<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[x]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER: 001-11899
THE HOUSTON EXPLORATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-2674487
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYEE
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1331 LAMAR STREET, SUITE 1065
HOUSTON, TEXAS 77010
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES
AND ZIP CODE)
(713) 652-2847
REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 1997, 23,332,763 shares of Common Stock, $.01 per share,
were outstanding.
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THE HOUSTON EXPLORATION COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Combined Balance Sheets -- June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Combined Statements of Operations -- Three-Month Periods and the Six-Month Periods
Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Combined Statements of Cash Flows -- Six Month Periods
Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to the Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<PAGE> 3
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
The words "anticipate," "believe," "expect," "estimate," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties,
such as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, expected, estimated or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under
the Securities Act of 1934, as amended.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOUSTON EXPLORATION COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................. $ 2,477 $ 2,851
Accounts receivable ................................................... 33,079 35,845
Accounts receivable--Affiliate ........................................ 2,527 --
Inventories ........................................................... 1,456 992
Prepayments and other ................................................. 463 924
---------- ----------
Total current assets ............................................. 40,002 40,612
Natural gas and oil properties, full cost method
Unevaluated properties ........................................... 78,080 60,258
Properties subject to amortization ............................... 504,090 468,062
Other property and equipment .......................................... 7,908 7,308
---------- ----------
590,078 535,628
Less: Accumulated depreciation, depletion and amortization ............ (200,501) (176,504)
---------- ----------
389,577 359,124
Other assets .......................................................... 852 1,549
---------- ----------
TOTAL ASSETS ..................................................... $ 430,431 $ 401,285
========== ==========
LIABILITIES:
Accounts payable and accrued expenses ................................. $ 30,870 $ 36,650
Accounts payable-Affiliate .......................................... -- 1,010
Deferred stock obligation ........................................... 8,825 --
---------- ----------
Total current liabilities ....................................... 39,695 37,660
Long-term debt ........................................................ 86,500 65,000
Deferred federal income tax ........................................... 62,440 56,475
Other deferred liabilities ............................................ 162 8,850
---------- ----------
TOTAL LIABILITIES ................................................ 188,797 167,985
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized,
23,333 shares issued and outstanding ............................. 233 233
Additional paid-in capital ............................................ 221,470 222,271
Retained earnings ..................................................... 19,931 10,796
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ....................................... 241,634 233,300
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 430,431 $ 401,285
========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
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<PAGE> 5
THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Natural gas and oil revenues ....................... $ 22,050 $ 11,272 $ 47,064 $ 21,252
Other ............................................. 170 302 484 535
-------- -------- -------- --------
Total revenues ................................... 22,220 11,574 47,548 21,787
OPERATING COSTS AND EXPENSES
Lease operating .................................... 3,764 1,806 8,013 3,634
Depreciation, depletion and amortization ........... 12,573 5,897 23,955 11,571
General and administrative, net .................... 1,546 1,210 2,956 2,702
-------- -------- -------- --------
Total operating expenses ......................... 17,883 8,913 34,924 17,907
INCOME FROM OPERATIONS ................................ 4,337 2,661 12,624 3,880
Interest expense, net ................................. 286 657 429 1,118
-------- -------- -------- --------
Income before income taxes ............................ 4,051 2,004 12,195 2,762
Provision (benefit) for federal
income taxes ..................................... 609 191 3,060 (27)
-------- -------- -------- --------
NET INCOME ............................................ $ 3,442 $ 1,813 $ 9,135 $ 2,789
======== ======== ======== ========
Net income per share .................................. $ 0.15 $ 0.12 $ 0.39 $ 0.18
======== ======== ======== ========
Weighted average shares outstanding ................... 23,333 15,295 23,333 15,295
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
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THE HOUSTON EXPLORATION COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 9,135 $ 2,789
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization .............................. 23,955 11,571
Deferred income tax expense ........................................... 5,305 6,206
Changes in operating assets and liabilities:
Decrease in accounts receivable ....................................... 239 3,935
Increase in inventories ............................................... (464) (33)
Decrease in prepayments and other ..................................... 461 759
Decrease in other assets and liabilities .............................. 833 615
Decrease in accounts payable and accrued expenses ..................... (6,790) (9,005)
--------- ---------
Net cash provided by operating activities ................................ 32,674 16,837
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment ..................................... (55,979) (30,629)
Dispositions and other ................................................... 1,572 1,523
--------- ---------
Net cash used in investing activities .................................... (54,407) (29,106)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ....................................... 35,500 5,991
Paydowns on long-term borrowings ......................................... (14,000) --
Common stock issuance costs .............................................. (141) --
Capital contributions from Brooklyn Union ................................ -- 10,293
--------- ---------
Net cash provided by financing activities ................................ 21,359 16,284
Increase in cash and cash equivalents .................................... (374) 4,015
Cash and cash equivalents, beginning of period ........................... 2,851 598
--------- ---------
Cash and cash equivalents, end of period ................................. $ 2,477 $ 4,613
========= =========
Cash paid for interest ................................................... $ 2,487 $ 2,253
========= =========
Cash paid for income taxes ............................................... $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
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<PAGE> 7
THE HOUSTON EXPLORATION COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
Organization
The Houston Exploration Company ("Houston Exploration" or the
"Company"), a Delaware corporation, was 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 The Brooklyn Union Gas
Company ("Brooklyn Union"). Prior to its initial public offering in September
1996 (the "IPO"), the Company was an indirect wholly-owned subsidiary of
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 South Texas, the Arkoma Basin, East Texas and West
Virginia.
Effective February 29, 1996 Brooklyn Union implemented a
reorganization of its exploration and production assets and liabilities by
transferring to Houston Exploration certain onshore producing properties and
acreage formerly owned by Fuel Resources, Inc. ("FRI"), a wholly owned
subsidiary of Brooklyn Union. These combined financial statements have been
prepared giving effect to the transfer of these assets and liabilities from the
time of the 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 balance sheet of the Company at June 30, 1997 and the statements
of operations and cash flows for the periods indicated herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes that the disclosures contained herein are
adequate to make the information presented not misleading. The balance sheet
at December 31, 1996 is derived from the December 31, 1996 audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The Interim Financial Statements should be read in
conjunction with the Combined Financial Statements and Notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of
operations for such interim periods are not necessary indicative of the results
for the full year.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement supersedes APB Opinion No. 15, "Earnings per Share" and
simplifies the computation of earnings per share ("EPS"). Primary EPS is
replaced with a presentation of basic EPS. Basic EPS includes no dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Fully
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<PAGE> 8
diluted EPS is replaced with diluted EPS. Diluted EPS reflects the potential
dilution if certain securities are converted. SFAS No. 128 requires dual
presentation of basic and diluted EPS by entities that issue any securities
other than ordinary common stock. SFAS No. 128 will be effective for financial
statements for both interim and annual periods ending after December 15, 1997,
and requires retroactive restatement of all EPS data presented. The Company
plans to adopt the statement on December 31, 1997. The Company does not expect
the effect of adopting SFAS No. 128 to have a material impact on its EPS
calculations, and, if adopted currently, SFAS No. 128 would not have a
material impact on the Company's reported EPS.
NOTE 2 -- 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 142 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 was
reduced by $3.1 million for production revenues and expenses related to the
assets between the May 1, 1996 effective date and July 2, 1996. The purchase
price of the TransTexas Acquisition was paid in cash, financed with borrowings
under the Company's Credit Facility.
Soxco
On September 25, 1996, the Company acquired substantially all of the
natural gas and oil properties and related assets (the "Soxco Acquisition") of
Smith Offshore Exploration Company ("Soxco"). The natural gas and oil
properties acquired in the Soxco Acquisition consisted solely of working
interests in properties located in the Gulf of Mexico that were already
operated by the Company or in which the Company also had a working interest.
Pursuant to the Soxco Acquisition, the Company paid Soxco cash in the aggregate
amount of $20.3 million (net of $3.4 million for certain purchase price
adjustments), and issued to Soxco 762,387 shares of common stock. The cash
portion of the purchase price was funded with the proceeds of the Company's
initial public offering. In addition to the foregoing, the Company will pay
Soxco a deferred purchase price of up to $17.6 million payable on January 31,
1998. The amount of the deferred purchase price 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, 1997,
provided that Soxco is entitled to receive a minimum deferred purchase price of
approximately $8.8 million. The Company has accrued and classified as current
the $8.8 million minimum deferred purchase price. 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.
NOTE 3 -- STOCKHOLDERS' EQUITY
On September 19, 1996, the Company entered into an underwriting
agreement with respect to the initial public offering of its common stock at a
price of $15.50 per share (the "IPO"). The initial closing of the IPO, in
which the Company issued 6,200,000 shares of common stock, was completed on
September 25, 1996. The underwriters delivered notice of the exercise of their
over allotment option on September 30, 1996. The closing of the over
allotment, in which the Company issued an additional 930,000 shares of common
stock, was completed on October 3, 1996. The Company received net proceeds of
approximately $101.0 million from the total of 7,130,000 shares sold in the
IPO.
Concurrently with the completion of the IPO, the Company's President
exchanged certain of his after program- payout working interests valued at $2.3
million for 145,161 shares of common stock. In addition,
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<PAGE> 9
concurrently with the completion of the public offering, the Company issued
762,387 shares of common stock valued at $11.8 million to Soxco in connection
with the Soxco Acquisition. See Note 2--Acquisitions.
In connection with the IPO, the Company's certificate of incorporation
was amended to effect an increase in the authorized capital stock of the
Company to 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,
the Company effected a forward stock split, effective prior to the completion
of the public offering, increasing the number of shares of common stock issued
and outstanding to 15,295,215. The financial statements reflect,
retroactively, the conversion and reclassification of the Company's common
stock pursuant to the split.
Net income per share for each period presented was determined by
dividing net income by the weighted average number of common shares
outstanding, after giving effect to the split referred to above. As of June
30, 1997, the Company had 2,333,276 options authorized of which 1,285,638 had
been granted. The options and the estimated number of shares issuable to Soxco
pursuant to the $8.8 million minimum deferred purchase price (see Note 2 -
Acquisitions) were not reflected in the earnings per share calculation as they
were antidilutive for the three months and the six months ended June 30,
1997.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
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.
NOTE 5 -- PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited combined pro forma information for the three months and
the six months ended June 30, 1996 gives effect to the TransTexas Acquisition,
the Soxco Acquisition and the application of the net proceeds from the IPO as
if such transactions had been completed as of January 1, 1996. See Note
2--Acquisitions and Note 3--Stockholders' Equity.
The historical results of operations have been adjusted to reflect (i)
an increase in natural gas and oil revenues, lease operating expense, general
and administrative expense and depreciation, depletion and amortization
attributed to the acquired properties, (ii) a reduction in interest expense
giving effect to the use of proceeds from the IPO to pay down long-term debt
and (iii) a net increase in income taxes as a result of the above.
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<PAGE> 10
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 date assumed, nor is the pro forma combined 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
<S> <C> <C>
REVENUES
Natural gas and oil revenues .................. $ 21,056 $ 41,055
Other ......................................... 302 535
---------- ----------
Total revenues ............................. 21,358 41,590
OPERATING COSTS AND EXPENSES
Lease operating expense ....................... 3,428 7,036
Depreciation, depletion and amortization ...... 10,287 20,324
General and administrative, net ............... 1,259 2,796
---------- ----------
Total operating expenses ................... 14,974 30,156
INCOME FROM OPERATIONS .......................... 6,384 11,434
Interest expense, net ........................... 475 790
---------- ----------
Income before income taxes ...................... 5,909 10,644
Provision for federal income taxes .............. 1,558 2,732
---------- ----------
NET INCOME ...................................... $ 4,351 $ 7,912
========== ==========
Net income per share ............................ $ 0.19 $ 0.34
========== ==========
Weighted average shares outstanding ............. 23,333 23,333
</TABLE>
NOTE 6 -- RELATED PARTY TRANSACTIONS
Effective January 1, 1997, the Company entered into an agreement to sell
to a subsidiary of Brooklyn Union certain onshore producing wells of the
Company that produce from formations that qualify for tax credits under Section
29 of the Internal Revenue Code ("Section 29"). Section 29 provides for a tax
credit from non-conventional fuel sources such as oil produced from shale and
tar sands and natural gas produced from geopressured brine, Devonian shale,
coal seams and tight sands formations. Brooklyn Union acquired an economic
interest in wells that are qualified for the tax credits and in exchange, the
Company (i) retained a volumetric production payment and a net profits
interest of 100% in the properties, (ii) will receive a cash down payment of
$1.6 million and will receive a quarterly payment of $0.75 for every dollar of
tax credit utilized. The Company will manage and administer the daily
operations of the properties in exchange for an annual management fee of
$100,000. At June 30, 1997, the balance sheet effect of this transaction was a
$1.6 million reduction to the full cost pool for the down payment. The income
statement effect for the three months ended and the six months ended June 30,
1997 was a reduction to income tax expense of $0.4 million and $0.9 million,
respectively.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding
of the historical financial position and results of operations of The Houston
Exploration Company (the "Company") for the three months and the six months
ended June 30, 1996 and 1997. The Company's historical combined financial
statements and notes thereto included elsewhere in this report contain detailed
information that should be referred to in conjunction with the following
discussion.
GENERAL
The Company was incorporated in December 1985 to conduct certain of
the natural gas and oil exploration and development activities of The Brooklyn
Union Gas Company ("Brooklyn Union"). The Company initially focused 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 the Company certain
onshore producing properties and related developed and undeveloped acreage.
Subsequent to the reorganization, the Company has expanded its focus to include
low risk exploitation and development drilling on the onshore properties
transferred, in addition to seeking opportunistic acquisitions both onshore and
offshore. On July 2, 1996, the Company acquired certain natural gas and oil
properties and associated pipelines located in Zapata County, Texas (the
"TransTexas Acquisition") from TransTexas Gas Corporation and TransTexas
Transmission Corporation. In September 1996, the Company completed an initial
public offering (the "IPO") of 7,130,000 shares of its common stock at $15.50
per share, resulting in net cash proceeds of approximately $101.0 million.
Concurrently with the completion of the IPO, the Company completed the
acquisition of the natural gas and oil properties and related assets of Smith
Offshore Exploration Company (the "Soxco Acquisition"). As of December 31,
1996, THEC Holdings Corp., a wholly-owned subsidiary of Brooklyn Union, owned
approximately 66% of the outstanding shares of Common Stock. At December 31,
1996, the Company had net proved reserves of 327 Bcfe, 98% of which were
natural gas and 74% 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.
The Company utilizes natural gas 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
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<PAGE> 12
differential between a fixed and a variable commodity price specified in the
contracts. The Company accounts for these transactions as hedging activities
and, accordingly, gains or losses are included in natural gas and oil revenues
in the period of the hedged production. The Company has entered into contracts
covering an average of approximately 73,000 Mmbtu per day (70,200 Mcf/d) for
July 1997 through October 1997 at a weighted average price of $2.04 per Mmbtu
and contracts covering an average of approximately 19,000 Mmbtu per day (18,000
Mcf/d) for November 1997 through March 1998 at a weighted average price of
$2.02 per Mmbtu, in each case before transaction and transportation costs.
During June 1997, net production from the Company's properties averaged
approximately 127,000 Mcfe per day.
RESULTS OF OPERATIONS
The following table sets forth the Company's historical and pro forma
natural gas and oil production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
PRO FORMA PRO FORMA
1997 1996 1996(1) 1997 1996 1996(1)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Production:
Natural gas (Mmcf) ........................ 11,246 5,759 10,535 21,817 11,498 20,956
Oil (Mbbls) ............................... 39 16 20 72 41 51
Total (Mmcfe) ............................. 11,480 5,855 10,655 22,249 11,744 21,262
Average sales prices:
Natural gas (per Mcf)(2) .................. $ 1.90 $ 1.89 $ 1.95 $ 2.09 $ 1.78 $ 1.91
Oil (per Bbl) ............................. 17.62 25.06 24.25 19.21 18.93 18.69
Expenses (per Mcfe):
Lease operating ........................... $ 0.33 $ 0.31 $ 0.31 $ 0.36 $ 0.31 $ 0.33
Depreciation, depletion and
amortization ............................ 1.10 1.01 0.97 1.08 0.99 0.96
General and administrative, net ........... 0.13 0.21 0.12 0.13 0.23 0.13
</TABLE>
- ---------------------------
(1) The pro forma production information for the three month and the six
periods ended June 30, 1996 gives effect to the TransTexas Acquisition and
the Soxco Acquisition as if such transactions had been completed as of
January 1, 1996.
(2) Reflects the effects of hedging. Absent the effects of hedging, average
realized natural gas prices would have been $1.96, $2.33 and $2.19 per Mcf
for the three months ended June 30, 1997, 1996 and pro forma 1996,
respectively; and, $2.36, $2.31 and $2.20 per mcf for the six months ended
June 30, 1997,1996 and pro forma 1996.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 AND 1997
General. Houston Exploration's production increased 96% from 5,855
Mmcfe for the three months ended June 30, 1996 to 11,480 Mmcfe for the three
months ended June 30, 1997. The primary source of this production increase is
the Charco Field which the Company acquired July 1, 1996 in the TransTexas
Acquisition. Beginning in the fourth quarter of 1996 the Company initiated a
development drilling and work over program that as of June 30, 1997 has
resulted in the successful completion of 7 new Charco wells. Since the end of
June 1997, the Company brought on line three additional Charco wells and was in
the process of completing two wells
-11-
<PAGE> 13
and drilling three more. Adding to the production increase for the three
months ended June 30, 1997 was new offshore production at Mustang Island 807,
Galveston Island 272 and West Cameron 60.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
96% from $11.3 million for the three months ended June 30, 1996 to $22.1
million for the three months ended June 30, 1997 as a result of the 96%
increase in production. The average realized price for natural gas increased
slightly by 1% from $1.89 per mcf for the three months ended June 30, 1996 to
$1.90 per mcf for the three months ended June 30, 1997.
As a result of hedging activities, the Company realized an average gas
price of $1.90 per Mcf for the three months ended June 30, 1997, compared to an
average price of $1.96 per Mcf that otherwise would have been received,
resulting in a $0.7 million decrease in natural gas revenues for the three
month period. For the three months ended June 30, 1996, the average realized
gas price was $1.89 per Mcf compared to an unhedged average gas price of $2.33
per Mcf, resulting in an decrease to natural gas revenues of $2.5 million for
the three month period.
Lease Operating Expenses. Lease operating expenses increased 111%
from $1.8 million for the three months ended June 30, 1996 to $3.8 million for
the three months ended June 30, 1997. On an Mcfe basis, lease operating
expenses increased 6% from $0.31 for the three months ended June 30, 1996 to
$0.33 for the comparable period of 1997. The increase in lease operating
expense is attributable to new operations and workover activities at the Charco
Field acquired in July 1996, the start-up of operations at Mustang Island 807
in early June 1997, combined with a general increase in costs in the oil
service industry.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 113% from $5.9 million for the three months
ended June 30, 1996 to $12.6 million for the three months ended June 30, 1997.
Depreciation, depletion and amortization expense per Mcfe increased 9% from
$1.01 for the three months ended June 30, 1996 to $1.10 for the three months
ended June 30, 1997. The increase in expense was a result of the production
increases from properties acquired in the TransTexas and Soxco Acquisitions as
well as newly developed properties combined with an increase in the depletion
rate. The increase in the depletion rate is attributable to the expansion of
the Company's exploration and development drilling program and reflects the
industry-wide increase in the costs of drilling goods and services, platform
and facilities construction and transportation services.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.1 million and $0.2 million for the three months ended June 30,
1996 and 1997, respectively, increased 25% from $1.2 million for the three
months ended June 30, 1996 to $1.5 million for the three months ended June 30,
1997. The Company capitalized general and administrative expenses directly
related to oil and gas exploration and development activities of $1.2 million
and $1.6 million, respectively, for the three months ended June 30, 1996 and
1997. The increase in aggregate general and administrative expense reflects the
overall growth and expansion of the Company's operations during the second half
of 1996 and continuing through the first six months of 1997. On an Mcfe basis,
general and administrative expenses decreased 38% from $0.21 for the three
months ended June 30, 1996 to $0.13 for the three months ended June 30, 1997.
The lower rate per Mcfe for the three months ended June 30, 1997 is directly
attributable to the significant increase in production for the three months
ended June 30, 1997 as compared to the same period of 1996.
Income Tax Provision. The provision for income taxes increased 200%
from expense of $0.2 million for the three months ended June 30, 1996 to an
expense of $0.6 million for the three months ended June 30, 1997 due to the
increase in pretax income.
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<PAGE> 14
Net Income. Operating income increased 59% to $4.3 million for the
three months ended June 30, 1997, an increase of $1.6 million compared to $2.7
million for the same period of 1996. Net income increased 89% or $1.6 million
from $1.8 million for the three months ended June 30, 1996, to $3.4 million for
the three months ended June 30, 1997. The increase in operating income and net
income was attributable primarily to higher production volumes.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1997
General. Houston Exploration's production increased 89% from 11,744
Mmcfe for the six months ended June 30, 1996 to 22,249 Mmcfe for the six
months ended June 30, 1997. The increase in production was attributable to
added production from both the TransTexas and the Soxco Acquisitions, which
were completed during the second half of 1996, combined with newly developed
offshore production brought on line during the the second quarter of 1997 and
the successful development drilling and workover programs begun in the latter
half of 1996 and continuing through the second quarter of 1997 on the Charco
Field properties acquired in the TransTexas Acquisition.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
121% from $21.3 million for the six months ended June 30, 1996 to $47.1 million
for the six months ended June 30, 1997 as a result of the 89% increase in
production combined with a 17% increase in average realized natural gas prices
from $1.78 per Mcf in the six months ended June 30, 1996 to $2.09 per Mcf in
the six months ended June 30, 1997.
As a result of hedging activities, the Company realized an average gas
price of $2.09 per Mcf for the six months ended June 30, 1997, compared to an
average price of $2.36 per Mcf that otherwise would have been received,
resulting in a $5.7 million decrease in natural gas revenues for the six month
period. For the six months ended June 30, 1996, the average realized gas price
was $1.78 per Mcf compared to an unhedged average gas price of $2.31, resulting
in a decrease to natural gas revenues of $6.0 million for the six month period.
Lease Operating Expenses. Lease operating expenses increased 122%
from $3.6 million for the six months ended June 30, 1996 to $8.0 million for
the six months ended June 30, 1997. On an Mcfe basis, lease operating expenses
increased 16% from $0.31 for the six months ended June 30, 1996 to $0.36 for
the six months ended June 30, 1997. The increase in lease operating expense for
the second half of 1997 is primarily attributable to properties acquired in the
TransTexas Acquisition combined with the effects of an industry-wide increase
in drilling and operating costs.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 106% from $11.6 million for the six months ended
June 30, 1996 to $23.9 million for the six months ended June 30, 1997.
Depreciation, depletion and amortization expense per Mcfe increased 9% from
$0.99 for the six months ended June 30, 1996 to $1.08 for the six months ended
June 30, 1997. The increase in expense was a result of the increased
production from acquired as well as newly developed properties combined with an
increased depletion rate. The increase in the depletion rate is attributable
to exploratory drilling in 1996 which did not add significant new reserves
combined with an industry wide increase in costs of drilling goods and
services, platform and facilities construction and transportation services.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.3 million and $0.5 million for the six month periods ended June
30, 1996 and 1997, respectively, increased 7% from $2.7 million for the six
months ended June 30, 1996 to $2.9 million for the six months ended June 30,
1997. The Company capitalized general and administrative expenses directly
related to oil and gas exploration and development activities of $2.4 million
and $3.4 million, respectively, for the six months ended June 30, 1996 and
1997. Aggregate general and administrative expense has increased from the first
half of 1996, and reflects the overall growth and expansion of the Company's
operations during the second half of 1996 and continuing through the first
quarter of 1997.
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<PAGE> 15
On an Mcfe basis, general and administrative expenses decreased 43% from $0.23
for the six months ended June 30, 1996 to $0.13 for the six months ended June
30, 1997. The lower rate per Mcfe during the first half of 1997 reflects the
increase in the Company's production during the first half of 1997.
Income Tax Provision. The provision for income taxes increased 102%
from a benefit of $0.03 million for the first six months of 1996 to an expense
of $3.1 million for the first six months of 1997 due to the increase in pretax
income.
Net Income. Operating income increased 223% to $12.6 million for the
six months ended June 30, 1997, an increase of $8.7 million compared to $3.9
million for the same period of 1996. Net income increased 225% or $6.3 million
from $2.8 million for the six months ended June 30, 1996, to $9.1 million for
the six months ended June 30, 1997. The significant increase in operating
income and net income was attributable primarily to higher production volumes
and higher net realized natural gas prices.
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.
Subsequent to the IPO, the Company has not received and does not anticipate
receiving capital contributions from Brooklyn Union.
The Company had $0.3 million in working capital and $61.9 million of
available borrowing base under its Credit Facility as of June 30, 1997. Net
cash provided by operating activities for the first six months of 1997 was
$32.7 million compared to $16.8 million for the same period of 1996. The
Company's cash position was increased during the period by borrowings of $35.5
million under the Company's Credit Facility. Funds used in investing and
financing activities consisted of $56.0 million for investments in property and
equipment and principal payments of $14.0 million on long-term borrowing under
the Credit Facility. As a result of these activities, cash and cash
equivalents decreased $0.3 million from $2.8 million at December 31, 1996 to
$2.5 million at June 30, 1997.
As of June 30, 1997, the Company has spent approximately $56 million
on exploration and development. As a result of the Company's continued
development drilling program in the Charco Field and the acceleration of
offshore exploratory drilling during the second half of 1997, the Company's
Board of Directors has approved an increase of $25 million to the initial
capital expenditure budget of $75 million for 1997. 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 remainder of the year. No significant
abandonment or dismantlement costs are anticipated through 1997. 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 June 30, 1997, the
borrowing base was $150 million, $86.5 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. 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
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<PAGE> 16
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 ($185.9 million as of June 30, 1997) and (ii) a total debt
to capitalization ratio of less than 55%. 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.
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<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
On April 27, 1997, the Company held its annual meeting of
stockholders. All matters brought for a vote before the
shareholders as listed in the Company's proxy statement were
approved:
1. The Company's Restated Certificate of Incorporation was amended to
remove the classification of the Board of Directors.
Votes For: 20,180,035 Votes Against: 2,159,106 Abstained: 700
2. The following eight Directors of the Company were elected to serve
until the Company's next annual meeting:
<TABLE>
<CAPTION>
DIRECTOR VOTES FOR VOTES WITHHELD
-------- --------- --------------
<S> <C> <C>
James G. Floyd 22,245,821 94,020
Robert B. Catell 22,328,821 11,020
Gordon F. Ahalt 22,333,941 5,900
Russell D. Gordy 22,328,816 11,025
Craig G. Matthews 22,328,621 11,220
James Q. Riordan 22,333,941 5,900
Lester H. Smith 22,334,236 5,605
Donald C. Vaughn 22,334,241 5,600
</TABLE>
3. The existing 1996 Stock Option Plan was approved so that grants under
such plan will remain exempt form a cap on deductible compensation
imposed by Section 162(m) of the Internal Revenue Code of 1986, as
amended.
Votes For: 19,805,002 Votes Against: 2,490,540 Abstained: 44,299
4. The appointment of Arthur Andersen LLP as the Company's independent
public accountants for the fiscal year ending December 31, 1997 was
ratified and approved.
Votes For: 22,339,091 Votes Against: 150 Abstained: 600
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Restated Certificate of Incorporation as amended
3.2 -- Restated Bylaws
10.1 -- Purchase and Sale Agreement dated January 1, 1997,
between The Houston Exploration Company and Keyspan
Natural Fuel, LLC
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
None.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HOUSTON EXPLORATION COMPANY
Date: July 31, 1997 By:/s/ James G. Floyd
---------------------------------------
James G. Floyd
President and Chief Executive Officer
Date: July 31, 1997 By:/s/ James F. Westmoreland
---------------------------------------
James F. Westmoreland
Vice President, Chief Accounting Officer,
Comptroller and Secretary
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<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation as amended
3.2 -- Restated Bylaws
10.1 -- Purchase and Sale Agreement dated January 1, 1997,
between The Houston Exploration Company and Keyspan
Natural Fuel, LLC
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 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 September 19, 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 2.47 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
The name of the Corporation is "The Houston Exploration Company."
ARTICLE II
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.
ARTICLE III
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.
-2-
<PAGE> 3
ARTICLE IV
Capitalization
Section 4.01. 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").
(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 4.02. 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;
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<PAGE> 4
(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;
(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
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<PAGE> 5
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 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 4.03. 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 4.04. 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
-5-
<PAGE> 6
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.
ARTICLE V
Directors
Section 5.01. 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 5.02. 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 5.03. 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.
-6-
<PAGE> 7
(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.
Section 5.04. 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 5.05. 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 5.06. Subject to Rights of Holders of Preferred Stock.
Notwithstanding the foregoing provisions of this Article V, 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 V, and such directors so elected need not be divided
into classes pursuant to this Article V unless expressly provided by the
provisions of such Preferred Stock Designation.
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<PAGE> 8
Section 5.07. 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 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 VI
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 VII
Actions and Meetings of Stockholders
Section 7.01. 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 7.02. 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.
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<PAGE> 9
(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.
(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 7.03. 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 VIII
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 IX
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 IX 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 X
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 X and of Articles V, VI and VII 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 5.07 or Article VIII
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 XI
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 September 18, 1996.
/s/ JAMES G. FLOYD
---------------------------------------------
James G. Floyd, President
/s/ JAMES F. WESTMORELAND
---------------------------------------------
James F. Westmoreland, Secretary
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<PAGE> 11
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO THE
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:
FIRST: That in lieu of a meeting and vote of directors, the Board of
Directors of the Corporation, by unanimous written consent filed with the
minutes of proceedings of the Board of Directors of the Corporation in
accordance with the provisions of Section 141(f) of the DGCL, adopted
resolutions approving and declaring advisable the following amendment to the
Certificate of Incorporation of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that Article V of the Restated
Certificate of Incorporation of the Corporation be amended to read in its
entirety as follows:
"ARTICLE V
Directors
Section 5.01. Number. 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.
Section 5.02. Term. All of the directors of the Corporation shall be
elected to serve for the term set forth in the Bylaws and, 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. Any director elected or
appointed to fill a vacancy shall hold office for the remaining term. No
decrease in the number of directors constituting the Corporation's Board of
Directors shall shorten the term of any incumbent director.
Section 5.03. 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.
<PAGE> 12
(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.
Section 5.04. 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 5.05. 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). Each director so appointed shall hold office for
the remainder of the term 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 5.06. Subject to Rights of Holders of Preferred Stock.
Notwithstanding the foregoing provisions of this Article V, 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 V.
Section 5.07. 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 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."
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<PAGE> 13
SECOND: That at the annual meeting of stockholders of the Corporation
on April 24, 1997, a two-thirds majority of the voting power of all outstanding
capital stock of the Corporation entitled to vote generally at an election of
directors voted in favor of such amendment, in accordance with the provisions
of Article X of the Company's Restated Certificate of Incorporation and Section
242 of the DGCL.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Sections 141 and 242 of the DGCL.
IN WITNESS WHEREOF, The Houston Exploration Company has caused this
Certificate of Amendment to its Restated Certificate of Incorporation to be
signed by its President and attested by its Secretary this 24th day of April,
1997.
Attest: THE HOUSTON EXPLORATION COMPANY
/s/ JAMES F. WESTMORELAND By: /s/ JAMES G. FLOYD
- --------------------------------- --------------------------------
James F. Westmoreland, Secretary James G. Floyd, President
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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", such term to
include the resolutions of the Board of Directors of the Corporation creating
any series of preferred stock, par value $0.01 per share, of the Corporation).
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 and Records
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.
Section 1.3. Books and Records. The books and records of the
Corporation may be kept at the Corporation's principal office in Houston, Texas
or at such other locations outside the State of Delaware as may from time to
time be designated by the Board of Directors.
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
<PAGE> 2
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.
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 total number of directors which the Corporation
would have if there were no vacancies (the "Whole Board"), 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 or the Certificate of Incorporation, 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. The Board of Directors may designate
the place of meeting (either within or without the State of Delaware) for any
meeting of Stockholders. If no designation is made by the Board of Directors,
the place of meeting shall be held at the principal executive office of the
Corporation.
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 9.1, 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.
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<PAGE> 3
(d) Any previously scheduled meeting of the Stockholders may be
postponed by resolution of the Board of Directors upon public notice given
prior to the time previously scheduled for such meeting.
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 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
voting power of the outstanding shares of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock"), 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) Election of directors at all meetings of
Stockholders at which directors are to be elected shall be by written ballot
and, except as otherwise provided in the Certificate of Incorporation, a
plurality of the votes cast thereat shall elect. Except as otherwise
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<PAGE> 4
provided by applicable law, the Certificate of Incorporation or these Bylaws,
all matters other than the election of directors submitted to the Stockholders
at any meeting shall be decided by a majority of the votes cast with respect.
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.
(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.
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
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<PAGE> 5
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.
(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
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<PAGE> 6
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.
Section 2.12. Inspectors of Election; Opening and Closing of Polls.
(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 the mandatory
provisions of 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.
(d) The chairman of the meeting may, and if required by the DGCL
shall, fix and announce at the meeting the date and time of the opening and the
closing of the polls for each matter upon which the Stockholders will vote at
the meeting.
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
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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
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. Nothing in this Section 2.13 shall entitle any Stockholder
to propose business for consideration at any special meeting of Stockholders.
(e) The chairman of any 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 or otherwise present any such proposal to Stockholders at a
meeting of Stockholders if the Board of Directors reasonably
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believes that the proponents thereof have not complied with Sections 13 and 14
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder, and the Corporation shall not
be required to include in its proxy statement to Stockholders any Stockholder
proposal not required to be included in its proxy statement to Stockholders in
accordance with the Exchange Act and such rules or regulations.
(g) Nothing in this Section 2.13 shall be deemed to affect any
rights of Stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 of the Exchange Act.
(h) 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.
Section 2.14. Action without Meeting. No action shall be taken by
Stockholders except at a 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. In
addition to the powers and authorities expressly conferred upon the Board of
Directors by these Bylaws, the Board of Directors 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 number of directors shall
be fixed from time to time exclusively pursuant to resolution adopted by a
majority of the Whole Board, but shall consist of not less than three nor more
than 15 directors, subject, however, to increases above 15 members as may be
required in order to permit the holders of any series of preferred stock of the
Corporation to elect directors under specified circumstances. 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. Election; Term of Office. (a) Subject to Sections 3.7
and 3.8, the directors shall be elected annually by Stockholders. Each
director shall hold office until his successor is elected and qualified or
until his earlier death, resignation or removal.
(b) Directors shall be elected by Stockholders only at annual
meetings of Stockholders, 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 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; provided, however, Stockholders may not nominate persons for
election to the Board of Directors at any special meeting of Stockholders unless
the business to be transacted at such special meeting, as set forth in the
notice of such meeting, includes the election of directors. Nominations by
Stockholders shall be made pursuant to timely notice in writing to the
Secretary. To be timely, a Stockholder's notice given in the context of an
annual meeting of Stockholders 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. To be timely, a Stockholder's notice given in the context of a special
meeting of Stockholders shall be delivered to or mailed and received at the
principal executive office of the Corporation not earlier than the ninetieth day
prior to such special meeting and not later than the close of business on the
later of the seventieth day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such special meeting. For purposes of the foregoing, "public
announcement" means the disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. 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:
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(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
Exchange Act 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);
(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.
(e) Nothing in this Section 3.4 shall be deemed to affect any
rights of Stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 of the Exchange Act.
(f) The chairman of a meeting of Stockholders shall have the
power and duty to determine whether a nomination was made in accordance with
the procedures set forth in this Section 3.4 and, if any nomination is not in
compliance with this Section 3.4, to declare that such defective nomination
shall be disregarded.
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.
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Section 3.6. Removal. No director 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 the voting power
of all outstanding Voting Stock, 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.
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 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. Each director so appointed shall hold
office 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 series of preferred stock of
the Corporation entitle the holders of such preferred stock, voting separately
by 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.
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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.
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 shall be called by the Secretary at the request of 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 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.
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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 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,
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. 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 (if any) or the Chief Executive Officer 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.
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Section 5.2. Other Committees. The Board of Directors may, by
resolution adopted by a majority of the Whole Board, 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.
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.
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
designate one member of each committee as chairman of such committee; provided,
however, that, except as provided in the following sentence, no person shall be
designated as chairman of the Executive Committee unless approved by a majority
of the Whole Board. 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.
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(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 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
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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.
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 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
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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.
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
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<PAGE> 18
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 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 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.
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(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.
(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
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<PAGE> 20
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.
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
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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 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
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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 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
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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 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
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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.
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
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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.
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.
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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.
Section 10.10. References/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. In these Bylaws, unless a contrary intention appears, all
references to Articles and Sections shall be deemed to be references to the
Articles and Sections of these Bylaws.
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; 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 the holders of not less than
66-2/3% of the voting power of all outstanding Voting Stock, 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 10.1
- --------------------------------------------------------------------------------
PURCHASE AND SALE AGREEMENT
between
THE HOUSTON EXPLORATION COMPANY, INC.
and
KEYSPAN NATURAL FUEL, LLC
Dated as of January 1, 1997
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C> <C>
1. Purchase and Sale . . . . . . . . . . . . . . . . . . . . . . . . 1
2. The Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Leases and Wells . . . . . . . . . . . . . . . . . . . . . 1
2.2 Incidental Rights . . . . . . . . . . . . . . . . . . . . 1
2.3 Excluded Assets . . . . . . . . . . . . . . . . . . . . . 2
3. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. Apportionment of Taxes and Production Revenues and Expenses . . . 2
6. Buyer's Representations and Warranties . . . . . . . . . . . . . . 3
6.1 Existence . . . . . . . . . . . . . . . . . . . . . . . . 3
6.2 Power and Authority . . . . . . . . . . . . . . . . . . . 3
6.3 Authorization . . . . . . . . . . . . . . . . . . . . . . 3
6.4 Execution and Delivery . . . . . . . . . . . . . . . . . . 3
6.5 Securities Laws . . . . . . . . . . . . . . . . . . . . . 3
6.6 Brokers' Fee . . . . . . . . . . . . . . . . . . . . . . . 3
7. Seller's Representations and Warranties . . . . . . . . . . . . . 3
7.1 Existence . . . . . . . . . . . . . . . . . . . . . . . . 3
7.2 Power and Authority . . . . . . . . . . . . . . . . . . . 4
7.3 Authorization . . . . . . . . . . . . . . . . . . . . . . 4
7.4 Execution and Delivery . . . . . . . . . . . . . . . . . . 4
7.5 Brokers' Fee . . . . . . . . . . . . . . . . . . . . . . . 4
7.6 Reserve Report . . . . . . . . . . . . . . . . . . . . . . 4
7.7 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.8 Title . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.9 Preferential Purchase Rights and Consents . . . . . . . . 6
7.10 No Prepayments . . . . . . . . . . . . . . . . . . . . . . 6
7.11 Gas Balancing . . . . . . . . . . . . . . . . . . . . . . 7
7.12 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.13 Operations in Progress . . . . . . . . . . . . . . . . . . 7
7.14 Hydrocarbon Sales Contracts . . . . . . . . . . . . . . . 7
7.15 Proceeds of Production . . . . . . . . . . . . . . . . . . 7
7.16 Material Contracts . . . . . . . . . . . . . . . . . . . . 7
7.17 Bills in the Ordinary Course . . . . . . . . . . . . . . . 7
7.18 Legal Proceedings . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
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<TABLE>
<S> <C> <C>
7.19 Compliance with Laws . . . . . . . . . . . . . . . . . . . 8
7.20 Environmental Matters . . . . . . . . . . . . . . . . . . 8
7.21 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . 8
7.22 Tax Partnerships . . . . . . . . . . . . . . . . . . . . . 8
7.23 Other Tax Matters . . . . . . . . . . . . . . . . . . . . 8
7.24. Condition . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9.1 Cooperation and Access . . . . . . . . . . . . . . . . . . 10
9.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 10
9.3 Subsequent Consents . . . . . . . . . . . . . . . . . . . 10
10. No Conditions to Closing . . . . . . . . . . . . . . . . . . . . . 10
11. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
11.1 Assignment and Option . . . . . . . . . . . . . . . . . . 10
11.2 Payment of Purchase Price . . . . . . . . . . . . . . . . 11
11.3 Management Agreement . . . . . . . . . . . . . . . . . . . 11
11.4 Non-Foreign Ownership Certificate . . . . . . . . . . . . 11
11.5 Additional Instruments . . . . . . . . . . . . . . . . . . 11
12. Post-Closing Matters . . . . . . . . . . . . . . . . . . . . . . . 11
12.1 Files and Records . . . . . . . . . . . . . . . . . . . . 11
12.2 Sales Taxes and Recording Fees . . . . . . . . . . . . . . 11
12.3 Purchase Price Adjustments for Defective Interests . . . . 11
12.4 Purchase Price Adjustment for Exercised Preferential
Purchase Rights and Failure to Obtain Consents . . . . . . 12
12.5 Allocation of Seller's Interest in Production . . . . . . 13
13. Apportionment of Liabilities and Obligations . . . . . . . . . . . 13
13.1 Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13.2 Seller . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.1 Buyer's Indemnification of Seller . . . . . . . . . . . . 13
14.2 Seller's Indemnification of Buyer . . . . . . . . . . . . 14
14.3 Third Party Claims . . . . . . . . . . . . . . . . . . . . 14
15. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 15
15.1 Further Assurances . . . . . . . . . . . . . . . . . . . . 15
15.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 15
15.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 15
15.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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<TABLE>
<S> <C> <C>
15.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . 15
15.6 Assignment . . . . . . . . . . . . . . . . . . . . . . . . 16
15.7 Binding Effect . . . . . . . . . . . . . . . . . . . . . . 16
15.8 Complete Agreement . . . . . . . . . . . . . . . . . . . . 16
15.9 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . 16
15.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . 16
15.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Leases - Part 1: Oklahoma
Part 2: Texas
Part 3: West Virginia
Exhibit B Wells (including WI, NRI, producing formation)
Exhibit C Form of Assignment of Oil and Gas Leases with Reservation of
Production Payment
Exhibit D Form of Option to Purchase Oil and Gas Interests
Exhibit E Form of Management Agreement and Memorandum of Management
Agreement for recording purposes
Exhibit F Form of Certificate of Non-Foreign Ownership
Exhibit G Reserve Report prepared by Miller & Lenz, Ltd. as of
December 31, 1996
</TABLE>
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<PAGE> 5
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement ("Agreement"), dated as of January 1, 1997, is
between THE HOUSTON EXPLORATION COMPANY, INC., a Delaware corporation
("Seller") and KEYSPAN NATURAL FUEL, LLC, a Delaware limited liability company
("Buyer").
RECITALS
A. Seller is the owner of certain oil and gas leasehold interests
in the states of Texas, West Virginia and Oklahoma, as more specifically
described below in Article 2 (the "Assets"); and
B. Seller desires to sell and Buyer desires to purchase the
Assets pursuant to the terms and conditions of this Agreement.
AGREEMENT
IN CONSIDERATION of the reservation of the"Production Payment"
(defined below) and "Reversionary Interest" (defined below) to be reserved by
Seller and the grant of the "Option" (defined below), and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Buyer agree as follows:
1. Purchase and Sale. Seller agrees to convey the Assets to
Buyer and Buyer agrees to purchase the Assets from Seller, all pursuant to the
terms and conditions of this Agreement. Seller will convey the Assets subject
to (i) the reservation by Seller of a production payment (the "Production
Payment"), reversionary interest ("Reversionary Interest") and other
reservations and obligations as specifically set forth in the Assignment of Oil
and Gas Leases With Reservation of Production Payment in a form substantially
similar to Exhibit C (the "Assignment"), and (ii) the Option To Purchase Oil
and Gas Interests to be granted to Seller at Closing in a form substantially
similar to Exhibit D (the "Option").
2. The Assets. The "Assets" shall be all of the following:
2.1 Leases and Wells. All of Seller's right, title and
interest in and to the oil and gas leases described in Exhibit A, including any
royalty, overriding royalty or other interests owned by Seller in such leases,
but insofar and only insofar as said leases and other interests cover (i) the
lands described in Exhibit A and (ii) the zone, horizon or interval described
in Exhibit B for each of the wells described in Exhibit B (the above described
interest in such leases being herein called the "Leases" and the above
described wells being herein called the "Wells");
2.2 Incidental Rights. All of Seller's right, title and
interest in and to the following, insofar and only insofar as same are
attributable to the Leases and the Wells:
(a) Unitization and Pooling Agreements. All presently
existing and valid oil, gas or mineral unitization, pooling, operating
and communitization agreements, declarations and
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<PAGE> 6
orders affecting the Leases and Wells, and in and to the properties
covered and the units created thereby (the "Unitization and Pooling
Agreements");
(b) Personal Property. The personal property and
fixtures that are appurtenant to the Leases, or the Wells, or the
Units, including all wells, casing, tubing, pumps, separators, tanks,
lines and other personal property and oil field equipment on such
Leases (the "Personal Property");
(c) Agreements. All presently existing and valid gas
sales, purchase, gathering and processing contracts and operating
agreements, joint venture agreements, partnership agreements, rights
of way, easements, permits, surface leases and other contracts,
agreements and instruments (the "Agreements").
Seller shall remain co-owners of any Unitization and Pooling Agreements,
Personal Property and Agreements to the extent they pertain to any property or
formation owned by Seller that is not exclusively part of, or applicable to,
the Wells or Leases.
2.3 Excluded Assets. The Assets do not include, and
Seller does not intend to convey, any of Seller's right, title or interest in
and to those interests set forth in Sections 2.2(a), (b) and (c), to the extent
such interests pertain to any property owned by Seller that is not associated
with the Leases or Wells. Notwithstanding the provisions of Section 2.2(a),
the Assets do not include any rights or interests in any well that is not
specifically described on Exhibit B or in the production from any such well.
3. Effective Date. The purchase and sale of the Assets shall be
effective, for all purposes, including allocation of revenue, expenses and
taxes, as of January 1, 1997 at 7:00 a.m. local time at the site of the Assets
(the "Effective Date").
4. Purchase Price. The purchase price for the Assets shall be
$1,360,000 (the "Purchase Price"). Buyer shall pay the Purchase Price to
Seller in immediately available funds at the Closing.
5. Apportionment of Taxes and Production Revenues and Expenses.
Buyer shall be entitled to revenue from the sale of hydrocarbons produced from
the Assets on or after the Effective Date. Buyer shall pay for costs and
expenses incurred with respect to the Assets on or after the Effective Date.
Seller shall be entitled to revenue from the sale of hydrocarbons produced from
the Assets before the Effective Date, and shall pay for costs and expenses
incurred with respect to the Assets prior to the Effective Date. Taxes
relating to the Assets, including ad valorem, property, production, severance
and other taxes (other than income taxes) shall be allocated in the same manner
as other expenses, with taxes that are measured by or that relate to production
being treated as expenses in connection with such production regardless of the
period for which such taxes are assessed.
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<PAGE> 7
6. Buyer's Representations and Warranties. Buyer makes the
following representations and warranties:
6.1 Existence. Buyer is a limited liability company,
duly organized and validly existing under the laws of the State of Delaware,
and Buyer is duly qualified to carry on its business, and is duly qualified and
in good standing, in each of the states in which the nature of its business and
activities requires it to be so qualified.
6.2 Power and Authority. Buyer has all requisite power
and authority to carry on its business as presently conducted, to enter into
this Agreement and each of the documents contemplated to be executed by Buyer
at Closing, and to perform its obligations under this Agreement and under such
documents. The consummation of the transactions contemplated by this Agreement
and each of the documents contemplated to be executed by Buyer at Closing will
not violate, nor be in conflict with, (i) any provision of Buyer's
organizational or governing documents, (ii) any agreement or instrument to
which Buyer is a party or is bound, or (iii) any judgment, decree, order,
statute, rule or regulation applicable to Buyer.
6.3 Authorization. The execution, delivery and
performance of this Agreement and each of the documents contemplated to be
executed by Buyer at Closing and the transactions contemplated hereby and
thereby have been duly and validly authorized by all requisite action on the
part of Buyer.
6.4 Execution and Delivery. This Agreement has been duly
executed and delivered on behalf of Buyer, and at the Closing all documents and
instruments required hereunder to be executed and delivered by Buyer shall have
been duly executed and delivered. This Agreement does, and such documents and
instruments shall, constitute legal, valid and binding obligations of Buyer
enforceable in accordance with their terms, subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application with respect to creditors, (ii) general principles of
equity and (iii) the power of a court to deny enforcement of remedies generally
based upon public policy.
6.5 Securities Laws. Buyer is purchasing the Assets for
Buyer's account, not for public distribution thereof, and Buyer shall not sell
or transfer all or any part of, or any interest in, the Assets in violation of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or the securities laws of any state.
6.6 Brokers' Fees. Buyer has incurred no liability,
contingent or otherwise, for brokers' or finders' fees relating to the
transactions contemplated by this Agreement for which Seller shall have any
responsibility whatsoever.
7. Seller's Representations and Warranties. Seller makes the
following representations and warranties:
7.1 Existence. Seller is a corporation duly organized
and validly existing under the laws of the State of Delaware, and Seller is
duly qualified to carry on its business, and is in good
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<PAGE> 8
standing, in the States of Texas, West Virginia and Oklahoma and is in good
standing in each jurisdiction in which the failure to qualify would have a
material adverse impact on the Assets or the transaction contemplated by this
Agreement.
7.2 Power and Authority. Seller has all requisite
corporate power and authority to carry on its business as presently conducted,
to enter into this Agreement and each of the documents contemplated to be
executed by Seller at Closing, and to perform its obligations under this
Agreement and under such documents. The consummation of the transactions
contemplated by this Agreement and each of the documents contemplated to be
executed by Seller at Closing will not violate, nor be in conflict with, (i)
any provision of Seller's certificate of incorporation, bylaws or governing
documents, (ii) any material agreement or instrument to which Seller is a party
or is bound, or (iii) any judgment, decree, order, statute, rule or regulation
applicable to Seller; provided that, Seller has or in good faith will use
reasonable efforts to secure (a) consents of or filings with the United States
Department of Interior or the applicable state agencies or authorities in
connection with the assignment of any federal or state leases or any interest
therein ("Governmental Consents"), (b) waivers of preferential rights to
purchase all or any portion of the Assets and consents to or notices of
assignment necessary to convey all or any portion of the Assets which are not
Governmental Consents, and (c) waivers of maintenance of uniform interest
provisions in applicable operating agreements; provided, however, Seller shall
not be required to commence or fund any litigation, or otherwise expend any
funds, to obtain any such third party consents.
7.3 Authorization. The execution, delivery and
performance of this Agreement and each of the documents contemplated to be
executed by Seller at Closing and the transactions contemplated hereby and
thereby have been duly and validly authorized by all requisite corporate action
on the part of Seller.
7.4 Execution and Delivery. This Agreement has been duly
executed and delivered on behalf of Seller, and all documents and instruments
required hereunder to be executed and delivered by Seller have been duly
executed and delivered. This Agreement does, and such documents and
instruments shall, constitute legal, valid and binding obligations of Seller
enforceable in accordance with their terms, subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application with respect to creditors, (ii) general principles of
equity and (iii) the power of a court to deny enforcement of remedies generally
based upon public policy.
7.5 Brokers' Fees. Seller has incurred no liability,
contingent or otherwise, for brokers' or finders' fees relating to the
transactions contemplated by this Agreement for which Buyer shall have any
responsibility whatsoever.
7.6 Reserve Report. The term "Reserve Report" shall mean
the reserve report prepared on behalf of Seller by Miller & Lenz, Ltd. and
based on reserves as of December 31, 1996, and attached hereto as Exhibit G.
To Seller's best knowledge, the average price for sales of hydrocarbons (based
on contract prices for existing effective contracts and estimates of spot
prices adjusted for transportation costs), historical costs of operations,
production volumes, payout data, pressure and test data, and other historical
information used in the preparation of the Reserve Report
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<PAGE> 9
were, on the dates so used, accurate in all material respects and Seller has no
reason to question the estimations set forth in the Reserve Report. The
Reserve Report covers only the Wells. The working interests ("WI") and net
revenue interest ("NRI") for each Well set forth on Exhibit B are the same as
the working interests and net revenue interests in such Wells used to prepare
the Reserve Report. To Seller's best knowledge, since the reserve report was
prepared, there have been no material adverse changes affecting the Assets
other than (i) depletion through normal production within authorized allowables
in accordance with normal and expected production declines, (ii) depreciation
of equipment and other personal property through ordinary wear and tear, and
(iii) general industry-wide conditions, including without limitation, changes
in the prices of hydrocarbons.
7.7 Liens. Except for the burdens and obligations
created by or arising under the Leases and except for Permitted Encumbrances,
the Assets are free and clear of all Encumbrances. As used herein, the term
"Encumbrances" shall mean all royalties, overriding royalties, production
payments, debts, liens, mortgages, security interests, claims, obligations and
encumbrances. Except to the extent that such "Permitted Encumbrances" reduce
Seller's interest in the production from the Wells to less than the NRI set
forth on Exhibit B, as used herein, the term "Permitted Encumbrances" shall
mean the following:
(i) the burdens, encumbrances and obligations created by
or arising under the Leases and all royalties, overriding royalties,
net profits interests, carried interests, reversionary interests,
back-in rights and other burdens to the extent that the foregoing do
not increase the share of costs that Seller is obligated to pay to
more than the WI, or reduce Seller's interest in production to less
than the NRI set forth in Exhibit B for the Wells;
(ii) all rights to consent by, required notices to, filing
with, or other actions by governmental entities in connection with the
sale or conveyance of the Assets if the same are customarily obtained
subsequent to such sale or conveyance;
(iii) rights of reassignment upon surrender of the Leases
held by predecessors in interest to Seller;
(iv) easements, rights-of-way, servitudes, permits,
licenses, surface leases and other rights in respect of surface use to
the extent these do not materially interfere with operations or
production on or from the Assets;
(v) rights and regulatory powers reserved to or vested in
any municipality or governmental, statutory or public authority;
(vi) all Agreements as defined in Section 2.2(c) to the
extent such Agreements are ordinary and customary in the oil and gas
exploration, developing, processing and extraction business and do
not increase the share of costs which Seller is obligated to pay to
more than the WI, or reduce Seller's interest in production from the
Wells to less than the NRI, set forth on Exhibit B for the Wells (the
"Material Agreements");
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<PAGE> 10
(vii) any (x) undetermined or inchoate liens or charges
constituting or securing the payment of expenses which were incurred
incidental to maintenance, development, production or operation of the
Assets or for the purpose of developing, producing or processing oil,
gas or other hydrocarbons therefrom or therein and (y) materialman's,
mechanics', repairman's, employees', contractors', operators' or other
similar liens, security interests or charges for liquidated amounts
arising in the ordinary course of business incidental to construction,
maintenance, development, production or operation of the Assets or the
production or processing of oil, gas or other hydrocarbons therefrom,
that are not delinquent and that will be paid in the ordinary course
of business or, if delinquent, that are being contested in good faith;
(viii) any liens for taxes not yet delinquent or, if
delinquent, that are being contested in good faith in the ordinary
course of business;
(ix) all liens, charges, encumbrances, contracts,
agreements, instruments, obligations, defects, irregularities and
other matters affecting any Asset which individually or in the
aggregate are not such as to interfere materially with the operation,
value or use of such Asset.
7.8 Title. Seller has Defensible Title to the Assets.
The term "Defensible Title" to the Assets means such record and beneficial
title of Seller that (i) entitles Seller to receive an interest in production
from the Wells not less than the NRI in the Wells as set forth on Exhibit B
throughout the productive life of each Well, (ii) obligates Seller to pay a
share of the costs of developing and operating the Wells not greater than the
WI as set forth on Exhibit B, (iii) entitles Seller to own such interest in the
Wells under applicable state law and for federal income tax purposes, and (iv)
is free and clear of any Encumbrances, except for the Permitted Encumbrances.
Any Asset for which Seller has less than Defensible Title shall be called a
"Defective Interest." Any title defect or other deficiency which causes Seller
not to have Defensible Title to an Asset is called a "Title Defect". Buyer's
exclusive remedy for Seller's breach of this representation and warranty is set
forth in Section 12.3 of this Agreement and Section 4.8 of the Assignment.
7.9 Preferential Purchase Rights and Consents. To
Seller's best knowledge, except as set forth in Part 1 of Exhibit G, there do
not exist any preferential rights to purchase all or any portion of the Assets.
To Seller's best knowledge, except for Governmental Consents and as set forth
in Part II of Exhibit G, there are no consents or waivers necessary to convey
any material portion of the Assets pursuant to this Agreement. Buyer's
exclusive remedy for Seller's breach of this representation and warranty is set
forth in Section 12.4.
7.10 No Prepayments. To Seller's best knowledge, Seller
is not obligated, by virtue of a prepayment arrangement, a "take or pay"
arrangement, a production payment, hedging or any other arrangement, to deliver
any material portion of hydrocarbons produced from the Assets at some future
time without then or thereafter receiving full payment therefor.
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<PAGE> 11
7.11 Gas Balancing. To Seller's best knowledge, no
material portion of hydrocarbons produced from the Assets are subject to a gas
imbalance or other arrangement requiring delivery of hydrocarbons without
receiving full payment therefor.
7.12 Leases. To Seller's best knowledge, all royalties,
rentals and other payments due by Seller under the Leases have been properly
and timely paid except where the failure to pay same will not have a material
adverse effect on the value of the particular Asset. To Seller's best
knowledge, all Leases are presently in full force and effect. To Seller's best
knowledge, Seller has not received a written notice of material default under
any Lease that could result in cancellation of the Lease.
7.13 Operations in Progress. To Seller's best knowledge,
as of the date of this Agreement, there are no operations in progress with
respect to the Assets which are reasonably expected to exceed [$35,000] per
project in cost net to Seller's interest and which shall be payable in whole or
in part on or after the Effective Date.
7.14 Hydrocarbon Sales Contracts. To Seller's best
knowledge, no material portion of the hydrocarbons produced from the Assets are
subject to a sales contract or other agreement relating to the production,
gathering, transporting, processing, treating or marketing of hydrocarbons
except those which can be terminated by Seller upon not more than three months
notice, and no person has any call upon, option to purchase or similar rights
with respect to any material portion of the Assets or to the production
therefrom.
7.15 Proceeds of Production. To Seller's best knowledge,
Seller is currently receiving from all purchasers of production from the Assets
at least the NRI set forth in Exhibit B without suspense or any indemnity other
than the normal division order warranty of title, the nonreceipt of which would
have a material adverse effect on the value of the Assets.
7.16 Material Contracts. To Seller's best knowledge, the
Material Agreements are in full force and effect. Seller has not received
written notices of material default under the Material Agreement that remains
uncured, and no material default exists in the performance by any party of its
obligations under any Material Agreement.
7.17 Bills in the Ordinary Course. In the ordinary course
of business and to Seller's best knowledge, Seller is current on its payments
for all costs and expenses pertaining to the Assets, except where such payments
are being contested with good faith or except where the failure to make such
payments would not have a material adverse effect on the Assets.
7.18 Legal Proceedings. No suit, action or other
proceeding is pending against Seller or, to Seller's best knowledge, threatened
in writing against Seller before any court, governmental agency, arbitrator or
other panel that relates to the Assets or the transaction contemplated by this
Agreement that might (i) impair Seller's ability to consummate the transaction
contemplated by this Agreement or (ii) cause the impairment or loss of Seller's
title to any material portion of the Assets or the value thereof or (iii)
hinder or impede the operation or enjoyment of the Leases in any material
respect insofar as they relate to the Assets.
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<PAGE> 12
7.19 Compliance with Laws. To Seller's best knowledge,
all laws, rules, regulations, ordinances and orders (of all governmental and
regulatory bodies having authority over the Assets) material to the operation
of the Assets have been complied with in all material respects.
7.20 Environmental Matters. To Seller's best knowledge,
no conditions exist on or in connection with the Assets that would subject
Seller or Buyer to any damages, remedial action, injunctive relief or other
liability under any Environmental Laws, including without limitation, all costs
associated directly or indirectly with cleanup, removal, closure or other
response actions. Seller and its predecessors have obtained and are in
material compliance with all Environmental Laws and all material permits,
licenses and approvals required under Environmental Laws.
As used herein, the term "Environmental Laws" shall mean any
and all existing laws (common or statutory), rules, regulations, codes, or
ordinances issued or promulgated by any federal, state or local governmental
entity relating to the management and disposal of waste materials, the
protection of public or employee health and safety, the cleanup, remediation or
prevention of pollution, or the protection of the environment.
7.21 Payment of Taxes. To Seller's best knowledge, all ad
valorem, property, production, severance, excise and similar taxes and
assessments based on or measured by the ownership of property or the production
of hydrocarbons or the receipt of proceeds therefrom on the Assets which are
currently due and payable have been properly and timely paid, except to the
extent such taxes are being contested in good faith in the ordinary course of
business.
7.22 Tax Partnerships. No portion of the Assets (i) has
been contributed to and is currently owned by a tax partnership; (ii) is
subject to any form of agreement (whether formal or informal, written or oral)
which has been determined by any state or federal tax statute, rule or
regulation to be or to have created a tax partnership; or (iii) otherwise
constitutes "partnership property" (as that term is used throughout Subchapter
K of Chapter 1 of Subtitle A of the Code) of a tax partnership. For purposes
of this Section 7.22, a "tax partnership" is any entity, organization or group
deemed to be a partnership within the meaning of Section 761 of the Code or any
similar state or federal statute, rule or regulation, and that is not excluded
from the application of the partnership provisions of Subchapter K of Chapter 1
of Subtitle A of the Code and of all similar provisions of state tax statutes
or regulations by reason of elections made, pursuant to Section 761(a) of the
Code and all such similar state or federal statutes, rules and regulations, to
be excluded from the application of all such partnership provisions.
7.23 Other Tax Matters.
(a) NGPA Determination. Seller or its
predecessor in interest has filed or caused to be filed with the applicable
state and/or federal agencies "Applications" for well determination for each
Well under the Natural Gas Policy Act of 1978, as amended (the "NGPA") and the
rules and regulations of the Federal Energy Regulatory Commission (the "FERC")
under such act (the "NGPA Regulations") requesting a determination that all or
a quantifiable portion of the gas produced from a particular Well is "natural
gas produced from designated tight formations" or natural gas produced from
Devonian Shale as defined in 18 C.F.R. 274.205(e). Each such
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<PAGE> 13
application has been approved by the indicated state and/or federal agency and
by the FERC and has been finally approved under and in accordance with Section
503 of the NGPA. Such applications comply with the requirements of the NGPA
and the NGPA Regulations and do not (1) contain any untrue statement of
material fact or (2) omit any statement of material fact necessary to make the
statements therein not misleading. No further applications are required under
the NGPA and the NGPA Regulations to allow the legal sale of all gas produced
from the Assets at a price equal to the price for such gas currently being
received. Production from qualifying formations which is commingled with
production from non-qualifying formations has been allocated on a reasonable
basis.
(b) Wells. Each Well producing from a tight sand
formation was spud and continuously drilled into the qualifying tight sand
formation after November 5, 1990 and prior to January 1, 1993. In certain
instances, the Wells may penetrate unexploited tight sand formations uphole of
current producing zones which should qualify as tight sand formations in
accordance with Situation 1 of Revenue Ruling 93-54. Each well producing gas
from Devonian shale was drilled after December 31, 1979 and before January 1,
1993. The hydrocarbons produced from each Well are "qualifying fuels" within
the meaning of Code Section 29(c).
(c) No Qualified Production prior to January 1,
1980. Prior to January 1, 1980, there was no production of oil or gas from,
nor were any wells drilled or completed on, the "property" (within the meaning
of Section 29 of the Code) on which any Well is located nor was any portion of
any such "property" included within a unit from which oil or gas was produced
or in which any wells were drilled or completed prior to such date.
(d) No Enhanced Oil Recovery Credit. No oil or
gas produced from the Wells qualifies or has qualified for (i) the enhanced oil
recovery credit or any other credit under Section 43 of the Code and none has
been claimed or taken on such oil or gas or (ii) the credit allowed under
Section 38 of the Code by reason of the energy percentage with respect to
property used in the project.
(e) No Government Financing. No portion of any
drilling, equipping, seismic or other development costs of the Assets paid by
Seller were financed by any state, local or federal agency, directly or
indirectly, including by way of grant, loan, expenditure or loan guaranty.
(f) Production Payment. The Production Payment
to be retained by Seller is expected to expire, when 73.7% of the original
estimated recoverable reserves in place on the Effective Date attributable to
the Leases have been produced.
(g) Seller Status. Seller is not a nonresident
alien, foreign corporation, foreign partnership, foreign trust or foreign
estate (as those terms are defined in the Code and the rules and regulations
promulgated thereunder), and Seller shall deliver to Buyer a certificate of
non-foreign ownership in the form of Exhibit F.
(h) Tax Ownership. Buyer will be treated as the
owner of the Assets for federal income tax purposes.
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<PAGE> 14
Buyer's sole and exclusive remedy for breach of any of the representations and
warranties in this Section 7.23 is set forth in Section 4.8 of the Assignment.
7.24. Condition. To the best of Seller's knowledge, each
Well has been drilled, completed, equipped and maintained in all material
respects in a good and workmanlike manner in accordance with good oilfield
practices, and to Seller's knowledge there is no material hazardous or
dangerous condition existing with respect to any Well, equipment or facilities
which are part of the Assets.
8. Tax Status. Seller and Buyer intend that the Production
Payment shall constitute debt for federal income tax purposes.
9. Covenants.
9.1 Cooperation and Access. Following execution of this
Agreement, Seller shall cooperate fully with Buyer's post-signing due diligence
efforts, both at Seller's offices and at the sites of the Assets.
9.2 Insurance. At or prior to Closing, Seller shall
cause Buyer to be named as an additional insured on all insurance policies
Seller has that pertain in any way to the ownership and operation of the
Assets. Upon request, Seller will provide Buyer Certificates of Insurance
naming Buyer as an additional insured, or other evidence, satisfactory to
Buyer, of compliance with this section.
9.3 Subsequent Consents. Notwithstanding the further
assurances provisions of Section 15.1, following execution of this Agreement,
Seller shall use reasonable efforts to obtain such subsequent consents as may
be required from third -parties with whom Seller has contractual privity to
allow the parties hereto to experience the benefits of the transactions
contemplated hereunder; provided, however, Seller shall not be required to
commence or fund any litigation, or otherwise expend any funds, to obtain any
such third party consents.
10. No Conditions to Closing. Other than securing the execution
and delivery of the documents which are contemplated to be executed and
delivered by it pursuant to Section 11, there are no conditions to Closing.
11. Closing. The consummation of the transactions contemplated
hereby (the "Closing") shall occur, either in person or by facsimile, at the
offices of Seller in Houston, Texas on or before March 31, 1997 (the "Closing
Date") beginning at 11:00 a.m. or at such other time and place as the parties
may agree to in writing. At Closing, the following events shall occur, each
being a condition precedent to the others and each being deemed to have
occurred simultaneously with the others (except where the documents involved
indicate otherwise):
11.1 Assignment and Option. Seller and Buyer shall
execute and deliver the Assignment and the Option. In addition, Seller shall
prepare within a reasonable period of time and Seller and Buyer shall execute
such other conveyances on official forms and related documentation
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<PAGE> 15
necessary to transfer the Assets to Buyer in accordance with requirements of
governmental regulations; provided, however, that any such separate or
additional conveyances required pursuant to this Section 11.1 or pursuant to
Section 15.1 (i) shall evidence the conveyance and assignment of the Assets
made or intended to be made in the Assignment, (ii) shall not modify or be
deemed to modify any of the terms, reservations, covenants and conditions set
forth in the Assignment, and (iii) shall be deemed to contain all of the terms,
reservations and provisions of the Assignment, as though the same were set
forth at length in such separate or additional conveyance.
11.2 Payment of Purchase Price. Buyer shall deliver the
Purchase Price by wire transfer to Seller's account in accordance with written
instructions supplied by Seller.
11.3 Management Agreement. Seller and Buyer shall execute
and deliver the Management Agreement and Memorandum of Management Agreement
(collectively, the "Management Agreement") substantially in the form attached
hereto as Exhibit E.
11.4 Non-Foreign Ownership Certificate. Seller shall
deliver to Buyer a certificate of non-foreign ownership substantially in the
form of Exhibit F.
11.5 Additional Instruments. Seller and Buyer shall
execute, acknowledge and deliver to each other such additional instruments as
are reasonable and customary to accomplish the purposes of this Agreement.
12. Post-Closing Matters.
12.1 Files and Records. Following Closing, Seller shall
retain physical possession of all lease files, land files, division order
files, production marketing files and production records in Seller's possession
relating to the Assets (the "Records"). However, except to the extent that
Buyer's inspection thereof would violate legal constraints or legal
obligations, Buyer shall have the right to inspect the Records in Seller's
offices at any reasonable time. At Buyer's request in writing (which written
request may be delivered by fax), to the extent that Seller's delivery thereof
would not violate legal constraints or legal obligations, Seller shall make
copies of the Records or materials in the Records at Seller's expense and shall
deliver said copies to Buyer at Seller's expense, provided that Seller may
charge Buyer the actual costs for such copies and delivery if such costs exceed
$250 per request. If Buyer requires copies of the Records for its own account,
Seller will permit Buyer, at Buyer's own expense, to make copies of pertinent
material contained in the Records to the extent such action would not violate
legal constraints or legal obligations.
12.2 Sales Taxes and Recording Fees. Seller shall pay all
taxes and fees occasioned by the sale of the Assets, including without
limitation, any transfer fees and sales taxes, and any documentary, filing and
recording fees required in connection with the filing and recording of any
assignments delivered hereunder.
12.3 Purchase Price Adjustments for Defective Interests.
In addition to the remedy provisions of Section 4.8 of the Assignment, Buyer
shall be entitled to the following rebate if Seller does not have Defensible
Title to any Assets and Seller has not cured the Title Defect causing such
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<PAGE> 16
Asset to be a Defective Interest within 30 days after notice from Buyer. At
any time and from time to time, if Buyer discovers that Seller has breached the
representations and warranties in Section 7.8 or 7.12, Buyer may give Seller a
Notice of Defective Interests, which notice shall describe the Defective
Interest, the Title Defect, and the value of the Title Defect. Buyer shall be
entitled to a rebate in the Purchase Price for a Title Defect which shall be
equal to the product obtained by multiplying the Purchase Price by a fraction,
the numerator of which is the volume of reserves allocated to the Title Defect
(which shall be determined in the manner described below) and the denominator
of which is the total volume of reserves allocated to all of the Assets in the
Reserve Report. The volume of reserves allocated to the Title Defect shall be
determined by multiplying the volume of reserves allocated to the affected Well
in the Reserve Report by a fraction, the numerator of which is the reduction in
the NRI in such Well resulting from the Title Defect and the denominator of
which is the NRI specified for such Well in Exhibit B; provided, however, that
if the Title Defect does not remain in effect during the entire productive life
of the subject Well, such fact shall be taken into account in determining the
value of the Title Defect. In addition to the payments and adjustments
pursuant to the foregoing provisions of this Section 12.3 and Section 4.8 of
the Assignment, Seller shall also protect, defend, indemnify and hold Buyer,
its employees, representatives, agents, successors and assigns harmless from
and against any and all claims, demands and causes of action asserted by any
third party relating to the Defective Interests. THIS INDEMNITY SHALL INCLUDE
ANY LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENCE
(BUT NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY LOSSES INCURRED
BY ANY INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE, REGULATION OR THEORY
OF STRICT LIABILITY.
12.4 Purchase Price Adjustment for Exercised Preferential
Purchase Rights and Failure to Obtain Consents. If the representation and
warranty in Section 7.9 is breached and such breach is not cured by Seller
within 30 days after notice in writing from Seller, then in addition to the
remedy provisions of Section 4.8 of the Assignment, , a portion of the Purchase
Price shall be rebated for the value of such affected Asset and such affected
Asset shall be excluded from the Assets conveyed to Buyer pursuant to the terms
hereof (collectively the "Excluded Assets"). The amount of the rebate in the
Purchase Price for an Excluded Asset shall be determined in accordance with the
provisions of Section 12.3. In addition to the payments and adjustments
pursuant to the foregoing provisions of this Section 12.4 and Section 4.8 of
the Assignment, Sellers shall also protect, defend, indemnify and hold Buyer,
its agents, employees, representatives, successors and assigns harmless from
and against any and all claims, demands, and causes of action asserted by any
third party relating to the Excluded Assets. THIS INDEMNITY SHALL INCLUDE ANY
LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENCE (BUT
NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY LOSSES INCURRED BY
ANY INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE, REGULATION OR THEORY OF
STRICT LIABILITY, EXCLUDING, HOWEVER, ANY SUCH LOSSES RESULTING SOLELY FROM (i)
THE PHYSICAL PRESENCE ON THE ASSETS OF ANY (y) ANY EMPLOYEE OF BUYER, OR (z)
ANY PERSON ACTING AT THE EXPRESS DIRECTION OF BUYER, OR ANY EMPLOYEE, AGENT OR
REPRESENTATIVE OF BUYER (OTHER THAN MANAGER, ANY OPERATOR SUPERVISED BY MANAGER
OR ANY AGENT, CONTRACTOR, SUBCONTRACTOR, VENDOR OR SUPPLIER OF MANAGER OR
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<PAGE> 17
OF ANY OPERATOR SUPERVISED BY MANAGER), OR (ii) THE NEGLIGENCE OF BUYER
OCCURRING AFTER THE TERMINATION OF THE MANAGEMENT AGREEMENT.
12.5 Allocation of Seller's Interest in Production. If
Seller has interests in the lands covered by the Leases that are not part of
the Assets ("Seller's Interests"), and such Seller's Interests are actually
producing hydrocarbons into a Well and such hydrocarbons are commingled with
the hydrocarbons produced from the Assets, Seller shall use reasonable efforts
to ensure that hydrocarbons attributable to Seller's Interests and to the
Assets are allocated in a reasonable and prudent manner.
13. Apportionment of Liabilities and Obligations.
13.1 Buyer. Upon Closing, subject to Seller's
indemnification obligation set forth in Section 14.2 and the terms of the
Management Agreement, Buyer shall assume and pay for all costs, expenses,
liabilities and obligations accruing or relating to the owning, operating or
maintaining of the Assets or the producing, transporting and marketing of
hydrocarbons from the Assets, relating to periods on and after the Effective
Date, including without limitation, all obligations arising under the Permitted
Encumbrances (collectively, the "Post-Effective Date Liabilities"); provided,
however, that Buyer shall not assume any obligations and shall have no
liability (contingent or otherwise) whatsoever with respect to the defective
portion of any Defective Interests or any Excluded Assets.
13.2 Seller. Upon Closing, Seller shall retain, assume
and pay for all costs, expenses, liabilities and obligations accruing or
relating to the owning, operating or maintaining of the Assets or the
producing, transporting and marketing of hydrocarbons from the Assets, relating
to periods before the Effective Date, including without limitation,
environmental obligations and liabilities arising out of any event, condition
or matter occurring or in existence on or prior to the Closing Date involving
Environmental Matters, the obligation to plug and abandon wells, off site
liabilities associated with the Assets, and all obligations arising under
agreements covering or relating to the Assets (collectively, the "Pre-Effective
Date Liabilities"). For purposes of this Agreement, "Environmental Matter"
shall mean any event, condition or matter relating to Environmental Laws or the
release of materials into the environment or protection of the environment or
health.
14. Indemnification. For the purposes of this Agreement, "Losses"
shall mean any actual loss, cost and expense (including reasonable fees and
expenses of attorneys, technical experts and expert witnesses), liability, and
damage (including those arising out of demands, suits, sanctions of every kind
and character); provided, however, that in no event shall "Losses" be deemed to
include consequential damages involving lost profits or loss of tax credits..
14.1 Buyer's Indemnification of Seller. Subject to the
terms of and the indemnification obligations contained in Section 14.2 and the
terms of the Management Agreement, Buyer shall indemnify and hold harmless
Seller, its officers, directors, shareholders, employees, representatives,
agents, successors and assigns, forever, from and against all Losses and
interest
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<PAGE> 18
thereon which arise from or in connection with (i) the Post-Effective Date
Liabilities, and (ii) the Buyer's breach by Buyer of any of its
representations, warranties or covenants in this Agreement.
14.2 Seller's Indemnification of Buyer. Seller shall
indemnify and hold harmless Buyer, its officers, directors, members, employees,
representatives, agents, successors and assigns, forever, from and against all
Losses and interest thereon which arise from or in connection with (i) the
Pre-Effective Date Liabilities, (ii) breach by Seller of any of its
representations, warranties or covenants in this Agreement regardless of
Seller's knowledge if such representations and warranties are knowledge
qualified, and (iii) any event, condition or matter, including Environmental
Matters, occurring or in existence on or prior to the Closing Date in
connection with the ownership or operation of the Assets. THIS INDEMNITY SHALL
INCLUDE ANY LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE
NEGLIGENCE (BUT NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY
LOSSES INCURRED BY ANY INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE,
REGULATION OR THEORY OF STRICT LIABILITY. NOTWITHSTANDING ANYTHING TO THE
CONTRARY CONTAINED IN THIS SECTION 14.2, THIS SECTION 14.2 SHALL NOT APPLY TO
BREACH OF ANY REPRESENTATION OR WARRANTY FOR WHICH AN EXCLUSIVE REMEDY IS
EXPRESSLY SET FORTH IN SECTION 12.3 OR 12.4 OF THIS AGREEMENT OR SECTION 4.8 OF
THE ASSIGNMENT.
14.3 Third Party Claims. If a claim by a third party is
made against Seller or Buyer (an "Indemnified Party"), and if such party
intends to seek indemnity with respect thereto under this Section 14, such
Indemnified Party shall promptly notify Buyer or Seller, as the case may be
(the "Indemnitor"), of such claims. The Indemnitor shall have 30 days after
receipt of such notice to undertake, conduct and control, through counsel of
its own choosing and at its own expense, the settlement or defense thereof, and
the Indemnified Party shall cooperate with it in connection therewith; provided
that the Indemnitor shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by such Indemnified Party,
however, the fees and expenses of such counsel shall be borne by such
Indemnified Party. So long as the Indemnitor, at Indemnitor's cost and
expense, (1) has undertaken the defense of, and assumed full responsibility for
all Losses with respect to, such claim, and (2) is reasonably contesting such
claim in good faith, by appropriate proceedings, the Indemnified Party shall
not pay or settle any such claim. Notwithstanding compliance by the Indemnitor
with the preceding sentence, the Indemnified Party shall have the right to pay
or settle any such claim, provided that in such event it shall waive any right
to indemnity therefor by the Indemnitor for such claim. If, within thirty (30)
days after the receipt of the Indemnified Party's notice of a claim of
indemnity hereunder, the Indemnitor does not notify the Indemnified Party that
it elects, at Indemnitor's cost and expense, to undertake the defense thereof
and assume full responsibility for all Losses with respect thereto, or gives
such notice and thereafter fails to contest such claim in good faith, the
Indemnified Party shall have the right to contest, settle or compromise the
claim but shall not thereby waive any right to indemnity therefor pursuant to
this Agreement.
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<PAGE> 19
15. Miscellaneous.
15.1 Further Assurances. After Closing, Seller and Buyer
shall execute, acknowledge and deliver or cause to be executed, acknowledged
and delivered such instruments and take such other action as may be reasonably
necessary or advisable to carry out the purposes and intents of this Agreement
and any document, certificate or other instrument delivered pursuant hereto.
15.2 Expenses. Each party shall bear and be liable for
its own direct and indirect expenses incurred in connection with the
negotiation and preparation of this Agreement and the consummation and
performance of the transactions contemplated by this Agreement. Without
limitation, such expenses shall include the fees and expenses of all attorneys,
accountants, financial advisers and other professionals incurred in connection
herewith.
15.3 Notices. All notices under this Agreement shall be
in writing and addressed as set forth below. Any communication or delivery
hereunder shall be deemed to have been duly made and the receiving party
charged with notice (i) if personally delivered or telecopied, when received,
(ii) if mailed, three business days after mailing, certified mail, return
receipt requested, or (iii) if sent by overnight courier, one day after
sending. All notices shall be addressed as follows:
If to Seller: The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attn: Thomas W. Powers
Telephone: (713) 652-2847
Fax: (713) 652-4017
If to Buyer: KeySpan Natural Fuel, LLC
One Metrotech Center
Brooklyn, New York 11201
Attention: Zain Mirza
Telephone: (718) 403-2260
Fax: (718) 858-6431
Any party may, by written notice so delivered to the other
party, change the address or individual to which delivery shall thereafter be
made.
15.4 Survival. The representations, warranties,
covenants, agreements and indemnities included or provided in this Agreement
shall survive Closing.
15.5 Confidentiality. Buyer and Seller shall keep this
Agreement confidential except to the extent each may be required to disclose
the contents hereof by recording the Assignment, Option and Memorandum of
Management Agreement in the real property records in
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<PAGE> 20
the counties in which the Assets are located or filing the official forms of
conveyance covering the Assets with appropriate governmental authorities, or to
the extent required in the operation of the Assets or pursuant to the
Management Agreement, by law, regulation or order, or in the ordinary course of
business whenever required or appropriate in the judgment of either party.
15.6 Assignment. Neither party may assign its rights or
delegate its duties or obligations under the terms of this Agreement without
the prior written consent of the other party which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Buyer may assign its
rights or delegate its duties or obligations to any of its Affiliates (as
defined in the Assignment) without the consent of Seller.
15.7 Binding Effect. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their successors and,
subject to Section 15.7, their assigns.
15.8 Complete Agreement. When executed by the authorized
representative of Seller and Buyer, this Agreement, the Exhibits hereto and the
documents to be delivered pursuant hereto shall constitute the complete
agreement between the parties. This Agreement may be amended only by a writing
signed by both parties.
15.9 Knowledge. As used in this Agreement, the term
"knowledge" shall mean the actual knowledge of any fact, circumstance or
condition by the officers or employees at a manager or higher level of the
party involved as such knowledge has been obtained in the performance of their
duties in the ordinary course of business after making reasonable and
appropriate inquiries.
15.10 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK EXCEPT TO
THE EXTENT THE LAWS OF ANY OTHER STATE ARE MANDATORILY APPLICABLE.
15.11 Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other party.
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<PAGE> 21
EXECUTED as of the date first above mentioned.
BUYER:
KEYSPAN NATURAL FUEL, LLC
By: /s/ ZAIN MIRZA
-------------------------------------
Zain Mirza
Chief Financial Officer
SELLER:
THE HOUSTON EXPLORATION COMPANY, INC.
By: /s/ THOMAS W. POWERS
-------------------------------------
Thomas W. Powers
Senior Vice President
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<PAGE> 22
EXHIBIT A
TO
PURCHASE AND SALE AGREEMENT
LEASES
Part 1: Oklahoma
The following oil and gas leases covering lands in Latimer and Le Flore
Counties, Oklahoma.
[EXHIBIT A, PART 1 HAS BEEN OMITTED AS IT CONTAINS A LEGAL DESCRIPTION OF ALL
OKLAHOMA LEASES]
<PAGE> 23
EXHIBIT A
TO
PURCHASE AND SALE AGREEMENT
LEASES
Part 2: Texas
The following oil and gas leases covering lands in Gregg and Panola Counties,
Texas:
[EXHIBIT A, PART 2 HAS BEEN OMITTED AS IT CONTAINS A LEGAL DESCRIPTION OF ALL
TEXAS LEASES]
<PAGE> 24
EXHIBIT A
TO
PURCHASE AND SALE AGREEMENT
LEASES
Part 3: West Virginia
The following oil and gas leases covering lands in Barbour, Doddridge,
Harrison, Lewis and Randolph Counties, West Virginia:
[EXHIBIT A, PART 3 HAS BEEN OMITTED AS IT CONTAINS A LEGAL DESCRIPTION OF ALL
WEST VIRGINA LEASES]
<PAGE> 25
EXHIBIT B
TO
PURCHASE AND SALE AGREEMENT
WELL LIST
[EXHIBIT B HAS BEEN OMITTED AS IT CONTAINS A LISTING OF ALL WELLS PURCHASED AND
SOLD]
<PAGE> 26
EXHIBIT C
ASSIGNMENT OF OIL AND GAS LEASES
WITH RESERVATION OF PRODUCTION PAYMENT
THIS ASSIGNMENT ("Assignment") is made effective as of January 1, 1997
(the "Effective Date") by and between The Houston Exploration Company, Inc., a
Delaware corporation, whose address is 1331 Lamar, Suite 1065, Houston, Texas
77010 (herein called "Grantor"), and KeySpan Natural Fuel, LLC, a Delaware
limited liability company, whose address is One Metrotech Center, Brooklyn, New
York 11201 (herein called "Grantee").
ARTICLE 1
CERTAIN DEFINITIONS AND REFERENCES
1.1 Certain Defined Terms. When used in this Assignment, the
following terms shall have the respective meanings assigned to them in this
Section 1.1 or in the sections and subsections referred to below:
"Affiliate" shall mean (a) any person directly or indirectly
owning, controlling or holding with power to vote 50% or more of the
outstanding voting securities of Grantee, (b) any person 50% or more
of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote by Grantee, (c) any
person directly or indirectly controlling, controlled by or under
common control with Grantee, and (d) any officer, director or partner
or member of Grantee or any person described in clause (c) of this
definition.
"Assignment" is defined in the first paragraph.
"BTU" means British Thermal Unit.
"Business Day" shall mean a day on which commercial banks are
open for business in the state of Texas.
"Credit Payment Amount" shall mean, for any Payment Period, an
amount equal to $0.75 of each dollar of tax credits (the "Tax
Credits") available to Grantee under Section 29 of the IRC, as a
result of the sale of Subject Hydrocarbons by or on behalf of Grantee,
to the extent that (a) such Subject Hydrocarbons (i) constitute
"qualified fuels" within the meaning of IRC Section 29(c), (ii) meet
the requirements of IRC Sections 29(d)(1), 29(d)(4) and 29(f), during
(A) such Payment Period and (B) any earlier Payment Period to the
extent the dollar amount of Tax Credits attributable thereto was not
taken into account in a Credit Payment Amount for a previous Payment
Period, and (iii) are produced from the Wells, and (b) Grantee is
treated as the owner of the Subject Interests for federal income tax
purposes. For purposes of the preceding sentence, Tax Credits
available to Grantee under IRC Section 29 shall be determined
C-1
<PAGE> 27
after taking into account any phase-out of Tax Credits under IRC
Section 29(b)(1) and any applicable inflation adjustment under IRC
Section 29(b)(2), but shall be determined without regard to
limitations on Grantee's use of Tax Credits imposed by IRC Section
29(b)(6) and without regard to whether Grantee actually utilizes such
Tax Credits. The Credit Payment Amount for any given Payment Period
shall initially be based on (1) estimated Subject Hydrocarbon
production and sales data available at the time of the calculation of
such amount and (2) an estimated inflation adjustment (as provided
under IRC Section 29(b)(2) based on the prior year's inflation factor;
provided that such estimated figures shall be later corrected when
actual data is available. Credit Payment Amounts shall be calculated
and, unless otherwise provided, will be credited to the Net Profits
Account, with respect to gas produced and sold from January 1, 1997
until the earlier of (x) December 31, 2002, or (y) the first day on
which Tax Credits are no longer permitted for gas attributable to the
Subject Hydrocarbons and produced and sold from the Wells. The Credit
Payment Amount shall not include payments for Tax Credits attributable
to natural gas liquids, unless Tax Credits are available with respect
to such liquids under applicable law. If for any reason the Tax
Credits are repealed by Congressional statute or resulting regulation,
no Credit Payment Amount shall be credited with respect to Subject
Hydrocarbons subject to such repeal. If for any reason the amount of
Tax Credits contemplated under this Agreement are reduced by
Congressional statute or resulting regulation, the Credit Payment
Amounts credited under this Agreement shall be reduced commensurate
with such reduction in Tax Credits.
"Effective Date" is defined in the first paragraph.
"Full Production Date" shall mean the date on which the total
volume of the Subject Hydrocarbons produced, saved and sold from and
after the Effective Date equals a volume equivalent to 21,866 MMCF of
gas (net to Grantee, using a conversion of 6 MCF/Barrel of liquid
production); provided that such volume shall be decreased by an
amount, if any, equal to the aggregate volume of reserves which are
attributable to any Excluded Asset or any Title Defect (as such terms
are defined in the Purchase Agreement).
"Grantee" shall mean Grantee as defined in the first paragraph
of this Assignment, and its successors and assigns; and, unless the
context in which used shall otherwise require, such term shall mean
any successor-owner at the time in question of any or all of the
Subject Interests.
"Grantor" shall mean Grantor as defined in the first paragraph
and its successors and assigns; and, unless the context in which used
shall otherwise require, such term shall mean any successor-owner at
the time in question of any or all of the Production Payment.
"Gross Proceeds" shall have the meaning assigned to it in
Section 4.2(a).
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Leases" is defined in Section 2.1(a).
C-2
<PAGE> 28
"Management Agreement" means the Management Agreement between
Grantor and Grantee dated as of January 1, 1997.
"Measurement Amount" is defined in Section 4.5.
"Net Profits" for any Payment Period shall mean the net
balance, positive or negative, resulting after application of the
credits and debits as provided in Sections 4.2 and 4.3 for such
period.
"Net Profits Account" shall have the meaning assigned to it in
Section 4.1.
"Non-Affiliate" shall mean any Person who is not an Affiliate.
"Option" shall mean that Option to Purchase Oil and Gas
Interests between Grantor and Grantee dated as of January 1, 1997.
"Other Income" is defined in Section 4.2(b).
"Payment Period" shall mean a calendar quarter, provided that
the first Payment Period shall mean the period from the Effective Date
until the end of the calendar quarter during which the Effective Date
occurs, and the last Payment Period shall mean the portion of the
calendar quarter during which the Termination Date occurs from the
beginning of such calendar quarter until and including the Termination
Date.
"Person" shall mean any natural person, association, joint
venture, trust, partnership, limited liability company, corporation or
other legal entity.
"Production Payment" is defined in Section 3.1 of this
Assignment.
"Production Payment Period" shall mean the period from the
Effective Date until and including the Termination Date.
"Production Sales Contracts" shall mean all contracts,
agreements and arrangements for the sale or disposition of Subject
Hydrocarbons that may be produced from or attributable to the Subject
Interests, whether presently existing or hereafter created.
"Purchase Agreement" means the Purchase and Sale Agreement
between Grantor and Grantee dated as of January 1, 1997.
"Subject Hydrocarbons" shall mean that portion of the oil, gas
and other minerals in and under and that may be produced, from and
after the Effective Date, from or attributable to the Subject
Interests and after deducting the appropriate share of all royalties
and any overriding royalties, production payments (except the
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Production Payment) and other similar charges burdening the Subject
Interests on the Effective Date. There shall not be included in the
Subject Hydrocarbons any oil, gas or other minerals unavoidably lost
in production or used by Grantee in conformity with good oil field
practices for production operations (including without limitation,
fuel, secondary or tertiary recovery) conducted solely for the purpose
of producing Subject Hydrocarbons from the Subject Interests, but only
so long as such Subject Hydrocarbons are so used.
"Subject Interests" is defined in Section 2.1.
"Termination Date" shall mean the day on which the total
volume of Subject Hydrocarbons produced, saved and sold from and after
the Effective Date equals a volume of 16,130.6 MMCF of gas (net to
Grantee, using a conversion of 6 MCF/barrel of liquid production);
provided that such volume shall be decreased by an amount, if any,
equal to the aggregate volume of Subject Hydrocarbons which are
attributable to Excluded Assets or Title Defect (as such terms are
defined in the Purchase Agreement).
"Wells" is defined in Section 2.1(a).
1.2 References and Titles. All references in this Assignment to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Assignment
unless expressly provided otherwise. Titles appearing at the beginning of any
of such subdivisions are for convenience only and shall not constitute part of
such subdivisions and shall be disregarded in construing the language contained
in such subdivisions. The words "this Assignment", "this instrument",
"herein", "hereof", "hereby", "hereunder" and words of similar import refer to
this Assignment (and reservation of Production Payment) as a whole and not to
any particular subdivision unless expressly so limited. Words in the singular
form shall be construed to include the plural and vice versa, unless the
context otherwise requires. All references in this Assignment to exhibits
refer to exhibits to this Assignment unless expressly provided otherwise, and
all such exhibits are hereby incorporated herein by reference and made a part
hereof for all purposes.
ARTICLE 2
ASSIGNMENT
2.1 For and in consideration of Ten Dollars ($10.00) and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Grantor does hereby GRANT, BARGAIN, SELL, TRANSFER,
ASSIGN, and CONVEY unto Grantee, its successors and assigns, all of the
following (the "Subject Interests"):
(a) All right, title and interest of Grantor in and to
the oil and gas leases described in Exhibit "A" (attached hereto and
made a part hereof for all purposes), including any royalty,
overriding royalty or other interests owned by Grantor in such leases,
insofar and only insofar as said leases cover (i) the lands described
in Exhibit A and (ii) the zone,
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horizon or interval wells described in Exhibit "B" (attached hereto
and made a part hereof for all purposes) for each of the wells
described in Exhibit B (the above described interest in such leases
being herein called the "Leases" and the above described wells being
herein called the "Wells");
(b) All right, title and interest of Grantor in and to,
or derived from, the following, insofar and only insofar as same are
attributable to the Leases and the Wells:
(i) All presently existing and valid oil, gas or
mineral unitization, pooling, operating and communitization
agreements, declarations and orders affecting the Leases and Wells,
and in and to the properties covered and the units created thereby
(the "Unitization and Pooling Agreements");
(ii) The personal property and fixtures that are
appurtenant to the Leases, or the Wells, or the Units, including all
wells, casing, tubing, pumps, separators, tanks, lines and other
personal property and oil field equipment on such Leases or Units (the
"Personal Property");
(iii) All presently existing and valid gas sales,
purchase, gathering and processing contracts and operating agreements,
joint venture agreements, partnership agreements, rights of way,
easements, permits and surface leases and other contracts, agreements
and instruments, only in relevant part to the extent and insofar as
the same are appurtenant to the Leases, Wells and interests conveyed
in the Units; provided, however, that Grantor retains its right, title
and interest in and to those interests set forth in Sections
2.1(b)(i), (ii) and (iii), to the extent such interests pertain to any
property owned by Grantor that is not associated with the Leases and
Wells (the "Agreements");
reserving to Grantor, however, the Production Payment and the other rights
reserved herein, as provided in Article 3 below; to have and to hold the
Subject Interests forever. Notwithstanding the provisions of Section
2.1(b)(i), Grantee shall have no right or interest in any well that is not
specifically described on Exhibit "B" or in the production from any such well.
Grantor has warranted title to the Subject Interests pursuant to the terms of
the Purchase Agreement, and the Purchase Agreement and Section 4.8 of this
Assignment set forth the exclusive remedy for breach of such warranty of title.
ARTICLE 3
RESERVATIONS
3.1 Production Payment. Grantor does hereby reserve unto itself,
and its successors and assigns, from this Assignment a production payment
payable out of and only from Subject Hydrocarbons equal to 100 percent of the
Net Profits derived from the Subject Interests; such production payment to be
effective during the Production Payment Period and such payments not to exceed,
in any Payment Period, the Gross Proceeds produced during such period, (the
"Production Payment"); and in each case as defined herein and subject to the
terms and conditions contained herein.
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3.2 Surface and Other Use. Grantor reserves unto itself, and its
successors and assigns, from this Assignment the right to use as much of the
surface of the acreage covered by the Leases as may be necessary in the conduct
of operations in those zones, formations and depths not assigned to Grantee
herein and on other property owned or leased by Grantor. Grantor further
reserves the right to drill through the depths, zones and formations herein
assigned to Grantee in conducting any operations in the depths, zones and
formations not assigned herein or on other property owned or leased by Grantor,
and also the right to drill, produce, operate and maintain infill wells as
permitted by regulatory agencies having jurisdiction over such matters.
Grantor reserves the right to jointly use any easements and rights-of-way for
its operations on the land covered hereby or on other lands in the area.
Grantor shall protect, defend, indemnify and hold Grantee, its agents,
employees, representatives, successors and assigns harmless from and against
any and all claims, demands, causes of action, losses and liabilities, arising
out of the exercise by Grantor, its successors and assigns of the rights
reserved in this Section 3.2. THIS INDEMNITY SHALL INCLUDE ANY LOSSES ARISING
OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENCE (BUT NOT GROSS
NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY LOSSES INCURRED BY ANY
INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE, REGULATION OR THEORY OF
STRICT LIABILITY.
3.3 Reversion Interest after Full Production Date. Grantor
reserves unto itself, and its successors and assigns, an undivided 90% interest
in and to the Subject Interests from and after the Full Production Date (the
"Reversion Interest"). If the Full Production Date is reached, and the Leases
or Wells, or any part thereof, are not covered by an existing joint operating
agreement, Grantor and Grantee agree to enter into a mutually acceptable Joint
Operating Agreement to govern operation of the Subject Interests after the Full
Production Date, such joint operating agreement to be in form and substance
similar to the Model Form Operating Agreement typically used by Grantor at the
Full Production Date, naming Grantor as Operator. Notwithstanding any other
provision of this Assignment, the Reversion Interest, if it has not heretofore
reverted, shall revert to Grantor no later than twenty-one (21) years after the
death of the last survivor of the heirs of Joseph P. Kennedy, father of the
former President of the United States living at the time of execution of this
Agreement, it being the intention of the parties that the Reversion Interest
vest in Grantor within the time prescribed by the rule against perpetuities.
ARTICLE 4
PRODUCTION PAYMENT ACCOUNTING
AND PAYMENT
4.1 Establishment of Net Profits Account. Grantee shall establish
and maintain a Net Profits Account (herein called the "Net Profits Account") in
accordance with the various provisions of this Assignment and at all times
during the Production Payment Period shall keep true and correct books and
records with respect thereto. Such books and records shall be open for
inspection and copying by the Grantor and its accountants and representatives.
4.2 Credits to Net Profits Account. Except as otherwise provided
herein, the Net Profits Account shall be credited with an amount equal to the
sum of Credit Payment Amounts, Gross Proceeds and Other Income.
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(a) "Gross Proceeds" shall mean, on an accrual accounting
basis, all consideration received, directly or indirectly, for sales
of Subject Hydrocarbons, subject to the following:
(1) If a controversy exists (whether by reason of
any statute, order, decree, rule, regulation, contract, or
third party claim) as to the correct or lawful sales price of
any Subject Hydrocarbons, then amounts received by Grantee and
promptly deposited by it into a mutually acceptable interest
bearing escrow account pending settlement of such controversy
shall not be considered to have been received by Grantee and
shall not be included in Gross Proceeds until such controversy
is resolved, but all such amounts, other than interest accrued
on the escrowed funds, thereafter paid to Grantee by the
escrow agent out of or on account of such escrow shall be
considered to be amounts received from the sale of Subject
Hydrocarbons. However, amounts so received by Grantee and not
deposited in such escrow account shall be considered to be
received for purposes of this definition of Gross Proceeds;
(2) Gross Proceeds relating to any non-consent
operations conducted with respect to all or any part of the
Subject Interests after the Effective Date shall be subject to
Section 5.8;
(3) Gross Proceeds shall not include any amount
which Grantee shall receive as a bonus for any lease or
payments made to Grantor in connection with adjustment of the
cost of any Well and leasehold equipment upon unitization or
revision of participating areas under federal divided-type
units covering any of the Subject Interests;
(4) Amounts received by Grantee from a purchaser
of Subject Hydrocarbons (i) as a prepayment of any portion of
the sales price for such Subject Hydrocarbons, (ii) as advance
gas payments or (iii) as payments pursuant to contractual
provisions providing for "take-or-pay" payments (including
amounts awarded by a court or agreed to by the parties in any
settlement of a claim net of costs and attorneys' fees
incurred in connection therewith as damages for the failure or
refusal of the purchaser to take Subject Hydrocarbons pursuant
to the contract which contains such provisions) shall be
considered to be received from the sale of Subject
Hydrocarbons during periods commencing with the Effective
Date; provided that such amounts shall not be considered
received from the sale of Subject Hydrocarbons at a later date
when Subject Hydrocarbons are delivered in respect of any such
payments under "make-up" or similar provisions;
(5) Cash settlements and cash make-ups received
by Grantee with respect to the Subject Interests under gas
balancing or similar agreements shall be considered derived
from the sale of Subject Hydrocarbons; and
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(6) Gross Proceeds shall not include Other Income.
(b) "Other Income" shall mean, on an accrual accounting basis, the
following:
(1) The proceeds received by Grantee from the
sale, after the Effective Date, of any materials, supplies,
equipment and other personal property or fixtures, or any part
thereof or interest therein, located on or used in connection
with the Subject Interests (including without limitation all
amounts attributable thereto which are received by Grantee by
way of conformance of investment in personal property and
equipment if the Subject Interests or any part or parts
thereof are hereafter from time to time unitized or are
affected by the revision of a participating area in a federal
divided-type unit);
(2) The proceeds of all insurance received by
Grantee (i) the cost of which is charged to the Net Profits
Account, directly or indirectly, and/or (ii) that accrue to
Grantee as a consequence of the loss or damage to any one or
more of the following which occurs after the Effective Date:
the Subject Interests, or any part thereof or interest
therein, the interest of Grantee in any materials, supplies,
equipment or other personal property or fixtures located on or
used in connection with any of the Subject Interests, or any
Subject Hydrocarbons; except to the extent such amounts are
used to repair or replace the items damaged or lost giving
rise to the receipt of such amounts;
(3) The proceeds of all judgments and claims
received by Grantee for damages to one or more of the
following which occurs after the Effective Date: the Subject
Interests, or any part thereof or interest therein, any
materials, supplies, equipment or other personal property or
fixtures, or any part thereof or interest therein, located on
or used in connection with any of the Subject Interests, or
any Subject Hydrocarbons; except to the extent such amounts
are used to repair or replace the items damaged or lost giving
rise to the receipt of such amounts;
(4) All proceeds of and/or from each of the
following amounts received by Grantee (to the extent
attributable to periods after the Effective Date) with respect
to the Subject Interests: (i) delay rentals, (ii) lease
bonuses, (iii) rentals from reservoir use or storage, and (iv)
payments in connection with adjustment of the cost of any Well
and leasehold equipment upon unitization or revision of
participation areas under federal divided-type units covering
any of the Subject Interests;
(5) Any interest, penalty or other amounts
received by Grantee which are attributable to the Subject
Interests and are not derived from the sale of Subject
Hydrocarbons;
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(6) All other monies and things of value which
are received by Grantee by virtue of the ownership after the
Effective Date of the Subject Interests and the materials,
supplies, equipment and other personal property and fixtures
located on or used in connection with the Subject Interests;
and
(7) Interest on proceeds escrowed under Section
4.2(a)(1) above.
4.3 Debits to Net Profits Account. Except as otherwise provided
herein the Net Profits Account shall be debited (without duplication), on an
accrual accounting basis, with the following amounts:
(a) All direct costs which are attributable to production
(excluding depletion, depreciation and amortization) of the Subject
Interests (i) for all direct labor (including fringe benefits) and
other services necessary for developing, operating, producing,
reworking and maintaining the Subject Interests after the Effective
Date, (ii) for dehydration, compression, separation, transportation
and marketing of the Subject Hydrocarbons after the Effective Date,
and (iii) for all materials, supplies, equipment and other personal
property and fixtures purchased for use on, or in connection with, any
of the Subject Interests after the Effective Date (including without
limitation (A) all amounts paid by Grantee for conformance of
investment if the Subject Interests or any part or parts thereof are
hereafter from time to time unitized or if any participating area in a
federal divided-type unit is changed, and (B) the cost of secondary
recovery, pressure maintenance, repressuring, recycling and other
operations conducted for the purpose of enhancing oil production);
(b) Costs (including without limitation outside legal,
accounting and engineering services) attributable to the Subject
Interests of (i) handling, investigating and/or settling litigation,
administrative proceedings and claims (including without limitation
lien claims other than liens for borrowed funds) and (ii) payment of
judgments, penalties and other liabilities (including interest
thereon), paid by Grantee (and not reimbursed under insurance
maintained by Grantee or others) and involving any of the Subject
Interests, or incident to the development, operation or maintenance of
the Subject Interests after the Effective Date, or requiring the
payment or restitution of any proceeds of Subject Hydrocarbons, or
arising from tax or royalty audits, except that there shall not be
debited to the Net Profits Account any expenses incurred by Grantee in
litigation of any claim or dispute arising hereunder between Grantee
and Grantor or amounts paid by Grantee to Grantor pursuant to a final
order entered by a court of competent jurisdiction resolving any such
claim or dispute or amounts paid by Grantee to Grantor in connection
with the settlement of any such claim or dispute;
(c) All taxes (except federal and state income, transfer,
mortgage, inheritance, estate, franchise and like taxes) paid by
Grantee with respect to the ownership of the Subject Interests or the
extraction of the Subject Hydrocarbons after the Effective Date,
including without limitation production, severance, and/or excise
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and other similar taxes assessed against, and/or measured by, the
production of (or the proceeds or value of production of) Subject
Hydrocarbons (without regard to the period of ownership for which such
taxes are assessed), occupation taxes, sales and use taxes, and ad
valorem taxes assessed against or attributable to the Subject
Interests or any equipment used in connection with production from any
of the Subject Interests;
(d) Insurance premiums attributable to the ownership or
operation of the Subject Interests paid by Grantee for insurance
actually carried for periods after the Effective Date with respect to
the Subject Interests, or any equipment located on any of the Subject
Interests, or incident to the development, operation or maintenance of
the Subject Interests after the Effective Date;
(e) All amounts attributable to the Subject Interests (to
the extent attributable to periods after the Effective Date) and
consisting of (i) rent and other consideration paid for the use or
damage to the surface and (ii) delay rentals, shut-in well payments,
minimum royalties and similar payments paid pursuant to the provisions
of agreements in force and effect before the Effective Date;
(f) Amounts attributable to the Subject Interests (and
attributable to periods after the Effective Date) and charged by the
relevant operator as overhead charges specified in applicable
operating agreements now or hereafter covering the Subject Interests;
(g) If as a result of the occurrence of the bankruptcy or
insolvency or similar occurrence of the purchaser of Subject
Hydrocarbons any amounts previously included in Gross Proceeds or
Other Income are reclaimed from Grantee or its representative, then
the amounts reclaimed as promptly as practicable following Grantee's
payment thereof;
(h) If Grantee shall be a party as to any non-consent
operations conducted with respect to all or any of the Subject
Interests after the Effective Date, all costs to be debited to the Net
Profits Account with respect thereto shall be governed by Section 5.8;
(i) The Management Fee (as defined in the Management
Agreement) paid pursuant to the Management Agreement; and
(j) Except as otherwise provided elsewhere in this
Assignment, all other direct expenditures attributable to the Subject
Interests paid by Grantee after the Effective Date for the necessary
or proper development, operation, maintenance and administration,
after the Effective Date, of the Subject Interests, if reasonably
incurred; provided, however, that notwithstanding anything herein
provided to the contrary, the Net Profits Account shall not be debited
with any cost or expense which is deducted or taken into account in
determining Gross Proceeds or Other Income,
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including, without limitation, the value of any component of Gross
Proceeds or Other Income.
4.4 Accounting for Net Profits. All debits to the Net Profits
Account calculated pursuant to Section 4.3 which are attributable to costs and
expenses paid by Grantee during a Payment Period, up to and including the last
day of such Payment Period, shall be debited against the Net Profits Account as
of the last day of such period. All credits to the Net Profits Account
calculated pursuant to Section 4.2 which are actually received by or on behalf
of Grantee during a Payment Period up to and including the last day of such
Payment Period shall be credited to the Net Profits Account as of the last day
of such Payment Period.
4.5 Measurement Amount and Payment of Production Payment. As of
the end of each Payment Period, the Grantee shall calculate, or cause to be
calculated, an amount (the "Measurement Amount"), being the sum of (a) any
Measurement Amount carried forward from a prior Payment Period; and (b) the Net
Profits for the then current Payment Period. Not more than 75 days following a
Payment Period the Grantee shall cause the Grantor to be paid the lesser of (i)
the Measurement Amount for such Payment Period or (ii) Gross Proceeds for the
Payment Period in question. If the Measurement Amount for a Payment Period is
a negative amount, no payment shall be due and payable by Grantee to Grantor
for a Production Payment hereunder for such Payment Period, and the negative
amount shall be carried forward to the next Payment Period. If the Measurement
Amount for the Payment Period is a positive amount and exceeds Gross Proceeds
for the Payment Period, the excess Measurement Amount shall be carried forward
to the next Payment Period. The Grantee shall send at the same time a
statement showing the calculation of the amount of the Production Payment, if
any, or the reason for any nonpayment, and clearly reflecting the condition of
the Net Profits Account as of the close of business on the last day of the
relevant Payment Period and clearly reflecting (with sufficient description so
that Grantor can identify such items and the particular Subject Interest
involved) those items which gave rise to debits and credits to the Net Profits
Account during such Payment Period and clearly reflecting for each Subject
Interest the quantities of Subject Hydrocarbons produced therefrom during the
Payment Period covered by such statement, the volumes of such production sold,
the prices at which such volumes were sold, and the taxes paid with respect to
such sales.
4.6 Escrow in the Event of Tax Audit. In the course of
an audit of the federal income tax returns of Grantee or an Affiliate of
Grantee (a "Tax Audit"), promptly following the earlier to occur of (a) the date
the IRS raises in writing an issue involving (i) the eligibility of the gas
production from the Subject Interests for credits pursuant to IRC Section 29 or
(ii) Grantee's ownership of the Subject Interests for federal income tax
purposes (either such issue being referred to herein as a "Tax Issue") or (b)
the date of issuance by the IRS of a statutory notice of deficiency involving a
Tax Issue, (such earlier date, the "Escrow Commencement Date"), Grantor and
Grantee shall enter into an Escrow Agreement with an escrow agent, substantially
in the form of Exhibit C attached hereto. The Escrow Agreement and the funds in
the "Escrow Account" established pursuant thereto shall be administered in
accordance with the following provisions:
(a) Beginning with the Payment Period in which the Escrow
Commencement Date occurs and continuing for each Payment Period until
the "Conclusion of a Tax Audit"
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(as that term is defined below, with such period of time being the
"Escrow Period"), Grantor shall deposit into the Escrow Account the
amount by which the Credit Payment Amount for such Payment Period
would be reduced if all open Tax Issues were sustained in favor of the
IRS (the "Escrow Amount" and the sum of all Escrow Amounts being the
"Escrowed Funds"). The Escrowed Funds shall not include any funds
which were due from Grantee to Grantor prior to the Escrow
Commencement Date, but which were not paid to Grantor. For tax
purposes only, Grantor shall be treated as the owner of the Escrowed
Funds.
(b) A Tax Audit will be deemed to have concluded upon the
earliest to occur of the following events with respect to each Tax
Issue: (i) the receipt by Grantee of written notice from the IRS that
it will not assert any adjustments with respect to the Tax Issue; (ii)
Grantee entering into a settlement agreement with the IRS which
resolves the open Tax Issue; (iii) a judgment of a court of law or a
decision in an administrative proceeding becoming non-appealable with
respect to the open Tax Issue; or (iv) the expiration of the
applicable period of limitations for making assessments with respect
to the years under examination in the Tax Audit if the IRS has made no
assessments within such period with respect to the open Tax Issue
(such earliest event being deemed the "Conclusion of a Tax Audit").
(c) At the Conclusion of a Tax Audit, Grantee and Grantor
agree to recalculate, pursuant to the provisions of this Section
4.6(c), any amounts due Grantee and Grantor pursuant to the terms of
this Assignment for the Escrow Period, taking into account the
reduction, if any, in the Credit Payment Amounts due for each Payment
Period during the Escrow Period resulting from the Tax Issues
sustained in favor of the IRS in the Tax Audit (including any
settlement described in Section 4.7). Grantee shall receive from the
Escrowed Funds an amount equal to 75% of the total dollar amount of
any reduction in Tax Credits available to Grantee with respect to
hydrocarbon production from the Wells as a result of the application
of the preceding sentence, including interest thereon, for the periods
on or after the Escrow Commencement Date. Except for such adjustment,
there is no other obligation of Grantor to make any other payment to
Grantee with respect to the Tax Audit, subject to Section 4.8 below.
Grantor shall receive all remaining Escrowed Funds related to the Tax
Issues resolved in the Tax Audit, including interest thereon. If in
the course of a Tax Audit, a Tax Issue is resolved, a portion of the
Escrowed Funds properly allocable to such Tax Issue will be
distributed in accordance with the principles of this Section 4.6.
4.7 Settlements Resulting from a Tax Audit. Grantee
shall make a reasonable attempt to prevail on any Tax Issue. If Grantee elects
to enter into a negotiated settlement with the IRS of any Tax Issue, Grantee
shall, in good faith, consult with Grantor regarding the suggested terms of
such settlement; provided, however, that Grantee shall be under no obligation
to comply with any suggestion of Grantor. Grantee shall provide to Grantor
copies of all correspondence or pleading between Grantee and the IRS regarding
any Tax Audit. Grantor shall be entitled to monitor all hearings and meetings
with the IRS associated with such settlement negotiations.
4.8 Overpayments. If at any time Grantee is determined to
have credited to the Net Profits Account more than the amount then due with
respect to any Credit Payment Amount as
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a result of a breach by Grantor of its representations and warranties in the
Purchase Agreement or otherwise, Grantor shall be obligated to return any such
overpayment, limited to amounts actually paid to Grantor by Grantee, including
interest on such amounts at the prime rate of interest in effect during the
time period of the overpayment at The Chase Manhattan Bank, N.A. (or any
successor bank, or if such bank does not exist, the United States prime rate
generally recognized in the financial media from time to time), within ten (10)
days after Grantee notifies Grantor of the amount of such overpayment and
interest and provides Grantor substantiation thereof. Alternatively, Grantee
may elect to offset the amount of any such overpayment and interest thereon as
set forth in the immediately preceding sentence against future Credit Payment
Amounts. The payment provided pursuant to this Section 4.8 shall constitute
Grantee's exclusive remedy with respect to the overpayment of Credit Payment
Amounts and breach of the representations and warranties in Section 7.23 of the
Purchase Agreement, but shall not otherwise limit Grantee's rights and remedies
with respect to any breach by Grantor of its representations and warranties in
the Purchase Agreement other than those in Section 7.232 thereof.
ARTICLE 5
OPERATION OF SUBJECT INTERESTS
5.1 Rights and Duties of Grantee. Grantee (subject to
the terms and provisions of any applicable operating agreements and subject to
the other provisions of this Assignment and the Management Agreement), as
between Grantor and Grantee, has exclusive charge, management and control of
all operations to be conducted on the Subject Interests and may take any and
all actions which a reasonably prudent operator would deem necessary or
advisable in the management, operation and control thereof. Grantee shall
promptly (and, unless the same are being contested in good faith and by
appropriate proceedings, before the same are delinquent) pay all costs and
expenses (including without limitation all taxes and all costs, expenses and
liabilities for labor, materials and equipment incurred in connection with the
Subject Interests and all obligations to the holders of royalty interests and
other interests affecting the Subject Interests) incurred from and after the
Effective Date in developing, operating and maintaining the Subject Interests.
Grantee shall be obligated to operate and maintain the Subject Interests as
would a reasonable and prudent operator under similar circumstances. As to
those of the Subject Interests as to which Grantee is not the operator, Grantee
shall take all such action and exercise all such rights and remedies as are
reasonably available to it to cause the operator to so maintain and operate
such Subject Interests. Grantee shall be deemed to have fully discharged all
of its obligations under this Section 5.1, and shall have no liability to
Grantor under this Section 5.1 during any period when the Management Agreement
is in effect and Grantee is in compliance with the Management Agreement in all
material respects.
5.2 Sales of Subject Hydrocarbons. Grantee shall have
the obligation to market or cause to be marketed the Subject Hydrocarbons in
accordance with its good faith business judgment and sound oil field practices.
Grantee shall fully discharge all of its obligations under this Section 5.2,
and shall have no liability to Grantor under this Section 5.2 during any period
when the Management Agreement is in effect and Grantee is in compliance with
the Management Agreement in all material respects. As to any third parties,
all acts of Grantee in marketing the Subject Hydrocarbons and all Production
Sales Contracts executed by Grantee shall be binding on Grantor
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and the Production Payment; it being understood that the right and obligation
to market the Subject Hydrocarbons is at all times vested in Grantee and
Grantor does not have any such right or obligation or any possessory interest
in all or part of the Subject Hydrocarbons, except as may be granted by
separate agreement or instrument. Accordingly, it shall not be necessary for
Grantor to join in any separate Production Sales Contracts or any amendments to
existing Production Sales Contracts.
5.3 Insurance. Grantee shall obtain or cause to be
obtained (and maintain or cause to be maintained during the economic life of
the Subject Interests) the types of insurance as in its reasonable good faith
business judgment a reasonable and prudent operator would carry under similar
circumstances. Grantee shall fully discharge all of its obligations under this
Section 5.3, and shall have no liability to Grantor under this Section 5.3
during any period when the Management Agreement is in effect and Grantee is in
compliance with the Management Agreement in all material respects.
5.4 Contracts with Affiliates. To the extent not
provided for in any applicable operating agreement, Grantee may perform
services and furnish supplies and equipment with respect to the Subject
Interests, provided that the amount of compensation, price or rental that can
be charged to the Net Profits Account therefor must be no less favorable than
those available from Non-Affiliates in the area engaged in the business of
rendering comparable services or selling or leasing comparable equipment and
supplies which could reasonably be made available to the Subject Interests.
5.5 Government Regulation. All obligations of Grantee
hereunder shall be subject to and limited by all applicable federal, state and
local laws, rules, regulations and orders (including those of any applicable
agency, board, official or commission having jurisdiction).
5.6 Abandonments. Prior to releasing, surrendering or
abandoning any portion of the Subject Interests, Grantee shall first offer in
writing to reassign such interest to Grantor, with Grantor assuming all
liability and obligations for such interest after such assignment. If Grantor
does not accept the offer to reassign within 60 days from such offer, Grantee
shall have the right without the joinder of Grantor to release, surrender
and/or abandon its interest in the Subject Interests, or any part thereof, or
interest therein even though the effect of such release, surrender or
abandonment will be to release, surrender or abandon the Production Payment the
same as though Grantor had joined therein insofar as the Production Payment
covers the Subject Interests, or any part thereof or interest therein, so
released, surrendered or abandoned by Grantee.
5.7 Pooling and Unitization.
(a) Certain of the Subject Interests may have been pooled
or unitized for the production of oil, gas and/or minerals prior to
the Effective Date or, after the Effective Date, may be so pooled or
unitized pursuant to Section 5.7(b). Such Subject Interests are and
shall be subject to the terms and provisions of such pooling and
unitization agreements, and the Production Payment in each such
Subject Interest shall apply to (and the term "Subject Hydrocarbons"
shall include) the production from such Units which is attributable to
such Subject Interest (and the Net Profits Account shall be computed
giving consideration to such
C-14
<PAGE> 40
production and costs, expenses, charges and credits attributable to
such Subject Interest) under and by virtue of the applicable pooling
and unitization agreements.
(b) Grantee shall have the right and power to unitize,
pool or combine the lands covered by the Subject Interests, or any
portion or portions thereof, with any other land or lease or leases so
as to create one or more unitized areas (or, with respect to unitized
or pooled areas theretofore created, to dissolve the same or to amend
and/or reconfigure the same to include additional acreage or
substances or to exclude acreage or substances). If pursuant to any
law, rule, regulation or order of any governmental body or official,
any of the Subject Interests are pooled or unitized in any manner, the
Production Payment insofar as it affects such Subject Interest shall
also be deemed pooled and unitized, and in any such event the
Production Payment shall apply to (and the term "Subject Hydrocarbons"
shall include) the production which accrues to such Subject Interest
under and by virtue of such pooling and unitization arrangements and
the Net Profits Account shall be computed giving consideration to such
production and costs, expenses, charges and credits attributable to
such Subject Interest under and by virtue of such pooling and
unitization arrangement. Notwithstanding the foregoing provisions of
Section 5.7(b), Grantee shall have no right or interest in any Well
that is not specifically described on Exhibit "B" or in the production
from any such Well.
5.8 Non-consent Operations.
(a) If Grantee elects (subject to Section 5.1) to
be a non-participating party (whether pursuant to an operating
agreement or other agreement or arrangement, including without
limitation, non-consent rights and obligations imposed by statute or
regulatory agency) with respect to any operation on any Subject
Interest or elects to be an abandoning party with respect to a Well
located on any Subject Interest, the consequence of which election is
that Grantee's interest in such Subject Interest or part thereof is
temporarily (i.e., during a recoupment period) or permanently
forfeited to the parties participating in such operations, or electing
not to abandon such Well, then the costs and proceeds attributable to
such forfeited interest shall not, for the period of such forfeiture
(which may be a continuous and permanent period), be debited or
credited to the Net Profits Account and such forfeited interest shall
not, for the period of such forfeiture, be subject to the Production
Payment.
(b) If Grantee elects (subject to Section 5.1) to be a
participating party to such an operation, or elects to be a
non-abandoning party with respect to such a Well, and any other party
or parties have elected not to participate in such operation (or have
elected to abandon such Well) with the result that (pursuant to an
operating agreement or other agreement or arrangement, including
without limitation, non-consent rights and obligations imposed by
statute and/or regulatory agency) Grantee becomes entitled to receive,
either temporarily (i.e., through a period of recoupment) or
permanently, interests belonging to such other party or parties, then
the costs and proceeds attributable to such non-participating parties'
interests to which Grantee becomes so obligated and entitled shall be
debited and credited to the Net Profits Account as though such
interests were part of the Subject Interests.
C-15
<PAGE> 41
5.9 Renewals and Extensions of Leases. The Production Payment
shall apply to all renewals, extensions and other similar arrangements (and/or
interests therein) of or with respect to any Lease which is included in the
Subject Interests, whether or not such renewals, extensions or arrangements
have heretofore been obtained by Grantor, or Grantor's predecessors in title,
or are hereafter obtained by Grantee as well as to each new lease covering any
minerals covered by one or more of the Leases (but only to the extent such
minerals were covered by a Lease) if same are taken or acquired while the
relevant Lease is in force and effect or within one year after the lapse
thereof.
ARTICLE 6
GRANTOR LIABILITY AND EQUIPMENT
6.1 No Personal Liability of Grantor. NOTWITHSTANDING ANYTHING TO
THE CONTRARY CONTAINED IN THIS ASSIGNMENT, GRANTOR SHALL NOT, BY VIRTUE OF THE
PRODUCTION PAYMENT RESERVED IN THIS ASSIGNMENT, PERSONALLY BE RESPONSIBLE FOR
PAYMENT OF ANY PART OF THE COSTS, EXPENSES OR LIABILITIES INCURRED IN
CONNECTION WITH EXPLORING, DEVELOPING, OPERATING, OWNING AND/OR MAINTAINING THE
SUBJECT INTERESTS; PROVIDED, HOWEVER, ALL SUCH COSTS, EXPENSES AND LIABILITIES
SHALL, TO THE EXTENT THE SAME RELATE TO PERIODS AFTER THE EFFECTIVE DATE,
NEVERTHELESS BE CHARGED AGAINST THE NET PROFITS ACCOUNT AS AND TO THE EXTENT
HEREIN PERMITTED.
6.2 Ownership of Equipment. The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests and is exclusively an interest in Net
Profits, as herein defined and provided for, and Grantor shall look exclusively
to the Subject Hydrocarbons for the satisfaction and realization of the
Production Payment.
ARTICLE 7
TRANSFERS
7.1 Assignments by Grantee. Upon prior written notice to Grantor,
Grantee shall have the right to transfer at any time and from time to time all
or any portion of the Subject Interests, provided, however, that (i) the
Subject Interests shall at all times be subject to this Assignment, the
Production Payment, the Option (as defined in the Purchase Agreement) and the
Management Agreement, and (ii) if such transfer or transfers result in less
than all of the Subject Interests being transferred to and held by the same
Person, Grantee shall retain the obligation to administer and pay the
Production Payment in accordance with the provisions hereof in the same manner
as if the Production Payment were held by a single Person. Any such assignment
shall not release Grantee from any obligation to Grantor under the Purchase
Agreement or this Assignment arising prior to the date of transfer.
Notwithstanding the foregoing Grantee shall not transfer all or any portion of
the Subject Interests to a Person which is not an Affiliate of Grantee without
the prior written consent of Grantor which consent shall not be unreasonably
withheld, conditioned or delayed.
C-16
<PAGE> 42
7.2 Assignments by Grantor. Grantor shall not transfer all or any
portion of the Production Payment without the prior written consent of Grantee
which consent shall not be unreasonably withheld, conditioned or delayed. Any
such assignment shall not release Grantor of any obligation under the Purchase
Agreement or Management Agreement.
7.3 Change in Ownership of Production Payment. No change of
ownership or right to receive payment of the Production Payment, or of any part
thereof, however accomplished shall be binding upon Grantee until notice
thereof shall have been furnished by the person claiming the benefit thereof,
and then only with respect to payments thereafter made. Notice of sale or
assignment shall consist of a copy of the recorded instrument accomplishing the
same or if there be no recorded instrument then a copy of the applicable
document accomplishing same; notice of change of ownership or right to receive
payment accomplished in any other manner (for example by reason of incapacity,
death or dissolution) shall consist of copies of recorded documents and
complete proceedings legally binding and conclusive of the rights of all
parties. Until such notice shall have been furnished to Grantee as provided
above, the payment or tender of all sums payable on the Production Payment and
delivery of all notices may be made in the manner provided herein precisely as
if no such change in interest or ownership or right to receive payment had
occurred. The kind of notice herein provided shall be exclusive, and no other
kind, whether actual or constructive, shall be binding on Grantee.
ARTICLE 8
MISCELLANEOUS
8.1 Governing Law. Except to the extent the terms hereof are
governed mandatorily by the real property laws of the states in which the
Subject Interests are located, the validity, effect and construction of this
Assignment shall be governed by the laws of the State of New York.
8.2 Intentions of the Parties. Nothing herein contained shall be
construed to constitute either party hereto (under state law or for tax
purposes) the agent of, or in partnership with, the other party. If, however,
the parties hereto are deemed to constitute a partnership for federal income
tax purposes, the parties elect to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A of the Code and agree not to take any
position inconsistent with such election. In addition, the parties hereto
intend that the Production Payment reserved hereby by Grantor shall at all
times be treated as an incorporeal (i.e., a non-possessory) interest in real
property or land under the laws of the state in which the Subject Interests are
located, a production payment under Section 636 of the Code, and, for tax
purposes, debt, payable out of net profits (rather than as a working or any
other interest).
8.3 Notices. All notices and other communications required or
permitted under this Assignment shall be in writing and, unless otherwise
specifically provided, shall be delivered personally, by prepaid telecopy or
similar means (with signed confirmed copy to follow by mail in the manner
provided below) or (except for quarterly statements provided for under Section
4.5 which may be sent by regular mail) by registered or certified mail, postage
prepaid, or by delivery service for which a receipt is obtained, at the
respective addresses shown opposite the signatures of Grantor and Grantee to
this Assignment, and shall be deemed delivered on the date of receipt. Either
party
C-17
<PAGE> 43
may specify an alternative address by giving notice to the other party, in the
manner provided in this Section 8.3.
8.4 Further Assurances. Grantor and Grantee agree to execute and
deliver to the other all such other and additional instruments, notices,
division orders, transfer orders and other documents and to do all such other
and further acts and things as may be necessary to more fully and effectively
grant, convey and assign to Grantee and to reserve to Grantor the rights,
titles, interest and estates conveyed to Grantee and reserved by Grantor
hereby.
8.5 Counterparts. This Assignment is being executed in multiple
originals, all of which are identical except that, for the convenience of
recording, counterparts hereof which are being recorded include only those
certain portions of Exhibit A and Exhibit B which include descriptions of
properties located in the recording jurisdiction in which the particular
counterpart is being recorded. All of such counterparts together shall
constitute one and the same instrument.
8.6 Binding Effect. All the covenants and agreements of Grantor
and Grantee herein contained shall be deemed to be covenants running with
Grantor's and Grantee's interest in the Subject Interests and the lands
affected thereby. All of the provisions hereof shall inure to the benefit of,
and shall be binding upon, each of the parties hereto and their respective
successors and, subject to the provisions of Article 7 and this Section 8.6,
their assigns. Any sale, conveyance, assignment, sublease or other transfer of
the Subject Interests, or any interest therein or any part thereof, shall
provide that the assignee assumes all of the obligations of the assignor with
respect to the interest transferred.
8.7 Partition. Grantor and Grantee acknowledge that Grantor and
Grantee have no right or interest that would permit either to partition any
portion of the Subject Interests, and Grantor and Grantee waive any such right.
8.8 Purchase Agreement. This Assignment is granted pursuant to
the Purchase Agreement. None of the provisions of this Assignment shall be
construed to diminish, limit or amend the terms of the Purchase Agreement.
8.9 Effective Date. This Assignment shall become effective for
all purposes as of 7:00 a.m. at the respective locations of the Subject
Interests on the Effective Date.
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<PAGE> 44
IN WITNESS WHEREOF, the parties have executed this Assignment on this
2nd day of July, 1997.
GRANTOR:
THE HOUSTON EXPLORATION COMPANY, INC.
By: /s/ THOMAS W. POWERS
------------------------------------
Thomas W. Powers
Senior Vice President
GRANTEE:
KEYSPAN NATURAL FUEL, LLC
By: /s/ ZAIN MIRZA
------------------------------------
Zain Mirza
Chief Financial Officer
This Assignment was Prepared by:
F. B Cochran III
Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas 77002-6760
RETURN RECORDED INSTRUMENT TO:
Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas 77002-6760
Attention: Yvonne Onak
C-19
<PAGE> 45
STATE OF NEW YORK )
) ss.
COUNTY OF KINGS )
The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Thomas W. Powers as Senior Vice President for The Houston
Exploration Company, Inc., a Delaware corporation, on behalf of the
corporation.
Witness my hand and official seal.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
STATE OF NEW YORK )
) ss.
COUNTY OF KINGS )
The foregoing instrument was acknowledged before me this 2nd day of
July, 1997 by Zain Mirza as Chief Financial Officer for KeySpan Natural Fuel,
LLC, a Delaware limited liability company, on behalf of the company.
Witness my hand and official seal.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
C-20
<PAGE> 46
EXHIBIT C
TO
ASSIGNMENT OF OIL AND GAS LEASES
WITH RESERVATION OF PRODUCTION PAYMENT
ESCROW AGREEMENT
This Escrow Agreement is made and entered into this ______ day of
_____________, by and between THE HOUSTON EXPLORATION COMPANY, INC. ("Seller"),
KEYSPAN NATURAL FUEL, LLC ("Buyer"), and ___________________ BANK ("Escrow
Agent"). Seller and Buyer are sometimes herein jointly referred to as the
"Parties."
RECITALS
A. Seller and Buyer are the Seller and Buyer, respectively, under
that certain Purchase and Sale Agreement dated as of January 1, 1997 (the
"Purchase and Sale Agreement"), and Grantor and Grantee, respectively, under
the Assignment of Oil and Gas Leases with Reservation of Production Payment
dated effective as of January 1, 1997 (the "Assignment"); and
B. Pursuant to Section 4.6 of the Assignment, Seller and Buyer
have agreed that Seller shall deposit Escrow Amounts, as defined therein, in an
escrow account; and
C. Escrow Agent has agreed to act as such in accordance with the
terms, provisions and conditions of this Escrow Agreement and to hold the funds
described herein in accordance with the terms and provisions hereof.
AGREEMENT
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto do hereby agree as follows:
1. Of even date herewith, Seller has delivered to Escrow Agent
and Escrow Agent hereby acknowledges the receipt of an Escrow Amount for
deposit into the account set up hereunder (the "Escrow Account"). Seller and
Buyer have advised Escrow Agent that Seller will deliver additional Escrow
Amounts for deposit into the Escrow Account. Such sums, together with any
interest or other earnings of the money so deposited shall be referred to
herein as the "Escrow Funds."
2. During the term of this Escrow Agreement, Escrow Agent shall
hold and maintain the Escrow Funds and said funds shall be invested or
reinvested by Escrow Agent at the joint written direction of Seller and Buyer.
Seller and Buyer hereby direct Escrow Agent to invest the Escrow Funds in the
_______________ Fund.
Exhibit C to Assignment
Page 1
<PAGE> 47
The Escrow Agent shall sell all or any designated part of such
investments so directed in writing jointly by Seller and Buyer. All
commissions, brokerage taxes, fees and expenses, if any, applicable to the
acquisition or sale of the investments under this paragraph shall be paid
initially from the interest or income generated from the Escrow Funds and
thereafter from any remaining amounts in the Escrow Funds. The Escrow Agent
shall not be liable for losses on any investments made by it pursuant to and in
compliance with such instructions.
3. The Escrow Agent shall hold and disburse the Escrow Funds
during the term of this Escrow Agreement in accordance with the written joint
instructions from Seller and Buyer. The Escrow Agent shall deliver the Escrow
Funds or any part thereof to the party designated to receive such funds if
Escrow Agent receives written joint instructions from both Seller and Buyer to
do so. The Escrow Agent shall hold the Escrow Funds until it has received a
joint written instruction notice from Seller and Buyer as to how delivery of
the Escrow Funds shall be made. Should any controversy arise between Seller
and Buyer and/or the Escrow Agent with respect to this Escrow Agreement or with
respect to the right to receive the Escrow Funds, the Escrow Agent shall have
the right to consult counsel and/or to institute a bill of interpleader in any
court of competent jurisdiction to determine the rights of the Parties. Should
such actions be necessary, or should the Escrow Agent become involved in
litigation in any manner whatsoever on account of this Escrow Agreement or the
Escrow Funds made hereunder, the Parties bind and obligate themselves, their
successors, assigns and legal representatives to pay the Escrow Agent, in
addition to any charge made hereunder for acting as Escrow Agent, reasonable
attorney's fees incurred by the Escrow Agent, and any other disbursements,
expenses, losses, costs and damages in connection with and resulting from such
actions.
4. (a) The duties of the Escrow Agent are only such as are
herein specifically provided, being purely ministerial in nature, and the
Escrow Agent shall incur no liability whatsoever except for gross negligence or
willful misconduct. The Escrow Agent is not a party to any other agreement
regarding the subject matter contained herein and as such shall only be bound
by the terms and conditions of this Escrow Agreement.
(b) The Escrow Agent shall be under no responsibility for
the recitals in this Escrow Agreement, the covenants or undertakings set forth
in the Purchase and Sale Agreement, the Assignment, or in respect of any of the
items deposited with the Escrow Agent other than to comply with the specific
duties and responsibilities herein set forth and any written instructions or
other communications of any party hereto herein provided for; and, without
limiting the generality of the foregoing, the Escrow Agent shall have no
obligation or responsibility to determine the correctness of any statement or
calculation made by any party hereto in any written instruction or other
communication or the genuineness or validity of any document. The Escrow Agent
shall be fully protected in acting in accordance with any joint written
instructions or other communications from Seller and Buyer given to it in
accordance with the provisions hereof and reasonably believed by it to have
been signed by the proper parties. The Escrow Agent shall have no liability
for losses arising from any cause beyond its control, including (but not
limited to) the following: (i) the act, failure or neglect of any agent or
correspondent selected by the Escrow Agent for the remittance of funds; (ii)
any delay, error, omission or default of any mail, delivery, cable or wireless
agency or operator;
Exhibit C to Assignment
Page 2
<PAGE> 48
(iii) the acts or edicts of any government or governmental agency or other
group or entity exercising governmental powers. The Escrow Agent shall be
entitled to pay from the Escrow Funds the cost and expense of defending any
legal proceedings which may be instituted against it with respect to the
subject matter of this Escrow Agreement (including counsel and investigatory
fees); provided, however, the Escrow Agent shall consult with Seller and Buyer
prior to incurring any legal expenses. The Escrow Agent shall not be required
to institute legal proceedings of any kind.
5. The Escrow Agent may resign at any time by giving written
notice to Seller and Buyer. Such resignation shall not be effective until a
new Escrow Agent has been appointed by the joint written agreement of Seller
and Buyer. The Escrow Agent may at any time be removed by joint notice in
writing delivered to the Escrow Agent by Seller and Buyer. The Escrow Agent's
sole responsibility thereafter shall be to keep safely all Escrow Funds then
held by it and to deliver the same to a person designated by the Parties or in
accordance with the directions of a final order or judgment from a court having
competent jurisdiction.
6. For its services pursuant to this Escrow Agreement, the Escrow
Agent shall be entitled to a fee of _______________ DOLLARS ($______________.00
U.S.). Any fees and expenses due the Escrow Agent shall be borne one-half
(1/2) by Seller and one-half (1/2) by Buyer and shall be paid within 10 days
after the receipt of an invoice from the Escrow Agent for such fees and
expenses. The Parties jointly and severally agree to pay to the Escrow Agent
its fees for the services rendered by it pursuant to the provisions of this
Escrow Agreement and will reimburse the Escrow Agent for its reasonable
expenses, including reasonable attorney's fees incurred in connection with the
negotiations, drafting and performance by it of such services. Except as
otherwise noted, this fee covers account acceptance, set-up and termination
expenses, plus usual and customary related administrative services such as
safekeeping, investment, collection and distribution of assets, including
normal record keeping and reporting requirements. Any additional services
beyond the receipt, investment and payment of funds specified in this Escrow
Agreement, or activities requiring excessive administrator time or
out-of-pocket expenses such as optional substitution of collateral or
securities, shall be deemed extraordinary fees for which related costs,
transaction charges and additional fees will be billed at the Escrow Agent's
standard charges for such items.
7. The Parties agree to indemnify, defend and hold the Escrow
Agent harmless from and against any and all loss, damage, tax, liability and
expense that may be incurred by the Escrow Agent arising out of or in
connection with its acceptance or appointment as the Escrow Agent hereunder,
including the legal costs and expenses of defending itself against any claim or
liability in connection with its performance hereunder.
8. The Escrow Agent is hereby given a lien on the Escrow Funds
for all indebtedness that may become owing to the Escrow Agent hereunder, which
lien may be enforced by the Escrow Agent by setoff or appropriate foreclosure
proceedings provided that the Escrow Agent has given Buyer and Seller not less
than 10 days prior written notice thereof.
Exhibit C to Assignment
Page 3
<PAGE> 49
9. The Parties warrant to the Escrow Agent that there are no
federal, state or local tax liabilities or filing requirements whatsoever
concerning the Escrow Agent's actions contemplated hereunder and warrant and
represent to the Escrow Agent that the Escrow Agent has no duty to withhold or
file any report regarding any tax liability under any federal or state income
tax, local or state property tax, local or state sales or use taxes, or any
other tax by any taxing authority. The Parties agree to jointly and severally
indemnify the Escrow Agent fully for any tax liability, penalties or interest
incurred by the Escrow Agent arising hereunder and agree to pay in full any
such tax liability together with penalty and interest if any tax liability is
ultimately assessed against the Escrow Agent for any reason as a result of its
actions hereunder (except for the Escrow Agent's individual income tax
liability arising from its income from its fees).
10. All notices, requests, directions, instructions, waivers,
approvals or other communications to any party hereto shall be made or
delivered in person or by registered mail or certified mail, postage prepaid,
addressed to such party as provided below, or to such other address as such
party may hereafter specify in a written notice to the other parties named
herein, and all such notices or other communications shall be in writing so
addressed and shall be effective upon receipt by the addressee thereof:
Escrow Agent: BANK
---------------------
Corporate Trust Department
Attn:
--------------------------------
Seller: The Houston Exploration Company, Inc.
1331 Lamar, Suite 1065
Houston, Texas 77010
Attn: Thomas W. Powers
Telephone: (713) 652-2847
Buyer: KeySpan Natural Fuel, LLC
One MetroTech Center
Brooklyn, New York 11201
Attention: Zain Mirza
Telephone: (718) 403-2260
Fax: (718) 858-6431
11. No agreement shall be effective to amend or supplement this
Escrow Agreement unless such agreement is in writing and signed by the parties
hereto. This Escrow Agreement may be executed in any number of execution
counterparts.
12. This Escrow Agreement shall be governed by and construed in
accordance with the laws of the State of ____________ except that statutory
provisions regarding fiduciary duties and
Exhibit C to Assignment
Page 4
<PAGE> 50
liabilities of Trustees shall not apply to this Escrow Agreement. The Parties
expressly waive such duties and liabilities, it being their intent to create
solely an agency relationship and hold the Escrow Agent liable only in the
event of its gross negligence or willful misconduct in order to obtain lower
fee schedule rates as specifically negotiated with the Escrow Agent.
13. This Escrow Agreement shall terminate by its own terms when
no funds remain in the Escrow Account, unless sooner terminated in writing by
the Parties, in which case the balance of any funds remaining in the Escrow
Account upon such termination shall promptly be paid in accordance with written
instructions signed by Seller and Buyer.
[the remainder of this page is intentionally blank]
Exhibit C to Assignment
Page 5
<PAGE> 51
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the date first above written.
THE HOUSTON EXPLORATION COMPANY, INC.
By:
------------------------------------
Name:
Title:
KEYSPAN NATURAL FUEL, LLC
By:
------------------------------------
Name:
Title:
, BANK,
-------------------------------
as Escrow Agent
By:
------------------------------------
Name:
Title: President
--------------
Exhibit C to Assignment
Page 6
<PAGE> 52
EXHIBIT D
FORM OF
OPTION TO PURCHASE OIL AND GAS INTERESTS
This Option to Purchase Oil and Gas Interests (this "Option") is
granted this 1st day of January, 1997 by KEYSPAN NATURAL FUEL, LLC, a Delaware
limited liability company, whose address is One Metrotech Center, Brooklyn, New
York 11201 ("Grantor") to THE HOUSTON EXPLORATION COMPANY, INC., a Delaware
corporation, whose address is 1331 Lamar, Suite 1065, Houston, Texas 77010
("Grantee").
For $10.00 and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Grantor grants and conveys to
Grantee the exclusive and irrevocable option to purchase all of the following
(the "Subject Interests") upon the terms and conditions set forth herein (the
"Option"):
A. All of Grantor's right, title and interest in and to
the oil and gas leases described in Exhibit A, including any royalty,
overriding royalty and other interests owned by Seller in such lease,
but insofar and only insofar as said leases and other interests cover
(i) the lands described in Exhibit A and (ii) the zone, horizon or
interval described in Exhibit B for each of the wells described in
Exhibit B (the above described interest in such leases being herein
called the "Leases" and the above described wells being herein called
the "Wells");
B. All right, title and interest of Grantor in and to,
or derived from, all valid oil, gas and mineral unitization, pooling,
operating and communitization agreements, declarations and orders
affecting the Leases and Wells, and in and to the properties covered
and the units created thereby (the "Unitization and Pooling
Agreements");
C. All right, title and interest of Grantor in and to
the personal property and fixtures that are appurtenant to the Leases,
or the Wells, or the Units, including all wells, casing, tubing,
pumps, separators, tanks, lines and other personal property and oil
field equipment on such Leases (the "Personal Property"); and
D. All right, title and interest of Grantor in and to
and under, or derived from, all valid gas sales, purchase, gathering
and processing contracts and operating agreements, joint venture
agreements, partnership agreements, rights of way, easements, permits
and surface leases and other contracts, agreements and instruments,
only in relevant part to the extent and insofar as the same are
appurtenant to the Leases, Wells and Units (the "Agreements").
1. Exercise of the Option. If the Management Agreement between
Grantor and Grantee dated January 1, 1997 has not been terminated pursuant
to Section 7.1(b) thereof, Grantee has the right to exercise the Option any
time during the period from January 1, 1997 until the later
D-1
<PAGE> 53
of (i) April 1, 2003 or (ii) 30 days after notice in writing from Grantor
stating that the Option will terminate if not exercised as to all Subject
Interests then subject thereto (the "Option Period") to purchase the Subject
Interests as an entirety for the purchase price determined in accordance with
Section 4 below.
2. Method of Exercise. To exercise the Option within the Option
Period as to any Subject Interests, the Grantee must deliver notice (an
"Exercise Notice") of such exercise in writing, delivered personally, by
prepaid telecopy or similar means (with signed confirmed copy to follow by mail
in the manner provided below) or by registered or certified mail, postage
prepaid, or by delivery service for which a receipt is obtained, at the address
set forth in the first paragraph of this Option, and shall be deemed delivered
on the date of receipt. The Exercise Notice shall specify the portion of the
Subject Interests which Grantee desires to repurchase pursuant to such exercise
of the Option. Each party may specify an alternative address by giving written
notice to the other of such change.
3. Option Effective Date. The effective date of the purchase of
the Subject Interests pursuant to an Exercise Notice (the "Option Effective
Date") shall be the first day of the month following the date Grantor receives
the Notice.
4. Option Price. The purchase price for the purchase of the
Subject Interests shall be the appraised fair market value of the Subject
Interests specified in the Exercise Notice as of the Option Effective Date net
of the fair market value of the reserves attributable to the Production
Payment and the Reversionary Interest. Unless the Grantor and Grantee agree
otherwise, the appraised fair market value of the Subject Interests shall be
the present value as of the Option Effective Date of the future net revenue and
costs (based on the average of such costs during the preceding twelve months)
estimated to be received therefrom (net of the revenues and costs attributable
to the Production Payment and Reversionary Interest), determined in accordance
with generally accepted engineering principles in effect at the time, by Miller
& Lenz, Ltd. or another nationally recognized petroleum engineering company
agreed upon by Grantor and Grantee. The price of hydrocarbons produced from
each Subject Interest and utilized in the forecast shall be based on an
unescalated average gas price reflective of the most recent 12-month period, as
quoted in the first monthly publication of Inside FERC's Gas Market Report for
Index for the first index pricing point downstream of such Subject Interest
adjusted for transportation costs from the Subject Interest to the index
pricing point (or a mutually agreeable substitute index if such index is no
longer published). The discount rate to be applied shall be the prime rate in
effect at Chase Manhattan Bank (or if such bank no longer exists, the United
States prime rate generally recognized in the financial media from
time-to-time) on the date on which the fair market value determination is made
plus 1.75 percent.
5. Terms of Purchase. Upon the closing of the purchase of the
Subject Interests pursuant to an exercise of the Option, Grantee shall be
entitled to receive, subject to the Production Payment, the proceeds, accounts
receivable, income, revenues, monies and other items attributable to the
Subject Interests from and after the Option Effective Date and same shall be
paid over to Grantee, and Grantee shall be liable to pay the expenses
attributable to the Subject Interests from and after the Option Effective Date.
Subject to the terms of the Assignment, Grantor shall be entitled to
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receive the production from the Subject Interests prior to the Option Effective
Date and shall be liable to pay the expenses attributable to the Subject
Interests prior to the Option Effective Date. Upon the closing of the purchase
of the Subject Interests pursuant to an exercise of the Option, Grantee shall
assume all obligations and liabilities attributable to the ownership or
operation of the Subject Interests on and after the Option Effective Date,
including the contractual and regulatory obligations in connection with the
Subject Interests and Grantee shall defend, indemnify and hold harmless the
Grantor (and its successors, assigns, members, officers, managers, employees,
representatives, agents and consultants) from and against all claims, demands,
actions, obligations, liabilities and expenses (including reasonable attorney,
consultant and expert witness fees) arising from such obligations and
liabilities assumed by Grantee hereunder.
6. Payment and Closing. The closing of the purchase pursuant to
an exercise of the Option shall occur at the offices of Grantee at 9:00 a.m. on
a mutually agreed upon business day no later than 90 days from the date the
Grantor receives the notice of an exercise. At the closing, the Grantee shall
deliver by wire transfer of immediately available U.S. funds, to the account
designated by Grantor, the purchase price for the Subject Interests, and the
Grantor shall deliver to Grantee one or more assignments fully executed and in
recordable form of the Subject Interests dated effective as of the Option
Effective Date and in form and substance reasonably satisfactory to Grantee
with warranty of title as to all matters arising by, through or under Grantor,
but not otherwise.
7. Governing Law. Except to the extent the terms hereof are
governed mandatorily by the real property laws of the states in which the
Subject Interests are located, the validity, effect and construction of this
Assignment shall be governed by the laws of the State of New York.
8. Further Assurances. Grantor and Grantee agree to execute and
deliver to the other all such other and additional instruments, notices,
division orders, transfer orders and other documents and to do all such other
and further acts and things as may be necessary to more fully and effectively
grant, convey and assign to Grantee the rights, titles, interest and estates
conveyed to Grantee pursuant to any exercise of the Option or otherwise
reasonably requested in connection therewith.
9. Counterparts. This Option may be executed in multiple
originals, all of which are identical except that, for the convenience of
recording, counterparts hereof which are being recorded in the various counties
where the Leases and Wells are located include only those certain portions of
Exhibits A and B which include descriptions of properties located in the
recording jurisdiction in which the particular counterpart is being recorded.
All of such counterparts together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Assignment on this
2nd day of July, 1997.
GRANTOR:
KEYSPAN NATURAL FUEL, LLC
By: /s/ ZAIN MIRZA
------------------------------------
Zain Mirza
Chief Financial Officer
GRANTEE:
THE HOUSTON EXPLORATION COMPANY, INC.
By: /s/ THOMAS W. POWERS
------------------------------------
Thomas W. Powers
Senior Vice President
RETURN RECORDED INSTRUMENT TO:
Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas 77002-6760
Attention: Yvonne Onak
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<PAGE> 56
STATE OF NEW YORK )
) ss.
COUNTY OF KINGS )
The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Zain Mirza as Chief Financial Officer for KEYSPAN NATURAL FUEL,
LLC, a Delaware limited liability company, on behalf of the company.
Witness my hand and official seal.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
STATE OF NEW YORK )
) ss.
COUNTY OF KINGS )
The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Thomas W. Powers as Senior Vice President for THE HOUSTON
EXPLORATION COMPANY, INC., a Delaware corporation, on behalf of the
corporation.
Witness my hand and official seal.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
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<PAGE> 57
EXHIBIT E
FORM OF
MANAGEMENT AGREEMENT
This Management Agreement (the "Agreement"), dated as of January 1,
1997, is by and between KEYSPAN NATURAL FUEL, LLC, a Delaware limited liability
company (the "Company") and THE HOUSTON EXPLORATION COMPANY, INC., a Delaware
corporation ("Manager") (collectively, the "Parties").
RECITALS
A. The Company owns a working interest and/or a royalty interest
in certain Wells that comprise the Assets;
B. Manager has the resources and expertise necessary to operate
and manage the Assets and to provide the management services to the Company as
set forth in this Agreement (collectively the "Services" as defined in Article
2 below);
C. The Company desires to retain Manager to provide such Services
and Manager desires to provide such Services all pursuant to the terms of this
Agreement; and
D. The Company recognizes that Manager owns and operates other
properties and that Manager will be operating such properties in the best
interest of the owners of those properties. Notwithstanding the foregoing, the
Parties intend that Manager be held to the standard of performance set forth
herein and in the operating agreements covering the Assets.
AGREEMENT
In consideration for the mutual promises hereunder, the Parties agree
as follows:
ARTICLE 1
DEFINITIONS
All capitalized terms used herein without definition shall have the
meanings ascribed thereto in the Assignment of Oil and Gas Leases with
Reservation of Production Payment dated effective January 1, 1997 (the
"Assignment"), by and between the Company and Manager ("Seller"), or in the
case of the terms "Assets," "Environmental Laws," "Losses," "Post-Effective
Date Liabilities" and "Wells," in the Purchase and Sale Agreement dated January
1, 1997, by and between the Company and Seller (the "Purchase and Sale
Agreement").
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ARTICLE 2
SERVICES
2.1 Subject to Section 2.2 hereof, the constraints of applicable
operating and other agreements to which all or any portion of the Assets are
now or hereafter subject and the other terms of this Agreement, Manager agrees
to manage the Assets for and on behalf of the Company, such management to
include, without limitation, performance of the following management functions
(the "Services") all of which are hereby expressly authorized by the Company:
(a) Operate, manage, and maintain the Assets.
(b) Gather, process condition, market, deliver, transport
and sell gas, oil and related hydrocarbons produced by the Company from the
Assets, and pay or cause to be paid all royalties and production payments
(including, without limitation, the Production Payment), and all other such
payment obligations arising in connection with the Assets or the production of
hydrocarbons therefrom; provided, however, that Manager shall obtain the
approval of the Company to enter into any sales or marketing agreement which
has a term of one year or greater.
(c) Operate the Assets in compliance in all material
respects with all federal, state (including any duly constituted federal or
state regulatory body), and local laws, ordinances, rules, regulations and
orders applicable to the Assets.
(d) Operate the Assets in compliance in all material
respects with all Environmental Laws and to implement and complete, or cause to
be implemented and completed, any remedial, removal or other response action
required on the Assets under applicable Environmental Laws, with such actions
to be implemented and completed in accordance with customary industry practices
and in compliance with applicable Environmental Laws.
(e) Inform the Company of any pending or threatened
action or investigation of which the Manager receives written notice and which
Manager believes in good faith could have a material adverse impact on the
Assets, including all actions initiated or investigations threatened by a third
party or governmental authority under applicable Environmental Laws.
(f) Manage and dispose of all solid and/or hazardous
wastes generated in connection with the operation of the Assets in compliance
in all material respects with applicable Environmental Laws and to initiate and
complete any remedial, removal or other response actions required under
applicable Environmental Laws in response to any release of a hazardous
substance on or in connection with the Assets.
(g) Employ or contract for the services of any Person
required by Manager, in its reasonable discretion, to assist Manager in the
performance of any of its duties and responsibilities under this Agreement,
including, without limitation, any legal, accounting, geological, geophysical,
engineering, operating and other services and advice as the Manager deems
advisable, in its reasonable discretion, from any Person.
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(h) Pay and perform all obligations of the Company which
relate to the Assets, including, without limitation, the payment to itself, on
behalf of the Company, of all money to which it becomes entitled pursuant to
the Assignment and the Agreement, and payment to third parties, on behalf of
the Company, of working interest expenses attributable to the Assets.
(i) Maintain insurance with respect to the Assets as is
reasonable and customary in the industry, including insurance of the types and
amounts set forth in the certificate furnished to Buyer pursuant to Section 9.2
of the Purchase Agreement and with respect to all such insurance, cause the
Company to be named as an additional insured on all such insurance policies.
(j) Execute and file and record, when appropriate or
required, all assignments and other regulatory instruments relating to the
Assets.
(k) Establish and maintain all bank accounts, books and
records, capital accounts, Net Profits Account and other accounts as are
required or convenient to operate the Assets.
(1) Perform all accounting and reporting as required by
the Assignment, the Purchase and Sale Agreement, and any other agreement
relating to the Assets and to which the Company is subject.
All accounting and reporting shall be performed in accordance with the
provisions of this Agreement, consistently applied. Such accounting and
reporting may initially be performed based on estimated figures, and
subsequently based on actual figures. Beginning with the Payment Period
commencing on January 1, 1997, and every applicable Payment Period thereafter,
Manager shall prepare and furnish to the Company within 30 days after the end
of such Payment Period a Quarterly Report. "Quarterly Report" shall mean a
report detailing gas production and sales from the Assets attributable to the
Wells for the applicable Payment Period. Such Quarterly Report shall include
(1) an accounting of the Net Profits Account, including a summary of all
credits and debits, (2) an accounting of the Company's share of all tax credit
qualified gas sales and production and total gas sales and production
attributable to the Assets and produced from the Wells, and (3) all other
information necessary and sufficient for the Company to calculate and verify
any Credit Payment Amount and to estimate its taxable income with respect to
the Assets.
On or before December 15th of each year, Manager shall furnish to the
Company a report covering the fiscal year ended September 30 (referred to
herein as the "Annual Report"), based upon mutually agreeable procedures, of
(1) the Net Profits Account, including all credits and debits, (2) the
Company's share of all tax credit qualified gas sales and production and total
gas sales and production attributable to the Assets and produced from the
Wells, (3) credits under Section 29 of the Internal Revenue Code of 1986, as
amended, ("IRC") which are attributable to the Assets, and (4) all other
information necessary and sufficient for the Company to calculate and report
its taxable income with respect to the Assets for the fiscal year ended on
September 30. If the production figures reported by Manager are amended by
Manager or any other operator or producer subsequent to Manager furnishing an
Annual Report to the Company, an amended Annual Report for the affected time
period shall be furnished to the Company within 60 days after the end of a
calendar quarter during which Manager received the amended production figures.
Notwithstanding the
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immediately foregoing, Manager shall have no obligation to amend a prior Annual
Report if the applicable period of limitations for the Internal Revenue Service
to make assessments with respect to the year in question has expired.
(m) Manage all contracts relating to the Assets to which
the Company is or becomes a party (except for the Purchase and Sale Agreement).
(n) Receive and collect all revenues and income
attributable to the Assets, including, without limitation, all Gross Proceeds
and Other Income.
(o) Negotiate, execute and deliver all contracts and
agreements and amendments to existing contracts and agreements affecting the
Assets which the Manager believes are necessary or desirable in connection with
the ownership, development, operation, production and maintenance of the Assets
or to perform any of the Services hereunder; provided, however, that Manager
shall obtain the approval of the Company to enter into any contract or
agreement which will have a cost to the Company exceeding $15,000.
(p) Assume the defense of, handle, investigate and/or
settle all claims, demands, causes of action, lawsuits and other proceedings
which relate in any way to the Assets or the Services performed pursuant to
this Agreement; provided, however, that Manager shall obtain the approval of
the Company to enter into a settlement of any claim or action which will have a
cost to the Company exceeding $10,000.
(q) All other acts and things as are necessary to carry
out the Manager's responsibilities under this Agreement.
Notwithstanding anything herein provided to the contrary, if
the Manager is not at any time the operator of a particular portion of the
Assets, the obligations of the Manager under this Agreement with respect to
such portion of the Assets, which have reference to operations or activities
which pursuant to contracts which are now or hereafter in effect are carried
out or performed by the operator, shall be construed to require only that the
Manager use reasonable efforts to cause the operator of such portion of the
Assets to take such actions or render such performance within the constraints
of the applicable contracts.
2.2 The Parties anticipate that the Gross Proceeds and Other
Income from the Assets will be sufficient to pay for all of the Services
hereunder and Manager is expressly authorized to use the Gross Proceeds and
Other Income from the Assets for such purpose. Unless Manager obtains the
prior written approval of the Company and except for emergency situations,
Manager will not undertake or approve Services or operations on the Assets that
in any instance will be anticipated to involve costs and expenses exceeding
Gross Proceeds and Other Income for such period when such costs and expenses
are payable and which excess costs and expenses cannot reasonably be expected
to be recouped from the Gross Proceeds and Other Income from a subsequent
period or periods. Unless Manager obtains the prior written approval of the
Company, Manager shall not undertake or approve Services or operations on the
Assets which will exceed cost levels or estimates previously approved by the
Company. If Manager reasonably anticipates the costs and expenses to
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be incurred during a particular period in order to perform the Services
hereunder for such period will (a) exceed Gross Proceeds and Other Income for
that same period, but that the excess costs and expenses over Gross Proceeds
and Other Income reasonably will be expected to be recouped from the Gross
Proceeds and Other Income from a subsequent period or periods, or (b) exceed
cost levels or estimates previously approved by the Company, then Manager shall
forward to the Company a request for the amount of funds required for the
Manager to timely perform such Services, together with documentation supporting
Manager's request. The Company shall respond to Manager's request on or before
10 business days after receipt of such request. If the Company in its
reasonable discretion elects to grant Manager's request, the Manager will
undertake such Service or operations on the Assets and the Company shall pay to
Manager the funds required for the Manager to timely perform such Services,
with the Company to recoup all such funds out of the revenues and income
collected by the Manager pursuant to Section 2.1(n) above on a schedule to be
determined by the Parties. Notwithstanding the foregoing, the Company shall
have no obligation to pay any costs or expenses from any source other than from
Gross Proceeds, Other Income and the amounts paid by the Company pursuant to
Section 2.3(a).
2.3 (a) The Manager shall invoice the Company for costs and
expenses incurred during each Payment Period in an amount not to exceed the
Credit Payment Amount for such Payment Period. Such invoice shall be delivered
not later than 45 days following the end of such Payment Period. The Company
shall pay the amount due pursuant to each invoice not later than 75 days
following the end of the applicable Payment Period.
(b) The amounts paid to Manager pursuant to Section
2.3(a) together with the revenues collected by the Manager pursuant to Section
2.1(n) above shall be used by the Manager to pay for the Services hereunder
including the payment of and to pay the Production Payment under the Assignment
and the payment of the Management Fee under this Agreement.
(c) Any Person is entitled to rely on this Agreement as
granting to the Manager the power and authority to manage the Assets and to
perform each of the Services on behalf of the Company. Although the Company
acknowledges that no further action or documentation is required to be given by
the Company in order to authorize or empower the Manager to manage the Assets
and to perform any of the Services on behalf of the Company, the Company agrees
to promptly furnish to the Manager whatever documentation or to promptly take
whatever action is requested by Manager to evidence that the Manager has the
power and authority to manage the Assets and to perform the Services on behalf
of the Company.
ARTICLE 3
PERFORMANCE OF SERVICES
Manager agrees to use reasonable efforts to perform all of the
Services in a reasonable and prudent manner consistent with good oil field and
business practices and taking into account the tax credits available with
respect to production from the Subject Interests. Notwithstanding any other
provision of the Agreement, it is expressly agreed that the Services rendered
by manager shall be as an independent contractor and the Company shall have no
supervision or control over the manner
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or method used by Manager in performing the tasks and duties set forth herein.
The Company's sole interest shall be in the results obtained.
ARTICLE 4
MANAGEMENT FEE
The Company shall pay Manager a fee of $8,333 per month during the
term of this Agreement (the "Management Fee"). The Management Fee is intended
to reimburse Manager for all of its internal administrative expenses incurred
in managing the Assets. The Parties understand that the Management Fee does
not cover COPAS overhead charges payable to any Person (including Manager) with
respect to the Assets under any applicable operating or other agreement, and
Manager shall pay such overhead charges pursuant to Section 2.1(h) as part of
the Company's obligations relating to the Assets. In addition, with respect to
any Well which is not covered by an operating agreement, Manager shall be
entitled to charge the Company and to pay to itself out of the revenue and
income collected by it pursuant to Section 2.1(n) or 2.2(a) above, a monthly
overhead charge of $125 per well; provided, however that such well rates shall
be adjusted in the manner provided for in Paragraph l(A)(3) of Section III of
the 1984-Onshore COPAS Accounting Procedure.
ARTICLE 5
INDEMNIFICATION
5.1 Manager shall defend, indemnify and hold harmless the Company,
and its officers, directors, employees, and agents, from and against all Losses
which arise directly or indirectly from or in connection with Manager's
management of the Assets and performance of the Services during the term of
this Agreement (including any breach of its duties and obligations under this
Agreement). THIS INDEMNITY SHALL INCLUDE ANY LOSSES ARISING OUT OF THE SOLE,
JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENT (BUT NOT GROSS NEGLIGENCE) OF ANY
INDEMNIFIED PARTY.
5.2 Manager shall defend, indemnify and hold harmless the Company,
and its officers, directors, employees, and agents, from and against all Losses
which arise directly or indirectly from or in connection with environmental
matters, including without limitation, any violation of any Environmental Law
and any remedial, removal or other expense obligation under any Environmental
Law, to the extent that Manager, or its successors or assigns, is jointly
liable with the Company and such environmental matters are attributable to the
period of time during which this Agreement is in force and effect. THIS
INDEMNITY SHALL INCLUDE ANY LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT
OR SUCCESSIVE NEGLIGENT (BUT NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY.
ARTICLE 6
ASSIGNMENT
The rights and obligations of the Company under this Agreement may not
be assigned or delegated by the Company, except to an Affiliate of the Company,
unless the Manager has consented to such assignment in writing, which consent
shall not be unreasonably withheld, delayed or
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conditioned. The rights, duties and obligations of Manager under this
Agreement may not be assigned or delegated by Manager in whole or in part
unless the Company has consented thereto in writing which consent shall not be
unreasonably withheld, delayed or conditioned. Nothing contained in this
Article 6 shall prevent Manager from engaging qualified contractors,
subcontractors, vendors and suppliers in the ordinary course of operating and
managing the Subject Interests, but no such engagement shall relieve Manager of
any of its duties or obligations hereunder.
ARTICLE 7
TERM/TERMINATION
7.1 The term of this Agreement shall commence on the Effective
Date hereof and shall continue until the date on which the earliest of the
following occurs:
(a) January 1, 2014 , and thereafter, this Agreement
shall continue on a year-to-year basis until terminated by either
party upon 90 days written notice to the other party.
(b) delivery of written notice of termination by the
Company to Manager following the occurrence of any of the following:
(i) at any time if Manager breaches any material
provision of this Agreement and Manager fails or refuses to
cure them and within 30 days after written notice from the
Company identifying such failure and stating that the failure
to cure the same may result in the termination of this
Agreement and the Option (or, if such cure reasonably requires
more than 30 days to complete, Manager has not promptly
commenced actions for such cure, and prosecuted such actions
with diligence after receipt of such notice);
(ii) at any time if Manager has been guilty of
gross negligence or willful misconduct in carrying out its
duties hereunder;
(iii) at any time if there is instituted by or
against Manager any proceedings under the Bankruptcy Reform
Act of 1978, as amended, under any other bankruptcy law, or
under any other law for the relief of debtors now or hereafter
existing, or a receiver is appointed for all or substantially
all of the assets of Manager, and such proceeding is not
dismissed or such receiver is not discharged, as the case may
be, within 30 days thereafter; or
(iv) at any time if manager shall (A) become
insolvent, (B) generally fail to or admit in writing its
inability to, pay debts as they become due, and (C) make a
general assignment for the benefit of creditors, (D) apply
for, consent to or acquiesce in the appointment of a trustee,
receiver, or other custodian.
(c) upon exercise of the Option, this Agreement shall
terminate; and
(d) at any time on 90 days written notice by the Company
to the Manager.
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Any termination of this Agreement, shall be without prejudice to the right of
the party not in default to collect any amounts then due and without waiver of
any other remedy to which the party not in default may be entitled for breach
of this Agreement. Upon termination of this Agreement (other than pursuant to
clause (c) above), Manager shall deliver to the Company or its designated
agent, copies of all title files, division order files, well files, production
records, equipment inventories, and production, severance and ad valorem tax
records pertaining to the Wells and other information about the Assets
reasonably requested by the Company.
ARTICLE 8
MISCELLANEOUS
8.1 This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the Parties
hereto and delivered to the other Party.
8.2 This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
8.3 All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally, sent by documented
overnight delivery service or, to the extent receipt is confirmed, by United
States mail, telecopy, telefax or other electronic transmission service to the
appropriate address as set forth below.
If to Manager: The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Attn: Thomas W. Powers
Telephone: (713) 652-2847
Fax: (713) 652-4017
If to Company: KeySpan Natural Fuel, LLC
One Metrotech Center
Brooklyn, New York 11201
Attention: Zain Mirza
Telephone: (718) 403-2260
Fax: (718) 858-6431
or at such other address and to the attention of such other person as such
Party may designate by written notice to the other Party.
8.4 The Company shall be deemed to have given its approval to
Manager for any matter requiring the Company's approval if the Company fails to
affirmatively give or deny its approval to Manager within 7 days of receipt
from Manager of a request for approval under this Agreement.
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8.5 Subject to Article 6 hereof, this Agreement shall be binding
upon and inure to the benefit of the Parties and their respective successors
and permitted assigns.
8.6 This Agreement may not be modified or amended except by an
instrument or instruments in writing signed by the Parties. Any party hereto
may, only by an instrument in writing, waive compliance by another Party with
any term or provision of this Agreement on the part of such other Party to be
performed or complied with. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
8.7 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 shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any adverse manner to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties hereto shall 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 manner to the end that the
transactions contemplated - hereby are fulfilled to the extent possible.
8.8 This Agreement is not intended to create, and shall not be
construed to create, a relationship of partnership or an association for profit
between the Manager and the Company.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
KEYSPAN NATURAL FUEL, LLC
By: /s/ ZAIN MIRZA
---------------------------------
Zain Mirza
Chief Financial Officer
THE HOUSTON EXPLORATION COMPANY, INC.
By: /s/ THOMAS W. POWERS
---------------------------------
Thomas W. Powers
Senior Vice President
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MEMORANDUM OF MANAGEMENT AGREEMENT
This MEMORANDUM OF MANAGEMENT AGREEMENT is effective as of January 1,
1997, and is executed by and between KEYSPAN NATURAL FUEL, LLC, a Delaware
limited liability company (the "Company") and THE HOUSTON EXPLORATION COMPANY,
INC., a Delaware corporation ("Manager") (collectively, the "Parties").
The Parties hereby give notice that they have entered into a
Management Agreement dated as of the date hereof, whereby the Company
contracted with Manager to perform certain operating and management services
relative to the lands and leases identified on Exhibit A and to the wells
identified on Exhibit B (collectively, the "Assets").
Manager has agreed to manage the Assets for and on behalf of the
Company, by performing certain management services (the "Services"), as limited
and described in more detail in the Management Agreement, which Services
include but are not limited to the following:
(a) Operate, manage, and maintain the Assets.
(b) Gather, process condition, market, deliver, transport
and sell gas, oil and related hydrocarbons produced by the Company from the
Assets, and pay or cause to be paid all royalties and production payments
(including, without limitation, the Production Payment), and all other such
payment obligations arising in connection with the Assets or the production of
hydrocarbons therefrom; provided, however, that Manager shall obtain the
approval of the Company to enter into any sales or marketing agreement which
has a term of one year or greater.
(c) Operate the Assets in compliance in all material
respects with all federal, state (including any duly constituted federal or
state regulatory body), and local laws, ordinances, rules, regulations and
orders applicable to the Assets.
(d) Operate the Assets in compliance in all material
respects with all Environmental Laws and to implement and complete, or cause to
be implemented and completed, any remedial, removal or other response action
required on the Assets under applicable Environmental Laws, with such actions
to be implemented and completed in accordance with customary industry practices
and in compliance with applicable Environmental Laws.
(e) Inform the Company of any pending or threatened
action or investigation of which the Manager receives written notice and which
Manager believes in good faith could have a material adverse impact on the
Assets, including all actions initiated or investigations threatened by a third
party or governmental authority under applicable Environmental Laws.
(f) Manage and dispose of all solid and/or hazardous
wastes generated in connection with the operation of the Assets in compliance
in all material respects with applicable Environmental Laws and to initiate and
complete any remedial, removal or other response actions required under
applicable Environmental Laws in response to any release of a hazardous
substance on or in connection with the Assets.
E-10
<PAGE> 67
(g) Employ or contract for the services of any Person
required by Manager, in its reasonable discretion, to assist Manager in the
performance of any of its duties and responsibilities under this Agreement,
including, without limitation, any legal, accounting, geological, geophysical,
engineering, operating and other services and advice as the Manager deems
advisable, in its reasonable discretion, from any Person.
(h) Pay and perform all obligations of the Company which
relate to the Assets, including, without limitation, the payment to itself, on
behalf of the Company, of all money to which it becomes entitled pursuant to
the Assignment, and payment to third parties, on behalf of the Company, of
working interest expenses attributable to the Assets.
(i) Maintain insurance with respect to the Assets as is
reasonable and customary in the industry, including insurance of the types and
amounts set forth in the certificate furnished to Buyer pursuant to Section 9.2
of the Purchase Agreement and with respect to all such insurance, cause the
Company to be named as an additional insured on all such insurance policies.
(j) Execute and file and record, when appropriate or
required, all assignments and other regulatory instruments relating to the
Assets.
(k) Establish and maintain all bank accounts, books and
records, capital accounts, Net Profits Account and other accounts as are
required or convenient to operate the Assets.
(1) Perform all accounting and reporting as required by
the Assignment, the Purchase and Sale Agreement, and any other agreement
relating to the Assets and to which the Company is subject.
(m) Manage all contracts relating to the Assets to which
the Company is or becomes a party (except for the Purchase and Sale Agreement).
(n) Receive and collect all revenues and income
attributable to the Assets, including, without limitation, all Gross Proceeds
and Other Income.
(o) Negotiate, execute and deliver all contracts and
agreements and amendments to existing contracts and agreements affecting the
Assets which the Manager believes are necessary or desirable in connection with
the ownership, development, operation, production and maintenance of the Assets
or to perform any of the Services hereunder; provided, however, that Manager
shall obtain the approval of the Company to enter into any contract or
agreement which will have a cost to the Company exceeding $15,000.
(p) Assume the defense of, handle, investigate and/or
settle all claims, demands, causes of action, lawsuits and other proceedings
which relate in any way to the Assets or the Services performed pursuant to
this Agreement; provided, however, that Manager shall obtain the approval of
the Company to enter into a settlement of any claim or action which will have a
cost to the Company exceeding $10,000.
E-11
<PAGE> 68
(q) All other acts and things as are necessary to carry
out the Manager's responsibilities under this Agreement.
Notwithstanding anything herein provided to the contrary, if the
Manager is not at any time the operator of a particular portion of the Assets,
the obligations of the Manager under the Management Agreement with respect to
such portion of the Assets, which have reference to operations or activities
which pursuant to contracts which are now or hereafter in effect are carried
out or performed by the operator, shall be construed to require only that the
Manager use reasonable efforts to cause the operator of such portion of the
Assets to take such actions or render such performance within the constraints
of the applicable contracts.
The Management Agreement is effective for the period from January 1,
1997 until terminated in accordance with its terms.
This Memorandum of Management Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
IN WITNESS WHEREOF, the Parties have executed this Memorandum of
Management Agreement as of the date first above written.
KEYSPAN NATURAL FUEL, LLC
By: /s/ ZAIN MIRZA
---------------------------------
Zain Mirza
Chief Financial Officer
THE HOUSTON EXPLORATION COMPANY, INC.
By: /s/ THOMAS W. POWERS
---------------------------------
Thomas W. Powers
Senior Vice President
E-12
<PAGE> 69
STATE OF NEW YORK )
) ss.
COUNTY OF KINGS )
The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Zain Mirza as Chief Financial Officer for KEYSPAN NATURAL FUEL,
LLC, a Delaware limited liability company, on behalf of the company.
Witness my hand and official seal.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
STATE OF NEW YORK )
) ss.
COUNTY OF KINGS )
The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Thomas W. Powers as Senior Vice President for THE HOUSTON
EXPLORATION COMPANY, INC., a Delaware corporation, on behalf of the
corporation.
Witness my hand and official seal.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
RETURN RECORDED INSTRUMENT TO:
Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas 77002-6760
Attention: Yvonne Onak
E-13
<PAGE> 70
EXHIBIT F
FORM OF CERTIFICATE OF NON-FOREIGN OWNERSHIP
Section 1445 of the Internal Revenue Code provides that a buyer of a
United States real property interest must withhold tax if the seller is a
foreign person. To inform KeySpan Natural Fuel, LLC (the "Buyer") that
withholding of tax is not required upon the disposition of a United States real
property interest owned by The Houston Exploration Company, Inc. (the
"Seller"), the undersigned hereby certifies the following on behalf of Seller:
1. The Seller is not a non-resident alien, foreign
corporation, foreign partnership, foreign trust, or
foreign estate (as those terms are defined in the
Internal Revenue Code and Income Tax Regulations);
2. The United States employer/taxpayer identification
number of the Seller is 22-2674487; and
3. Seller's address is:
The Houston Exploration Company
1331 Lamar, Suite 1065
Houston, Texas 77010
Seller understands that this certification may be disclosed to the Internal
Revenue Service by the Buyer and any false statement contained herein may be
punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete, and I further declare that I have authority to sign this document
on behalf of Seller.
By: /s/ THOMAS W. POWERS
--------------------------------
Thomas W. Powers
Senior Vice President
Subscribed and sworn before me this 2 day of July, 1997.
/s/ CHARLES KLEIN
-----------------------------------
Notary Public
Name:
------------------------------
Address:
---------------------------
My commission expires: 2/28/99
-------------
(SEAL) Charles Klein
Notary Public, State of New York
No. 24-01KL4766052
Qualified in Kings County
Commission Expires Feb. 28, 1999
F-1
<PAGE> 71
EXHIBIT G
TO
PURCHASE AND SALE AGREEMENT
RESERVE REPORT
[EXHIBIT G HAS BEEN OMITTED AS IT CONTAINS A DETAILED RESERVE REPORT OF ALL
WELLS PURCHASED AND SOLD]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF THE HOUSTON EXPLORATION COMPANY SET FORTH IN THE
COMPANY'S FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,477
<SECURITIES> 0
<RECEIVABLES> 35,606
<ALLOWANCES> 0
<INVENTORY> 1,456
<CURRENT-ASSETS> 40,002
<PP&E> 590,078
<DEPRECIATION> 200,501
<TOTAL-ASSETS> 430,431
<CURRENT-LIABILITIES> 39,695
<BONDS> 86,500
0
0
<COMMON> 233
<OTHER-SE> 241,401
<TOTAL-LIABILITY-AND-EQUITY> 430,431
<SALES> 47,064
<TOTAL-REVENUES> 47,548
<CGS> 0
<TOTAL-COSTS> 34,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 429
<INCOME-PRETAX> 12,195
<INCOME-TAX> 3,060
<INCOME-CONTINUING> 9,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,135
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
