declare the principal amount then outstanding of and the accrued interest on
the Loans and all other amounts payable by the Company hereunder and under the
Notes to be forthwith due and payable, whereupon such amounts shall be
immediately due and payable without presentment, demand, protest, notice of
intent to accelerate, notice of acceleration or other formalities of any kind,
all of which are hereby expressly waived by the Company; provided, however,
notwithstanding the foregoing waivers, the Agent will give the Company one (1)
Business Day's prior notice of the acceleration of Notes under this clause (i);
and (ii) in the case of the occurrence of an Event of Default referred to in
clause (e), (f) or (g), or clause (j) to the extent it refers to clauses (e),
(f) or (g), of this Section 10.01 the Commitments shall be automatically
cancelled and the principal amount then outstanding of, and the accrued
interest on, the Loans and all other amounts payable by the Company hereunder
and under the Notes shall become automatically immediately due and payable
without presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby
expressly waived by the Company.
Section 10.02 Cash Collateral for Letters of Credit. Without
limitation of any right or remedy specified in Section 10.01, if any of the
Indebtedness (other than the LC Exposure) shall have become due and payable
pursuant to the immediately foregoing paragraph of Section 10.01, the Agent,
upon the request of the Majority Banks, shall, proceed to enforce remedies
under the Security Instruments. Upon realization of any of the collateral
covered by the Security Instruments, all such cash and cash proceeds shall be
applied first, to the payment of all unreimbursed fees and
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expenses outstanding hereunder or under any of the other Security Instruments,
then, to the amount of outstanding balance of the Indebtedness, and then, held
by the Agent as cash collateral to secure the Company's obligation to reimburse
the Agent and the Banks for drawings for the LC Exposure.
ARTICLE XI
The Agent
Section 11.01 Appointment, Powers and Immunities. Each Bank hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder
with such powers as are specifically delegated to the Agent by the terms of
this Agreement, together with such other powers as are reasonably incidental
thereto. The Agent (which term as used in this sentence and in Section 11.05
and the first sentence of Section 11.06 shall include reference to its
affiliates and its own and its affiliates' officers, directors, employees and
agents): (a) shall have no duties or responsibilities except those expressly
set forth in this Agreement, and shall not by reason of this Agreement be a
trustee for any Bank; (b) shall not be responsible to the Banks for any
recitals, statements, representations or warranties contained in this
Agreement, or in any certificate or other document referred to or provided for
in, or received by any of them under, this Agreement, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, any Note or any other document referred to or provided for herein or
for any failure by the Company or any other Person to perform any of its
obligations hereunder or thereunder; (c) shall not be required to initiate or
conduct any litigation or collection proceedings hereunder; and (d) shall not
be responsible for any action taken or omitted to be taken by it hereunder or
under any other document or instrument referred to or provided for herein or in
connection herewith, even if such actions or omissions are foreseeably caused
by the ordinary negligence of the Agent, except for its own gross negligence or
willful misconduct. The Agent may employ agents and attorneys-in-fact and
shall not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it in good faith. The Agent may deem and treat
the payee of any Note as the holder thereof for all purposes hereof unless and
until a written notice of the assignment or transfer thereof shall have been
filed with the Agent, together with the written consent of the Company to such
assignment or transfer.
Section 11.02 Reliance by Agent. The Agent shall be entitled to
rely upon any certification, notice or other communication (including any
thereof by telephone, telex, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper
Person or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Agent. As to any matters not
expressly provided for by this Agreement, the Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
instructions signed by the Majority Banks, and such instructions of the
Majority Banks and any action taken or failure to act pursuant thereto shall be
binding on all of the Banks.
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Section 11.03 Defaults. The Agent shall not be deemed to have
knowledge of the occurrence of an Event of Default (other than the non-payment
of principal of or interest on Loans or of fees) unless the Agent has received
notice from a Bank or the Company specifying such Event of Default and stating
that such notice is a "Notice of Default." In the event that the Agent
receives such a notice of the occurrence of an Event of Default, the Agent
shall give prompt notice thereof to the Banks (and shall give each Bank and the
Company prompt notice of each such non- payment). The Agent shall (subject to
Section 11.07) take such action with respect to such Event of Default as shall
be directed by the Majority Banks, provided that, unless and until the Agent
shall have received such directions, the Agent may (but shall not be obligated
to) take such action, or refrain from taking such action, with respect to such
Event of Default as it shall deem advisable in the best interest of the Banks.
Section 11.04 Rights as a Bank. With respect to its Commitments,
the Loans made by it and the Letters of Credit, TCB (and any successor acting
as Agent) in its capacity as a Bank hereunder shall have the same rights and
powers hereunder as any other Bank and may exercise the same as though it were
not acting as the Agent, and the term "Bank" or "Banks" shall, unless the
context otherwise indicates, include the Agent in its individual capacity. TCB
(and any successor acting as Agent) and its affiliates may (without having to
account therefor to any Bank) accept deposits from, lend money to and generally
engage in any kind of banking, trust or other business with the Company (any
and of its affiliates) as if it were not acting as the Agent, and TCB and its
affiliates may accept fees and other consideration from the Company for
services in connection with this Agreement or otherwise without having to
account for the same to the Banks.
Section 11.05 Indemnification. THE BANKS AGREE TO INDEMNITY THE
AGENT (TO THE EXTENT NOT REIMBURSED UNDER SECTION 12.03, BUT WITHOUT LIMITING
THE OBLIGATIONS OF THE COMPANY UNDER SAID SECTION 12.03), RATABLY IN ACCORDANCE
WITH THE AGGREGATE PRINCIPAL AMOUNT OF THE LOANS MADE BY THE BANKS (OR, IF NO
LOANS ARE AT THE TIME OUTSTANDING, RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE
COMMITMENTS), FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY
KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED
AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR
ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY (INCLUDING, WITHOUT LIMITATION, THE COSTS AND EXPENSES
WHICH THE COMPANY IS OBLIGATED TO PAY UNDER SECTION 12.03 BUT EXCLUDING, UNLESS
AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS
AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER OR THE
ENFORCEMENT OF ANY OF THE TERMS HEREOF OR OF ANY SUCH OTHER DOCUMENTS, PROVIDED
THAT NO BANK SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE
FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE INDEMNIFIED.
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Section 11.06 Non-Reliance on Agent and other Banks. Each Bank
agrees that it has, independently and without reliance on the Agent or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Company and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent or any other Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement. The Agent shall
not be required to keep itself informed as to the performance or observance by
the Company of this Agreement or any other document referred to or provided for
herein or to inspect the Properties or books of the Company. Except for
notices, reports and other documents and information expressly required to be
furnished to the Banks by the Agent hereunder, the Agent shall not have any
duty or responsibility to provide any Bank with any credit or other information
concerning the affairs, financial condition or business of the Company (or any
of its affiliates) which may come into the possession of the Agent or any of
its affiliates.
Section 11.07 Failure to Act. Except for action expressly required
of the Agent hereunder, the Agent shall in all cases be fully justified in
failing or refusing to act hereunder unless it shall be indemnified to its
satisfaction by the Banks against any and all liability and expenses which may
be incurred by it by reason of taking or continuing to take any such action.
Section 11.08 Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent
may resign at any time by giving notice thereof to the Banks and the Company
and the Agent may be removed at any time with or without cause by the Majority
Banks. Upon any such resignation or removal, the Majority Banks, after
consultation with the Company, shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Majority
Banks and shall have accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or the Majority Banks' removal
of the retiring Agent, then the retiring Agent may, on behalf of the Banks,
after consultation with the Company, appoint a successor Agent. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this Section 11 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent.
ARTICLE XII
Miscellaneous
Section 12.01 Waiver. No failure on the part of the Agent or any
Bank to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under this
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Agreement or any Note shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, power or privilege under this Agreement or
any Note preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
Section 12.02 Notices. All notices and other communications
provided for herein and in the other Security Instruments (including, without
limitation, any modifications of, or waivers or consents under, this Agreement
or the other Security Instruments) shall be given or made by telex, telecopy,
telegraph, cable or in writing and telexed, telecopied, telegraphed, cabled,
mailed or delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or in the other Security
Instruments; or, as to any party, at such other address as shall be designated
by such party in a notice to each other party. Except as otherwise provided in
this Agreement or in the other Security Instruments, all such communications
shall be deemed to have been duly given when transmitted by telex or
telecopier, delivered to the telegraph or cable office or personally delivered
or, in the case of a mailed notice, upon receipt, in each case given or
addressed as aforesaid.
Section 12.03 Payment of Expenses, Indemnities, etc. The Company
agrees to:
(a) whether or not the transactions hereby contemplated
are consummated, pay all reasonable expenses of the Agent in the
administration (both before and after the execution hereof and
including advice of counsel as to the rights and duties of the Agent
and the Banks with respect thereto) of, and in connection with the
negotiation, investigation, preparation, execution and delivery of,
recording or filing of, preservation of rights under, enforcement of,
and refinancing, renegotiation or restructuring of, this Agreement,
the Notes and the other Security Instruments and any amendment, waiver
or consent relating thereto (including, without limitation, the
reasonable fees and disbursements of counsel for the Agent and in the
case of enforcement for any of the Banks); and promptly reimburse the
Agent for all reasonable amounts expended, advanced or incurred by the
Agent or the Banks to satisfy any obligation of the Company under this
Agreement or any Security Instrument;
(b) pay and hold each of the Banks harmless from and
against any and all present and future stamp and other similar taxes
with respect to the foregoing matters and save each Bank harmless from
and against any and all liabilities with respect to or resulting from
any delay or omission to pay such taxes; and
(C) INDEMNIFY THE AGENT AND EACH BANK, ITS OFFICERS,
DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES FROM,
HOLD EACH OF THEM HARMLESS AGAINST, PROMPTLY UPON DEMAND PAY OR
REIMBURSE EACH OF THEM FOR, AND REFRAIN FROM CREATING OR ASSERTING
AGAINST ANY OF THEM, ANY AND ALL ACTIONS, SUITS, PROCEEDINGS
(INCLUDING ANY INVESTIGATIONS, LITIGATION OR
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INQUIRIES), CLAIMS, DEMANDS, CAUSES OF ACTION, LOSSES, LIABILITIES,
DAMAGES AND REASONABLY INCURRED COSTS OR EXPENSES OF ANY KIND OR
NATURE WHATSOEVER REGARDLESS OF WHETHER FORESEEABLY CAUSED BY THE
ORDINARY NEGLIGENCE OF THE AGENT AND/OR THE BANKS (COLLECTIVELY THE
"INDEMNITY MATTERS") WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR
INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY
THERETO) AS A RESULT OF, ARISING OUT OF OR RELATED TO (I) ANY ACTUAL
OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY OF THE LOANS OR
(II) ANY OTHER ASPECT OF THIS AGREEMENT, THE NOTES, AND THE OTHER
SECURITY INSTRUMENTS, INCLUDING, WITHOUT LIMITATION, THE REASONABLE
FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER REASONABLE EXPENSES
INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO
DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM, BUT EXCLUDING
HEREFROM ALL INDEMNITY MATTERS ARISING SOLELY BY REASON OF CLAIMS
BETWEEN THE BANKS OR ANY BANK AND THE AGENT OR A BANK SHAREHOLDER
AGAINST THE BANK OR SOLELY BY REASON OF GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT ON THE PART OF THE PARTY SEEKING INDEMNITY; AND
(D) INDEMNIFY AND HOLD THE AGENT AND EACH BANK, ITS
OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES
HARMLESS AGAINST, PROMPTLY TO PAY ON DEMAND OR REIMBURSE EACH OF THEM
WITH RESPECT TO, ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION, LOSS,
DAMAGE, LIABILITIES, AND REASONABLY INCURRED COSTS AND EXPENSES
REGARDLESS OF WHETHER FORESEEABLY CAUSED BY THE ORDINARY NEGLIGENCE OF
THE AGENT AND/OR THE BANKS OF ANY AND EVERY KIND OR NATURE WHATSOEVER
ASSERTED AGAINST OR INCURRED BY ANY OF THEM BY REASON OF OR ARISING
OUT OF OR IN ANY WAY RELATED TO (I) THE BREACH OF ANY REPRESENTATION
OR WARRANTY AS SET FORTH HEREIN REGARDING ENVIRONMENTAL LAWS, OR (II)
THE FAILURE OF THE COMPANY TO PERFORM ANY OBLIGATION HEREIN REQUIRED
TO BE PERFORMED PURSUANT TO ENVIRONMENTAL LAWS. THE FOREGOING
INDEMNITY SHALL NOT APPLY WITH RESPECT TO MATTERS CAUSED BY OR ARISING
OUT OF THE SOLE NEGLIGENCE, SOLE GROSS NEGLIGENCE OR SOLE WILLFUL
MISCONDUCT OF THE PARTY SEEKING INDEMNITY. THE AGENT OR BANK, AS
APPROPRIATE SHALL GIVE NOTICE TO THE COMPANY OF ANY SUCH CLAIM OR
DEMAND BEING MADE AGAINST THE AGENT OR SUCH BANK AND THE COMPANY SHALL
HAVE THE NON-EXCLUSIVE RIGHT TO JOIN IN THE DEFENSE AGAINST ANY SUCH
CLAIM OR DEMAND. THE PROVISIONS OF THIS PARAGRAPH SHALL SURVIVE THE
FINAL PAYMENT OF ALL INDEBTEDNESS AND THE TERMINATION OF THIS
AGREEMENT AND SHALL CONTINUE THEREAFTER IN FULL FORCE AND EFFECT.
The Company's obligations under this Section 12.03 shall survive any
termination of this Agreement and the payment of the Notes.
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Section 12.04 Amendments, Etc. Any provision of this Agreement or
any other Security Instruments may be amended, modified or waived with the
Majority Banks' consent; provided that no amendment, modification or waiver
which (i) extends the maturity of the Loans, (ii) releases all or substantially
all of the collateral or the obligations of the Company or any Guarantor, (iii)
modifies or waives the payment of any principal, interest, fees or other amount
due hereunder or under the Notes or any Letter of Credit or Letter of Credit
Agreement, (iv) modifies or reduces the total Commitments of all of the Banks
or the Commitment of any one of the Banks (except by assignment or
participation under this Agreement), (v) changes the interest rate applicable
to the Loans, or (vi) modifies any provision of this Agreement requiring the
vote of 100% of the Banks, shall be effective without prior written consent of
all Banks. The Company's written agreement is needed for any amendment or
modification of this Agreement or any other Security Instrument.
Section 12.05 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
Section 12.06 Assignments and Participations.
(a) The Company may not assign its rights or obligations
hereunder or under the Notes or under any Letter of Credit Agreement
without the prior consent of all of the Banks and the Agent.
(b) Each Bank may, upon the written consent of the Agent
and the Company, which consent shall not be unreasonably withheld,
assign to one or more assignees all or a portion of its rights and
obligations under this Agreement pursuant to an Assignment and
Acceptance Agreement substantially in the form of Exhibit F (an
"Assignment and Acceptance") provided, however, that (i) any such
assignment shall be in the aggregate amount of at least $10,000,000,
and (ii) the assignee shall pay to the Agent a processing and
recordation fee of $2,500. Any such assignment will become effective
upon the issuance by the Agent of a letter of acknowledgment
reflecting such assignment and the resultant effects thereof on the
Commitments of the assignor and assignee, and the principal amount
outstanding of the Loans owed to the assignor and assignee, the Agent
hereby agreeing to effect such issuance no later than five (5)
Business Days after its receipt of an Assignment and Acceptance
executed by all parties thereto. Promptly after receipt of an
Assignment and Acceptance executed by all parties thereto, the Agent
shall send to the Company a copy of such executed Assignment and
Acceptance. Upon receipt of such executed Assignment and Acceptance,
the Company, will, at its own expense, execute and deliver new Notes
to the assignor and/or assignee, as appropriate, in accordance with
their respective interests as they appear on the Agent's letter of
acknowledgment. Upon the effectiveness of any assignment pursuant to
this Section, the assignee will become a "Bank," if not already a
"Bank," for all purposes of this Agreement and the other Security
Instruments. The assignor shall be relieved of its obligations
hereunder to the extent of such assignment (and if the assigning
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<PAGE> 72
Bank no longer holds any rights or obligations under this Agreement,
such assigning Bank shall cease to be a "Bank" hereunder). The Agent
will prepare on the last Business Day of each month during which an
assignment has become effective pursuant to this Section a new
schedule giving effect to all such assignments effected during such
month, and will promptly provide the same to the Company and each of
the Banks.
(c) Each Bank may, following written notice to the
Company, transfer, grant or assign participations in all or any part
of such Bank's interests hereunder pursuant to this subsection to any
Person, provided that: (i) such Bank shall remain a "Bank" for all
purposes of this Agreement and the transferee of such participation
shall not constitute a "Bank" hereunder; and (ii) no participant under
any such participation shall have rights to approve any amendment to
or waiver of this Agreement, the Notes or any Security Instrument
except to the extent such amendment or waiver would (x) extend the
Drawdown Termination Date, (y) reduce the interest rate (other than as
a result of waiving the applicability of any post-default increases in
interest rates) or fees applicable to any of the Commitments or Loans
in which such participant is participating, or postpone the payment of
any thereof, or (z) release all or substantially all of the collateral
(except as expressly provided in the Security Instruments) supporting
any of the Commitments or Loans in which such participant is
participating. In the case of any such participation, the participant
shall not have any rights under this Agreement or any of the Security
Instruments (the participant's rights against the granting Bank in
respect of such participation to be those set forth in the agreement
with such Bank creating such participation), and all amounts payable
by the Company hereunder shall be determined as if such Bank had not
sold such participation, provided that such participant shall be
entitled to receive additional amounts under Article V on the same
basis as if it were a Bank.
(d) Notwithstanding any other provisions of this Section
12.06, no transfer or assignment of the interests or obligations of
any Bank hereunder or any grant of participations therein shall be
permitted if such transfer, assignment or grant would require the
Company to file a registration statement with the SEC or to qualify
the Loans under the "Blue Sky" laws of any state.
(e) The Banks may furnish any information concerning the
Company in the possession of the Banks from time to time (i) to
assignees and participants and (ii) following the prior consent of the
Company (which will not be unreasonably withheld) to prospective
assignees and participants; provided, however, neither the Agent nor
any of the Banks shall have any liability with respect to any
inadvertent disclosure of information to prospective assignees and
participants.
(f) Notwithstanding anything in this Section 12.06 to the
contrary, any Bank may assign and pledge all or any of its Notes to
any Federal Reserve Bank or the United States
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Treasury as collateral security pursuant to Regulation A of the Board
of Governors of the Federal Reserve System and any operating circular
issued by such Federal Reserve System and/or such Federal Reserve
Bank. No such assignment and/or pledge shall release the assigning
and/or pledging Bank from its obligations hereunder.
Section 12.07 Invalidity. In the event that any one or more of the
provisions contained in the Notes, this Agreement or in any other Security
Instrument shall, for any reason, be held invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of the Notes, this Agreement or any other Security
Instrument.
Section 12.08 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 12.09 References. The words "herein," "hereof,"
"hereunder" and other words of similar import when used in this Agreement refer
to this Agreement as a whole, and not to any particular article, section or
subsection. Any reference herein to a Section or Subsection shall be deemed to
refer to the applicable Section or Subsection of this Agreement unless
otherwise stated herein. Any reference herein to an exhibit or schedule shall
be deemed to refer to the applicable exhibit or schedule attached hereto unless
otherwise stated herein.
Section 12.10 Termination of Agreement; Survival of Obligations.
(a) This Agreement and the Security Instruments shall
terminate and cease to be of legal force and effect upon the payment
in full of the Indebtedness and the termination of the Commitments.
To the extent that any payments on the Indebtedness or proceeds of the
collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor
in possession, receiver or other Person under any bankruptcy law,
common law or equitable cause, then to such extent the Indebtedness so
satisfied shall be revived and continue as if such payment or proceeds
had not been received by the Agent or the Banks, and the security
interests, rights, powers and remedies of the Agent and the Banks
under this Agreement and the Security Instruments shall continue in
full force and effect. In such event, this Agreement shall be
automatically reinstated pursuant to the terms of Subsection 12.10(b)
if it shall theretofore have been terminated.
(b) The grant of a security interest under the Security
Instruments and all of the Agent's and the Banks' rights, powers and
remedies under this Agreement and under the Security Instruments shall
remain in full force and effect until the Agent has retransferred and
delivered all collateral described therein in its possession to the
Company, including without limitation all shares of stock, and
executed a written release or termination statement and reassigned to
the Company without recourse or warranty any remaining collateral,
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<PAGE> 74
including without limitation all shares of stock, and all rights
conveyed hereby. Upon the complete payment of the Indebtedness and
the compliance by the Company with all covenants and agreements
hereof, at the written request and expense of the Company, will
deliver to the Company the Notes marked "paid" or with such other
notation as is appropriate and will release, reassign and transfer the
collateral, including without limitation all shares of stock, to the
Company or such other Person as is appropriate and declare this
Agreement and the Security Instruments to be of no further force or
effect. Notwithstanding the foregoing, the obligations of the Company
under Sections 5.01, 5.05 and 12.03 shall survive the repayment of the
Loans and the termination of the Commitments.
Section 12.11 Captions. Captions and section headings appearing
herein are included solely for convenience of reference and are not intended
to affect the interpretation of any provision of this Agreement.
Section 12.12 Governing Law; Submission to Jurisdiction.
(A) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS;
EXCEPT THAT TEX. REV. CIV. STAT. ANN. ART. 5069, CH. 15 (WHICH
REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING
TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, THE NOTES OR THE OTHER SECURITY INSTRUMENTS MAY BE BROUGHT
IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA
FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND (TO THE
EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE AND
DOES NOT PRECLUDE THE AGENT OR ANY BANK FROM OBTAINING JURISDICTION
OVER THE COMPANY IN ANY COURT OTHERWISE HAVING JURISDICTION.
Section 12.13 Interest. It is the intention of the parties hereto
that each Bank shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated hereby would be usurious as to
any Bank under laws applicable to it (including the laws of the United States
of America and the State of Texas or any other jurisdiction whose laws may be
mandatorily applicable to such Bank notwithstanding the other provisions of
this Agreement), then, in that event,
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<PAGE> 75
notwithstanding anything to the contrary in the Notes, this Agreement or in any
other Security Instrument or agreement entered into in connection with or as
security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Bank that
is contracted for, taken, reserved, charged or received by such Bank under the
Notes, this Agreement or under any of the other aforesaid Security Instruments
or agreements or otherwise in connection with the Notes shall under no
circumstances exceed the maximum amount allowed by such applicable law, and any
excess shall be cancelled automatically and if theretofore paid shall be
credited by such Bank on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Indebtedness shall have been or would
thereby be paid in full, refunded by such Bank to the Company); and (ii) in the
event that the maturity of the Notes is accelerated by reason of an election of
the holder thereof resulting from any Event of Default under this Agreement or
otherwise, or in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to any Bank may
never include more than the maximum amount allowed by such applicable law, and
excess interest, if any, provided for in this Agreement or otherwise shall be
cancelled automatically by such Bank as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited by such Bank on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by such Bank to the Company). All sums paid or agreed to be paid to
any Bank for the use, forbearance or detention of sums due hereunder shall, to
the extent permitted by law applicable to such Bank, be amortized, prorated,
allocated and spread in equal parts throughout the full term of the Loans
evidenced by the Notes until payment in full so that the rate or amount of
interest on account of any Loans hereunder does not exceed the maximum amount
allowed by such applicable law. If at any time and from time to time (i) the
amount of interest payable to any Bank on any date shall be computed at the
Highest Lawful Rate applicable to such Bank pursuant to this Section 12.13 and
(ii) in respect of any subsequent interest computation period the amount of
interest otherwise payable to such Bank would be less than the amount of
interest payable to such Bank computed at the Highest Lawful Rate applicable to
such Bank, then the amount of interest payable to such Bank in respect of such
subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Bank until the total amount of interest
payable to such Bank shall equal the total amount of interest which would have
been payable to such Bank if the total amount of interest had been computed
without giving effect to this Section.
To the extent that Article 5069-1.04 of the Texas Revised Civil
Statutes is relevant to any Bank for the purpose of determining the Highest
Lawful Rate, each such Bank hereby elects to determine the applicable rate
ceiling under such Article by the indicated (weekly) rate ceiling from time to
time in effect.
Section 12.14 Waiver of Jury Trial. EACH OF THE PARTIES HERETO
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL
BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR TO DEFEND ANY RIGHTS UNDER
THIS AGREEMENT, THE
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<PAGE> 76
NOTES OR ANY OTHER SECURITY INSTRUMENT OR UNDER ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN
CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER SECURITY INSTRUMENT AND
AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT
BEFORE A JURY.
Section 12.15 Exculpation Provisions. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER
SECURITY INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF
THE TERMS OF THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS; THAT IT HAS IN
FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND
KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS
BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE
NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER SECURITY
INSTRUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS
AGREEMENT AND THE OTHER SECURITY INSTRUMENTS; AND THAT IT RECOGNIZES THAT
CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS
RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE
TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH
LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND
THE OTHER SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR
KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 12.16 No Oral Agreements. THIS WRITTEN AGREEMENT, THE
NOTES, AND THE OTHER SECURITY INSTRUMENTS 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 AMONG THE PARTIES.
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<PAGE> 77
The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
COMPANY:
THE HOUSTON EXPLORATION
COMPANY
By: /s/ THOMAS W. POWERS
------------------------------------
Name: Thomas W. Powers
Title: Vice President
Address: 1331 Lamar
Suite 1065
Houston, Texas 77010
Telecopier No.: 713/652-4017
Telephone No.: 713/652-2847
Attention: Mr. James F. Westmoreland
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<PAGE> 78
BANKS:
Commitment TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
$150,000,000.00
By: /s/ PAUL J. NIDOH
------------------------------------
Name: Paul J. Nidoh
Title: Vice President
Applicable Lending Office for Base
Rate Loans:
Address: 712 Main Street
Houston, Texas 77002
Applicable Lending Office for Fixed
Rate Loans:
Address: 712 Main Street
Houston, Texas 77002
Address for Notices:
Address: 712 Main Street
Houston, Texas 77002
Telecopier No.: 713/216-4117
Telephone No.: 713/216-4110
Attention: Mr. Paul J. Nidoh
S-TCBN-86
with a copy to:
Address: 1111 Fannin
Houston, Texas 77002
Telecopier No.: 713/750-3810
Telephone No.: 713/750-2784
Attention: Mr. Gale Manning
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<PAGE> 79
AGENT:
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent
By: /s/ PAUL J. NIDOH
------------------------------------
Name: Paul J. Nidoh
Title: Vice President
Address for Notices to Agent:
712 Main Street, 8-TCBS-27
Houston, Texas 77002
Telecopier No.: 713/216-4919
Telephone No.: 713/216-5001
Attention: Ms. Norma Benzon,
Manager of Capital
Markets Loan Operations
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<PAGE> 80
EXHIBIT B
FORM OF
REVOLVING CREDIT NOTE
$_________________ Houston, Texas July ____, 1996
THE HOUSTON EXPLORATION COMPANY (hereinafter called the "Company"), a
Delaware corporation, with offices at 1331 Lamar, Suite 1065, Houston, Texas
77010, for value received, promises and agrees to pay on or before July 1,
2000, to the order of ________________________________________________________
(hereinafter called the "Bank") at the banking quarters of TEXAS COMMERCE BANK
NATIONAL ASSOCIATION, as Agent, located at 712 Main Street, Houston, Texas
77002, in coin or currency of the United States of America which at the time of
payment is legal tender for the payment of public and private debts, the
principal sum of ___________________________________________________________
DOLLARS ($___________________), or so much thereof as may be advanced pursuant
to the Credit Agreement hereinafter mentioned, as shown on the schedules
attached hereto and any continuation of such schedules.
All capitalized terms which are used but not defined in this Note
shall have the same meanings as in the Credit Agreement dated as of July 1,
1996, between the Company, Texas Commerce Bank National Association, as
Administrative Agent, the Bank and each other bank signatory thereto (such
Credit Agreement, together with all amendments or supplements thereto, being
the "Credit Agreement").
In addition to the principal sum referred to in the first paragraph of
this Note, the Company also agrees to pay interest on all amounts hereof so
advanced and remaining from time to time unpaid hereon from the date hereof
until maturity at the rates and on the dates provided for in the Credit
Agreement. Past due principal and interest shall bear interest at the
Post-Default Rate.
The Bank is hereby authorized to record all loans and all payments and
prepayments hereunder on account of principal and interest on the schedules
attached hereto and made a part hereof for all purposes and to provide
continuations to such schedules as may be necessary. The date, type, interest
rate and maturity of each Loan made by the Bank to the Company, and each
payment made on account of the principal thereof, shall be recorded by the Bank
on its books and, prior to any transfer of this Note, endorsed by the Bank on
the schedules attached hereto or any continuation thereof.
This Note is a "Revolving Credit Note" under the Credit Agreement, is
issued pursuant to and is entitled to the benefits of the Credit Agreement.
Reference is made to the Credit Agreement for provisions for the acceleration
of the maturity hereof on the occurrence of certain events specified
B-1
<PAGE> 81
therein, for interest rate computations in the event that the otherwise agreed
rate is at any time limited by the Highest Lawful Rate, for the reimbursement
of attorneys' fees or other costs of collection or enforcement, and for all
other pertinent purposes. It is contemplated that by reason of prepayment
hereon there may be times when no Indebtedness is owing hereunder; but
notwithstanding such occurrences, this Note shall remain valid and shall be in
full force and effect as to loans made pursuant to the Credit Agreement
subsequent to each occurrence.
This Note has been made and issued and is payable in the State of
Texas and shall be governed by the laws of such State.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------
Name: James F. Westmoreland
Title: Vice President
B-2
<PAGE> 82
EXHIBIT C
FORM OF
COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ______________________
of The Houston Exploration Company, a Delaware corporation (the "Company"), and
that as such he is authorized to execute this certificate on behalf of the
Company. With reference to the Credit Agreement dated as of July 1, 1996
(together with all amendments or supplements thereto being the "Agreement"),
among the Company, Texas Commerce Bank National Association, individually and
as administrative agent ("the Agent") for itself and the other banks signatory
thereto (the "Banks"), the undersigned further certifies, represents and
warrants as follows (each capitalized term used herein having the same meaning
given to it in the Agreement unless otherwise specified):
(a) The representations and warranties of the Company
contained in the Agreement and otherwise made in writing by or on
behalf of the Company pursuant to the Agreement were true and correct
when made, and are repeated at and as of the time of delivery hereof
and are true and correct at and as of the time of delivery hereof in
all material respects, or has notified the Agent of any failure
thereof.
(b) The Company has performed and complied with all
agreements and conditions contained in the Agreement required to be
performed or complied with by it prior to or at the time of delivery
hereof.
(c) Neither the Company nor any Subsidiary has incurred
any material liabilities, direct or contingent, since December 31,
1995, except those (i) set forth in Schedule 7.03 to the Agreement,
(ii) disclosed on the most recent financial statements of the Company
and the Subsidiaries delivered to the Agent and (iii) consented to by
the Agent and the Banks in writing.
(d) Since December 31, 1995, no change has occurred,
either in any case or in the aggregate, in the condition, financial or
otherwise, of the Company or any Subsidiary which would have a
Material Adverse Effect, except as disclosed to the Agent in writing.
(e) There exists, and, after giving effect to the loan or
loans or extensions of credit with respect to which this certificate
is being delivered, will exist, no Event of Default under the
Agreement or any event or circumstance which constitutes, or with
notice or lapse of time (or both) would constitute, an event of
default under any loan or credit agreement, indenture, deed of trust,
security agreement or other agreement or instrument evidencing or
pertaining to any Debt of the Company or any
C-1
<PAGE> 83
Subsidiary, or under any material agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any
Subsidiary is bound.
(f) Based upon the detailed computations set forth on
Schedule 8.01 attached hereto, the Company is in compliance with the
provisions of Sections 9.12 and 9.13 of the Agreement as of
__________________, 19______.
EXECUTED AND DELIVERED this ____ day of ___________, 19__.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
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<PAGE> 84
EXHIBIT E
FORM OF
BORROWING, CONTINUATION AND CONVERSION REQUEST
____________, 19__
The Houston Exploration Company, a Delaware corporation (the
"Company"), pursuant to the Credit Agreement dated as of July 1, 1996 (as the
same may be amended or supplemented, the "Agreement"), among the Company, Texas
Commerce Bank National Association, individually and as administrative agent,
and the other banks signatory thereto hereby makes the requests indicated below
(unless otherwise defined herein, capitalized terms are defined in the
Agreement):
[ ] 1. Revolving Credit Loans:
(a) Aggregate amount of new Revolving Credit Loans to be
$________________;
(b) Requested funding date is _________________, 199__;
(c) $_____________________ of such borrowings are to be Fixed Rate
Loans;
$_____________________ of such borrowings are to be Base Rate
Loans; and
(d) Length of Interest Period for Fixed Rate Loans is
_________________.
[ ] 2. Fixed Rate Loan Continuation for Fixed Rate Loans maturing on
_________________:
(a) Aggregate amount to be continued as Fixed Rate Loans is
$_______________;
(b) Aggregate amount to be converted to Base Rate Loans is
$_______________; and
(c) Length of Interest Period for continued Fixed Rate Loans is
________________________.
[ ] 3. Conversion of Outstanding Base Rate Loans to Fixed Rate Loans:
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<PAGE> 85
Convert $__________________ of the outstanding Base Rate Loans
to Fixed Rate Loans on ____________________ with an Interest
Period of ______________________.
[ ] 4. Letter of Credit
(a) Account Party:
---------------------------------
(b) Issuance Date: , 19
-------------------------- ---
(c) Beneficiary:
---------------------------------
(d) Expiration Date: , 19
-------------------------- ---
(e) Delivery Instructions:
---------------------------
--------------------------------------------------
The undersigned certifies that he is the __________________ of the
Company, and that as such he is authorized to execute this certificate on
behalf of the Company. The undersigned further certifies, represents and
warrants on behalf of the Company that the Company is entitled to receive the
requested loan or loans or extension of credit under the terms and conditions
of the Agreement.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
E-2
<PAGE> 86
EXHIBIT F
FORM OF
ASSIGNMENT AND ACCEPTANCE
Dated: _______________, 199__
Reference is made to that certain Credit Agreement dated as of July 1,
1996, among The Houston Exploration Company, a Delaware corporation (the
"Company"), Texas Commerce Bank National Association, individually and as
Administrative Agent, and the other banks signatory thereto (such Credit
Agreement together with all amendments and supplements thereto being the
"Credit Agreement"). Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to such terms in the Credit Agreement. This
Assignment and Acceptance, between the Assignor (as defined and set forth on
Schedule I hereto and made a part hereof) and the Assignee (as defined and set
forth on Schedule I hereto and made a part hereof) is dated as of the Effective
Date (as set forth on Schedule I hereto and made a part hereof).
1. The Assignor hereby irrevocably sells and assigns to the
Assignee without recourse to the Assignor, and the Assignee hereby irrevocably
purchases and assumes from the Assignor without recourse to the Assignor, as of
the Effective Date, an undivided interest (the "Assigned Interest") in and to
all the Assignor's rights and obligations under the Credit Agreement respecting
those, and only those, Commitments and Loans contained in the Credit Agreement
as are set forth on Schedule I, in a principal amount as set forth on Schedule
I.
2. The Assignor (i) represents and warrants that it owns the
Assigned Interest free and clear from any lien or adverse claim; (ii) other
than the representation and warranty set forth in clause (i) above, makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or any other instrument, document or agreement delivered in
connection therewith, or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Agreement, or any other
instrument or document furnished pursuant thereto, other than that it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any adverse claim; (iii) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Company or the performance or observance by either
the Guarantors, the Company or its Subsidiaries or of any of their respective
obligations under the Credit Agreement, or any other instrument or document
furnished pursuant thereto; and (iv) attaches the Note held by it evidencing
the Assigned Interest and requests that the Company exchange such Note for a
new Note payable to the Assignor (if the Assignor has retained any interest in
the Assigned Interest) and a new Note payable to the Assignee in the respective
amounts which reflect the assignment being made hereby (and after giving effect
to any other assignments which have become effective on the Effective Date).
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<PAGE> 87
3. The Assignee (i) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (ii) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements referred to in Section 7.02, or if later, the most recent
financial statements delivered pursuant to Section 8.01 thereof, and such other
documents and information as it has deemed appropriate to make its own credit
analysis; (iii) agrees that it will, independently and without reliance upon
either the Agent, any other Bank or the Assignor and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Credit Agreement;
(iv) agrees that it will be bound by the provisions of the Credit Agreement and
will perform in accordance with its terms all the obligations which by the
terms of the Credit Agreement are required to be performed by it; and (v) if
the Assignee is organized under the laws of a jurisdiction outside the United
States, attaches the forms prescribed by the Internal Revenue Service of the
United States certifying as to the Assignee's exemption from United States
withholding taxes with respect to all payments to be made to the Assignee under
the Credit Agreement or such other documents as are necessary to indicate that
all such payments are subject to such tax at a rate reduced by an applicable
tax treaty.
4. Following the execution of this Assignment and Acceptance, it
will be delivered to the Company effective as of the Effective Date (which
Effective Date shall, unless otherwise agreed, be at least five (5) Business
Days after the execution of this Assignment and Acceptance).
5. Upon delivery to the Company, all payments under the Credit
Agreement in respect of the Assigned Interest (including without limitation,
all payments of principal, interest and fees with respect thereto) for the
period up to, but not including, the Effective Date, shall be made to the Agent
for the benefit of the Assignor, and for the period from and after the
Effective Date shall be made to the Agent for the benefit of the Assignee.
Assignor and Assignee hereby agree that if Assignor receives any of the
payments referred to in the preceding sentence which should have been made to
Assignee, or if Assignee receives any of the payments referred to in the
previous sentence which should have been made to Assignor, such payments shall
promptly be paid by Assignor to Assignee, or by Assignee to Assignor, as the
case may be, in full.
6. From and after the Effective Date, (i) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment
and Acceptance and Section 12.06 of the Credit Agreement, shall have the rights
and obligations thereunder, and (ii) the Assignor shall, to the extent provided
in this Assignment and Acceptance and Section 12.06 of the Credit Agreement,
relinquish its rights and be released from its obligations under the Credit
Agreement.
7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
F-2
<PAGE> 88
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed by their respective duly authorized officers on
Schedule I hereto.
--------------------------------------
as Assignor
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
as Assignee
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
F-3
<PAGE> 89
APPROVED:
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, as Agent
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
F-4
<PAGE> 90
SCHEDULE I
TO
ASSIGNMENT AND ACCEPTANCE
Assignor: _________________________________________________
Total Commitment of Assignor Prior to Effective Date: $___________
Total Commitment of Assignor After Effective Date: $___________
Assignee: _________________________________________________
Total Commitment of Assignee Prior to Effective Date: $___________
Total Commitment of Assignee After Effective Date: $___________
Effective Date of Assignment: ______________________________, 199_
Amount of Total Commitment Assigned: $_____________________
<TABLE>
<CAPTION>
Principal Amount Percentage Assigned
Facilities (or amount of) (Shown as a percentage
Assigned Commitment) Assigned of aggregate Commitments)
- -------- -------------------- -------------------------
<S> <C> <C>
Revolving Credit $___________________ ____________%
</TABLE>
Assignee's Base Rate Address for Notice:
Lending Office:
- ------------------------------- -------------------------------
- ------------------------------- -------------------------------
- ------------------------------- -------------------------------
Attn:
--------------------------
Telex No:
----------------------
Telecopy No:
Assignee's Eurodollar -------------------
Lending Office: Telephone No:
------------------
- -------------------------------
- -------------------------------
- -------------------------------
Schedule I-1
<PAGE> 91
[UPDATE]
SCHEDULE 1.02(b)
EXISTING LETTERS OF CREDIT
Texas Commerce Bank National Association
<TABLE>
<CAPTION>
Amount Maturity L/C #
------ -------- -----
<S> <C> <C>
$50,000.00 11/1/96 I440622
$740,500.00 4/8/97 I443971
$455,696.19 4/24/97 I444444
$300,000.00 6/6/96 I445680
</TABLE>
The Chase Manhattan Bank, N.A.
<TABLE>
<CAPTION>
Amount Maturity L/C #
------ -------- -----
<S> <C> <C>
$75,000.00 1/31/97 I514821
</TABLE>
Schedule 1.02(b)-1
<PAGE> 1
EXHIBIT 10.17
PURCHASE AND SALE AGREEMENT
TRANSTEXAS GAS CORPORATION
TRANSTEXAS TRANSMISSION CORPORATION
AND
THE HOUSTON EXPLORATION COMPANY
DATED JUNE 21, 1996
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
<S> <C> <C>
SALE AND PURCHASE OF INTERESTS . . . . . . . . . . . . . . . . . . . . . 2
1.01 Agreement to Sell; Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.02 Adjustments to Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.03 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.04 Assumed Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.05 Retained Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.06 Indemnification and Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . 7
2.01 Organization and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.02 Authority and Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.03 Due Execution and Binding Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.04 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.05 No Default and Compliance with Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.06 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.07 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.08 Contracts, Agreements, Plans and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.09 Status and Operation of Oil and Gas Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.11 Judgment Liens and Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.12 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.13 Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.14 Plugging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.15 Consents and Preferential Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.16 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.17 Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.18 Material Adverse Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . 11
3.01 Organization and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.02 Authority and Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.03 Due Execution and Binding Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
3.04 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.05 BUYER'S ACKNOWLEDGMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.06 Funds Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.07 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.08 Knowledgeable Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE IV
ADDITIONAL AGREEMENTS AND COVENANTS . . . . . . . . . . . . . . . . . . . 13
4.01 Covenants of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(a) Operation of Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(b) Certain Covenants with Respect to the Interests . . . . . . . . . . . . . . . . . . . . . . . . 14
(c) Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(d) Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(e) No Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(f) Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(g) Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.02 Covenants of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(a) Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(b) Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(c) Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(d) INDEMNIFICATION AS TO INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(e) Use of Seller's Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE V
TITLE MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 16
5.01 Access, Data and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.02 Marketable Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.03 Title Defects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.04 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.05 Right of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.06 Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.07 Preferential Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.08 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.09 Post Closing Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VI
CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . 20
6.01 Conditions to the Obligations of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
(a) Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Officers' Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(c) Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(d) No Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(e) Delivery of Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.02 Conditions to the Obligations of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(a) Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(b) Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(c) Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(d) No Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(e) Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.03 Failure to Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII
THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.01 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.02 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.03 Closing Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Change of Operatorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(b) Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(c) Delivery of Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.04 Post Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.05 Gas Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE VIII
TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.01 Grounds for Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE IX
EXTENT AND SURVIVAL OF REPRESENTATIONS
AND WARRANTIES: INDEMNIFICATIONS . . . . . . . . . . . . . . . . . . . . 25
9.01 SCOPE OF REPRESENTATIONS OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.02 INDEMNIFICATION OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.03 INDEMNIFICATION OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.04 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
9.05 Compliance with Express Negligence Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.06 Limitations of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE X
CASUALTY LOSS AND CONDEMNATION . . . . . . . . . . . . . . . . . . . . 27
10.01 Casualty Loss: Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XI
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 28
11.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.02 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(a) Exclusive Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(b) Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(c) Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(d) Choice of Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(e) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(f) Use of Terms "Include" or "Knowledge" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(g) Assignments and No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(h) Appendix, Exhibits and Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(i) Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(j) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(k) Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(l) No Recordation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(m) Filing and Recording of Assignments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(n) Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(o) Preservation of Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(p) Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(q) Subsequent Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.03 Brokers' Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.04 Waiver of the Deceptive Trade Practices - Consumer Protection Act . . . . . . . . . . . . . . . . . . . . 31
11.05 Release of Judgment Lien(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
iv
<PAGE> 6
LIST OF ATTACHMENTS
Appendix A Definitions
Exhibits
- --------
A-Part I Leases
A-Part II Wells
A-Part III Pipeline Assets
A-Part IV Allocated Value
B Plat
C-1 Form of Conveyance, Bill of Sale and Assignment
C-2 Form of Mineral Deed
D Form of Escrow Agreement
E Form of Exchange Agreement
F Form of Arbitration Agreement
Schedules
- ---------
1.04 Assumed Agreements
2.04 Contracts
2.06 Environmental Matters
2.08 List of Certain Contracts
2.10 Pending Litigation
2.13 Imbalances
2.15 Consents
2.16 Liens
4.01 Operations
v
<PAGE> 7
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT is made and entered into on this
the 21th day of June, 1996, but effective as of May 1, 1996 by and between
TransTexas Gas Corporation, a Delaware corporation ("TransTexas") whose address
is 1300 East North Belt, Suite 310, Houston, Texas 77032-2949, and TransTexas
Transmission Corporation, a Delaware corporation ("Transmission"), whose
address is 1300 East North Belt, Suite 310, Houston, Texas 77032-2949
(TransTexas and Transmission collectively referred to as "Seller") and The
Houston Exploration Company, a Delaware corporation ("Buyer") whose address is
1331 Lamar, Suite 1065, Houston, Texas 77010, with Seller and Buyer being
sometimes collectively referred to hereafter as the "Parties" or sometimes
individually referred to as a "Party".
A. Seller owns interests in and to the oil and gas leases and the oil,
gas and mineral leases listed on Exhibit "A-Part I" attached hereto (the
"Leases"), together with
1. Seller's interest in the wells located on the Leases
described on Exhibit "A-Part II", attached hereto (the
"Wells");
2. Seller's interest in any mineral fees in the Land;
3. Seller's interest in easements, permits, licenses, surface
and subsurface leases, rights-of-way, servitudes and other
surface and subsurface rights to the extent assignable, and
to the extent now being solely used in connection with the
Leases;
4. Seller's interest in materials, equipment and facilities in
and on the Land and used solely in connection with the use
or operation of the Leases or Gathering System or both;
5. Seller's interest in easements, permits, licenses, surface
and subsurface leases, rights of way, servitudes and other
surface and subsurface rights to the extent assignable, and
to the extent now being used in connection with
Transmission's operation of certain of its pipeline assets
described on Exhibit "A-Part III, attached hereto.
6. Seller's interest in the facilities and all pipelines,
including but not limited to all flowlines, gathering
pipelines, and transporting pipelines, located on or used
in connection with the marketing of production from the
Leases (all such flowlines, gathering pipelines, and
transporting pipelines being located approximately where
depicted on the plat attached hereto as Exhibit "B" (the
"Gathering System").
<PAGE> 8
7. Seller's interest in contracts including division orders,
unit agreements, operating agreements, and other contracts
and agreements to the extent, arising out of, connected
with, or attributable to operation of the Leases;
8. Seller's files and records arising out of, connected with,
or attributable solely to the Leases and the Gathering
System;
9. Seller's interest in Hydrocarbons produced from the Leases
on and after the Effective Date; and
10. a copy of the "Company Abstract" and the indices relating
thereto,
all of the foregoing, except the Excluded Assets described in Section 1.03,
herein called the "Interests."
B. Seller agrees to sell and convey and Buyer agrees to purchase and
pay for the Interests effective as of May 1, 1996 at 7:00 A.M., local time (the
"Effective Date").
C. All capitalized terms shall have the meanings set forth in the body
of this instrument or set forth on Appendix A, attached hereto.
IN CONSIDERATION OF the covenants, obligations and agreements of
the Parties set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties, for
themselves and their respective successors and assigns, covenant and agree as
follows:
ARTICLE I
SALE AND PURCHASE OF INTERESTS
1.01 Agreement to Sell; Purchase Price. Subject to the terms and
conditions of this Agreement, Seller shall sell and convey, and Buyer shall
purchase and accept, the Interests for a total consideration Sixty Two Million
Two Hundred Five Thousand Dollars ($62,205,000) (the "Purchase Price") payable
in cash at Closing. For such consideration, Seller shall further sell and
convey the option to Buyer to purchase those certain Production Payment
Interests described in Article XI hereof.
1.02 Adjustments to Purchase Price.
(a) In addition to any adjustments pursuant to any other
Article hereof, the Purchase Price will be adjusted as follows:
(i) The Purchase Price will be adjusted upward by the
following:
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(A) An amount equal to the value of all
Hydrocarbons in storage above the pipeline connection at
the Effective Date attributable to the Interests, which
amount the Parties agree is $1,000; and
(B) The amount of all expenses relating to the
Interests incurred by Seller and attributable to the period
after the Effective Date, including all reasonable,
ordinary and customary (1) operating expenditures, (2)
capital expenditures, (3) prepaid expenses paid by Seller
and attributable to the period after the Effective Date
(other than delay rentals due prior to the Effective Date),
and (4) other expenses under applicable operating
agreements, participation, exploration and development
agreements and other similar types of agreements which
cover or relate to any of the Interests between Seller and
any unaffiliated third party (to the extent not reimbursed
by other parties and to the extent not related solely to
the negotiations and consummation of this Agreement);
(ii) The Purchase Price will be adjusted downward by
the following:
(A) The amount of the proceeds received by
Seller (net of sales and severance taxes and Production
Burdens) that are attributable to the production of
Hydrocarbons from the Interests for the period of time
subsequent to the Effective Date; and
(B) An amount equal to Seller's share of ad
valorem and similar taxes payable with respect to the
Interests for 1996, prorated as of the Effective Date using
the actual 1995 tax assessment if the 1996 assessment is
not available as of the date of final determination of
Purchase Price adjustments.
(b) At least five days prior to the Closing Date, Seller will
estimate the Purchase Price Adjustment Amount and deliver to Buyer a
preliminary schedule setting forth in reasonable detail the calculation. The
Purchase Price will be adjusted at Closing as set forth in such preliminary
schedule.
(c) As soon as reasonably practicable, and in any event within
90 days following the Closing Date, Seller will deliver to Buyer the Purchase
Price Adjustment Schedule setting forth the final adjustments to the Purchase
Price. Within 30 days after delivery of the Purchase Price Adjustment
Schedule, Buyer will notify Seller whether Buyer agrees or disagrees with the
determination of the final Purchase Price Adjustment Amount set forth in the
Purchase Price Adjustment Schedule. If Buyer disagrees with such
determination, representatives of Seller and Buyer will meet within 20 days
after Seller's delivery of the Purchase Price Adjustment Schedule and endeavor
to resolve their differences regarding the determination of the Purchase Price
Adjustment Amount. If the representatives of Seller and
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Buyer are unable to agree upon such determination of the final Purchase Price
Adjustment Amount within 60 days after Seller's delivery of the Purchase Price
Adjustment Schedule, Seller will select a nationally recognized independent
accounting firm from a list of three such firms provided by Buyer (none of
which will be the independent accounting firm regularly used by Buyer), which
firm will audit the Purchase Price Adjustment Schedule and determine the final
Purchase Price Adjustment Amount. The decision of such independent accounting
firm will be binding on Seller and Buyer, and the fees and expenses of such
independent accounting firm will be borne one-half by Seller and one-half by
Buyer.
(d) If the final Purchase Price Adjustment Amount as finally
determined pursuant to Section 1.02(c) is a smaller upward adjustment or a
larger downward adjustment than that estimated pursuant to Section 1.02(b),
Seller will pay to Buyer the amount of such excess. If the final Purchase
Price Adjustment Amount as finally determined pursuant to Section 1.02(c) is a
larger upward adjustment or a smaller downward adjustment than that estimated
pursuant to Section 1.02(b), Buyer will pay to Seller the amount of such
deficiency. Any such payments contemplated by this Section 1.02(d) will be
made by wire transfer in immediately available funds to an account or accounts
as may be designated in writing by the recipient on or before the fifth
business day following the final determination of the applicable amount.
1.03 Excluded Assets.
Certain assets which might otherwise be considered as attaching to
the Interests herein conveyed shall be excluded from the provisions of this
Agreement and shall be called "Excluded Assets". Such Excluded Assets shall
include (i) all trade credits and all accounts and general intangibles (as
defined in the Texas Uniform Commercial Code) attributable to the Interests
with respect to any period of time prior to the Effective Date; (ii) all claims
or causes of action of the Seller (A) arising from acts, omissions or events,
or damage to or destruction of property, occurring prior to the Effective Date,
(B) arising under or with respect to any contract affecting the Interests that
are attributable to periods of time prior to the Effective Date (including but
not limited to claims for adjustments or refunds), or (C) with respect to any
of the Excluded Assets; (iii) all rights and interests of the Seller (A) under
any policy of insurance or indemnity, (B) under any bond, or (C) to any
insurance or condemnation proceeds or awards arising in each case, from acts,
omissions, or events, or damage to or destruction of property occurring prior
to the Effective Date; (iv) all substances produced and sold that are
attributable to the Interests with respect to all periods prior to the
Effective Date together with all proceeds from or of such substances; (v) all
claims of the Seller for refunds of or loss carry forwards with respect to (A)
production or any other taxes attributable to any period prior to the Effective
Date, (B) income or franchise taxes, or (C) any taxes attributable to the
Excluded Assets; (vi) all amounts due and payable Seller as adjustments to
insurance premiums related to the Interests with respect to any period prior to
the Effective Date; (vii) all proceeds, income and revenues, including but not
limited to, any security deposit or other deposits made, attributable to (A)
the Interests for any period prior to the Effective Date, or (B) any Excluded
Assets; (viii) all radio and communications
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equipment; (ix) all documents and instruments of the Seller that may be
protected by the attorney-client privilege; (x) all data that cannot be
disclosed or assigned to the Buyer as a result of confidentiality arrangements
or licenses under agreements with persons not affiliated with the Seller; (xi)
all audit rights arising under any agreement or contract or otherwise with
respect to any time period prior to the Effective Date or to any or the
Excluded Assets; (xii) all notes, memorandums, agreements or reports of any
consultant or other professional employed by the Seller in connection with the
sale of the Interests; (xiii) all agreements, communications and correspondence
between Seller and First Union Corporation of North Carolina (the "Advisor")
and their respective employees, representatives or agents relating to the
transactions contemplated by this Agreement; (xiv) all lists of prospective
purchasers for such transactions compiled by either the Seller or the Advisor;
(xv) all bids submitted by any respective purchasers of the Interests; (xvi)
all analyses by Seller or the Advisor of any bids submitted by any prospective
purchaser; (xvii) all correspondence or communications between the Seller or
the Advisor and their respective employees, representatives or agents, and any
prospective purchaser of the Interests other than the Buyer; (xviii) all
correspondence or communication between the Seller and the Advisor, their
respective employees, representatives or agents, regarding any or all of the
bids, the prospective purchasers, the engagement of or the activities of the
Advisor or any of the transactions contemplated in this Agreement; (xix) all
internal correspondence and communications of the Seller with respect to the
sale of the Interests or any transaction contemplated in this Agreement; (xx)
all rights in and to all of the geophysical files or data owned by or licensed
to the Seller covering the Interests. "Excluded Assets" shall not include any
title opinions, run sheets and abstracts of title related to the Interests.
1.04 Assumed Liability. From and after the Closing Date, Buyer shall
assume and discharge the following liabilities ("Assumed Liabilities"):
(a) all duties, liabilities and obligations (collectively the
"Obligations") arising after the Effective Date (i) under the Leases and those
agreements, arrangements, contracts and instruments listed on Schedule 1.04
attached hereto, (ii) imposed by governmental laws and regulations, and (iii)
for plugging, abandonment and surface restoration of the oil, gas, injection,
water or other wells listed on Exhibit A-Part II or commenced after the Closing
Date.
(b) any and all losses, liabilities, claims, fines, expenses,
damages, costs (including attorneys' fees and expenses) and causes of action
created by, related to, or arising out of any federal or state environmental
law, rule, regulation or order or any breach of any such law, rule, regulation
or order for operations on the Interests after the Closing Date or the
condition of the Interests occurring after the Closing Date.
1.05 Retained Liability. Seller shall retain and discharge the
following liabilities ("Retained Liabilities"):
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(a) all costs, expenses, liabilities, and Obligations assumed
or otherwise agreed to be paid by Seller pursuant to the terms of this
Agreement including, without limitation, satisfaction of those Judgment Liens
which are further described in Article 2.11;
(b) all duties, liabilities, and Obligations arising out of, in
connection with, or relating to the Interests not specifically included within
Assumed Liabilities; and
(c) all costs, expenses, liabilities and Obligations relating
to, arising from, or pertaining in any way to any Drilling Program Agreement.
1.06 Indemnification and Contribution.
(a) SELLER AGREES THAT IT SHALL RELEASE, DEFEND, INDEMNIFY AND
HOLD HARMLESS BUYER FROM AND AGAINST ANY COSTS, EXPENSES, LIABILITIES AND
OBLIGATIONS, INCLUDING BUT NOT LIMITED TO BUYER'S ATTORNEYS' FEES AND
LITIGATION EXPENSES, RELATING TO, ARISING FROM, OR PERTAINING IN ANY WAY TO
RETAINED LIABILITIES. Seller further agrees that, to the extent any costs,
expenses, liabilities or Obligations are attributable in any part to Retained
Liabilities, then Seller shall bear such part of such costs, expenses,
liabilities and Obligations, and BUYER SHALL BE ENTITLED TO INDEMNITY AND
DEFENSE AS PROVIDED ABOVE FROM SELLER FOR SUCH COSTS, EXPENSES, LIABILITIES AND
OBLIGATIONS. IN ADDITION, BUYER SHALL BE ENTITLED TO RECEIVE FROM SELLER
BUYER'S ATTORNEYS' FEES AND LITIGATION EXPENSES INCURRED IN ESTABLISHING
BUYER'S RIGHT TO INDEMNITY UNDER THIS SECTION. However, nothing in this
Section shall be deemed to create any third party beneficiary or other similar
interest in any person or entity other than the Parties hereto.
(b) BUYER AGREES THAT IT SHALL RELEASE, DEFEND, INDEMNIFY AND
HOLD HARMLESS SELLER FROM AND AGAINST ANY COSTS, EXPENSES, LIABILITIES AND
OBLIGATIONS, INCLUDING BUT NOT LIMITED TO SELLER'S ATTORNEYS' FEES AND
LITIGATION EXPENSES, RELATING TO, ARISING FROM, OR PERTAINING IN ANY WAY TO
ASSUMED LIABILITIES. Buyer further agrees that, to the extent any costs,
expenses, liabilities or Obligations are attributable in any part to Assumed
Liabilities, then Buyer shall bear such part of such costs, expenses,
liabilities and Obligations, and SELLER SHALL BE ENTITLED TO INDEMNITY AND
DEFENSE AS PROVIDED ABOVE FROM BUYER FOR SUCH COSTS, EXPENSES, LIABILITIES AND
OBLIGATIONS. IN ADDITION, SELLER SHALL BE ENTITLED TO RECEIVE FROM BUYER
SELLER'S ATTORNEYS' FEES AND LITIGATION EXPENSES INCURRED IN ESTABLISHING
SELLER'S RIGHT TO INDEMNITY UNDER THIS SECTION. However, nothing in this
Section shall be deemed to create any third party beneficiary or other similar
interest in any person or entity other than the Parties hereto.
(c) BOTH PARTIES AGREE THAT ALL INDEMNITY OBLIGATIONS IN THIS
AGREEMENT SHALL BE WITHOUT REGARD TO THE NEGLIGENCE OR
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STRICT LIABILITY OF THE INDEMNIFIED PARTY WHETHER THE NEGLIGENCE OR STRICT
LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as otherwise disclosed in this Agreement or in the attached
Schedules, Seller (in Sections 2.02-2.05, inclusive, the term "Seller" shall be
separately applicable to each of TransTexas and Transmission) represents and
warrants with respect to themselves and the Interests that:
2.01 Organization and Good Standing.
(a) TransTexas and Transmission are corporations duly
organized, validly existing and in good standing under the laws of the State of
Delaware and have all requisite corporate power and authority to own and lease
the properties and assets they currently own and lease and to carry on their
businesses as such businesses are currently conducted. TransTexas and
Transmission are duly licensed or qualified to do business as a foreign
corporation in the State of Texas and are in good standing in the State of
Texas.
(b) Seller confirm that they are not a "foreign person" for the
purposes of Section 1445 or Section 7701 of the Code.
2.02 Authority and Authorization of Agreement. Seller has all requisite
corporate power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated by this Agreement and to perform all
the terms and conditions of this Agreement to be performed by it. The
execution and delivery of this Agreement by Seller, the performance by it of
all the terms and conditions to be performed by it and the consummation of the
transactions contemplated by this Agreement have been duly authorized and
approved by all necessary corporate action.
2.03 Due Execution and Binding Obligation. This Agreement has been duly
executed and delivered on behalf of Seller and constitutes the valid and
binding obligation of Seller, enforceable against it in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency
or other laws relating to or affecting the enforcement of creditors' rights
generally and general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
2.04 No Violations. This Agreement and its execution and delivery by
Seller does not, and the fulfillment and compliance with the terms and
conditions of this Agreement and the consummation of the transactions
contemplated herein will not:
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(a) conflict with, or require the consent of any Person under
the articles of incorporation or bylaws of Seller;
(b) to the best of Seller' knowledge, violate any provision of
The Securities Act of 1933, as amended or the Trust Indenture Act of 1939, as
amended, if applicable, require any filing, consent, authorization, notice or
approval under any Governmental Requirement applicable to or binding upon
Seller (assuming receipt of all routine governmental consents typically
received after consummation of transactions of the nature contemplated by this
Agreement);
(c) except as set forth in Schedule 2.04, to the best of
Seller's knowledge, conflict with, result in a breach of, constitute a default
under (without regard to requirements of notice or the lapse of time or both),
accelerate or permit the acceleration of the performance required by, or
require any consent, authorization or approval under (i) any mortgage,
indenture, loan, credit agreement or other agreement or instrument evidencing
indebtedness for borrowed money to which Seller is a party or by which it is
bound or to which any of the Interests are subject or (ii) any lease, license,
contract or other agreement or instrument to which Seller is a party or by
which it is bound or which any of its properties is subject which violation,
breach, encumbrance or lack of consent or approval would be reasonably expected
to have a Material Adverse Effect; or
(d) result in the creation or imposition of any lien, charge or
other encumbrance upon the Interests.
2.05 No Default and Compliance with Laws and Regulations. To the best of
Seller's knowledge:
(a) Seller is not in default under, and no condition exists
that with notice or lapse of time or both would constitute a default by it
under, (i) any order, judgment or decree of any Governmental Authority or (ii)
any agreement, contract, lease, license or other instrument which default or
potential default would reasonably be expected to have any Material Adverse
Effect.
(b) Seller is in compliance with all Legal Requirements
applicable to its current business and operations where noncompliance would
reasonably be expected to have a Material Adverse Effect.
2.06 Environmental Matters. Except as set forth in Schedule 2.06, to the
best of Seller's knowledge, (i) during the period commencing with Predecessor's
acquisition of the Interests through the Closing Date, the Interests have been
operated in compliance with the applicable federal and state environmental laws,
rules and regulations where the noncompliance with which would reasonably be
expected to have a Material Adverse Effect, (ii) Seller or Predecessor has not
entered into any agreement with a Governmental Authority or private party with
respect to any environmental matter which agreement would reasonably be expected
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to have a Material Adverse Effect, and (iii) no Governmental Authority
investigation under any such environmental laws, rules or regulations is pending
with respect to the Interests which would reasonably be expected to have a
Material Adverse Effect. EXCEPT AS PROVIDED IN THIS SECTION 2.06, SELLER MAKES
NO REPRESENTATION OR WARRANTY AS TO ANY ENVIRONMENTAL MATTER RELATING TO THE
INTERESTS.
2.07 Taxes. All returns, statements and reports with respect to Taxes
based upon, measured by or imposed with respect to the ownership, operation or
production of the Interests which are required to be filed on or before the
Closing Date and which, if not so filed, would have a Material Adverse Effect,
have been (or will have been by the Closing Date) filed with the appropriate
Governmental Authorities and all such Taxes have been (or will have been by the
Closing Date) paid or deposited (except to the extent being challenged in good
faith by appropriate proceedings).
2.08 Contracts, Agreements, Plans and Commitments. Schedule 2.08 sets
forth a list of the following types of contracts by which the Interests after
Closing will be bound and which will not be terminable by Buyer without penalty
upon 90 days' or less notice: joint operating agreements, unit agreements,
farmout and farmin agreements, participation, exploration and development
agreements and agreements (not otherwise listed) containing area of mutual
interest provisions. Except as specified in Schedule 2.08, to the best of
Seller's knowledge, the contracts listed in Schedule 2.08 affecting the
Interests of Seller are in full force and effect in accordance with their
respective terms. Seller represents and warrants that there are no natural gas
or other hydrocarbon sales, gathering or transportation agreements in place
with respect to the Interests that cannot be terminated on not more than thirty
(30) days notice.
2.09 Status and Operation of Oil and Gas Properties.
(a) The Leases and other agreements under which Seller holds
the Interests are in full force and effect in accordance with their respective
terms, and, as applicable, Seller shall deliver Marketable Title therefor as
further defined in Article 5.02; and
(b) Seller has not, with respect to the Interests received any
material advance, "take-or-pay" or other similar payments under production
sales contacts that entitle the buyers to "make up" or otherwise receive
deliveries of Hydrocarbons at any time after the Effective Date without paying
at such time the applicable contract price and Seller has not received any
amount in settlement of any dispute with a gas purchaser relating to the
Interests.
2.10 Litigation. Except as set forth in Schedule 2.10:
(a) there is no action, suit or proceeding pending or, to the
best of Seller's knowledge, threatened against Seller relating to the
Interests; and
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(b) to the best of Seller's knowledge, Seller is not charged
with a violation of, or threatened with a charge of a violation of, any Legal
Requirement relating to any aspect of its business, which violation would
reasonably be expected to have a Material Adverse Effect on the Interests or
the transactions contemplated by this Agreement.
2.11 Judgment Liens and Security. The Interests are subject to the
following liens (each a "Judgment Lien"):
(a) Judgment Lien, dated April 22, 1994, to secure a judgment
against TransAmerican Natural Gas Corporation and TransTexas Gas Corporation in
the sum of $2,019,920.58 awarded in Coastal Oil & Gas Corporation v.
TransAmerican Natural Gas Corporation and TransTexas Gas Corporation v. The
Coastal Corporation, Coastal Gas Marketing Company (Cause No. C-91-770-D3),
Webb County District Court (49th Judicial District), recorded in Volume 206,
Page 232 of the Official Records of Webb County, Texas, and in Volume 497, Page
432 of the Official Records of Zapata County, Texas. This Judgment Lien is
secured by a bond (the "Coastal Supersedeas Bond") issued by International
Fidelity Insurance Company, which secures payment of the judgment, including
attorneys' fees, and all accrued post-judgment interest in the event of a final
non-appealable judgment adverse to TransTexas, et al.
(b) Judgment Lien, dated January 13, 1995, to secure a judgment
against TransAmerican Natural Gas Corporation and TransTexas Gas Corporation in
the sum of $17,957,156.00 awarded in H.S. Finklestein v. TransAmerican Natural
Gas Corporation and TransTexas Gas Corporation (Cause No. 2,677), Zapata County
District Court (49th Judicial District), recorded in Volume 281, Page 295 of
the Official Records of Webb County, Texas and Volume 511, Page 651 of the
Official Records of Zapata County, Texas. This Judgment Lien is secured by a
bond (the "Finklestein Supersedeas Bond") by International Fidelity Insurance
Company, which secures payment of the judgment, including attorneys' fees, and
all accrued post-judgment interest in the event of a final non-appealable
judgment adverse to TransTexas, et al.
(c) Seller hereby agrees that the bond in each of these matters
will be maintained by Seller in amounts sufficient to satisfy the judgment
until judgment is made final or these matters are otherwise settled or disposed
of and are no longer an encumbrance on the Interests. Seller hereby further
agrees to provide prompt written notice to Buyer in the event that either of
the judgments described in Article 2.11(a) or Article 2.11(b) are (i) made
final; (ii) otherwise settled or disposed of and are no longer an encumbrance
on the Interests; or (iii) no longer secured by the Coastal Supersedeas Bond or
the Finklestein Supersedeas Bond, respectively, or that the bonding company
issuing such bonds has failed or refused to fulfill its obligations thereunder.
Seller agrees to take whatever measures are necessary, including but not
limited to, payment of the relevant judgments to prevent the sale of the
Interests to satisfy such judgments. These representations in this Section
2.11 shall survive until the final resolution of each of these matters.
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2.12 Payments. All royalties, delay rentals and shut-in royalties
relating to the Leases have been timely and properly paid and all overriding
royalties and production payments relating to the Leases have been timely and
properly paid.
2.13 Imbalances. Except as set forth in Schedule 2.13, no owner of an
interest in or under a Lease is entitled to take more gas from such lease than
its proportionate share as a result of such owner's under production of gas in
a prior period and none of the Wells are subject to being curtailed or shut-in
now or in the future by any Governmental Authority as a result of any over
production of such well or violation of any Governmental Requirements prior to
the Closing Date.
2.14 Plugging. Except for the wells set forth on Exhibit "A-Part II,"
all wells drilled by Seller, Predecessor or any assignee or contractor of
either of them on the land covered by the Leases have been properly plugged and
abandoned and the land surrounding them properly restored in full compliance
with all applicable Governmental Requirements and the Leases.
2.15 Consents and Preferential Rights. Except as set forth on Schedule
2.15, there are no consents to assign, approvals of assignments, rights of
refusal, preferential rights to purchase or similar rights relating to the
Interests.
2.16 Liens. Except as set forth on Schedule 2.16, there are no liens
affecting the Interests.
2.17 Bills. All costs, expenses and charges for services provided or
materials supplied prior to the Closing Date to the Interests have been paid as
of the Closing Date.
2.18 Material Adverse Event. From the Effective Date to the Closing
Date, there have been no material adverse events relating to the Interests
which in the aggregate would reasonably be expected to reduce the value of the
Interests by more than Five Hundred Thousand Dollars ($500,000).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
3.01 Organization and Good Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
3.02 Authority and Authorization of Agreement. Buyer has all requisite
corporate power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated by this Agreement and to perform all
the terms and conditions of this Agreement to be performed by it. The
execution and delivery of this Agreement by Buyer, the performance by Buyer of
all the terms and conditions to be performed by it and the
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consummation of the transactions contemplated by this Agreement have been duly
authorized and approved by all necessary corporate action.
3.03 Due Execution and Binding Obligation. This Agreement has been duly
executed and delivered by Buyer and constitutes the valid and binding
obligation of Buyer, enforceable against it in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency or other
laws relating to or affecting the enforcement of creditors' rights generally
and general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3.04 No Violations. This Agreement and its execution and delivery by
Buyer do not, and the fulfillment and compliance with the terms and conditions
of this Agreement and the consummation of the transactions contemplated will
not:
(a) conflict with, or require the consent of any person under
the articles of incorporation or bylaws of Buyer;
(b) to the best of Buyer's knowledge violate any provision of,
or, require any filing, consent, authorization or approval under, any Legal
Requirement applicable to or binding upon Buyer (assuming receipt of all
routine governmental consents typically received after consummation of
transactions of the nature contemplated by this Agreement); or
(c) to the best of Buyer's knowledge conflict with, result in a
breach of, constitute a default under (without regard to requirements of notice
or the lapse of time or both), accelerate or permit the acceleration of the
performance required by, or require any consent, authorization or approval
under, (i) any mortgage , indenture, loan, credit agreement or other agreement
or instrument evidencing indebtedness for borrowed money to which Buyer is a
party or by which Buyer is bound or to which any of its properties is subject
or (ii) any lease, license, contract or other agreement or instrument to which
Buyer is a party or by which it is bound or to which any of its properties is
subject which violation, breach, encumbrance or lack of consent, authorization
or approval, with respect to the matters specified in clauses (b) and (c) of
this Section 3.04, would reasonably be expected to have a Material Adverse
Effect on the business, financial condition or results of operations of Buyer,
taken as a whole.
3.05 BUYER'S ACKNOWLEDGMENT. BUYER IS AWARE THAT THE INTERESTS AND THE
LAND HAVE BEEN USED FOR EXPLORATION, DEVELOPMENT, AND PRODUCTION OF OIL AND GAS
AND THAT THERE MAY BE PETROLEUM, PRODUCED WATER, WASTES, OR OTHER MATERIALS
LOCATED ON OR UNDER THE LAND OR ASSOCIATED WITH THE INTERESTS. EQUIPMENT AND
SITES INCLUDED IN THE INTERESTS OR THE LAND MAY CONTAIN ASBESTOS, HAZARDOUS
SUBSTANCES OR NATURALLY OCCURRING RADIOACTIVE MATERIAL ("NORM"). NORM MAY
AFFIX OR ATTACH ITSELF TO THE INSIDE OF WELLS, MATERIALS, AND EQUIPMENT AS
SCALE, OR IN OTHER FORMS; THE WELLS, MATERIALS, AND EQUIPMENT LOCATED ON
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THE LAND OR INCLUDED IN THE INTERESTS MAY CONTAIN NORM AND OTHER WASTES OR
HAZARDOUS SUBSTANCES; AND NORM-CONTAINING MATERIAL AND OTHER WASTES OR
HAZARDOUS SUBSTANCES MAY HAVE BEEN BURIED, COME IN CONTACT WITH THE SOIL, OR
OTHERWISE BEEN DISPOSED OF ON THE LAND. SPECIAL PROCEDURES MAY BE REQUIRED FOR
THE REMEDIATION AND REMOVAL, TRANSPORTATION, OR DISPOSAL OF WASTES, ASBESTOS,
HAZARDOUS SUBSTANCES AND NORM FROM THE INTERESTS AND THE LAND.
3.06 Funds Available. Buyer has or will have prior to the Closing Date,
sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to make payment of the Purchase Price due at the
Closing.
3.07 Litigation. There is no action, suit, proceeding or governmental
investigation or inquiry pending, or to the knowledge of Buyer, threatened
against Buyer or its subsidiaries or any of their respective properties that
might delay, prevent or hinder the consummation of the transactions
contemplated by this Agreement.
3.08 Knowledgeable Investor. Buyer is and has been during the preceding
two years primarily engaged in the business of exploring for, drilling for or
refining oil or gas. Prior to entering into this Agreement, Buyer was advised
by, and it has relied solely on, its own scientific, legal, tax and other
professional counsel concerning this Agreement, the Interests and their value
and has not relied on any statement, data or communication by Seller whether
orally or in writing except as specifically set forth in this Agreement. Buyer
is acquiring the Interests for its own account for investment purposes and not
with a view to or for sale and will not sell, transfer, lease or otherwise
convey in any manner, in whole or in part, the Interests without the necessary
registration, or exemptions therefrom, under applicable federal and state
securities laws.
ARTICLE IV
ADDITIONAL AGREEMENTS AND COVENANTS
4.01 Covenants of Seller. Seller covenants and agrees with Buyer with
respect to itself and the Interests as follows:
(a) Operation of Oil and Gas Properties. Except as may be
expressly permitted under this Agreement or as set forth in any Schedule, from
the date of this Agreement until the Closing, without first obtaining the
written consent of Buyer (which consent will not be unreasonably withheld), it
will not:
(i) waive any right relating to any of the Interests;
(ii) release or abandon any of the Interests;
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(iii) convey, farmout, or otherwise dispose of the
Interests;
(iv) engage in any material operations on any Interest that
it has not previously committed to and that may be expected to cost
Seller in the aggregate in excess of Twenty Five Thousand Dollars
($25,000) (except for emergency operations, in which case Seller
will promptly notify Buyer of such operations); or
(v) commit itself to do any of the foregoing; provided
however, that nothing contained in this Section 4.01(a) or
elsewhere in this Agreement will limit the rights of Seller to
produce, consume and sell Hydrocarbons from the Interests or
insignificant amounts of personal property in the ordinary course
of business and to comply with applicable Legal Requirements.
(b) Certain Covenants with Respect to the Interests. Except as
may otherwise be expressly permitted in this Agreement or as set forth in any
Schedule, from the date of this Agreement to the Closing, unless otherwise
consented to in writing by Buyer (which consent will not be unreasonably
withheld), it will:
(i) promptly notify Buyer of the receipt of any written
notice or written claim of which Seller becomes aware relating to
any default or breach under, or of any termination or cancellation
or written threat of termination or cancellation of any Lease or
other Interest;
(ii) not enter into, modify or terminate any Lease; and
(iii) maintain and operate the Interests as a reasonably
prudent operator
and, except as set forth on Schedule 4.01, since the Effective Date, Seller has
neither conducted operations on the Interests nor committed to conduct
operations on the Interests costing in the aggregate in excess of One Hundred
Thousand Dollars ($100,000).
(c) Access. Seller will afford to Buyer and its authorized
representatives, at Buyer's sole expense, risk and cost and upon reasonable
notice, reasonable access from the date of this Agreement until the Closing,
during normal business hours, to the Interests and to its personnel, files and
records relating to the Interests or the personnel, files and records of any
Affiliate of Seller which are related solely to the Interests, to the extent
that such access and disclosure will not unreasonably interfere with the normal
operation of the business of Seller or such Affiliate or violate the terms of
any agreement by which Seller or such Affiliate is bound or any applicable
Legal Requirement; provided however, that the confidentiality of any data or
information so acquired will be maintained by Buyer and its representatives in
accordance with Section 4.02(d).
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(d) Best Efforts. Seller will use its Best Efforts to obtain
the satisfaction of the conditions to Closing applicable to it set forth in
Section 6.01.
(e) No Negotiations. Until Closing or termination of this
Agreement, Seller agrees not to solicit from any Person any proposals or offers
for, or enter into any negotiations relating to, the disposition of any of the
Interests, except as otherwise permitted in this Agreement.
(f) Public Announcements. Subject to applicable Legal
Requirements and stock exchange requirements, prior to Closing, Seller will
obtain the approval of Buyer before issuing, or permitting any of the
directors, officers, employees or agents of Seller or any of its Affiliates to
issue, any press release or other public announcement with respect to this
Agreement or the transactions contemplated.
(g) Financial Information. At least five (5) days prior to
Closing, Seller will provide to Buyer such financial information, including
revenues and expenses, as Buyer may reasonably request, relating to the
Interests for the period from January 1, 1993 to Closing.
4.02 Covenants of Buyer. Buyer covenants and agrees with Seller as
follows:
(a) Best Efforts. Buyer will use its Best Efforts to obtain
the satisfaction of the conditions to Closing set forth in Section 6.02.
(b) Public Announcements. Subject to applicable Legal
Requirements and stock exchange requirements, prior to Closing, Buyer will
obtain the approval of Seller before issuing, or permitting any of the
directors, officers, employees or agents of Buyer or any of its Affiliates to
issue, any press release or other public announcement with respect to this
Agreement or the transactions contemplated.
(c) Confidential Information. If this Agreement is terminated
or, if not terminated, until the Closing, the confidentiality of any data or
information received by Buyer regarding the business and assets of Seller will
be maintained by Buyer and its representatives in accordance with the
Confidentiality Agreement, and without limiting the preceding, Buyer confirms
that prior to Closing, neither it nor its representatives will have discussions
with or make requests for information from third parties (including any
Governmental Authority) concerning the transaction contemplated or any of the
Interests (whether in connection with Buyer's due diligence investigation or
otherwise) without the prior written consent of Seller. If this Agreement is
terminated, Buyer will promptly return to Seller all information and data (and
all copies of any such information and data) furnished to Buyer or its
representatives in connection with Buyer's investigation of the Interests or
this Agreement.
(d) INDEMNIFICATION AS TO INSPECTION. BUYER WILL REPAIR ANY
DAMAGE TO THE PROPERTIES OF SELLER RESULTING FROM ITS INSPECTION OF SUCH
PROPERTIES, AND BUYER WILL INDEMNIFY,
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DEFEND (INCLUDING REASONABLE ATTORNEYS' FEES) AND HOLD SELLER HARMLESS FROM AND
AGAINST ANY AND ALL LOSSES, COSTS, DAMAGES, OBLIGATIONS, CLAIMS, LIABILITIES,
EXPENSES OR CAUSES OF ACTION (COLLECTIVELY THE "CLAIMS") ARISING FROM SUCH
INSPECTIONS, INCLUDING CLAIMS FOR PERSONAL INJURY, DEATH AND PROPERTY DAMAGE,
IN EACH INSTANCE, INCLUDING CLAIMS RESULTING FROM THE NEGLIGENCE OR STRICT
LIABILITY OF SELLER OR ITS OFFICERS, EMPLOYEES AND AGENTS WHETHER THE
NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.
(e) Use of Seller's Name. Buyer will not use any logos,
trademarks or trade names belonging to Seller or any Affiliate of Seller.
ARTICLE V
TITLE MATTERS
5.01 Access, Data and Information.
Promptly after the execution of this Agreement, Seller shall
provide Buyer reasonable access to Seller's books, records, files and other
pertinent data relating to title to the Interests including, but not limited
to:
(a) title opinions and reports pertaining to the Interests
heretofore received by Seller;
(b) all abstracts of title and title status reports pertaining
to the Interests heretofore received by Seller;
(c) all of the Leases, unitization, pooling, and operating
agreements, division and transfer orders, and the farmout agreements
relating to the Interests;
(d) all records and data sheets relating to the payment of all
bonuses, rentals, royalties, and other payments due under the Leases;
(e) all records relating to the payment of ad valorem,
property, production, severance, and similar taxes and assessments based
upon or measured by the ownership of property or the production of
Hydrocarbons therefrom on the Interests;
(f) ownership maps and surveys relating to the Interests;
(g) engineering and geological reports, studies and well logs
relating to the Interests; and
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(h) production records relating to the Interests;
PROVIDED THAT, SELLER MAKES NO WARRANTY, AND EXPRESSLY DISCLAIMS ALL WARRANTIES
AS TO THE ACCURACY OR COMPLETENESS OF THE BOOKS, RECORDS, FILES AND OTHER
PERTINENT DATA THAT IT MAY PROVIDE TO BUYER.
5.02 Marketable Title.
On the Closing Date, Seller shall convey to Buyer Marketable Title
to the Interests. As used herein the term "Marketable Title" shall mean, as to
each of the Interests, that title which:
(a) Entitles the Seller, as to the Leases described on Exhibit
"A-Part I" and the Wells described in Exhibit "A-Part II", to receive not
less than the interests designated as the "Net Revenue Interest" set forth
on such exhibits of all Hydrocarbons produced, saved and marketed from such
leases and wells, except for any decrease (i) caused by orders of the
appropriate regulatory body having jurisdiction over the Interests that are
promulgated after the Effective Date that concern pooling, unitization,
communitization or spacing matters (ii) caused by any Lease containing a
sliding-scale royalty clause or other similar clause with respect to a
Production Burden associated with a particular Interest or (iii) caused by
Buyer, its successors or assigns;
(b) Obligates the Seller, as to the Leases described on
Exhibit "A-Part II" and the wells described in Exhibit "A-Part II", to bear
not more than the respective percentages designated as the "Working
Interests" set forth on such exhibits of the costs and expenses relating to
the maintenance, development and operation of such leases and wells, except
for any increase (i) caused by Buyer, its successors and assigns, (ii) that
also results in the Net Revenue Interest associated with the Lease or well
being proportionately increased, or (iii) caused by orders of the
appropriate regulatory agency having jurisdiction over the Interests that
are promulgated after the Effective Date that concern pooling, unitization,
communitization or spacing matters; and
(c) Is free and clear of all liens, security agreements,
options, claims, lawsuits, charges, taxes, restrictions, encumbrances and
defects, except for Permitted Encumbrances (as hereinafter defined). As
used herein the term "Permitted Encumbrances" means: (i) liens for taxes
not yet delinquent; (ii) liens, charges, encumbrances, contracts,
agreements, instruments, obligations, defects, and irregularities
affecting the Interests (including, without limitation, liens of
operators relating to obligations not yet due and pursuant to which
Seller is not in default) that are not such as to interfere materially
with the operation, value or use of the Interests; (iii) such other
defects or irregularities of title or liens, charges or encumbrances as
Buyer may have waived in writing; (iv) minor defects or irregularities of
title that do
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not materially interfere with Buyer's ability to receive the economic
benefits from the Interests; (v) notwithstanding anything to the contrary
in this Section 5.02, all rights to consent by, required notices to,
filings with or other actions by governmental entities in connection with
the sale or conveyances of federal, state or other governmental oil and
gas leases or interests therein or related thereto where the same are
customarily obtained subsequent to assignment of such leases; (vi)
lessors' royalties, overriding royalties, division orders and sales
contracts, operating agreements, reversionary interests, and similar
burdens which do not operate to reduce the Net Revenue Interest of any
Interest to less than the amount set forth in Exhibit "A-Part I" hereto
or Exhibit "A-Part II" hereto; and (vii) conventional rights of
reassignment obligating Seller to reassign its interest in any portion
of the Interests to a third party in the event it intends to release or
abandon such interest prior to the expiration of the primary term or
other termination of such interest.
(d) Seller and Buyer agree to the allocation of the Purchase
Price to the Interests (the "Allocated Value") set forth on Exhibit "A-Part
IV", attached hereto.
5.03 Title Defects.
On or before three (3) days before the Closing Date, Buyer shall
notify Seller in writing of any encumbrance, lien, security agreement, charge,
restriction, option, tax, encroachment, claim or defect affecting the Interests
which in the opinion of Buyer as of such time would not give Buyer Marketable
Title, in accordance with Section 5.02, and the Allocated Value of the
Interests affected by each such title defect (all of which are herein called
the "title defects"). Liens listed on Schedule 2.16, other than the Judgment
Liens, shall constitute title defects and Buyer shall have no obligation to
notify Seller in waiting of such liens. Seller shall thereupon have the right
but not the obligation to attempt to cure the title defects at its expense on
or before the Closing Date. If Seller elects not to cure the title defects or
the title defects cannot be cured or removed to the reasonable satisfaction of
Buyer on or before the Closing Date, Buyer may elect in writing (i) to waive
the uncured title defects or (ii) to eliminate that portion of the Interests
affected by the title defects from the purchase and sale hereunder, in which
event the Purchase Price shall be reduced by the Allocated Value of the
Interests or portion thereof so excluded; provided however, that the Purchase
Price shall not be adjusted pursuant to this Section 5.03 until the aggregate
amount of the value of the title defects exceeds Five Hundred Thousand Dollars
($500,000) but once the aggregate amount of the value of the title defects
exceeds Five Hundred Thousand Dollars ($500,000), the Purchase Price shall be
adjusted pursuant to this Section 5.03 by the aggregate value of all title
defects in excess of One Hundred Twenty Five Thousand Dollars ($125,000) in the
aggregate.
5.04 Adjustments. In the event that only a portion of any of the
Interests is affected by title defects, Buyer may elect to accept said
Interest and pay a reduced Purchase Price based upon the percentage loss of
the Net Revenue Interest for such affected Interest and the Purchase Price
shall be adjusted by deducting the reduction in the Allocated Value for such
Interest.
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5.05 Right of Termination. In the event that the adjustments to the
Purchase Price pursuant to Section 5.03, Section 5.04, Section 5.07 or Section
5.08 or in combination exceeds five percent (5%) of the Purchase Price, either
party shall have the right to terminate this Agreement by written notice to the
other prior to the Closing Date, in which case neither party shall have any
further liability to the other.
5.06 Disputes. In the event the Parties acting in good faith are unable
to agree (a) whether a particular matter constitutes a title defect, (b) on the
portion of the Interest affected by the title defect or (c) the appropriate
reduction in the Purchase Price to be made upon elimination from this
transaction of the portion of the Interest affected by the title defect, the
affected Interest shall be removed from consideration hereunder and the
Purchase Price shall be adjusted accordingly.
5.07 Preferential Rights. Seller will notify the owners of preferential
rights to purchase the Interests, if any. If a third party effectively
exercises an applicable preferential right to purchase any of the Interests,
the affected Interests will be removed from the Agreement and the Purchase
Price will be adjusted by a reduction in the Purchase Price equal to the
Allocated Value of such Interests.
5.08 Consents. The sale of the Interests may require the approval or
consent of lessors, joint interest owners, farmors, sublessors, assignors or
other third parties (other than governmental bodies). Seller shall attempt to
obtain such approvals or consents prior to closing. If Seller cannot obtain a
necessary consent or approval, at Buyer's election, the affected Interest will
be removed from the Agreement and the Purchase Price will be adjusted by a
reduction in the Purchase Price equal to the Allocated Value of such Interest
or Buyer will accept such Interest without such consent. Buyer agrees to
provide to the holder of such right of approval or consent such information,
including financial information, as such holder may reasonably request.
5.09 Post Closing Adjustments. In the event that Buyer notifies Seller
of a title defect after the Closing, but prior to the expiration of sixty (60)
days after the Closing, Seller may elect at its expense to cure such defect.
If such defect is not cured within ninety (90) days after the Closing, Buyer
may elect to either waive such defect or to reconvey the affected Interest to
Seller; provided that, Buyer shall be conclusively deemed to have waived any
title defect relating to a tract on which it either (a) commences a well prior
to the expiration of such ninety (90) day period or (b) reworks a well at a
cost of in excess of One Hundred Thousand Dollars ($100,000) prior to the
expiration of such ninety (90) day period. If Buyer reconveys such Interest to
Seller, Buyer shall be entitled to an amount out of the Escrow Fund equal to
the Allocated Value of such Interests subject to such adjustments to revenues
and expenses of such Interests for the period from February 1, 1996 to the date
of reconveyance as may be necessary to restore both parties to that position
that would have existed if such Interest had been eliminated prior to Closing
under Section 5.03, and the parties shall jointly direct the Escrow Agent to
pay such amount to Buyer. Notwithstanding the foregoing, Buyer shall not be
entitled to any amount until the total value of title defects
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under this Section 5.09 and under Section 5.03 exceed in the aggregate Five
Hundred Thousand Dollars ($500,000), but once the aggregate amount of the value
of title defects exceeds Five Hundred Thousand Dollars ($500,000), Buyer shall
be entitled to the amount derived in the preceding sentence to the extent it
exceeds the greater of zero or the remainder of One Hundred Twenty Five
Thousand Dollars ($125,000) less the value of the title defects asserted under
Section 5.03. If such Escrow Fund is insufficient to pay such amount, Seller
shall remain liable to Buyer for such insufficiency up to an additional Four
Million Dollars ($4,000,000); provided that, this limitation shall not be
applicable to any amounts to which Buyer may be entitled as a result of the
breach of a warranty or representation under this Agreement. In the event the
Parties acting in good faith are unable to agree (a) whether a particular
matter constitutes a title defect, (b) on the portion of the Interest affected
by the title defect or (c) the appropriate adjustment to the Allocated Value of
such Interest, the dispute shall be submitted to binding arbitration under the
Arbitration Agreement. The failure of Buyer to notify Seller under Section
5.03 of any title defect shall not in any respect limit Buyer's right to notify
Seller of any such title defect under this Section. As soon as Buyer has
received the amounts it is entitled to out of the Escrow Fund, the Buyer and
Seller shall direct the Escrow Agent to disburse the remaining funds in the
Escrow Fund to Seller.
ARTICLE VI
CONDITIONS TO CLOSING
6.01 Conditions to the Obligations of Buyer. The obligations of Buyer to
proceed with the Closing contemplated by this Agreement are subject to the
satisfaction on or prior to the Closing of all of the following conditions, any
one or more of which may be waived, in whole or in part, in writing by Buyer:
(a) Compliance. Except for such breaches of representations,
warranties or covenants of Seller made in this Agreement as would not have a
Material Adverse Effect, the representations and warranties made by Seller will
be correct at and as of the Closing as though such representations and
warranties were made at and as of the Closing, and Seller will have complied
with all the covenants required by this Agreement to be performed by it at or
prior to the Closing.
(b) Officers' Certificates. Buyer will have received
certificates, dated the Closing Date, of an officer of Seller certifying as to
the matters specified in Section 6.01(a).
(c) Legal Opinion. Buyer will have received from the Law Firm
of Gardere & Wynne, L.L.P., an opinion dated the Closing Date, collectively to
the effect that:
(i) TransTexas and Transmission are corporations duly
organized, validly existing and in good standing under the laws of
the State of Delaware, with all requisite corporate power and
authority to own and lease the properties and assets they currently
own and lease and to carry on their businesses as such
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businesses are currently conducted; TransTexas and Transmission are
duly licensed or qualified to do business as foreign corporations
in the State of Texas and are in good standing in the State of
Texas; and the execution, delivery and performance of this
Agreement will not violate or conflict with the articles of
incorporation or bylaws of either of them.
(ii) Both of TransTexas and Transmission have all
requisite corporate power and authority to execute and deliver the
Agreement, to consummate the transactions contemplated and to
perform all the terms and conditions to be performed by each of
them; the execution and delivery of the Agreement by them, the
performance by them of all the terms and conditions to be performed
by them and the consummation of the transactions contemplated have
been duly authorized and approved by all necessary corporate
action; and this Agreement has been duly executed and delivered by
them and constitutes the legal, valid and binding obligation of
them.
(iii) The liens set forth on Schedule 2.16, except the
Judgment Liens, have been validly and effectively released insofar
as they cover the Interests and such liens, except the Judgment
Liens, are no longer encumbrances on the Interests.
(d) No Orders. The Closing will not violate any order or
decree of any Governmental Authority having competent jurisdiction over the
transactions contemplated by this Agreement.
(e) Delivery of Letter. Buyer will have received a letter from
International Fidelity Insurance Company (the "Company") dated as of the
Closing Date in which it confirms that:
(i) the Coastal Supersedeas Bond and the Finklestein
Supersedeas Bond are in full force and effect in
accordance with their terms;
(ii) there has been no change or impairment in the
collateral securing such bonds; and
(iii) the Company will not cancel or terminate either of
such bonds without giving Buyer ten (10) days
prior written notice unless theretofore Buyer has
waived in writing such written notice.
6.02 Conditions to the Obligations of Seller. The obligation of Seller
to proceed with the Closing contemplated by this Agreement is subject to the
satisfaction on or prior to the Closing of all of the following conditions, any
one or more of which may be waived, in whole or in part, in writing by Seller.
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(a) Compliance. Except for such breaches of representation or
warranties or covenants of Buyer made in this Agreement as would not have a
Material Adverse Effect on the business, financial condition and results of
operations of Buyer, taken as a whole, the representation and warranties made
by Buyer will be correct at and as of the Closing as though said
representations and warranties were made at and as of the Closing, and Buyer
will have complied with all the covenants required by this Agreement to be
performed by it at or prior to the Closing.
(b) Officer's Certificate. Seller will have received a
certificate dated the Closing Date of an officer of Buyer, certifying as to the
matters specified in Section 6.02(a).
(c) Legal Opinion. Seller will have received from the Law Firm
of Cullen and Dykeman, an opinion dated the Closing Date to the effect that:
(i) Buyer is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and the execution, delivery and performance of the
Agreement by the Buyer will not violate or conflict with the
articles of incorporation or by laws of Buyer.
(ii) Buyer has all requisite corporate power and
authority to execute and deliver the Agreement, to consummate the
transactions contemplated and to perform all terms and conditions
to be performed by it; the execution and delivery of the Agreement
by Buyer, the performance by Buyer of all of the terms and
conditions to be performed by it and the consummation of the
transactions contemplated have been duly authorized and approved by
all necessary corporate action; and the Agreement has been duly
executed and delivered by Buyer, and constitutes the legal, valid
and binding obligation of Buyer.
(d) No Orders. The Closing will not violate any order or
decree of any Governmental Authority having competent jurisdiction over the
transactions contemplated by this Agreement.
(e) Liens. Seller has or will have received prior to Closing
releases relating to the liens described on Schedule 2.16 insofar as they cover
the Interests.
6.03 Failure to Close. If all of the conditions to Closing have been
satisfied or waived on or before the Closing Date, and either the Seller or
Buyer fails to close, then the party
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failing to close will be deemed to have breached its obligation to perform at
Closing under this Agreement.
ARTICLE VII
THE CLOSING
7.01 General.
The Closing will take place at 10:00 a.m. at the offices of Seller
in Houston, Texas on the later to occur of (a) July 1, 1996, or (b) at such
other time and place as Buyer and Seller may mutually agree in writing.
7.02 Consideration. At Closing, Buyer shall wire transfer the Purchase
Price, subject to adjustment as herein provided, to Seller at such bank account
as Seller may designate on or before Closing.
7.03 Closing Obligations.
(a) Change of Operatorship. For Seller-operated Interests,
Buyer will deliver to Seller at Closing the following: (i) evidence of
compliance with the requirements of all laws and regulations relating to the
transfer of operatorship, including those regarding the assumption of
responsibility for the plugging and abandoning of the wells listed on Exhibit
"A-Part II", including, as applicable, evidence that the appropriate bond,
surety letter, letter of credit, or other financial security has been accepted
by the relevant regulatory agency; and (ii) evidence that Buyer has, where
possible under applicable regulations, obtained all necessary permits or
transfers of permits to operate the applicable Interests and Land.
(b) Closing Documents. The Parties, as indicated, will execute
and deliver the following instruments:
(i) An instrument in the form of the Conveyance, Bill
of Sale and Assignment attached as Exhibit C-1, an
instrument in the Form of the Mineral Deed
attached as Exhibit C-2 and an instrument in the
Form of Assignment of Easements and Equipment
attached as Exhibit C-3, all modified to the
extent necessary before Closing to conform to the
terms of this Agreement;
(ii) Letter-in-lieu-of-transfer orders;
(iii) Other documents reasonably required to close this
transaction and implement the terms of this
Agreement, including deeds, bills of sale, and the
like and instruments necessary under operating
agreements, plans of unitization, laws, and
regulations
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affecting the Interests to transfer the Interests
and related obligations from Seller to Buyer.
(iv) Change-of-operator forms for Seller-operated
Wells. (If, however, the Operator of a well must
be elected and the election is after Closing, the
parties will execute the applicable instruments
after the election.)
(v) The Escrow Agreement in the form attached hereto
as Exhibit D relating to the title defect matters.
(vi) The Exchange Agreement in the form attached hereto
as Exhibit E relating to the exchange of gas from
the Leases.
(vii) The Arbitration Agreement in the form attached
hereto as Exhibit F.
(c) Delivery of Possession. Subject to the terms of applicable
joint operating agreements, if any, and this Agreement, Seller will deliver
possession of the Interests to Buyer as of the Closing Date.
7.04 Post Closing. Within five (5) days after Closing:
(a) Buyer shall record in the public records of the appropriate
county or counties all counterparts of the Conveyance, Bill of Sale and
Assignment and Mineral Deed and provide Seller with proof thereof; and erect or
install such lease and well signs and pipeline signs as may be required by
applicable regulations, indicating that Buyer is the owner of the Interests;
and
(b) Seller shall remove all lease and well signs indicating
Seller's ownership and, if necessary, advise applicable state and federal
agencies of this sale.
(c) Seller and Buyer shall cooperate in providing ingress and
egress to the other across their properties in Zapata County so that both Buyer
and Seller shall have access to their properties in Zapata County.
7.05 Gas Sales. At the request of Buyer, given on or before three (3)
days before July 1, 1996, Seller shall sell on behalf of Buyer the
Hydrocarbons to be produced from the Interests during the month of July, 1996.
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ARTICLE VIII
TERMINATION
8.01 Grounds for Termination. This Agreement may be lawfully
terminated at any time prior to the Closing:
(a) by the mutual written agreement of Seller and Buyer; or
(b) as otherwise provided in this Agreement;
(c) by written notice given by Seller or by Buyer if the
consummation of the transactions contemplated by this Agreement would violate
any nonappealable final order, decree or judgment of any Governmental Authority
having competent jurisdiction enjoining, restraining or otherwise preventing,
or awarding substantial damages in connection with, the consummation of this
Agreement or the transactions contemplated; provided however, that a party will
not be allowed to exercise any right of termination pursuant to this clause if
the event giving rise to such right was due to the failure of such party to
perform or observe in any material respect any of the covenants or agreements
set forth to be performed or observed by such party; or
(d) by written notice given by Seller or by Buyer if its
conditions to Closing in Sections 6.01 and 6.02, have not been satisfied or
waived on or before July 3, 1996.
ARTICLE IX
EXTENT AND SURVIVAL OF REPRESENTATIONS
AND WARRANTIES: INDEMNIFICATIONS
9.01 SCOPE OF REPRESENTATIONS OF SELLER.
(a) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS
AGREEMENT, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, AND
DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY,
STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO BUYER
(INCLUDING ANY OPINION, INFORMATION OR ADVICE WHICH MAY HAVE BEEN PROVIDED TO
BUYER BY ANY AFFILIATE, OFFICER, DIRECTOR, STOCKHOLDER, PARTNER, EMPLOYEE,
AGENT, CONSULTANT OR REPRESENTATIVE OF SELLER OR BY ANY INVESTMENT BANK OR
INVESTMENT BANKING FIRM, ANY PETROLEUM ENGINEER OR ENGINEERING FIRM, SELLER'S
COUNSEL OR ANY OTHER AGENT, CONSULTANT OR REPRESENTATIVE). WITHOUT LIMITING
THE GENERALITY OF THE FOREGOING, SELLER EXPRESSLY DISCLAIMS AND NEGATES ANY
REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON LAW, BY STATUTE, OR
OTHERWISE RELATING TO (A) THE CONDITION OF THE
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INTERESTS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF
MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE, OR OF CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS), IT BEING DISTINCTLY UNDERSTOOD THE INTERESTS
ARE BEING SOLD "AS IS", WHERE IS" AND "WITH ALL FAULTS AS TO ALL MATTERS", (B)
ANY INFRINGEMENT BY SELLER OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRD
PARTY (C) ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED
TO BUYER BY OR ON BEHALF OF SELLER (INCLUDING WITHOUT LIMITATION, IN RESPECT OF
GEOLOGICAL AND ENGINEERING DATA, THE EXISTENCE OR EXTENT OF OIL, GAS OR THE
MINERAL RESERVES, THE RECOVERABILITY OF SUCH RESERVES, ANY PRODUCT PRICING
ASSUMPTIONS, AND THE ABILITY TO SELL OIL OR GAS PRODUCTION AFTER CLOSING), AND
(D) THE ENVIRONMENTAL CONDITION AND OTHER CONDITION OF THE INTERESTS AND ANY
POTENTIAL LIABILITY ARISING FROM OR RELATED TO THE INTERESTS.
(b) Buyer acknowledges and affirms that it has had full access
to the Interests and to information with respect to the Interests, and that
Buyer has made its own independent investigation, analysis and evaluation of
the transactions contemplated by this Agreement and Seller affirms it will
provide such access and information through the Closing Date.
9.02 INDEMNIFICATION OF BUYER. SUBJECT TO SECTION 9.06, SELLER AGREES TO
RELEASE, INDEMNIFY AND HOLD BUYER HARMLESS FROM AND AGAINST, ANY LOSS, DAMAGE
OR EXPENSE (INCLUDING REASONABLE ATTORNEYS' FEES) SUSTAINED BY BUYER ARISING
OUT OF OR RESULTING FROM ANY BREACH OF ANY OF THE REPRESENTATIONS, WARRANTIES
OR COVENANTS MADE BY SELLER IN THIS AGREEMENT; PROVIDED HOWEVER, THAT BUYER
WILL NOT BE ENTITLED TO ASSERT RIGHTS OF INDEMNIFICATION UNDER THIS SECTION
9.02 UNLESS AND UNTIL THE AGGREGATE OF ALL SUCH LOSSES EXCEEDS $100,000 (IT
BEING UNDERSTOOD THAT SUCH LOSSES WILL ACCUMULATE UNTIL SUCH TIME OR TIMES AS
THE AGGREGATE OF ALL SUCH LOSSES EXCEEDS $100,000, AT WHICH TIME BUYER WILL BE
ENTITLED TO INDEMNIFICATION FOR ALL SUCH LOSSES COVERED UNDER THIS SECTION
9.02).
9.03 INDEMNIFICATION OF SELLER.
(A) BUYER AGREES TO RELEASE, INDEMNIFY AND HOLD SELLER HARMLESS
FROM AND AGAINST, ANY LOSS, DAMAGE OR EXPENSE (INCLUDING REASONABLE ATTORNEYS'
FEES) SUSTAINED BY SELLER ARISING OUT OF OR RESULTING FROM ANY BREACH OF ANY OF
THE REPRESENTATIONS, WARRANTIES OR COVENANTS MADE BY BUYER IN THIS AGREEMENT;
PROVIDED HOWEVER, THAT SELLER WILL NOT BE ENTITLED TO ASSERT RIGHTS OF
INDEMNIFICATION UNDER THIS SECTION 9.03(A) UNLESS AND UNTIL THE AGGREGATE OF
ALL SUCH LOSSES EXCEEDS $100,000 (IT BEING UNDERSTOOD THAT SUCH LOSSES WILL
ACCUMULATE
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<PAGE> 33
UNTIL SUCH TIME OR TIMES AS THE AGGREGATE OF ALL SUCH LOSSES EXCEEDS $100,000,
AT WHICH TIME SELLER WILL BE ENTITLED TO INDEMNIFICATION FOR ALL SUCH LOSSES
COVERED UNDER THIS SECTION 9.03(A)).
9.04 Survival. Except as to the Judgment Liens described in Article
2.11, the representations and warranties of the Parties set forth in this
Agreement and in any certificate or instrument delivered in connection with this
Agreement will survive for a period of eighteen (18) months from and after the
Closing Date, following which date neither Seller nor Buyer may bring any
action or present any claim for a breach of such representations and
warranties; provided that, there will be no termination of any representation
or warranty as to which a bona fide claim has been asserted if either Buyer or
Seller has received notice of such claim prior to the expiration of such time
period. Seller's representations and warranties with respect to the Judgment
Liens described in Article 2.11 will survive until they are released.
9.05 Compliance with Express Negligence Test: THE PARTIES AGREE THAT THE
OBLIGATIONS OF THE INDEMNIFYING PARTY TO INDEMNIFY THE INDEMNIFIED PARTY SHALL
BE WITHOUT REGARD TO THE NEGLIGENCE OR STRICT LIABILITY OF THE INDEMNIFIED
PARTY, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT,
CONCURRENT OR SOLE.
9.06 Limitations of Liability.
In no event shall Seller or Buyer ever be liable to the other for
any consequential or punitive damages relating to or arising out of this
Agreement or the Interests.
ARTICLE X
CASUALTY LOSS AND CONDEMNATION
10.01 Casualty Loss: Condemnation. If after the date of execution of
this Agreement and prior to the Closing, any part of the Interests is destroyed
by fire or other casualty, Seller shall restore the Interests to the condition
such Interests were in immediately before such casualty loss if such loss is in
excess of Twenty-five Thousand Dollars ($25,000). If the Interests are not
restored to the condition prior to such casualty loss, Buyer, as its sole
remedy, may elect to terminate this Agreement. If not so terminated, this
Agreement shall remain in full force and effect without any Purchase Price
reduction. If any condemnation proceeding shall affect the Interests prior to
Closing, and the result of such proceeding can reasonably be expected to have a
Material Adverse Effect on the Interests, Buyer may elect to terminate this
Agreement.
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<PAGE> 34
ARTICLE XI
MISCELLANEOUS
11.01 Notices. All notices and other communications given under this
Agreement will be in writing and will be deemed given if delivered personally
or mailed by registered or certified mail, return receipt requested, to the
parties at the following address:
(a) If to Buyer, to:
THE HOUSTON EXPLORATION COMPANY
1331 Lamar, Suite 1065
Houston, Texas 77010
Attention: President
(b) If to Seller, to:
TRANSTEXAS GAS CORPORATION
1300 East North Belt, Suite 310
Houston, Texas 77032-2949
Attention: President
TRANSTEXAS TRANSMISSION CORPORATION
1300 East North Belt, Suite 310
Houston, Texas 77032-2949
Attention: President
11.02 Miscellaneous.
(a) Exclusive Agreement. This Agreement supersedes all prior
written or oral agreements between Buyer, on the one hand, and Seller, on the
other, with respect to the transactions contemplated, other than the
Confidentiality Agreement, and, except for such Confidentiality Agreement, is
intended as a complete and exclusive statement of the terms of the agreement
between Buyer, on the one hand and Seller, on the other, with respect to the
transactions contemplated.
(b) Amendments. This Agreement may not be changed or
terminated orally and may be amended only by a written agreement signed by
Seller and by Buyer.
(c) CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES OF
CONFLICTS OF LAWS.
(d) CHOICE OF FORUM. ALL CLAIMS, DISPUTES OR CAUSES OR ACTION
RELATING TO OR ARISING OUT OF THIS AGREEMENT WILL BE BROUGHT, HEARD AND
RESOLVED SOLELY AND EXCLUSIVELY BY AND IN A STATE COURT SITUATED IN HOUSTON,
TEXAS. EACH OF THE PARTIES TO THIS AGREEMENT SUBMITS TO THE JURISDICTION OF
SUCH STATE COURT
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<PAGE> 35
SITUATED IN HOUSTON, TEXAS AND WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR
CHANGE THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY THE
OTHER PARTY TO THIS AGREEMENT IN ACCORDANCE WITH THIS SECTION.
(e) Headings. The headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
(f) Use of Terms "Include" or "Knowledge". The term "include"
and derivatives of that term are used in an illustrative sense and not a
limiting sense. As used in this Agreement, the terms "knowledge" or "best
knowledge" and derivatives of those terms are intended to mean actual knowledge
of any fact, circumstance or condition by an officer or employee of a Party
involved at a supervisory or higher level, but do not include (i) knowledge
imputed to the Party involved by reason of knowledge of or notice to any
person, firm or corporation other than its officers or employees at a
supervisory or higher level or (ii) knowledge deemed to have been
constructively given by reason of any filing, registration or recording of any
document or instrument in any public record or with any governmental entity.
(g) Assignments and No Third Party Beneficiaries. Buyer will
not assign this Agreement or any part without the prior written consent of
Seller in its sole discretion. Except as otherwise provided, this Agreement
will be binding upon and inure to the benefit of the parties and their
respective successors and assigns. No such assignment will release Buyer of
any of its obligations under this Agreement. Nothing in this Agreement will
entitle any person other than the parties or their respective permitted
successors and assigns to any claim, cause of action, remedy or right of any
kind.
(h) Appendix, Exhibits and Schedules. Each Appendix, Schedule
and Exhibit to this Agreement is incorporated in and made a part of this
Agreement.
(i) Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated is not affected in any manner
adverse to any party. Upon any binding determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable and legally
enforceable manner, to the end that the transaction contemplated may be
completed to the extent possible.
(j) Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be deemed to be an original and all of
which together will constitute but one and the same agreement.
(k) Waiver. No waiver of any of the provisions of this
Agreement will be deemed or will constitute a waiver of any other provisions
(whether or not similar), nor will such waiver constitute a continuing waiver
unless otherwise expressly provided.
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(l) No Recordation. Without limiting either Party's rights
under this Agreement, Buyer and Seller agree not to record or place of record
this Agreement or any copy or memorandum of it.
(m) Filing and Recording of Assignments, etc. Buyer will be
solely responsible for all filings and recording of assignments and other
documents related to the Interests and for all applicable fees, and Buyer will
advise Seller of the pertinent recording date. Seller will not be responsible
for any loss to Buyer because of Buyer's failure to file or record documents
correctly or promptly. Buyer will promptly file all appropriate forms,
declarations or bonds with agencies of the State of Texas relative to its
assumption of operations and Seller will cooperate with Buyer in connection
with such filings.
(n) Further Assurances.
(i) The parties each agree to deliver or cause to be
delivered to the other on the Closing Date, and at such subsequent times as
will be reasonably requested, any additional instrument that the other may
reasonably request for the purpose of carrying out this Agreement.
(ii) After the Closing, Seller and Buyer will execute,
acknowledge and deliver all such further conveyances, transfer orders, division
orders, notices, assumptions, releases and acquittances, and such other
instruments, and will take such further actions, as may be necessary or
appropriate to assure fully to Buyer, its successors or assigns, all of the
Interests intended to be conveyed to Buyer by the Conveyance, Bill of Sale and
Assignment and Mineral Deed pursuant to this Agreement, and to assure fully to
Seller and its Affiliates and their successors and assigns, the assumption of
the liabilities and obligations intended to be assumed by Buyer pursuant to the
Conveyance, Bill of Sale and Assignment and Mineral Deed, and this Agreement.
(o) Preservation of Books and Records. For a period of seven
years after the Closing Date, Buyer will (i) preserve and retain all the files
and records that relate to the Interests and (ii) make such files and records
available at the then current administrative headquarters of Buyer to Seller
and the officers, employees, agent and Affiliates of Seller and third parties
to whom Seller is currently contractually obligated to allow access to such
records, upon reasonable notice and at reasonable times, it being understood
that Seller will be entitled to make and retain copies of any such files and
records as it deems necessary. Buyer agrees to permit representatives of
Seller to meet with its employees on a mutually convenient basis in order to
enable Seller to obtain additional information and explanations of any
materials provided pursuant to this subparagraph.
(p) Gender. Words of any gender used in this contract shall be
held and construed to include any other gender, and words in the singular
number shall be held to include the plural, and vice versa, unless the context
requires otherwise.
(q) Subsequent Filings. Effective at the Closing Date, Buyer
will file with the appropriate governmental authorities such notice or
certificates as are necessary to reflect the sale of the Interests to Buyer.
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<PAGE> 37
11.03 Brokers' Expenses.
(a) Seller has incurred no obligation or liability contingent
or otherwise, directly or indirectly, for any broker, finder or intermediary
fee or commission in connection with the transactions contemplated by this
Agreement which will be the responsibility of Buyer, and if any such obligation
or liability exists, it will remain an obligation of Seller and Buyer will have
no responsibility for it.
(b) Buyer has incurred no obligation or liability, contingent
or otherwise, directly or indirectly for any broker, finder or intermediary fee
or commission in connection with the transactions contemplated by this
Agreement which will be the responsibility of Seller, and if any such
obligation or liability exists, it will remain an obligation of Buyer, and
Seller will have no responsibility for it.
(c) Buyer will bear and pay (i) all State or local government
sales taxes incident to the transfer of the Interests to Buyer, (ii) all
documentary, transfer and other State and local government taxes incident to
the transfer of the Interests to Buyer and (iii) all costs or fees required to
obtain consent to assign any operating agreement included in the Interests.
(d) Except as specifically provided, all legal and other costs
and expenses in connection with this Agreement and the transactions
contemplated will be paid by Seller or Buyer, as the case may be, depending
upon which party incurred such costs and expenses.
11.04 Waiver of the Deceptive Trade Practices - Consumer Protection Act
Buyer's rights and remedies with respect to this transaction and
with respect to all acts or practices of the Seller, past, present or future,
in connection with this transaction shall be governed by legal principles other
than the Texas Deceptive Trade Practices - Consumer Protection Act, Tex. Bus. &
Ann. Section 17.41 et seq. (Vernon 1987 and Supp. 1994) (the "DTPA"), or any
similar statute of any jurisdiction, that may be applicable to the transactions
contemplated hereby. Buyer hereby waives the applicability of the DTPA, or any
similar statute, to this transaction and any and all rights, duties or remedies
that might be imposed by the DTPA, or any similar statute, provided, however,
Buyer does not waive Section 17.555 or the DTPA. Buyer represents , warrants
and acknowledges that it is purchasing the assets covered hereunder for
commercial or business use. Buyer further acknowledges, represents and
warrants (i) that Buyer has assets of Five Million Dollars ($5,000,000.00) or
more according to its most recent financial statement prepared in accordance
with generally accepted accounting principals, (ii) that Buyer has knowledge
and experience in financial and business matters that enable it to evaluate the
merits and the risks of a transaction such as this and (iii) that Buyer is not
in a significantly disparate bargaining position with the Seller. Buyer
expressly acknowledges and recognizes that the price for which the Seller has
agreed to sell the Interests and perform its obligations under the terms of
this Agreement has been predicated upon the inapplicability of the DTPA, or any
similar statute, and this waiver of the DTPA. BUYER FURTHER RECOGNIZES THAT
THE SELLER, IN DETERMINING TO PROCEED WITH ENTERING INTO THIS AGREEMENT, HAS
EXPRESSLY RELIED ON THE PROVISIONS OF THIS SECTION 11.04.
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11.05 Release of Judgment Lien(s). Seller hereby agrees that it shall,
as to each of the Judgment Liens described in Article 2.11:
(a) As soon as practical, but in no event later than sixty (60)
days after Closing, apply for and prosecute with diligence at the appropriate
court, pursuant to the provisions of Article 52.011 of the Texas Property Code,
an order releasing such Judgment Lien, or to otherwise remove such Judgment
Lien, as an encumbrance on the Interests; and/or
(b) Obtain a release or removal of either of such Judgment
Liens as an encumbrance on the Interests contemporaneously with and in the
event that, after the execution of this Agreement, Seller, or any Affiliate of
Seller, obtains a release or removal of either of such Judgment Liens from any
other properties owned by Seller, or any of its Affiliates, in Webb or Zapata
Counties, Texas.
The undersigned have executed this Agreement as of the date first written
above.
TRANSTEXAS GAS CORPORATION
By: /s/ ARNOLD H. BRACKENRIDGE
-----------------------------------------
Arnold H. Brackenridge
President and Chief Operating
Officer
TRANSTEXAS TRANSMISSION
CORPORATION
By: /s/ ARNOLD H. BRACKENRIDGE
-----------------------------------------
Arnold H. Brackenridge
President
THE HOUSTON EXPLORATION COMPANY
By: /s/ JAMES G. FLOYD
-----------------------------------------
James G. Floyd
President and Chief Executive
Officer
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APPENDIX A
Definitions
Capitalized terms used in this Agreement will have the meanings
ascribed to them in this Appendix A unless such terms are defined elsewhere in
this Agreement.
Affiliate: A Person that, directly or indirectly, controls or is
controlled by or is under common control with any other Person. For purposes
of this definition, "control" signifies the possession of the power to direct
the management and policies of an Entity, directly or indirectly, whether
through ownership of voting securities, by contract, or otherwise.
Best Efforts: A party's best efforts in accordance with reasonable
commercial practices and without the incurrence of unreasonable expense in the
context of the transactions contemplated.
Closing: The closing of the transactions contemplated by this
Agreement.
Closing Date: The date of the Closing.
Code: The Internal Revenue Code of 1986, as amended.
Confidentiality Agreement: The Confidentiality Agreement between
Buyer and Seller relating to the Interests.
Escrow Agent: The bank designated as such in the Escrow Agreement.
Escrow Fund: The amount placed in Escrow pursuant to the Escrow
Agreement attached hereto as Exhibit D.
Governmental Authority: The United States of America, any state,
commonwealth, territory or possession of the United States and any political
subdivision of any of the foregoing, including but not limited to courts,
departments, commissions, boards, bureaus, agencies or other instrumentalities.
Hydrocarbons: Oil, gas, minerals and other gaseous and liquid
hydrocarbons or any combination of the foregoing.
Land: The Lands covered by the Leases.
Legal Requirements: Any law, statute, ordinance, decree,
requirement, order, judgment, rule or regulation of, including the terms of any
license or permit issued by, any Governmental Authority.
Material Adverse Effect: Any material adverse effect on the
operation, value, or use of the Interests, taken as a whole.
A-1
<PAGE> 40
Person: Any individual or Entity.
Predecessor: The entity first acquiring title to an Interest as
among Gasland, Inc., Good Hope Refineries, Inc., JRS Properties, Inc., JRS
Realty, Inc., Laredo Exploration, Inc., Lynn Petroleum Storage & Transport Co.,
Inc., Southern Exploration and Production Corporation, Southern Gas
Transmission Corporation, Southern Interoil Corp., Southern Petroleum Trading
Company, Southern Pipeline Corporation; Southern States, Inc., Southern States
Pipeline Corp., Southwest Texas Services, Inc., The GHR Companies, Inc., The
Southern States Petroleum Partnership, TransAmerican Transmission Corporation,
TransAmerican Pipeline Corporation, TransTexas Gas Corporation, TransTexas
Transmission Corporation, GHR Energy Corporation, GHR Pipeline Corp., GHR
Transmission Corp., Southern States Exploration, Inc. and TransAmerican Natural
Gas Corporation or any Affiliate of them.
Production Burdens: All royalty interests, overriding royalty
interests, production payments, net profits interest or other similar interest
that constitute a burden on, are measured by or are payable out of the
production of Hydrocarbons or the proceeds realized from the sale or other
disposition of Hydrocarbons.
Purchase Price Adjustment Amount: The net adjustment to the
Purchase Price to be made pursuant to Section .
Purchase Price Adjustment Schedule: A schedule of the Purchase
Price Adjustment Amount (specifying whether the Purchase Price is to be
increased or decreased by such amount), which will be prepared by Seller.
Taxes: All Taxes (other than franchise, withholding, payroll and
employment taxes based on income) which are based upon, measured by or imposed
with respect to the ownership or operation of the Interests together with any
interest on such taxes, any penalties, additions to tax or additional amounts
with respect to such taxes and any interest in respect of such penalties,
additions or additional amounts.
A-2
<PAGE> 1
Exhibit 10.18
EXHIBIT E
TO PURCHASE AND SALE AGREEMENT
GAS EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "Agreement") is made and entered into this
_____ day of July 1996, by and between TRANSTEXAS GAS CORPORATION, whose
address is 1300 East North Belt, Suite 310, Houston, Texas 77032-2949,
(hereinafter collectively called "TRANSTEXAS") and THE HOUSTON EXPLORATION
COMPANY whose address is 1331 Lamar, Suite 1065, Houston, Texas 77010
(hereinafter called "OWNER").
WHEREAS OWNER is the owner and operator of the Leases located in Zapata
County, Texas;
NOW THEREFORE, in consideration of the premises herein contained and of
the mutual covenants and promises herein made by and between TRANSTEXAS and
OWNER, TRANSTEXAS and OWNER hereby agree as follows:
ARTICLE I
DEFINITIONS
The following definitions of terms shall apply for all purposes of this
Agreement, including the preambles and exhibits, unless the context otherwise
clearly requires:
A. "BTU" shall mean British Thermal Unit. The term "MMBTU" shall mean
one million (1,000,000) BTUs.
B. "Day" shall mean the twenty-four (24) hour period beginning at 7:00
A.M., local time on one calendar day and ending at 7:00 A.M., local time on the
following calendar day.
C. "MCF" and "MMCF" shall mean a volume of one thousand cubic feet and
one million cubic feet, respectively, of natural gas as measured at a standard
pressure base of 14.65 PSIA, and a standard temperature of 60 degree
fahrenheit. Whenever the conditions of pressure and temperature differ from
the above standard, conversion of the volume from actual conditions to the
standard conditions shall be in accordance with the Ideal Gas Laws, corrected
for deviation by the methods set forth in Report No. 3 of the Gas Measurement
Committee of the American Gas Association, ANSI/API 2530, as now amended and as
may be amended and supplemented hereafter. For the purposes of computation of
volume of natural gas there shall be a presumption that the atmospheric
pressure is 14.65 PSIA.
<PAGE> 2
D. "Delhi Agreement" means that certain Interruptible Gas Transportation
Agreement dated November 1, 1995 between Delhi Gas Pipeline Corporation and
TransTexas Gas Corporation.
E. "Leases" shall be the oil and gas leases described on Exhibit A -
Part I, attached hereto and made a part hereof, and any extensions or renewals
thereof; provided that, the Lease listed as item 34 thereon shall be considered
a "Lease" and subject to this Agreement only for so long as the Delhi Agreement
remains in force and effect.
F. "High Pressure Pipeline" means that certain gas pipeline depicted in
yellow on Exhibit B, attached hereto and made a part hereof.
G. "Low Pressure Pipeline" means that certain gas pipeline depicted in
blue on Exhibit B, attached hereto and made a part hereof.
H. "Month" shall mean the period of time from 7:00 A.M. of the first day
of a calendar Month to 7:00 A.M. of the first day of the next succeeding
calendar Month.
I. "Pipeline Delivery Point" shall be at the interconnection of the
pipeline facilities of TRANSTEXAS TRANSMISSION CORPORATION ("TRANSMISSION") and
the Third Party Pipelines located near Aqua Dulce, Nueces County, Texas, or at
mutually agreeable points along TRANSMISSION's Pipeline System.
J. "Pipeline System" shall mean the gathering and transmission pipelines
owned and operated by TRANSMISSION.
K. "Redelivered Gas" shall mean that certain volume of natural gas,
measured in MMBTUs, delivered by, or on behalf of, TRANSTEXAS to Third Party
Pipelines for the account of and on behalf of OWNER at the Pipeline Delivery
Point, which cumulatively contains an amount of MMBTUs which is equivalent to
the cumulative amount of MMBTUs (measured on a dry basis) contained in the
OWNER Gas, as such term is hereinafter defined, and which meets quality
specifications of the Third Party Pipelines taking delivery of such natural
gas.
L. "Third Party Pipeline" shall mean any pipeline, whether one or more,
which is connected with the Pipeline System at or near Aqua Dulce, Texas and,
as nominated by OWNER, in to which TRANSTEXAS delivers Redelivered Gas.
M. "OWNER Gas" shall mean all gas produced by OWNER from the Leases;
provided that, the volume of such gas shall not exceed 65,000 MMBTUs per Day
("Existing Well MDQ") from wells drilled on the Leases as of the date hereof
(the "Existing Wells") or exceed 50,000 MMBTUs per Day ("New Well MDQ") from
wells drilled on the
2
<PAGE> 3
Leases after the date hereof (the "New Wells") without the prior written
consent of TRANSTEXAS.
N. "Central Delivery Points" shall be the points at which the natural
gas produced from the Leases enters the Pipeline System; provided that,
TRANSTEXAS shall provide a sufficient number of such points so that it will not
be necessary for OWNER to install additional lines to connect any Existing Well
to the Pipeline System. On New Wells, TRANSTEXAS shall be required to provide
additional Central Delivery Points only on the High Pressure Line and OWNER
will be required to provide all lines to such points. Subject to the
provisions hereof, all gas produced from New Wells shall be delivered to
TRANSTEXAS into the High Pressure Line.
O. "Capacity Limitation" shall mean insufficient capacity in a Third
Party Pipeline to effectuate the delivery of Redelivered Gas to Owner into such
pipeline.
ARTICLE II
GENERAL AGREEMENT OF THE PARTIES
Pursuant to the terms of this Agreement, OWNER hereby agrees to deliver
all OWNER Gas to the Central Delivery Points and TRANSTEXAS hereby agrees to
take possession of all of OWNER Gas at the Central Delivery Points and to
deliver Redelivered Gas for the account of OWNER to Third Party Pipelines
according to terms and conditions hereinafter set forth.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
A. TRANSTEXAS represents and warrants to OWNER that:
(1) They are corporations duly incorporated and validly existing and in
good standing under the laws of the jurisdiction in which they are
organized and have duly qualified and are authorized to conduct business
and are in good standing as corporations in the State of Texas with full
power and authority to own their property and assets and transact the
business in which they are engaged;
(2) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action, and no order, consent,
approval, license, authorization, or validation of, or filing, recording,
or registration with, or exemption by, any governmental authority or
public agency is required to authorize, or is required in connection with
the execution, delivery, and performance by them of this
3
<PAGE> 4
Agreement or the legality, validity, binding effect, or enforceability of
this Agreement;
(3) They have the corporate power to execute, deliver and carry out the
terms of this Agreement;
(4) This Agreement constitutes their legal, valid, and binding
obligations, enforceable in accordance with its respective terms, except
to the extent that enforcement may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors rights
generally and by equitable principles, regardless of whether enforcement
is sought in equity or at law; and
(5) The execution, delivery and performance of this Agreement and
compliance with the terms and provision hereof do not contravene, violate
or conflict with any provision or constitute a default under or result in
a breach of their articles of incorporation or by-laws or any indenture,
mortgage, deed of trust or any other instrument, any contractual covenant
or any restriction by which they or their property or assets is bound or
to which it may be subject, or any permit, license, law, regulation, rule,
ordinance, order, judgment or decree applicable to them or their business
or properties.
B. OWNER represents and warrants to TRANSTEXAS that:
(1) It is a corporation duly incorporated and validly existing and in
good standing under the laws of the jurisdiction in which is organized
with the full power and authority to own its property and assets and
transact the business in which it is engaged and has duly qualified and is
authorized to conduct business and is in good standing as a corporation in
the State of Texas.
(2) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action, and no order, consent,
approval, license, authorization or validation of, filing, recording or
registration with or exemption by any governmental authority or public
agency is required to authorize or is required in connection with the
execution, delivery and performance by it of this Agreement or the
legality, validity, binding effect or enforceability of this Agreement;
(3) It has the requisite power to execute, deliver and carry out the
terms of this Agreement;
(4) This Agreement constitutes its legal, valid and binding obligation,
enforceable in accordance with its respective terms except to the extent
that enforcement may be
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<PAGE> 5
limited by applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditor's rights generally and by equitable principles,
regardless of whether enforcement is sought is equity or at law; and
(5) The execution, delivery and performance of this Agreement and
compliance with the terms and provisions hereof do not contravene, violate
or conflict with any provision of, constitute a default under or result in
a breach of its articles of incorporation, bylaws or any indenture,
mortgage, deed of trust or other instrument, contractual covenant or any
restriction by which it or its property or assets is bound or to which it
may be subject or any permit, license, law, regulation, rule, ordinance,
order, judgment or decree applicable to it or its business or properties.
ARTICLE IV
OBLIGATIONS OF THE PARTIES
A. Commitment of Owner:
OWNER agrees that during the existence of the Leases, OWNER shall
deliver to TRANSTEXAS all OWNER Gas. In the event of the termination of any
Lease, OWNER's obligation to deliver gas produced from such Lease under the
terms of this Agreement shall cease. In the event, the Existing Well MDQ or
the New Well MDQ is exceeded, and TRANSTEXAS does not agree to take such
excess, OWNER may designate, in its reasonable discretion, those Leases or
parts thereof from which such excess occurs and, on such designation, such
Leases or parts thereof shall be released from this Agreement and OWNER shall
no longer have any obligation to deliver gas produced from such Leases or parts
thereof to TRANSTEXAS. In the event that Owner drills a well on the Leases
that produces from below the top of Cretaceous Formation, Owner shall submit to
TRANSTEXAS information relating to the quality and quantity of the gas produced
from such well. If TRANSTEXAS elects to take gas from such well, all gas
produced from wells drilled on the Leases below the top of the Cretaceous
Formation shall be subject to this Agreement. If TRANSTEXAS fails to notify
OWNER in writing within thirty (30) days after OWNER'S submission to TRANSTEXAS
of such quantity and quality information of its election to take such gas, all
gas produced from below the top of the Cretaceous Formation shall be released
from this Agreement.
B. Commitment of TRANSTEXAS:
As consideration to OWNER for delivering OWNER Gas to TRANSTEXAS at
the Central Delivery Points, TRANSTEXAS hereby agrees to deliver to Third Party
Pipelines at the Pipeline Delivery Point for the account of and on behalf of
OWNER, on each day during the term of this Agreement, in accordance with daily
nomination made by
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OWNER to the Third Party Pipelines, that certain volume of gas, measured in
MMBTUs by said Third Party Pipelines, which is equal to the cumulative volume
of gas, measured in MMBTUs as provided below, delivered by OWNER to TRANSTEXAS
at the Central Delivery Points during the applicable day.
The cumulative MMBTUs of the OWNER Gas delivered at the Central
Delivery Points shall be calculated, on a daily basis, in the manner set forth
below.
(1) Measurement:
TRANSTEXAS shall have the volume (measured in MCF) of OWNER Gas
delivered to TRANSTEXAS at the Central Delivery Points measured by Coastal
Flow Measurement, Inc., Post Office Box 58925, Houston, Texas, an
independent and non-affiliated gas measurement and analysis entity (or
such successor independent entity as shall be named by TRANSTEXAS and
approved by OWNER), at a measuring station, at each Central Delivery Point
which shall be fabricated, installed and maintained in accordance with the
specifications of American Gas Association Measurement Committee Report
No. 3, as revised September 1985. TRANSTEXAS shall verify the accuracy of
the measuring equipment at reasonable intervals of not less than monthly
and whenever reasonably requested by OWNER. TRANSTEXAS shall give OWNER
advance written notice of the time of all tests. TRANSTEXAS shall provide
OWNER with copies of all meter tests and gas analyses, physical inspection
reports, volume statements for each Central Delivery Point and chart
integrations. TRANSTEXAS shall bear the cost of installation, maintenance
and testing, except as provided in the next paragraph, of all measuring
equipment, including all meters, but if this Agreement is terminated
pursuant to Article V, below, such measuring equipment, including the
meters, shall become the property of OWNER.
If any test of the measuring equipment shall be requested by OWNER
and, upon such test, the measuring equipment in question shall be found to
be registering within a one percent (1%) tolerance then the cost of such
test shall be charged to and borne by OWNER and if the variation equals or
exceeds one percent (1%) tolerance then TRANSTEXAS shall bear the cost of
the test.
If at any time, the measuring equipment is out of service or
malfunctioning such that the quantity of gas is incorrectly indicated by
such equipment, then the gas delivered during such period shall be
estimated and agreed upon on the basis of the best data available, using
the following methods, set forth in order of preference, if feasible:
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(a) By use of any check meter measuring equipment if such is in use
and in good working order.
(b) By correcting the error if the percentage of error is
ascertainable by calibration, test or mathematical calculation.
(c) By estimating the quantities of deliveries by comparison with
deliveries during the preceding periods under similar conditions
when the measuring equipment was registering accurately.
If upon any test, the measuring equipment is found to be inaccurate by one
percent (1%) or less, previous readings of such equipment shall be
considered correct in computing the deliveries of gas hereunder, but such
equipment shall be immediately adjusted to record accurately. If upon any
test, the measuring equipment shall be found to be inaccurate by more than
one percent (1%), then any previous readings of such equipment and any
payments based upon such previous readings shall be corrected to zero
error for any period which is definitely known or agreed upon, but if the
period is not definitely known or agreed upon, then such corrections shall
be for a period covering the last half of the time elapsed since the
previous test.
For the purpose of determining the MMBTU content of the OWNER Gas,
TRANSTEXAS shall require that Coastal Flow Measurement, Inc. (or such
successor independent entity as shall be named by TRANSTEXAS and approved
by OWNER) collect and sample such gas to confirm composition and heating
value each time that it verifies the accuracy of any measuring or metering
equipment. The composition and gross heating value of the OWNER Gas shall
be determined by means of chromatography or other industry accepted
method. The first such determination shall be made within thirty (30)
days after delivery of gas begins and shall apply until the first day of
the month following the next test. The gas composition and gross heating
value shall be determined at least monthly. OWNER may, at its own
expense, install, maintain and operate any industry acceptable
continuous-sampling device, but such equipment shall not interfere with
operation of the equipment installed by TRANSTEXAS.
OWNER shall have the right to audit all records of TRANSTEXAS
necessary to verify the volumes received at the Central Delivery Points
and volumes delivered to the Third Party Pipelines at the Pipeline
Delivery Point.
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C. Nominations and Balancing:
When nominating gas flow into the Pipeline System, OWNER shall submit
a nomination with such upstream of the Pipeline Delivery Point
("upstream") and downstream of the Pipeline Delivery Point ("downstream")
information as may be reasonably requested by TRANSTEXAS. If both receipt
and delivery quantities referenced in the nomination are confirmed with
the appropriate upstream and downstream pipelines by TRANSTEXAS, the gas
will be scheduled to flow. If such confirmations cannot be obtained, the
gas will not be scheduled to flow. The deadline for submittal of such
nominations for assured confirmation on the date requested shall be by
11:00 o'clock A.M. of the previous business day for daily revisions and by
11:00 o'clock A.M. of the fifth business day prior to the first of the
month for the next calendar month's business. TRANSTEXAS may waive any
part of the notice upon request if, in TRANSTEXAS' reasonable judgment,
operating conditions permit such waiver. TRANSTEXAS and OWNER shall
inform each other of any discovered unanticipated changes in deliveries
immediately.
OWNER'S Gas shall be delivered at uniform hourly and daily rates of
flow as nearly as practicable, but it is recognized that due to operating
conditions the quantities of gas received and delivered may not be in
balance on any one particular day. It is agreed that the quantities of
gas in MMBTUs received and delivered for the account of OWNER may vary
above or below the quantities scheduled on any day by five percent (5%);
provided that, the cumulative net variation in MMBTUs during any month
above or below the quantities scheduled shall not exceed a quantity equal
to the product of the daily volumes scheduled multiplied by the number of
days in such month multiplied by two percent (2%). TRANSTEXAS and OWNER
shall endeavor to keep such variance to a minimum. Following receipt of
monthly allocation statements, additional variances may appear, and
TRANSTEXAS and OWNER shall make such adjustment in receipts and deliveries
as promptly as is consistent with their operating conditions in order to
balance any excess or deficiency so shown; in any event, such adjustment
shall be made within sixty (60) days whether by physical delivery or by
cash settlement at a mutually agreed to price. Should TRANSTEXAS and
OWNER fail to balance by physical delivery or reach mutual agreement to a
cash settlement price within such sixty (60) day period, then the cash
settlement price (the "Cash Settlement Price") shall be 110% of the Inside
FERC Gas Market Report, Houston Ship Channel Index for large volumes as
determined for the month(s) in which the imbalances occurred.
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It is understood and agreed that there will be complete balancing
upon or following termination of this Agreement and that the provisions of
this Section shall survive the termination of the other portions of this
Agreement until such time as such balancing can be attained; however,
TRANSTEXAS shall not be obligated to extend this section beyond a period
of twenty-four (24) months after the date of final service hereunder.
OWNER shall make, or cause to be made, all necessary arrangements
with pipelines or parties at or downstream of the Pipeline Delivery Point
in order to effectuate TRANSTEXAS' receipt and delivery of gas. Such
arrangements must be coordinated with TRANSTEXAS Gas Control Department
and must be acceptable to TRANSTEXAS in its reasonable discretion.
D. Charges:
In consideration for OWNER's delivery of OWNER Gas at the Central
Delivery Points, TRANSTEXAS shall exchange such gas for Redelivered Gas, and
OWNER hereby agrees to pay TRANSTEXAS the sum of Seventeen Cents ($0.17) per
MCF exchange fee for OWNER Gas received by TRANSTEXAS at the Central Delivery
Points as follows:
(1) Billing:
No earlier than the fifteenth (15th) day of the month following the
month Redelivered Gas was delivered to Third Party Pipelines, TRANSTEXAS
shall render to OWNER an invoice which will include the following
information:
(a) Metered Quantity (in MCFs) of OWNER Gas delivered to TRANSTEXAS
at each Central Delivery Point for the previous month.
(b) The MMBTUs (measured on a dry basis)/MCF of the gas delivered to
each Central Delivery Point for the previous month.
(c) The monthly total of MMBTUs (measured on a dry basis) of OWNER
GAS delivered at each Central Delivery Point.
(d) The monthly total of MMBTUs (measured on a dry basis) of OWNER
Gas delivered to TRANSTEXAS at all the Central Delivery Points
for the previous month.
(e) Metered Quantity (in MCFs), as measured by the meters operated
by the Third Party Pipelines, of Redelivered OWNER Gas at
Pipeline Delivery Point(s) for the previous month.
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(f) The MMBTUs/MCF, as measured by the Third Party Pipelines, of the
Redelivered Gas delivered to the Pipeline Delivery Point(s) for
the previous month.
(g) The monthly total of MMBTUs of Redelivered Gas delivered by
TRANSTEXAS to Third Party Pipelines at the Pipeline Delivery
Point(s) for the previous month.
(h) The difference, if any, between the monthly total of MMBTU's of
OWNER Gas delivered to TRANSTEXAS and the monthly total of
MMBTUs of Redelivered Gas delivered by TRANSTEXAS to Third Party
Pipelines for the previous month.
(i) The cumulative difference of the monthly total of MMBTUs of
OWNER Gas delivered to TRANSTEXAS and monthly total of MMBTUs of
Redelivered Gas delivered by TRANSTEXAS to Third Party Pipelines
for all previous months after adjustments.
(j) The total amount due for the previous month calculated by
multiplying the Monthly Total of MCFs of gas delivered to
TRANSTEXAS at the Central Delivery Points by the OWNER by
$0.17/MCF.
(2) Payment:
Owner shall pay TRANSTEXAS the total amount due for exchanging OWNER
Gas for the previous month as shown on the invoice referred to in D(1)
above, by wire transfer to an account designated by TRANSTEXAS or by such
other means as agreed to by TRANSTEXAS so that payment is received and
TRANSTEXAS has available funds therefrom within ten (10) days of the
receipt by Owner of TRANSTEXAS' invoice.
Should OWNER fail to pay all of the amount of any bill as herein
provided when such amount is due, TRANSTEXAS may charge for late payment.
Such charge for late payment shall be determined by multiplying (a) the
unpaid portion of the bill, by (b) the ratio of the number of days from
the due date to the date of the actual payment to 365, by (c) the then
effective prime interest rate (Texas Commerce Bank National Association),
plus three percent (3%), but not to exceed the maximum rate permitted by
law. If such failure to pay continues for thirty (30) days after payment
is due, TRANSTEXAS, in addition to any other remedy it may have, may
suspend further delivery of gas for OWNER's account until such amount is
paid; provided, however, that if OWNER, in good faith, shall dispute the
amount of any such bills or parts thereof and shall pay to TRANSTEXAS such
amount as it concedes
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to be correct, then TRANSTEXAS shall not be entitled to suspend further
delivery of gas.
In the event any overcharge or undercharge in any form whatsoever
shall be found within twenty-four (24) months from the date such
discrepancy occurs, the appropriate party shall refund the amount of
overcharge or pay the amount of undercharge within thirty (30) days after
the final determination of the amount overcharged or undercharged has been
made.
Both parties hereto shall have the right, at any and all reasonable
times to examine the books and records of the other party to the extent
necessary to verify the accuracy of any statement, charge, computation or
demand made under or pursuant to this Agreement for a period of two years
from the date of such statement, charge, computation or demand.
(3) Programs:
OWNER and TRANSTEXAS recognize that some of the gas delivered to the
Central Delivery Points will not be OWNER Gas and will be subject to
certain prior agreements between TransTexas Gas Corporation and
TransAmerican Natural Gas Corporation and third parties ("Third Party
Gas"). The Third Party Gas shall be measured at the wells from which it
is produced in a manner consistent with the measurement of OWNER Gas and
OWNER shall have the same rights as to such measurement as it has with
respect to the measurement of OWNER Gas. The Third Party Gas shall be
deducted from gas delivered at the Central Delivery Points in determining
the quantity of OWNER Gas delivered at the Central Delivery Points.
TRANSTEXAS agrees it will not charge OWNER the fee set forth above on
Third Party Gas and OWNER agrees to transport Third Party Gas through its
existing lines without charge to the owners of such gas.
(4) Capacity Limitations:
Any Capacity Limitations shall be shared by OWNER and TRANSTEXAS on a
prorata basis in accordance with the volumes of gas each of them desires
to deliver to the effected Third Party Pipeline.
(5) Pressure:
TRANSTEXAS shall operate the Pipeline System so that the pressure in
the pipeline commonly known as the "High Pressure Line" does not exceed
1300 PSIG and the pressure in the pipeline commonly known as the "Low
Pressure Line" does not exceed 350 PSIG.
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ARTICLE V
EARLY TERMINATION
A. Failure to Take:
In the event that for any reason other than (1) a force majeure (but
only insofar as a force majeure is less than 30 days per occurrence and the
force majeures during a calendar year are less than 45 days in the aggregate)
or (2) normal and customary minor imbalances which cannot be avoided with
reasonable diligence or (3) Capacity Limitations, TRANSTEXAS fails during any
month to deliver cumulative MMBTUs on behalf of OWNER to Third Party Pipelines
at the Pipeline Delivery Point equal to the cumulative MMBTUs nominated by
OWNER during such month, which nominations must be based on reasonable
estimates of the amounts of gas that OWNER is capable of delivering to the
Central Delivery Points during such month, OWNER may, after thirty (30) days
written notice to TransTexas, at its election, terminate this Agreement and be
released from any and all liability hereunder; provided that, TRANSTEXAS may
avoid such termination by paying to OWNER within such thirty (30) days an
amount equal to the product of (1) the Cash Settlement Price for the applicable
month times (2) the difference between (a) the cumulative MMBTUs nominated by
OWNER during such month and (b) the cumulative MMBTUs delivered on behalf of
OWNER to Third Party Pipelines at the Pipeline Delivery Point during such
month. In the limited case where a force majeure exceeds thirty (30) days or
force majeures in the aggregate exceed forty-five (45) days, TRANSTEXAS may
avoid the termination right of Owner under this paragraph by delivering gas to
Third Party Pipelines on behalf of OWNER which is equal to the gas nominated by
OWNER, but which gas is in excess of the gas actually received by TRANSTEXAS at
the Central Delivery Points. On the occurrence of TRANSTEXAS' ability to take
all gas made available by OWNER at the Central Delivery Points, twenty percent
(20%) of all such gas so received shall be credited to TRANSTEXAS until the gas
so credited equals the total excess of gas delivered to Third Party Pipelines
on behalf of OWNER over the OWNER Gas actually received by TRANSTEXAS at the
Central Delivery Points.
B. Breach:
In the event that TRANSTEXAS fails to meets its obligations, duties,
indemnities and representations under Purchase and Sale Agreement dated June
21, 1996 by and between THE HOUSTON EXPLORATION COMPANY and TRANSTEXAS GAS
CORPORATION, or this Agreement, OWNER may, at any time after thirty (30) days
written notice to TRANSTEXAS, at its election terminate this Agreement and be
released from any and all liability hereunder; provided that, if during such
thirty (30) day period, TRANSTEXAS remedies such failure, OWNER's right to
terminate for such failure, but not for future failures, shall be extinguished.
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ARTICLE VI
INDEMNITY, CLAIMS AND TITLE
A. TRANSTEXAS INDEMNITY:
FROM DELIVERY OF OWNER GAS TO TRANSTEXAS AT THE CENTRAL DELIVERY
POINTS TO THE REDELIVERY OF THE GAS TO THIRD PARTY PIPELINES, TRANSTEXAS SHALL
RELEASE, INDEMNIFY, DEFEND (INCLUDING REASONABLE ATTORNEYS' FEES) AND HOLD
HARMLESS OWNER FROM AND AGAINST ANY AND ALL LOSSES, COSTS, DAMAGES,
OBLIGATIONS, CLAIMS, LIABILITIES, EXPENSES OR CAUSES OF ACTION (THE "CLAIMS")
ARISING FROM OR RELATING TO THE OWNER GAS INCLUDING CLAIMS FOR PERSONAL INJURY,
DEATH AND PROPERTY DAMAGE, IN EACH INSTANCE, INCLUDING CLAIMS RESULTING FROM
THE NEGLIGENCE OR STRICT LIABILITY OF OWNER OR ITS OFFICERS, EMPLOYEES AND
AGENTS WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT,
CONCURRENT OR SOLE.
B. OWNER INDEMNITY:
BEFORE DELIVERY OF OWNER GAS TO TRANSTEXAS AT THE CENTRAL DELIVERY
POINTS AND AFTER DELIVERY TO THIRD PARTY PIPELINES, OWNER SHALL RELEASE,
INDEMNIFY, DEFEND (INCLUDING REASONABLE ATTORNEYS' FEES) AND HOLD HARMLESS
TRANSTEXAS FROM AND AGAINST ANY AND ALL LOSSES, COSTS, DAMAGES, OBLIGATIONS,
CLAIMS, LIABILITIES, EXPENSES OR CAUSES OF ACTION (THE "CLAIMS") ARISING FROM
OR RELATING TO THE OWNER GAS OR REDELIVERED GAS, AS THE CASE MAY BE, INCLUDING
CLAIMS FOR PERSONAL INJURY, DEATH AND PROPERTY DAMAGE, IN EACH INSTANCE,
INCLUDING CLAIMS RESULTING FROM THE NEGLIGENCE OR STRICT LIABILITY OF OWNER OR
ITS OFFICERS, EMPLOYEES AND AGENTS WHETHER THE NEGLIGENCE OR STRICT LIABILITY
IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.
C. OWNER Claims:
OWNER represents and warrants that all gas delivered to TRANSTEXAS at
the Central Delivery Points other than Third Party Gas shall be free and clear
of all liens, claims, and encumbrances and hereby agrees to indemnify, defend
(including reasonable attorneys' fees) and hold harmless TRANSTEXAS from and
against any such liens, claims and encumbrances.
D. TRANSTEXAS Claims:
TRANSTEXAS represents and warrants that all Redelivered Gas shall be
free and clear of all liens, claims and encumbrances and hereby agrees to
indemnify, defend (including reasonable attorneys' fees) and hold harmless
OWNER from and against any such liens, claims and encumbrances.
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E. Title:
The title and ownership of OWNER Gas shall vest in TRANSTEXAS only at
such time as an equivalent quantity of Redelivered Gas is delivered to a Third
Party Pipelines on behalf of OWNER. Until such equivalent quantity is
delivered to Third Party Pipelines, title and ownership of OWNER Gas shall
remain in OWNER.
ARTICLE VII
NOTICES
Unless otherwise specified herein, any notice shall be deemed given the
day after the day when dispatched by Federal Express or other over night
delivery service to the street address of the parties shown below or when
transmitted by facsimile, with receipt verified or confirmed, to the parties at
the respective telephone numbers shown below:
THE HOUSTON EXPLORATION COMPANY
1331 Lamar, Suite 1065
Houston, Texas 77010
Facsimile No. (713) 652-4017
Attention: Gas Manager
TRANSTEXAS GAS CORPORATION
1300 East North Belt, Suite 340
Houston, Texas 77032-2949
Facsimile No. (713) 986-8877
Either party may designate a further or a different address upon proper
written notice to the other party. Monthly statements and payments shall be
considered duly delivered when received by registered, certified or ordinary
mail.
ARTICLE VIII
FORCE MAJEURE
If either TRANSTEXAS or OWNER is rendered unable, wholly or in part, by
force majeure to carry out its obligations under this Agreement, other than the
obligation to make money payments, that party claiming such force majeure shall
give to the other party prompt written notice of the force majeure with
reasonably full particulars concerning such force majeure. Such notice shall
include, but not be limited to, the starting date, cause, and extent of such
force majeure. Thereupon, the obligations of such party, so far as they are
affected by the force majeure, shall be suspended during, but no longer than,
the continuance of the force majeure. The party claiming the force majeure
event shall use all reasonable diligence to remedy the force majeure situation
as soon
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as practical. Notwithstanding the requirement that any force majeure shall be
remedied with all reasonable diligence, no party shall be required against its
will to settle any strikes, lockouts, or other labor difficulties. Further,
the handling of all such labor difficulties shall be entirely within the
discretion of the affected party. The term "force majeure" as herein employed
shall mean an act of God, strike, lockout, or other industrial disturbance; an
act of the public enemy or war; blockage or public riot; lightning, fire, storm
or flood; explosion; governmental action, delay, restraint, or inaction;
unavailability of equipment; and any other cause, whether of the kind
specifically enumerated above or otherwise, including, but not limited to,
TRANSTEXAS' failure to deliver OWNER Gas as a result of commitments with third
parties existing as of the date of this Agreement, which is not reasonably
within the control of the party claiming suspension of its obligations
hereunder. Such term likewise includes (a) in such instances where either of
the parties identified in the Article VIII is required to obtain servitudes,
right-of-way grants, permits or licenses to enable such party to fulfill its
obligations hereunder, the inability of such party to acquire, or the delays on
the part of such party in acquiring, at a reasonable cost and after reasonable
diligence, such servitudes, right-of-way grants, permits or licenses and (b) in
those instances where either party is required to furnish materials or maintain
facilities or is required to secure permits or permission from any governmental
agency, federal, state or municipal, civil or military, to enable such party to
fulfill its obligations hereunder, the inability of such party to acquire, or
on the part of such party in acquiring, at a reasonable cost and after the
exercise of reasonable diligence, such materials and supplies, permits and
permissions.
Either of the parties may partially or entirely interrupt its performance
hereunder for the purpose of making necessary or desirable inspections,
alterations and repairs, but only for such time as may be reasonable and
unavoidable; and the party requiring such relief shall give the other party
reasonable notice of its intention to suspend its performance hereunder, except
in cases of emergency where such notice is impracticable, and shall endeavor to
arrange such interruptions so as to inconvenience the other party as little as
possible. Service interruptions on the part of any party which are sanctioned
by the provisions of this Article VIII are expressly included in the definition
of "force majeure" for the purposes of this Agreement.
ARTICLE IX
MISCELLANEOUS
A. Assignment:
Either party may assign their rights, obligations or interests
hereunder for any purpose without the prior consent of
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the non-assigning party. The terms and provisions of the Agreement shall
extend to and be binding upon the parties, their respective successors and
assigns.
B. Waiver:
This Agreement constitutes the entire agreement between the parties
and no representation, waiver or agreement, oral or otherwise, shall affect the
subject matter hereof unless and until such representation, waiver or agreement
is reduced to writing and executed by authorized representatives of the
parties.
C. Choice of Law:
THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS AND ANY LEGAL ACTION FILED BY EITHER PARTY
HERETO, RELATED TO THE PERFORMANCE OR FAILURE TO PERFORM IN ACCORDANCE WITH THE
TERMS HEREOF SHALL BE IN STATE DISTRICT COURT IN HARRIS COUNTY, TEXAS.
D. Captions:
The captions used in this Agreement are solely for the convenience of
the parties hereto and shall have no significance, separate and apart from the
terms and provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have each caused this
Agreement to be duly executed in multiple originals by its authorized office as
of the date first set forth hereinabove.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------------------
Name: James G. Floyd
Title: President and Chief
Executive Officer
TRANSTEXAS GAS CORPORATION
By:
-----------------------------------------
Name: Arnold H. Brackenridge
Title: President
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TransTexas Transmission Corporation and its successors and assigns
covenant that they will do such things as are necessary to enable TransTexas
Gas Corporation to perform its obligation under this Agreement.
TRANSTEXAS TRANSMISSION CORPORATION
By:
----------------------------------------
Name: Arnold H. Brackenridge
Title: President
17
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EXHIBIT 10.19
BROOKLYN UNION GAS COMPANY
AND ITS SUBSIDIARIES
AGREEMENT FOR FILING CONSOLIDATED
FEDERAL INCOME TAX RETURNS AND FOR
ALLOCATION OF CONSOLIDATED FEDERAL
INCOME TAX LIABILITIES AND BENEFITS
DATED SEPTEMBER 1, 1994
Brooklyn Union Gas Company (BU) and its Subsidiaries (collectively
referred to as "the Parties") hereby agree to annually join in the filing of a
consolidated Federal income tax return and to allocate the consolidated Federal
income tax liabilities and benefits among the members of the consolidated group
in accordance with the provisions of this Agreement.
1. PARTIES TO THE AGREEMENT:
The Parties to this Agreement and the signatures of their corporate
officers approving this Agreement are attached as Exhibit 1 to 9. The Exhibits
may be modified from time to time to reflect the changes in the consolidated
group, with no effect on the basic Agreement.
2. DEFINITIONS:
"ALTERNATIVE MINIMUM TAX" is the tax imposed by Internal Revenue Code
Section 55 and shown on Form 4626-Alternative Minimum Tax-Corporations
on a separate or consolidated Federal income tax return.
"ALTERNATIVE MINIMUM TAX CREDIT" is the credit allowed by Internal
Revenue Code Section 53 and shown on Form 8827-Credit For Prior Years
Alternative Minimum Tax on a separate or consolidated Federal income tax
return.
"CONSOLIDATED TAX" is the aggregate current federal income tax liability
for a tax year, excluding the alternative minimum tax, environmental tax
and alternative minimum tax credits. It is the tax shown on the
consolidated Federal income tax return including any amended returns
relating to the same year. If a refund is due on the consolidated
Federal income tax return or any amended returns relating to the same
year, the consolidated tax for the tax year will be the refund amount.
"CONSOLIDATED TAXABLE INCOME" is the aggregate taxable income of the
Parties to this Agreement for a tax year computed as though such
company has filed a separate Federal income tax return on the same
basis as used in the consolidated Federal income tax return.
<PAGE> 2
Page 2
"CONSOLIDATED TAXABLE LOSS" is the aggregate taxable loss of the Parties
to this Agreement for a tax year computed as though such company had
filed a separate Federal income tax return on the same basis as used in
the consolidated Federal income tax return.
"ENVIRONMENTAL TAX" is the tax shown on Form 4626-Alternative Minimum
Tax-Corporations on the consolidated Federal income tax return.
"SEPARATE RETURN TAXABLE INCOME" is the taxable income of a party to
this Agreement for a tax year, computed as though such party had filed
a separate return on the same basis as used in the consolidated return
giving effect to intercompany transactions in the consolidated return in
accordance with Treasury Regulations 1.1502-13, except that dividend
income from any party shall be disregarded.
"SEPARATE RETURN TAXABLE LOSS" is the taxable loss of a party to this
Agreement for a tax year, computed as though such party had filed a
separate return on the same basis as used in the consolidated return
giving effect to intercompany transactions in the consolidated return
in accordance with Treasury Regulations 1.1502-13, except that
dividend income from any party shall be disregarded.
3. TAX ALLOCATION PROCEDURES:
The consolidated tax shall be allocated among the Parties to this
Agreement utilizing the additional amount allocation method, in conformity
with Internal Revenue Code Sections 1552(a)(2) and Treasury Regulations
1.1502-33(d)(2)(ii), in the following manner:
a. BU will act as the agent for all Parties to this Agreement with
respect to payments made to or cash received from the Internal
Revenue Service or to or from any party to this Agreement.
b. Intercompany transactions which affect the consolidated taxable
income or loss will be treated in accordance with Treasury
Regulations 1.1502-13.
c. Each member of the consolidated group having separate return taxable
income will pay to BU an amount equal to its proportionate share of
the consolidated tax based on the ratio of their separate return
taxable income to the aggregate of all members having separate return
taxable income.
d. Each member of the consolidated group having a separate return
taxable loss will receive payment from BU for the tax benefit of such
loss utilized in the consolidated Federal income tax return. If the
aggregate of the members separate return taxable
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losses are not entirely utilized in the consolidated Federal income
tax return, the aggregate benefit actually received will be
apportioned to the members having a separate return tax loss in the
ratio of each members separate return taxable loss bears to the
aggregate of such losses. The unused separate return taxable loss
will be allocated in a similar manner in the year the separate return
taxable losses are utilized either by carryback or carryforward in
the consolidated Federal income tax return.
e. General business credits, nonconventional fuel credits and capital
losses are allocated to the company that generated the credits or
capital losses on a separate return basis. Credits and capital losses
not utilized in the current year are allocated to the company that
generated these items when they are utilized either by carryback or
carryforward in the consolidated Federal income tax return.
f. The environmental tax is allocated to members having positive
alternative minimum taxable income based on the ratio of their
separate return alternative minimum taxable income to the aggregate
of all the members having separate return alternative minimum taxable
income. Any tax due from members other than BU will be paid to BU.
g. If a consolidated alternative minimum tax exists, the tax will be
apportioned to the members having a separate return alternative
minimum tax (applying the tax allocation procedures of this section
3) based on the ratio of their separate return alternative minimum
tax to the aggregate of all members having separate return
alternative minimum tax. Any tax due from members other than BU will
be paid to BU.
h. If a consolidated tax is reduced by an alternative minimum tax
credit, the credit will be apportioned to the members having paid a
separate return alternative minimum tax in prior years, on a
first-in; first-out basis. The credit will be allocated based on the
ratio of the separate return alternative minimum tax to the aggregate
of all members having separate return alternative tax for each year
from which the credit was generated by reversal of prior years
alternative minimum taxes on a first-in; first-out basis. Any credit
due to members other than BU will be paid to them by BU.
4. TAX ADJUSTMENTS:
In the event the consolidated tax is subsequently revised by Internal
Revenue Service adjustments, amended returns, claims for refund, or otherwise,
such changes, together with any interest related thereto, shall be allocated in
the same manner as though these adjustments had been a part of the original
consolidated Federal income tax return that was filed. Penalties are
<PAGE> 4
Page 4
allocated to BU unless the penalty specifically relates to the actions of any
other party to the Agreement. BU will be the sole arbiter for the allocation of
penalties under this Agreement.
5. EFFECTIVE DATE:
This Agreement is effective for the consolidated Federal income tax
return to be filed for the fiscal year ending September 30, 1994 and all
subsequent years, and all years where a final determination of consolidated
Federal income tax has not been made.
<PAGE> 5
EXHIBIT 1
BROOKLYN UNION GAS COMPANY
AND ITS SUBSIDIARIES
PARTIES TO THE AGREEMENT FOR FILING
CONSOLIDATED FEDERAL INCOME TAX RETURNS
AND FOR ALLOCATION OF CONSOLIDATED FEDERAL
INCOME TAX LIABILITIES AND BENEFITS
DATED SEPTEMBER 1, 1994
Parties Covered By This Exhibit:
Federal Employer
Company Name Identification Number
------------ ---------------------
Brooklyn Union Gas Company 11-0584613
Approved by RM Diamond Title VP, Comptroller & CAO
----------------------
Date approved 9/1/94
----------------
<PAGE> 6
EXHIBIT 3
BROOKLYN UNION GAS COMPANY
AND ITS SUBSIDIARIES
PARTIES TO THE AGREEMENT FOR FILING
CONSOLIDATED FEDERAL INCOME TAX RETURNS
AND FOR ALLOCATION OF CONSOLIDATED FEDERAL
INCOME TAX LIABILITIES AND BENEFITS
DATED SEPTEMBER 1, 1994
Parties Covered By This Exhibit:
Federal Employer
Company Name Identification Number
------------ ---------------------
The Houston Exploration Company 22-2674487
Approved by James Westmoreland Title VP & Controller
--------------------
Date approved 9/7/94
-------------
<PAGE> 1
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
July 3, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES, INC.
We hereby consent to the references to us under the headings "Prospectus
Summary-Summary Natural Gas and Oil Reserve Data", "Business -- Natural Gas and
Oil Reserves", "Smith Offshore Exploration Company Notes to Financial
Statements-Supplemental Information on Oil and Gas Exploration and Producing
Activities", and "Experts" in the Prospectus constituting part of this
Registration Statement on Form S-1 of The Houston Exploration Company.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ DANNY D. SIMMONS
-----------------------------------
Danny D. Simmons
Senior Vice President
Houston, Texas
July 3, 1996
<PAGE> 1
EXHIBIT 23.5
CONSENT OF HUDDLESTON & CO., INC.
We hereby consent to the references to us under the headings "Prospectus
Summary -- Summary Natural Gas and Oil Reserve Data," "Business -- Natural Gas
and Oil Reserves" and "Experts" in the Prospectus constituting part of this
Registration Statement of Form S-1 of The Houston Exploration Company, dated
July 1996.
Very truly yours,
HUDDLESTON & CO., INC.
By: /s/ PETER D. HUDDLESTON
------------------------------------
Peter D. Huddleston, P.E.
President
July 3, 1996
PDH:ek
<PAGE> 1
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
July 2, 1996
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints James G. Floyd and James F. Westmoreland (with
full power to each to act alone) as his true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place, and
stead, in any and all capacities, to sign, execute and file this Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act")
and any or all amendments (including, without limitation, post-effective
amendments and any amendment or amendments or additional registration statements
filed pursuant to Rule 462 under the Securities Act increasing the amount of
securities for which registration is being sought), with all exhibits and any
and all other documents required to be filed with respect thereto, with the
Securities and Exchange Commission, to sign any and all applications,
registration statements, notices or other documents necessary or advisable to
comply with the applicable state security laws, and to file the same, together
with all other documents in connection therewith, with the appropriate state
securities authorities, granting unto said attorneys-in-fact and agents or any
of them, or their or his substitute or substitutes, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- --------------
<S> <C> <C>
/s/ LESTER H. SMITH Director June 30, 1996
Lester H. Smith
</TABLE>
