<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
INTERCOAST ENERGY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 1311 42-1456354
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
666 GRAND AVENUE, 26TH FLOOR
DES MOINES, IOWA 50309
(515) 281-2693
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DONALD C. HEPPERMANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
666 GRAND AVENUE, 26TH FLOOR
DES MOINES, IOWA 50309
(515) 281-2693
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
LYNNWOOD R. MOORE, JR., ESQ. MARGO S. SCHOLIN, ESQ.
CONNER & WINTERS, A PROFESSIONAL BAKER & BOTTS, L.L.P.
CORPORATION 3000 ONE SHELL PLAZA, 910 LOUISIANA
2400 FIRST PLACE TOWER, 15 EAST 5TH HOUSTON, TEXAS 77002
STREET
TULSA, OKLAHOMA 74103-4391
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $0.01 par value.... 7,072,500 shares $16.00 $113,160,000 $39,021
==========================================================================================
</TABLE>
(1) Includes 922,500 shares subject to an over-allotment option to be granted
to the Underwriters by the Company.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K.
<TABLE>
<CAPTION>
REGISTRATION
STATEMENT ITEM HEADING IN THE FORM PROSPECTUS CAPTION
-------------- ------------------- ------------------
<C> <S> <C>
1. Forepart of the
Registration Statement and
Outside Front Cover Page
of Prospectus............. Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of Inside Front and Outside Back Cover
Prospectus................ Pages
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed Prospectus Summary; Risk Factors;
Charges................... The Company
4. Use of Proceeds............ Prospectus Summary; Use of Proceeds
5. Determination of Offering Outside Front Cover Page;
Price..................... Underwriting
6. Dilution................... Dilution
7. Selling Security Holders... *
8. Plan of Distribution....... Outside Front Cover Page;
Underwriting
9. Description of Securities
to Be Registered.......... Description of Capital Stock
10. Interests of Named Experts
and Counsel............... *
11. Information with Respect to Prospectus Summary; The Company;
the Registrant............ Dividend Policy; Unaudited Pro
Forma Combined Financial
Statements; Selected Historical
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business and
Properties; Relationship Between
the Company and the Parent;
Management; Certain Transactions;
Principal Stockholder; Description
of Capital Stock; Shares Eligible
for Future Sale; Financial
Statements
12. Disclosure of Commission
Position on
Indemnification for
Securities Act
Liabilities............... *
</TABLE>
- --------
* Not applicable or answer thereto is negative.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1996
6,150,000 SHARES
INTERCOAST ENERGY COMPANY
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby (the "Offering") are being
offered by InterCoast Energy Company ("InterCoast" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock
of the Company (the "Common Stock"). It is currently estimated that the initial
public offering price will be between $ and $ per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Application will be made to list the Common
Stock on the New York Stock Exchange.
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................................... $ $ $
- ------------------------------------------------------------------------------------------------------
Total........................................................ $ $ $
- ------------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of Over-Allotment Option(3)..... $ $ $
======================================================================================================
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $ , which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to
the Underwriters to purchase up to 922,500 additional shares, on the same
terms, solely to cover over-allotments. See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to their right to reject orders in whole or in part. It is
expected that delivery of the Common Stock will be made in New York City on
or about , 1996.
-----------
PAINEWEBBER INCORPORATED MERRILL LYNCH & CO.
-----------
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
INTERCOAST ENERGY COMPANY
Note: Throughout this Prospectus, the Company is described as though
InterCoast Power Marketing Company ("InterCoast Power Marketing") were its
wholly owned subsidiary, although InterCoast Power Marketing is still a
subsidiary of MidAmerican Capital Company, the parent of the Company. It has
been determined that any transfer of the capital stock of InterCoast Power
Marketing to the Company may require Federal Energy Regulatory Commission
approval of the transfer of its marketer certificate, which approval, if
required, will be sought and is expected to be received prior to the time that
the Registration Statement of which this Prospectus is a part becomes
effective. If such approval has not been received by that time, the transfer
to the Company will be made in any event, but until InterCoast Power Marketing
has received necessary approval from the Federal Energy Regulatory Commission,
it will engage in electric power transactions as a broker only and not as a
marketer.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. References to "InterCoast" or the "Company"
herein include InterCoast Energy Company and its subsidiaries and their
predecessors unless the context otherwise requires. The information in this
Prospectus assumes an initial public offering price of $16.00 per share of
Common Stock and that, unless otherwise indicated, the Underwriters' over-
allotment option will not be exercised. Pro forma information gives effect to
the April 1996 Sawyer Canyon Acquisition (as hereinafter defined) and to the
acquisition of the assets of GED Gas Services, L.L.C. ("GED"), a natural gas
marketing company, effective November 1995. Certain terms relating to the
energy industry are defined in "Glossary." Investors should carefully consider
the information set forth under the heading "Risk Factors."
THE COMPANY
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange ("CPEX(TM)")
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located in
Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves and cash flow through a balanced focus on
Extensional Infill drilling (as hereinafter defined), strategic acquisitions of
producing properties and regionally focused exploratory drilling. The Company
believes its success has resulted from its ability to (i) identify internally a
large number of desirable Extensional Infill drilling locations, (ii) apply
strict economic and reserve risk criteria to both drilling and acquisition
operations, and (iii) operate as an efficient, low-cost producer. Through the
implementation of this approach, the Company has replaced 390% of its
production at an average finding cost from all sources of $0.84 per Mcfe for
the three year period ended December 31, 1995, after giving pro forma effect to
the Sawyer Canyon Acquisition.
In April 1996, the Company acquired properties in the Sawyer Canyon Field,
Sutton County, Texas (the "Sawyer Canyon Acquisition") from Enron Oil & Gas
Company at a net purchase price of $45.2 million. The acquired properties
include 350 gross (319 net) wells (of which approximately 95% are operated by
the Company) and had estimated net proved reserves of 58.3 Bcfe at December 31,
1995, virtually all of which are natural gas. The acquired properties also
include 37.2 miles of associated gas gathering lines. After giving pro forma
effect to the Sawyer Canyon Acquisition, the Company's estimated net proved
reserves have grown by 201%, from 83.5 Bcfe at December 31, 1992, to 251.0 Bcfe
at December 31, 1995. At December 31, 1995, on a pro forma basis, approximately
76% of the Company's estimated net proved reserves were natural gas, and the
Company's SEC-10 Reserve Value was $223.6 million. Average daily production has
improved from 27.2 MMcfe during 1992 to 85.1 MMcfe during April 1996,
representing an increase of 213%. At March 31, 1996, on a pro forma basis, the
net tangible assets and properties of the Company's natural gas and oil
operations comprised over 97% of the Company's total tangible asset base.
The Company is also engaged in natural gas and wholesale electric power
marketing. The Company provides a range of natural gas marketing services to
industrial and utility customers and natural gas producers in addition to
marketing substantially all of the natural gas produced from Company-operated
wells. In the electric power sector, which is rapidly shifting from being
heavily regulated to becoming a more competitive industry, the Company actively
pursues opportunities for the wholesale brokering, purchasing and marketing of
electricity. The Company's Federal Energy Regulatory Commission ("FERC")
certification as a power marketer became effective in July 1995, allowing it to
purchase electricity and resell it to wholesale purchasers. As a recent entrant
into this business, the Company's strategic thrust is to expand its electric
power marketing business to keep pace with the competitive changes in the
electric industry. In a further move, the Company established commercial
operation of CPEX(TM) in May 1995. CPEX(TM) permits subscribers, including
utilities and other electric power generation, transmission and marketing
companies, to electronically buy and sell wholesale electricity and
transmission services via the Company's proprietary network.
3
<PAGE>
BUSINESS STRENGTHS AND STRATEGIES
The Company believes that it has several key strengths and strategies that
position it to continue as a successful energy company and respond effectively
and rapidly to changing market opportunities. These include:
. Active Extensional Infill Drilling Program. The Company targets drilling
prospects that enhance the economic recovery of natural gas and oil in
producing areas to a level greater than that previously achieved by the
owners of the prevailing leasehold by increasing the density of wells that
penetrate known reservoirs. Typically, development of these prospects
requires that the Company obtain some or all of the rights to drill on
acreage that is held by production. The Company refers to this approach as
"Extensional Infill" drilling which has been implemented by various members
of the Company's current management team since 1985. The Company focuses on
internally generated Extensional Infill drilling opportunities within the
Mid-Continent region, with particular emphasis on north Louisiana, northwest
Oklahoma and the Texas panhandle, and southeast New Mexico. Through its
Extensional Infill drilling program, the Company has developed 53.7 Bcfe of
estimated net proved reserves through the end of 1995 at an average cost of
$0.75 per Mcfe. The Company utilizes an experienced team of geologists,
petroleum engineers and landmen to generate, evaluate and acquire
Extensional Infill prospects, applying strict economic and reserve risk
criteria. The Company's geologists regularly monitor and analyze drilling
and production activities within their geographic areas of expertise to
generate new drilling prospects. Because a majority of the Company's
Extensional Infill prospects involve farmouts on acreage not currently
leased by the Company, the Company is able to maintain a large number of
Extensional Infill prospects without making a major capital investment in an
inventory of undeveloped leasehold acreage. As a result of this approach,
the Company is able to drill prospects on the basis of their technical and
economic merits rather than to retain expiring leasehold positions. During
the three-year period ended December 31, 1995, the Company drilled 87
Extensional Infill wells, 52 of which were completed as commercial
producers. At April 30, 1996, the Company had in excess of 150 Extensional
Infill prospects identified in the core areas in which it operates and
anticipates identifying at least 50 additional prospects during the
remainder of 1996. The Company currently plans to drill at least 27
Extensional Infill wells based on its $12 million 1996 capital budget for
Extensional Infill drilling.
. Strategic Producing Property Acquisitions. The Company seeks strategic
acquisitions of producing properties where it can obtain operational control
and where opportunities exist both to reduce operating costs and increase
production and reserves through Extensional Infill drilling and other
exploitation activities. From April 1, 1992 through April 30, 1996, the
Company acquired 188.6 Bcfe of estimated net proved reserves through 31
acquisitions at an average acquisition cost of $0.67 per Mcfe. In many
situations, the Company's acquisition of producing properties originates
from the identification of Extensional Infill drilling prospects. The
Company's most successful acquisition involving this approach was the
acquisition of its interests in the Elm Grove Field, Bossier Parish,
Louisiana. In early 1994, a Company geologist generated a number of
Extensional Infill drilling prospects in the Elm Grove Field. The Company
was able to acquire the 15 marginal producing wells in the field at a cost
of $6.7 million in August 1994. It then assumed operations of the field and
has since drilled 11 productive wells, recompleted 6 of the 15 existing
wells to access the behind pipe reserves and discovered a deeper productive
zone not previously produced in the field. As a result of the Company's
enhancement efforts, gross average daily production from the Elm Grove Field
has increased from 2 MMcf when acquired to a current rate of 11 MMcf, and
estimated net proved reserves increased from 15.5 Bcfe at the time of
acquisition to approximately 31.8 Bcfe (including net production of 3.3 Bcfe
since its acquisition) at December 31, 1995.
. Regionally Focused Exploratory Drilling Program. The Company initiated a
regionally focused exploratory drilling program in 1994. The Company
generally seeks larger exploratory prospects which are based upon good
subsurface geologic control on unproved structures or features which provide
both significant reserve potential and an opportunity for multiple well
locations. The Company focuses its
4
<PAGE>
exploratory efforts primarily in the Gulf Coast region where its personnel
have extensive experience. The Company currently plans to drill 5 to 7
exploratory wells in 1996, primarily in the Gulf Coast region, based on a
1996 budget for exploratory drilling of $4 million, which represents 25% of
the Company's total drilling budget.
. Efficient Operator. The Company pursues workovers, recompletions and other
production optimization methods in order to exploit the additional
production capabilities of its existing reserve base, new well completions
and newly acquired properties. For this reason, the Company prefers to
operate its properties in order to enhance its ability to maximize their
present value and to maintain control of operating expenses and the timing
and amount of capital expenditures. At April 30, 1996, the Company owned
interests in 2,051 gross (667 net) wells, approximately 32% gross (83% net)
of which are operated by the Company. The Company believes that it is a
low-cost operator as indicated by its lease operating expenses of $0.61 per
Mcfe during 1995 ($0.50 per Mcfe during the first quarter of 1996). The
Company has generally found that it has been able to increase product
prices and reduce costs when compared to the prior operators of its newly
acquired properties.
. Natural Gas Marketing. During the first quarter of 1996, the Company
marketed over 200 MMcf per day of natural gas, including approximately 50
MMcf per day of natural gas from its operated wells. The Company's natural
gas marketing activities provide the Company with the opportunity to
maximize both the current sales volumes and the price received for its
natural gas production and to minimize marketing and transportation costs.
The Company intends to expand its existing natural gas marketing business
and acquire other natural gas marketing companies where strategic synergies
exist. Effective November 1995, the Company acquired the assets of GED, a
natural gas marketing company that specializes in aggregating volumes
purchased from producers, and, in the first quarter of 1996, the Company
opened a natural gas marketing office to focus on market opportunities in
the northern end of the Mid-Continent area.
. Electric Power Marketing. The electric industry is rapidly shifting from
being heavily regulated to becoming a more competitive industry. In 1992,
Congress passed the Energy Policy Act which accelerated competitive trends
within the electric industry. The Company commenced electric wholesale
power brokering operations in October 1993. As a broker, the Company acts
as an intermediary between wholesale buyers and sellers. Effective July
1995, the Company's FERC certification as a power marketer became effective
which allows it to fully engage in the wholesale purchase and sale of
electricity. To date, the Company has brokered and marketed sales of
electricity among over 60 utilities. Since attaining marketer status, the
Company has experienced a steady increase in total quarterly sales. The
Company believes it will be able to capitalize on expanding marketing
opportunities created within the increasingly competitive electric power
industry.
. First Market-Based National Electronic Power Exchange. In May 1995, the
Company launched commercial operation of CPEX(TM), the first market-based
national electronic exchange for the buying and selling of wholesale
electric power and transmission services. As of April 30, 1996, CPEX(TM)
had 30 subscribers with operations in 25 states. Subscribers utilize
CPEX(TM) to electronically buy and sell electricity and transmission
services through on-site computers in the competitive wholesale market for
the next one hour and four hour durations. As both the number of CPEX(TM)
subscribers and their familiarity with the competitive exchange of electric
power have increased, the Company has seen a rapid rise in megawatt hours
("MWh") traded on CPEX(TM). The Company's strategy is to continually
upgrade the capabilities of CPEX(TM) and expand market penetration in order
to maintain its industry leading position in the market-based electronic
trading of wholesale electric power.
5
<PAGE>
RELATIONSHIP WITH PARENT
The Company is currently an indirect wholly owned subsidiary of MidAmerican
Energy Company ("MidAmerican Energy"). MidAmerican Energy, an electric and gas
utility, was formed in July 1995 as a result of the merger of Iowa-Illinois Gas
and Electric Company and Midwest Resources Inc. MidAmerican Energy, through a
wholly owned subsidiary, owns a total of 7,927,500 shares of Common Stock,
which after the Offering will represent approximately 56% (or 53% if the
Underwriters exercise their over-allotment option in full) of the outstanding
Common Stock.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Compa- 6,150,000 shares
ny.................................
Common Stock to be Outstanding after 14,079,500 shares (1)
the Offering.......................
Use of Proceeds..................... The net proceeds of the Offering will be
used to repay indebtedness incurred to
finance the Sawyer Canyon Acquisition and
outstanding under the Company's revolving
credit facility. See "Use of Proceeds."
</TABLE>
- --------
(1) Includes 2,000 restricted shares of Common Stock issuable under the
Company's Non-Employee Director Stock Plan upon completion of the Offering
but does not include 546,600 shares of Common Stock reserved for issuance
pursuant to outstanding options under the Company's Long-Term Incentive
Stock Plan. See "Management--Long-Term Incentive Stock Plan " and
"Management--Director Stock Plan."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth, as of and for each of the periods indicated,
certain summary historical and summary pro forma financial data for the Company
giving effect to certain acquisitions and the Offering. The historical data as
of March 31, 1996 and for the three months ended March 31, 1996 and 1995 are
unaudited and the results for such periods are not necessarily indicative of
results for the full year. In the opinion of management, such unaudited
historical data reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. The summary pro forma financial
information, except in the case of balance sheet data, reflects the Sawyer
Canyon Acquisition and the acquisition of the assets of GED as if such
acquisitions occurred on January 1, 1995 and gives effect to the Offering. The
unaudited summary pro forma balance sheet data reflects the Sawyer Canyon
Acquisition as if it occurred on March 31, 1996 and gives effect to the
Offering. The summary historical financial data should be read in conjunction
with the consolidated financial statements of the Company included elsewhere in
this Prospectus and "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere in this Prospectus. The summary pro forma financial data are
derived from the Unaudited Pro Forma Combined Financial Statements included
elsewhere in this Prospectus, and should be read in conjunction therewith.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1995 1995 1996 1996
-------- -------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
InterCoast Oil and Gas
Company
Gas and oil revenues... $ 37,359 $ 44,466 $ 48,109 $ 61,193 $10,995 $ 15,647 $ 19,072
Gas and oil operating
expenses.............. (9,616) (15,016) (14,552) (17,505) (3,645) (3,508) (4,122)
Depreciation, depletion
and amortization
expense............... (13,535) (18,602) (21,489) (27,897) (5,115) (6,214) (7,567)
General and
administrative
expense, net.......... (2,183) (2,633) (2,288) (2,508) (640) (714) (769)
-------- -------- -------- -------- ------- -------- --------
12,025 8,215 9,780 13,283 1,595 5,211 6,614
-------- -------- -------- -------- ------- -------- --------
InterCoast Energy
Marketing
Natural gas sales
revenues.............. 16,715 13,700 24,066 82,269 1,996 36,868 36,868
Cost of gas sold....... (16,216) (13,142) (23,218) (80,434) (1,874) (36,080) (36,080)
Gathering system
revenues.............. -- -- -- 1,594 -- -- 315
Gathering system
expenses.............. -- -- -- (105) -- -- (31)
Electric power sales
revenues.............. 19 446 421 421 -- 406 406
Cost of electric power
sold.................. -- -- (325) (325) -- (292) (292)
Operating expenses..... (369) (778) (952) (1,918) (209) (596) (596)
General and
administrative
expense............... (163) (314) (410) (410) (103) (181) (181)
-------- -------- -------- -------- ------- -------- --------
(14) (88) (418) 1,092 (190) 125 409
-------- -------- -------- -------- ------- -------- --------
Continental Power
Exchange, Inc.
Administrative and
development expense,
net................... -- (52) (2,346) (2,346) (35) (739) (739)
-------- -------- -------- -------- ------- -------- --------
Corporate expenses..... (1,013) (1,553) (1,554) (2,738) (389) (472) (705)
-------- -------- -------- -------- ------- -------- --------
Income before income
taxes................. 10,998 6,522 5,462 9,291 981 4,125 5,579
Provision for income
taxes................. 4,984 2,637 1,926 3,266 362 1,529 2,037
-------- -------- -------- -------- ------- -------- --------
Net income............. $ 6,014 $ 3,885 $ 3,536 $ 6,025 $ 619 $ 2,596 $ 3,542
======== ======== ======== ======== ======= ======== ========
Average common shares
outstanding........... 7,928 7,928 7,928 14,078 7,928 7,928 14,078
Earnings per common
share................. $ 0.76 $ 0.49 $ 0.45 $ 0.43 $ 0.08 $ 0.33 $ 0.25
======== ======== ======== ======== ======= ======== ========
OTHER DATA:
EBITDA (1)............. $ 24,670 $ 25,356 $ 27,359 $ 37,596 $ 6,179 $ 10,477 $ 13,284
Capital expenditures... 73,700 43,491 43,522 88,762 11,155 14,310 59,550
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1,879 $ 381
Working capital......................................... 1,761 263
Total assets............................................ 205,984 249,726
Long-term debt.......................................... 47,000 --
Stockholders' equity.................................... 105,892 196,634
</TABLE>
- -------
(1) EBITDA is income before income taxes, interest, depreciation, depletion and
amortization. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA NATURAL GAS AND OIL OPERATING AND RESERVE DATA
The following table sets forth summary information, on a historical and pro
forma basis for the Sawyer Canyon Acquisition, with respect to the operation of
the Company's natural gas and oil properties and the Company's estimated proved
natural gas and oil reserves at the end of the periods indicated. See "Business
and Properties--Natural Gas and Oil Reserves" and "Business and Properties--
Production, Prices and Operating Expenses."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- -----------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 1995 1996 1996
------- ------- ------- --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION:
Natural gas (MMcf)..... 12,742 15,591 17,835 25,980 4,066 5,113 6,727
Oil and liquids
(MBbls)............... 691 1,024 1,028 1,045 252 316 320
Total (MMcfe).......... 16,887 21,737 24,003 32,250 5,578 7,008 8,648
AVERAGE SALES PRICE:
Natural gas (per Mcf)
(1)................... $ 2.04 $ 1.82 $ 1.65 $ 1.63 $ 1.61 $ 2.00 $ 2.02
Oil (per Bbl).......... 16.07 14.93 16.45 17.54 16.41 17.64 17.65
AVERAGE COSTS (PER
MCFE):
Lease operating ex-
pense................. $ 0.57 $ 0.69 $ 0.61 $ 0.54 $ 0.65 $ 0.50 $ 0.48
Depreciation, depletion
and amortization...... 0.80 0.86 0.90 0.87 0.92 0.89 0.87
General and administra-
tive, net (2)......... 0.13 0.12 0.10 0.07 0.11 0.10 0.08
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
PRO FORMA
1993 1994 1995 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Natural gas (MMcf).................... 112,023 148,611 133,673 191,427
Oil and liquids (MBbls)............... 8,955 7,304 9,844 9,923
Total (MMcfe)......................... 165,754 192,434 192,737 250,965
Present value of estimated future net
cash flows, before income taxes,
discounted at 10% per annum (in
thousands)........................... $137,711 $144,595 $168,159 $223,571
Standardized measure of discounted fu-
ture net cash flows (in thousands)... $118,202 $126,044 $136,924 $189,778
Percent of proved developed reserves.. 90% 81% 83% 86%
Reserve Life Index (in years) (3)..... 9.8 8.9 8.0 7.8
RESERVE REPLACEMENT DATA:
Finding costs (per Mcfe) (4).......... $ 0.72 $ 0.72 $ 0.84 $ 0.84
Production replacement ratio (5)...... 612% 263% 107% 349%
</TABLE>
- --------
(1) Includes the results of the Company's price risk management activities. See
"Business and Properties--Natural Gas and Oil Production Marketing
Activities."
(2) Before allocation of corporate expenses.
(3) Calculated by dividing year-end proved reserves by annual actual or pro
forma production (as applicable) for the most recent year.
(4) Represents the average finding costs over a three-year period, ending at
the end of the period presented.
(5) Equals current period reserve additions through acquisitions of reserves,
extensions and discoveries, and revisions to prior estimates divided by the
production for such period.
8
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before purchasing the shares of
Common Stock offered hereby.
VOLATILITY OF NATURAL GAS AND OIL PRICES; INDUSTRY CONDITIONS
The Company's financial condition, profitability and future rate of growth
and the carrying value of its natural gas and oil properties are significantly
dependent upon prevailing prices for natural gas, oil and condensate. The
Company's ability to maintain its borrowing capacity and to obtain additional
capital on attractive terms is also substantially dependent upon natural gas
and oil prices. The energy markets have historically been, and are likely to
continue to be, volatile and prices for natural gas and oil are subject to
large fluctuations in response to relatively minor changes in the supply and
demand for natural gas and oil, market uncertainty and a variety of additional
factors beyond the control of the Company. These factors include weather
conditions in the United States, the condition of the United States economy,
the actions of the Organization of Petroleum Exporting Countries, governmental
regulation, political stability in the Middle East and other petroleum
producing areas, the foreign and domestic supply of natural gas and oil, the
price of foreign imports and the availability of alternate fuel sources. A
substantial or extended decline 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, carrying value of its proved reserves and access to
capital. In addition, the marketability of the Company's and third party
production depends upon a number of factors beyond the Company's control,
including the availability and capacity of transportation and processing
facilities, the effect of federal and state regulation of natural gas and oil
production and transportation, changes in supply due to drilling by other
producers and changes in demand. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties--
Natural Gas and Oil Production Marketing Activities."
PRICE RISK MANAGEMENT
In connection with the marketing of its own natural gas production, the
Company has entered into, and intends in the future to enter into, price risk
management contracts and arrangements. See "Business and Properties--Natural
Gas and Oil Production Marketing Activities." These contracts involve fixed
for floating price swap agreements on notional volumes which require payments
to (or the receipt of payments from) counterparties to such agreements based
on the differential between a fixed and variable price for natural gas. The
Company maintains coverage of such notional volumes with adequate physical
volume deliveries at the hub points used to price such agreements. The Company
utilizes these contracts in an effort to reduce risks relating to the
volatility of natural gas prices. However, such transactions may also limit
potential gains by the Company if natural gas prices were to rise
substantially over the price established by the contracts. The contracts are
subject to market risks relating to potential future increases in natural gas
prices which must be managed by the Company on a portfolio basis.
Additionally, credit risks exist because a party to a contract may not be able
to perform the contract in accordance with its terms. The Company is currently
party to swap arrangements covering an amount of natural gas volumes which is
equal to approximately 50% of its current total monthly production of its
equity gas, at a weighted average price of $2.047 per MMBtu at May 1, 1996.
In connection with its third party natural gas marketing activities, the
Company also has entered into, and intends in the future to enter into, price
risk management contracts and arrangements. See "Business and Properties--
Natural Gas and Oil Production Marketing Activities." These contracts and
arrangements relate to natural gas and include forward contracts involving
physical delivery of natural gas, swap agreements which require payments to
(or the receipt of payments from) counterparties to such agreements based on
the differential between a fixed and variable price for natural gas, swap
agreements designed to translate geographic pricing differences ("basis"), New
York Mercantile Exchange ("NYMEX") or other exchange-traded options, over-the-
counter options and other similar contractual arrangements. The Company
utilizes these contracts in an effort to reduce risks relating to the
volatility of natural gas prices. The contracts themselves involve certain
risks, including volatility risks and regional supply and demand aberrations
which must be managed by the Company
9
<PAGE>
on a portfolio basis. Additionally, credit risks exist because a party to a
contract may not be able to perform the contract in accordance with its terms.
There also exists a delivery or receipt risk that the Company or a
counterparty may not be able to fulfill its physical requirements due to
reasons within or outside its control. In the event of non-performance, the
Company may be required to purchase or sell natural gas at prices greatly
above or below market prices to fulfill contractual obligations or the Company
may be required to make certain payments in order to satisfy its obligations
under the contracts, possibly without legal recourse against the non-
performing party. Certain employees of the Company are authorized to enter
into such risk management contracts and arrangements within the Company's risk
management guidelines. There is no assurance that these guidelines will
prevent significant losses relating to these contracts and arrangements.
Further, these guidelines may not adequately address market volatility and
other risks associated with these contracts and arrangements. In addition, the
risk exists that these contracts and arrangements could be entered into or
traded outside of the guidelines. If these employees enter into or buy and
sell these contracts and arrangements outside these guidelines, such activity
could result in significant losses. While the Company is not currently
involved in similar contracts and arrangements with respect to electric power,
it is anticipated that in the future similar types of activities may be
undertaken with respect to electric power.
RESERVE REPLACEMENT RISKS
The Company's future performance is dependent upon its ability to find,
develop and acquire additional natural gas and oil reserves that are
economically recoverable. Without successful drilling or acquisition
activities, the Company's reserves and revenues will decline. No assurances
can be given that the Company will be able to find and develop or acquire
additional reserves at an acceptable cost. Further, the Company's approach to
obtaining drilling rights for its Extensional Infill drilling prospects
depends upon the willingness of property owners to grant the necessary
drilling rights to the Company after the prospects have been identified by the
Company. The Company may encounter difficulty in obtaining grants of farmouts
on certain of its locations on reasonable terms, in which case the Company may
not be able to obtain the drilling rights at all, or it may incur substantial
costs or burdens or experience significant delays before finally obtaining the
desired rights.
The Company's natural gas and oil business is capital intensive and, to
maintain its asset base of natural gas and oil reserves, a significant amount
of cash flow from operations must be reinvested in property acquisitions and
development and exploration activities. To the extent cash flow from
operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investments
to maintain or expand its asset base would be impaired. Without such
investment, the Company's natural gas and oil reserves would decline.
The successful acquisition of producing properties requires an assessment of
recoverable reserves, future natural gas and oil prices and operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact and their accuracy inherently uncertain.
In addition, no assurances can be given that the Company's exploitation and
development activities will result in any increases in reserves. The Company's
operations may be curtailed, delayed or canceled as a result of lack of
adequate capital and other factors, such as title problems, weather,
compliance with governmental regulations or price controls, mechanical
difficulties or shortages or delays in the delivery of equipment. In addition,
the costs of exploitation and development may materially exceed initial
estimates.
RELIANCE ON ESTIMATES OF NATURAL GAS AND OIL RESERVES
The reserve data set forth in this Prospectus represent only estimates of
Netherland, Sewell and Associates, Inc., other third-party petroleum engineers
and the Company. Reserve engineering is a subjective process of estimating the
recovery of underground accumulations of natural gas and oil that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of the available data, of the assumptions made, and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable natural gas and oil reserves and of future net cash
flows therefrom necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development costs
and
10
<PAGE>
workover and remedial costs, all of which may in fact vary considerably from
actual results. As a result, any such estimates are inherently imprecise, and
estimates by other engineers, or by the same engineers at a different time,
might differ materially from those included herein. Actual prices, production,
development expenditures, operating expenses and quantities of recoverable
natural gas and oil reserves will vary from those assumed in the estimates and
such variances may be significant. Any significant variance from the
assumptions could result in the actual quantity of the Company's reserves and
future net cash flow therefrom being materially different from the estimates
set forth in this Prospectus. In addition, the Company's estimated reserves
may be subject to downward or upward revision, based upon production history,
results of future exploration and development, prevailing natural gas and oil
prices, operating and development costs and other factors. The Company's
properties may also be susceptible to hydrocarbon drainage from production by
other operators on adjacent properties. See "Business and Properties--Natural
Gas and Oil Reserves."
The present worth of future net cash flows set forth herein should not be
construed as the current market value of the estimated natural gas and oil
reserves attributable to the Company's properties. In accordance with
applicable requirements of the Securities and Exchange Commission (the
"Commission"), the estimated discounted future net revenues from estimated
proved reserves are based on prices and costs as of the date of the estimate
unless such prices or costs are contractually determined at such date. Actual
future prices and costs may be materially higher or lower. Actual future net
revenues also will be affected by factors such as actual production, supply
and demand for natural gas and oil, curtailments or increases in consumption
by natural gas purchasers, changes in governmental regulations or taxation and
the impact of inflation on costs.
OPERATING RISKS
The natural gas and oil business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures or discharges of toxic gases. Any of these occurrences could result
in substantial losses to the Company due to injury or loss of life, severe
damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. Moreover, offshore
operations are subject to a variety of operating risks peculiar to the marine
environment, such as hurricanes or other adverse weather conditions, to more
extensive governmental regulation, including regulations that may, in certain
circumstances, impose strict liability for pollution damage, and to
interruption or termination of operations by governmental authorities based on
environmental or other considerations. The presence of unanticipated pressure
or irregularities in formations, miscalculations or accidents may cause such
activity to be unsuccessful, resulting in a total loss of the Company's
investment in such activity. Although the Company maintains insurance coverage
considered to be customary in the industry, it is not fully insured against
certain of these risks, either because such insurance is not available or
because of the high premium costs. There can be no assurance that any
insurance obtained by the Company will be adequate to cover any losses or
liabilities, or that such insurance will continue to be available or available
on terms which are acceptable to the Company. See "Business and Properties--
Operational Hazards and Insurance."
CERTAIN RISKS OF NATURAL GAS MARKETING OPERATIONS
The profitability of the Company's natural gas marketing operations depends
in large part on the ability of the Company's management to assess and respond
to changing market conditions in negotiating natural gas purchase and sales
agreements. The inability of management to respond appropriately to changing
market conditions could have a negative effect on the profitability of the
Company's natural gas marketing businesses. Under certain agreements, the
Company is obligated to purchase or sell specified quantities of natural gas
at prices related to the market price. Although the Company attempts to match
its purchase obligations with sales obligations in certain instances, it is
still subject to price risk, particularly where the index or market for
determining the purchase price under a contract is different from the index or
market for determining the sales price under the corresponding contract. The
Company uses financial risk management techniques to hedge its price risk, but
these techniques and actions do not eliminate all such risk. See "--Price Risk
Management."
11
<PAGE>
CERTAIN RISKS AFFECTING CPEX(TM)
The electric energy power exchange business is an emerging industry
characterized by technological change, new product and service introductions
and evolving industry standards. The future success of CPEX(TM) will depend in
large part on the Company's ability to anticipate industry standards, quickly
adopt and integrate industry advancements and enhance its products and
services on a timely basis to keep pace with technological changes and changes
in the power exchange market. Any delay or failure to respond to market or
technological changes or evolving industry standards, or the failure of
CPEX(TM) to achieve market acceptance, could have a material adverse effect on
the future operations of CPEX(TM). Although the Company is developing in-house
capabilities to support its current CPEX(TM) software applications and to
develop new software applications for its CPEX(TM) operations, it will
continue to rely heavily on the services of third party specialty software
development firms. Because of the Company's reliance on such third party
services, it may not be able to control either the software support services
required in its CPEX(TM) operations or the timing of the development and
implementation of new software and hardware configurations, delays in which
could cause the Company to lose market share to its competitors. Further,
there can be no assurance that legal protections relied upon by the Company to
protect the proprietary intellectual property rights underlying its trading
network will be adequate or that the Company's competitors will not
independently develop technologies which are substantially equivalent or
superior to the Company's technologies. The Company's CPEX(TM) operations have
incurred losses since their inception, and there can be no assurance that such
operations will become profitable. CPEX(TM) is in the early stage of
commercial operation, and there can be no assurance of its future viability or
that the Company will recover its investment in CPEX(TM).
CERTAIN RISKS AFFECTING ELECTRIC POWER MARKETING OPERATIONS
Although in the early stages of development, the wholesale electric power
marketing business is very competitive with approximately 200 companies to
date having received FERC certification as power marketers. Many of these
competitors have greater financial resources than the Company and direct
access to generating resources. The Company neither owns nor has any long-term
rights to any electric generating resources. There can be no assurance that
the Company will be able to procure adequate amounts of electricity at
reasonable prices or to find markets for such electricity. The Company has
only recently entered the power marketing business, and its power marketing
operations have incurred losses in the past. There can be no assurance that
such operations will become profitable.
DEPENDENCE ON KEY PERSONNEL; LIMITED OPERATING HISTORY
The Company's operations are dependent upon a relatively small group of
management and technical personnel. The loss of one or more of these
individuals could have a material adverse effect on the Company. See
"Management--Directors and Executive Officers." In addition, the Company's
power marketing and CPEX(TM) operations have a limited operating history and
are essentially start-up operations.
COMPETITION
The energy industry is highly competitive, particularly with respect to the
acquisition of desirable natural gas and oil properties and in marketing
natural gas and oil production and electricity. The Company competes with
major and independent energy companies (including public utilities), as well
as numerous individuals and marketers. The availability of funds and
information relating to a property, the investment criteria utilized by the
Company and the availability of alternate fuel sources are factors which also
affect the Company's ability to compete. In addition, the Company faces
intense competition in the natural gas marketing and power marketing
businesses. Competition is also emerging in electric energy exchange networks.
The Company expects competition to increase in these markets from both
existing competitors and other companies that may enter these markets in the
future. Many of the Company's competitors in its business activities have
financial and other resources and acquisition, exploration and development
budgets that are substantially greater than those of the Company, which may
adversely affect the Company's ability to compete with these companies. See
"Business and Properties--Competition."
12
<PAGE>
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various federal, state and local
governmental regulations which may be changed from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, unitization and pooling
of properties and taxation. From time to time, regulatory agencies have
imposed price controls and limitations on production by restricting the rate
of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas. In addition, the production, handling,
storage, transportation and disposal of oil and gas, by-products thereof and
other substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. These laws and regulations have continually imposed increasingly
strict requirements for water and air pollution control and solid waste
management. To date, expenditures related to compliance with these laws have
not been significant. The Company believes, however, that the trend of more
expansive and stricter environmental legislation and regulations will continue
and such legislation may result in additional costs to the Company in the
future. Amendments to the Resource Conservation and Recovery Act to regulate
further the handling, transportation, storage and disposal of oil and gas
exploration and production wastes have been considered by Congress and may be
adopted. Such legislation, if enacted, could have a significant adverse impact
on the Company's operating costs. See "Business and Properties--Regulation."
Although the Company's natural gas marketing business is generally not
subject to federal or state regulation, many of the parties with whom the
Company does business (including interstate and intrastate pipelines,
gathering and storage companies, and local distribution companies) are subject
to federal and state regulation. As a result, changes in governmental
regulations may have an adverse impact on the Company's natural gas marketing
business. In addition, such parties may also file tariffs at the federal
and/or state level on account of their regulated status, changes in which may
have an adverse effect on the Company's natural gas marketing business.
Finally, because the Company's natural gas marketing business is affiliated
with a regulated utility, it is possible that government regulation could
directly or indirectly adversely impact such a business. See "Business and
Properties--Regulation."
The timing and direction of future federal and state regulatory actions will
likely impact the Company's power marketing and electricity trading exchange
operations. The Company has designed CPEX(TM) and has plans for future system
developments predicated on the regulatory freedom for wholesale and,
eventually, retail electricity users to choose among supply sources and
transmission paths. Federal and state legislation and decisions that federal
and various state regulators make about whether, when and how retail
competition may come about, and the terms and conditions under which
traditional utilities will be allowed to compete, will likely have a
significant bearing on the Company's ability to compete in this market.
Additionally, future changes in the regulation of power marketers and the
regulation of power marketing in general by the FERC or state authorities are
possible. Currently, the Company is essentially free to compete for wholesale
electricity customers across the United States, except for certain
transactions involving MidAmerican Energy. While there are no regulatory
proceedings currently pending or in the planning stages of which the Company
is aware that would further restrict the Company's ability to compete, there
can be no assurance that regulatory changes might not take place in the future
that could adversely impact the Company's ability to compete. See "Business
and Properties--Regulation."
PRINCIPAL STOCKHOLDER
MidAmerican Energy, through its wholly owned subsidiary MidAmerican Capital
Company ("MidAmerican Capital"), owns 7,927,500 shares of Common Stock, which
will represent approximately 56% (or 53% if the Underwriters exercise their
over-allotment option in full) of the outstanding Common Stock after the
Offering. Such concentration of ownership of Common Stock may have an adverse
effect on the market price of the Common Stock. As a result of such stock
ownership, MidAmerican Capital, and its parent company, MidAmerican Energy,
will be able to elect all members of the Board of Directors of the Company
(the "Board
13
<PAGE>
of Directors") and to control the vote on all matters submitted to the Board
of Directors or stockholders, including, without limitation, matters relating
to the Company's exploration, development, capital, operating and acquisition
expenditure plans. It is contemplated that upon completion of the Offering the
Board of Directors will be comprised of seven members, five of whom will be
directors or current or former officers of MidAmerican Energy, MidAmerican
Capital or the Company. See "Relationship Between the Company and the Parent"
and "Principal Stockholder."
The Company and MidAmerican Capital intend to enter into certain agreements,
including a registration rights agreement, a tax sharing agreement, an
administrative services agreement and a general indemnification agreement, to
provide for certain transactions and relationships between the parties. See
"Relationship Between the Company and the Parent--Contractual Arrangements."
The Company and MidAmerican Capital and its other affiliates may enter into
other material transactions and agreements from time to time in the future.
The relationship between the Company and MidAmerican Energy and its other
affiliates may give rise to conflicts of interest with respect to, among other
things, transactions and agreements among the Company and MidAmerican Energy
and its other affiliates, issuances of additional shares of voting securities,
the election of directors or the payment of dividends, if any, by the Company.
There can be no assurance that conflicts will be resolved in favor of the
Company. Further, there are no contractual or other restrictions on the
ability of MidAmerican Energy to engage in oil and gas exploration and
production, natural gas marketing or electric power marketing or in the
operation of an electric power trading exchange. Circumstances presently exist
and could arise in the future in which the Company and MidAmerican Energy
engage in activities in competition with one another. See "Relationship
Between the Company and the Parent--Potential Conflicts of Interest."
MidAmerican Energy and MidAmerican Capital will realize certain benefits as
a result of the Offering, including the creation of a public market for the
Common Stock which will provide a market indication of the value of the
Company. See "Shares Eligible for Future Sale." In addition, all of the net
proceeds to the Company from the Offering will be used to repay a note payable
to MidAmerican Capital, the proceeds of which were used to finance the Sawyer
Canyon Acquisition, and to repay indebtedness under the Company's revolving
credit facility which was borrowed to repay a note payable to MidAmerican
Capital. See "Use of Proceeds."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DILUTION
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between
the Company and the Underwriters and may not be indicative of the future
market price for the Common Stock. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Company has applied to list the Common Stock on the New York Stock Exchange.
No assurance can be made, however, that an active trading market for the
Common Stock will develop or, if developed, that it will be sustained. The
market price of the Common Stock could also be subject to significant
fluctuation in response to variations in results of operations and other
factors. Investors in the Common Stock offered hereby will also experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock. At an assumed public offering price of $16.00 per
share, the dilution to investors would be $2.42 per share. In addition,
MidAmerican Capital acquired its shares of Common Stock at a per share price
that is substantially less than the initial public offering price. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
MidAmerican Capital, the holder of all of the currently outstanding shares
of Common Stock, has agreed not to dispose of any shares of Common Stock
without the prior consent of the representatives of the Underwriters for a
period of 180 days from the date of this Prospectus. The shares of Common
Stock held by MidAmerican Capital are deemed "restricted securities" within
the meaning of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), and may be resold after the 180-day period only upon
registration under the Securities Act or pursuant to an exemption from
registration, including exemptions contained in Rule 144. MidAmerican Capital
has been granted certain rights to demand registration of its shares
14
<PAGE>
of Common Stock at any time commencing six months from the date of the closing
of the Offering. See "Relationship Between the Company and the Parent--
Contractual Arrangements--Registration Rights Agreement." As of May 22, 1996,
options exercisable for 546,600 shares of Common Stock were outstanding under
the Company's 1996 Long-Term Incentive Stock Plan, none of which are currently
exercisable. Generally, all shares issued upon the exercise of such options
will be freely tradeable under the Securities Act. Future sales of substantial
amounts of Common Stock in the public market following the Offering could
adversely affect the market price of Common Stock. The Company is unable to
make any prediction as to the effect, if any, that the future sales of Common
Stock or the availability of Common Stock for sale will have on the market
price of the Common Stock prevailing from time to time. See "Shares Eligible
for Future Sale."
FORWARD-LOOKING STATEMENTS
There are a number of statements in this Prospectus which address
activities, events or developments which the Company expects or anticipates
will or may occur in the future, including such things as future capital
expenditures (including the amount and nature thereof), wells to be drilled or
reworked, natural gas and oil prices and demand, drilling prospects to be
identified, expansion and other development trends of industry segments in
which the Company is active, acquisitions of assets and businesses, production
of natural gas and oil reserves, expansion and growth of the Company's
businesses and operations, and other such matters. These statements are based
on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the risk factors
discussed in this section; general economic, market or business conditions;
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company; changes in laws or regulations and other factors, most
of which are beyond the control of the Company. Consequently, all of the
forward-looking statements made in this Prospectus are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its business or operations.
BLANK CHECK PREFERRED STOCK
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes blank check preferred stock which may have the
effect of discouraging unsolicited acquisition proposals. See "Description of
Capital Stock--Preferred Stock."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently intends to retain its earnings to provide funds for
reinvestment in the Company's businesses, and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. See "Dividend
Policy."
15
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THE COMPANY
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange, CPEX(TM),
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located
in Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves and cash flow through a balanced focus on
Extensional Infill drilling, strategic acquisitions of producing properties
and regionally focused exploratory drilling. The Company believes its success
has resulted from its ability to (i) identify internally a large number of
desirable Extensional Infill drilling locations, (ii) apply strict economic
and reserve risk criteria to both drilling and acquisition operations, and
(iii) operate as an efficient, low-cost producer.
The Company was incorporated in Delaware on May 17, 1996, and is an indirect
wholly owned subsidiary of MidAmerican Energy, an electric and gas utility.
MidAmerican Energy was formed in July 1995 as a result of the merger of Iowa-
Illinois Gas and Electric Company and Midwest Resources Inc. MidAmerican
Energy, through its wholly owned subsidiary, will continue to maintain
effective control over the Company and its operations, including the election
of the Board of Directors, election of officers and dividend policy, as well
as other operational matters.
The Company is organized as a holding company with four direct wholly owned
subsidiaries: (i) InterCoast Oil and Gas Company, formerly named Medallion
Production Company ("InterCoast Oil and Gas"), which conducts the Company's
natural gas and oil exploration and production business, (ii) InterCoast Gas
Services Company ("InterCoast Gas Services"), which conducts the Company's
natural gas marketing business, (iii) Continental Power Exchange, Inc.
("Continental Power Exchange"), which operates CPEX(TM), the Company's market-
based electronic exchange for the buying and selling of wholesale electricity
and transmission services, and (iv) InterCoast Power Marketing Company
("InterCoast Power Marketing"), which conducts the Company's power marketing
and brokering operations.
In 1992, InterCoast Oil and Gas acquired the undeveloped natural gas and oil
properties, prospect inventory and goodwill (name and personnel) of Medallion
Petroleum, Inc. and assumed the operation and management of the Company's
existing natural gas and oil properties. The acquired management of Medallion
Petroleum, Inc. had been engaged in the natural gas and oil business since
1985. Prior to 1992, the Company participated in the oil and gas business
principally as a passive investor in drilling and acquisition operations
conducted by other industry members, including Medallion Petroleum, Inc.
InterCoast Gas Services was formed in May 1996. Portions of its natural gas
marketing operations have been in business since 1985. Continental Power
Exchange was formed in 1994 and commenced commercial operation of CPEX(TM) in
May 1995. InterCoast Power Marketing was formed in 1993. It commenced
brokering electric power transactions in October 1993 and commenced marketing
electric power in July 1995.
The Company's principal executive offices are located at 666 Grand Avenue,
26th Floor, Des Moines, Iowa 50309, and its telephone number is (515) 281-
2693. The principal operating offices of InterCoast Oil and Gas are located at
7130 South Lewis Avenue, Suite 700, Tulsa, Oklahoma 74136, and its telephone
number is (918) 488-8283.
16
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be $90.7 million ($104.5
million if the Underwriters' over-allotment option is exercised in full).
Approximately $45.2 million of such net proceeds will be used to repay in full
indebtedness due MidAmerican Capital under a promissory note (the "MidAmerican
Capital Note"), due on or before April 12, 1997, with interest payable
quarterly at LIBOR plus 55 basis points (6.17% at May 15, 1996). The proceeds
of the MidAmerican Capital Note were utilized in connection with the Sawyer
Canyon Acquisition. See "Business and Properties--Producing Property
Acquisitions--Sawyer Canyon Acquisition." The Company intends to use
approximately $45 million of the net proceeds for the repayment of all
indebtedness anticipated to be outstanding under a new five-year unsecured
$100 million revolving credit facility (the "Credit Facility"). Such
indebtedness will be incurred in order to repay existing indebtedness due
MidAmerican Capital borrowed in connection with financing the Company's
operating and acquisition activities. The Company has received a commitment
from a bank to agent the Credit Facility and anticipates the facility to be in
place prior to consummation of the Offering. The Credit Facility will bear
interest at a rate based on LIBOR plus an additional increment which varies
based on the level of borrowings. Future borrowings under the Credit Facility
will be available for Extensional Infill and exploratory drilling, acquisition
activities and for general corporate purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently intends to retain its earnings to provide funds for
reinvestment in the Company's businesses and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. The Company is a
holding company that conducts substantially all of its operations through its
subsidiaries. As a result, the Company's ability to pay dividends on the
Common Stock will be dependent on the cash flow of its subsidiaries. Payment
of dividends is also subject to then existing business conditions and the
business results, cash requirements and financial condition of the Company,
and will be at the discretion of the Board of Directors. In addition, the
payment of dividends will be subject to certain restrictions under the Credit
Facility, the specific terms of which have not been finalized. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
17
<PAGE>
CAPITALIZATION
The following table sets forth at March 31, 1996: (a) the capitalization of
the Company, (b) the pro forma capitalization of the Company after giving
effect to debt incurred in connection with the Sawyer Canyon Acquisition, and
(c) the as adjusted capitalization of the Company after giving effect to the
transaction described in (b) above, the use of borrowings under the Credit
Facility to pay long-term debt due to MidAmerican Capital as described under
"Use of Proceeds," and the Offering and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's historical and
unaudited pro forma combined financial statements, including the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------
PRO FORMA PRO FORMA
ACTUAL FOR ACQUISITION AS ADJUSTED
-------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Due to MidAmerican Capital............... $ 47,000 $ 47,000 $ --
MidAmerican Capital Note................. -- 45,240 --
-------- -------- --------
Total long-term debt................... 47,000 92,240 --
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized; no shares
issued and outstanding.................. -- -- --
Common stock, $0.01 par value, 25,000,000
shares authorized;
7,927,500 shares issued and outstanding;
14,077,500 shares pro forma as
adjusted................................ 79 79 141
Additional paid-in capital............... 85,995 85,995 176,675
Retained earnings........................ 19,818 19,818 19,818
-------- -------- --------
Total stockholders' equity............. 105,892 105,892 196,634
-------- -------- --------
Total capitalization...................... $152,892 $198,132 $196,634
======== ======== ========
</TABLE>
18
<PAGE>
DILUTION
At March 31, 1996, the net tangible book value of the Company was $100.4
million or $12.66 per share of Common Stock. "Net tangible book value" per
share represents the amount of the Company's tangible net worth (tangible
assets less liabilities) divided by the total number of shares of Common Stock
outstanding. After giving effect as of March 31, 1996, to the receipt of $90.7
million of estimated net proceeds (net of estimated underwriting discounts and
commissions and other estimated offering expenses to be borne by the Company)
from the sale by the Company of 6,150,000 shares of Common Stock at an assumed
public offering price of $16.00 per share, the net tangible book value of the
Common Stock outstanding at March 31, 1996, would have been approximately
$191.1 million or $13.58 per share, representing an immediate increase in net
tangible book value of approximately $0.92 per share to the Company's current
stockholder and an immediate dilution of approximately $2.42 per share to new
investors purchasing the Common Stock at the initial public offering price.
The following table illustrates such per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $16.00
------
Net tangible book value per share at March 31, 1996... $12.66
Increase in net tangible book value per share
attributable to new investors........................ 0.92
------
Net tangible book value per share after the Offering........... 13.58
------
Dilution in net tangible book value per share to new invest-
ors........................................................... $ 2.42
======
</TABLE>
The following table summarizes as of March 31, 1996, after giving effect to
the Offering, the number of shares of Common Stock purchased or to be
purchased from the Company, the total consideration paid or to be paid and the
average price per share paid or to be paid by the Company's existing sole
stockholder and by new investors purchasing shares of Common Stock in the
Offering (assuming an initial public offering price of $16.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder....... 7,927,500 56% $105,892,000 52% $13.36
New investors.............. 6,150,000 44 98,400,000 48 16.00
---------- --- ------------ ---
Total.................... 14,077,500 100% $204,292,000 100%
========== === ============ ===
</TABLE>
The above computations assume no exercise of the Underwriters' over-
allotment option and no exercise of any outstanding stock options. At May 22,
1996, there were outstanding options to purchase 546,600 shares of Common
Stock at an exercise price equal to the initial public offering price per
share for the Common Stock in the Offering. See "Management--Long-Term
Incentive Stock Plan."
19
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined statements of income are
presented as if the acquisitions of the Sawyer Canyon Properties (as
hereinafter defined) and the assets of GED (the "Gas Marketing Assets") and
this Offering had been completed January 1, 1995. The Sawyer Canyon Properties
were acquired in April 1996 for total consideration of $45.2 million, subject
to post-closing adjustment, and the Gas Marketing Assets were acquired
effective November 1995 for total consideration of $1.8 million, subject to
post-closing adjustment. The historical results of the Company include the
results of the Gas Marketing Assets effective as of November 1, 1995. The
accompanying unaudited pro forma combined balance sheet as of March 31, 1996
is presented as if the acquisition of the Sawyer Canyon Properties and this
Offering had occurred on March 31, 1996.
The unaudited pro forma combined financial statements are based on the
assumptions set forth in the notes to such statements. Such pro forma
information should be read in conjunction with the Company's financial
statements and related notes thereto and is not necessarily indicative of the
results that actually would have occurred had the transactions been in effect
on the dates or for the periods indicated, or of results that may occur in the
future.
20
<PAGE>
INTERCOAST ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- -------------------------------------
INTERCOAST SAWYER GAS
ENERGY CANYON MARKETING ACQUISITION OFFERING AS
COMPANY PROPERTIES ASSETS ADJUSTMENTS ADJUSTMENTS ADJUSTED
---------- ---------- --------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INTERCOAST OIL AND GAS
COMPANY
Gas and oil revenues... $ 48,109 $13,084 -- -- -- $ 61,193
Gas and oil operating
expenses.............. (14,552) (2,953) -- -- -- (17,505)
Depreciation, depletion
and amortization
expense............... (21,489) -- -- (6,408)(1) -- (27,897)
General and
administrative
expense, net.......... (2,288) -- -- (220)(2) -- (2,508)
-------- ------- ------- -------- ------- --------
9,780 10,131 -- (6,628) -- 13,283
-------- ------- ------- -------- ------- --------
INTERCOAST ENERGY MAR-
KETING
Natural gas sales
revenues.............. 24,066 -- 58,203 -- -- 82,269
Cost of gas sold....... (23,218) -- (57,216) -- -- (80,434)
Gathering system
revenues.............. -- 1,594 -- -- -- 1,594
Gathering system
expenses.............. -- (105) -- -- -- (105)
Electric power sales
revenues.............. 421 -- -- -- -- 421
Cost of electric power
sold.................. (325) -- -- -- -- (325)
Operating expenses..... (952) -- (966) -- -- (1,918)
General and
administrative
expense............... (410) -- -- -- -- (410)
-------- ------- ------- -------- ------- --------
(418) 1,489 21 -- -- 1,092
-------- ------- ------- -------- ------- --------
CONTINENTAL POWER EX-
CHANGE, INC.
Administrative and
development expense,
net................... (2,346) -- -- -- -- (2,346)
-------- ------- ------- -------- ------- --------
Corporate expense....... (1,554) -- -- -- (1,184)(3) (2,738)
-------- ------- ------- -------- ------- --------
Interest expense........ -- -- -- (2,961)(4) 2,961 (5) --
-------- ------- ------- -------- ------- --------
Income before income
taxes.................. 5,462 11,620 21 (9,589) 1,777 9,291
Provision for income
taxes.................. 1,926 -- -- 718 (6) 622 (6) 3,266
-------- ------- ------- -------- ------- --------
Net income.............. $ 3,536 $11,620 $ 21 $(10,307) $ 1,155 $ 6,025
======== ======= ======= ======== ======= ========
Average common shares
outstanding............ 7,928 6,150 (7) 14,078
======== ======= ========
Earnings per common
share.................. $ 0.45 $ 0.43
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
21
<PAGE>
INTERCOAST ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- ------------------------------------
INTERCOAST SAWYER
ENERGY CANYON ACQUISITION OFFERING AS
COMPANY PROPERTIES ADJUSTMENTS ADJUSTMENTS ADJUSTED
---------- ---------- ------------ ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INTERCOAST OIL AND GAS
COMPANY
Gas and oil revenues... $ 15,647 $3,425 -- -- $ 19,072
Gas and oil operating
expenses.............. (3,508) (614) -- -- (4,122)
Depreciation, depletion
and amortization
expense............... (6,214) -- (1,353)(1) -- (7,567)
General and administra-
tive expense, net..... (714) -- (55)(2) -- (769)
-------- ------ ------- ----- --------
5,211 2,811 (1,408) -- 6,614
-------- ------ ------- ----- --------
INTERCOAST ENERGY MAR-
KETING
Natural gas sales reve-
nues.................. 36,868 -- -- -- 36,868
Cost of gas sold....... (36,080) -- -- -- (36,080)
Gathering system reve-
nues.................. -- 315 -- -- 315
Gathering system ex-
penses................ -- (31) -- -- (31)
Electric power sales
revenues.............. 406 -- -- -- 406
Cost of electric power
sold.................. (292) -- -- -- (292)
Operating expenses..... (596) -- -- -- (596)
General and administra-
tive expense.......... (181) -- -- -- (181)
-------- ------ ------- ----- --------
125 284 -- -- 409
-------- ------ ------- ----- --------
CONTINENTAL POWER EX-
CHANGE, INC.
Administrative and de-
velopment expense,
net................... (739) -- -- -- (739)
-------- ------ ------- ----- --------
Corporate expense....... (472) -- -- (233)(3) (705)
-------- ------ ------- ----- --------
Interest expense........ -- -- (740)(4) 740 (5) --
-------- ------ ------- ----- --------
Income before income
taxes.................. 4,125 3,095 (2,148) 507 5,579
Provision for income
taxes.................. 1,529 -- 331 (6) 177 (6) 2,037
-------- ------ ------- ----- --------
Net income.............. $ 2,596 $3,095 $(2,479) $ 330 $ 3,542
======== ====== ======= ===== ========
Average common shares
outstanding............ 7,928 6,150 (7) 14,078
======== ===== ========
Earnings per common
share.................. $ 0.33 $ 0.25
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
22
<PAGE>
INTERCOAST ENERGY COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
INTERCOAST ------------------------------------
ENERGY ACQUISITION OFFERING AS
COMPANY ADJUSTMENTS ADJUSTMENTS ADJUSTED
---------- ----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..... $ 1,879 $ -- $ 90,742 (7) $ 381
(92,240)(5)
Accounts receivable........... 25,656 -- -- 25,656
Other......................... 1,393 -- -- 1,393
-------- ------- -------- --------
Total current assets......... 28,928 -- (1,498) 27,430
Gas and oil properties, net..... 166,231 45,240(8) -- 211,471
Continental Power Exchange,
Inc., net...................... 6,231 -- -- 6,231
Intangible and other assets..... 4,594 -- -- 4,594
-------- ------- -------- --------
Total assets................. 205,984 45,240 (1,498) 249,726
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable.............. 22,642 -- -- 22,642
Other current liabilities..... 4,525 -- -- 4,525
-------- ------- -------- --------
Total current liabilities.... 27,167 -- -- 27,167
Accumulated deferred income tax-
es............................. 25,925 -- -- 25,925
Long-term debt
MidAmerican Capital Note...... -- 45,240(8) (45,240)(5) --
Due to MidAmerican Capital.... 47,000 -- (47,000)(5) --
-------- ------- -------- --------
47,000 45,240 (92,240) --
-------- ------- -------- --------
Stockholders' Equity
Common stock $0.01 par value,
25,000,000 shares authorized;
7,927,500 shares issued and
outstanding; 14,077,500 pro
forma as adjusted............ 79 -- 62 (7) 141
Additional paid-in capital.... 85,995 -- 90,680 (7) 176,675
Retained earnings............. 19,818 -- -- 19,818
-------- ------- -------- --------
Total stockholders' equity... 105,892 -- 90,742 196,634
-------- ------- -------- --------
Total liabilities and stock-
holders' equity............. $205,984 $45,240 $ (1,498) $249,726
======== ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Reflects additional estimated depreciation, depletion and amortization,
calculated using the unit-of-production method, after giving effect to the
Sawyer Canyon Acquisition as if such acquisition had occurred on January 1,
1995. The Company's actual and pro forma depreciation, depletion and
amortization rates for the year ended December 31, 1995 and the three
months ended March 31, 1996 were $0.90 ($0.87 on a pro forma basis) and
$0.89 ($0.87 on a pro forma basis) per Mcfe produced, respectively.
(2) Reflects estimated incremental general and administrative expenses due to
the Sawyer Canyon Acquisition.
(3) Reflects estimated incremental corporate expenses primarily related to the
Company becoming publicly held.
(4) Reflects increased interest expense as if the Company incurred borrowings
under the MidAmerican Capital Note to finance $45.2 million of the
acquisition cost for the Sawyer Canyon Properties as of January 1, 1995.
(5) Reflects the assumed repayment of outstanding indebtedness from the
estimated net proceeds of the Offering and a corresponding elimination of
interest expense on such indebtedness.
(6) Reflects pro forma adjustments for income tax expense using the Company's
statutory federal tax rate.
(7) Reflects the assumed sale, net of Underwriters' discount and estimated
offering costs, of 6,150,000 shares of Common Stock at an assumed initial
offering price of $16.00 per share.
(8) Reflects pro forma adjustments to reflect the acquisition of the Sawyer
Canyon Properties for total consideration of $45.2 million as if such
acquisition had occurred on March 31, 1996.
24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth selected consolidated financial data for the
Company as of and for each of the periods indicated. The selected financial
information presented in the table below for and at the end of each of the
years in the three-year period ended December 31, 1995 is derived from the
audited financial statements of the Company. The selected financial information
for and at the end of the years ended December 31, 1991 and 1992 and for and at
the end of the three months ended March 31, 1995 and 1996 is derived from the
unaudited financial statements of the Company which, in the opinion of
management, include all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the selected financial
information for such periods. The results for the three months ended March 31,
1996 are not necessarily indicative of the results to be achieved for the full
year. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and unaudited
pro forma combined financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
InterCoast Oil and Gas
Company
Gas and oil revenues... $ 7,133 $20,767 $ 37,359 $ 44,466 $ 48,109 $10,995 $15,647
Gas and oil operating
expenses.............. (1,972) (4,587) (9,616) (15,016) (14,552) (3,645) (3,508)
Depreciation, depletion
and amortization
expense............... (3,025) (8,517) (13,535) (18,602) (21,489) (5,115) (6,214)
General and
administrative
expense, net.......... (284) (1,264) (2,183) (2,633) (2,288) (640) (714)
------- ------- -------- -------- -------- ------- -------
1,852 6,399 12,025 8,215 9,780 1,595 5,211
------- ------- -------- -------- -------- ------- -------
InterCoast Energy
Marketing
Natural gas sales
revenues.............. -- 7,554 16,715 13,700 24,066 1,996 36,868
Cost of gas sold....... -- (7,262) (16,216) (13,142) (23,218) (1,874) (36,080)
Electric power sales
revenues.............. -- -- 19 446 421 -- 406
Cost of electric power
sold.................. -- -- -- -- (325) -- (292)
Operating expenses..... -- (127) (369) (778) (952) (209) (596)
General and
administrative
expense............... -- -- (163) (314) (410) (103) (181)
------- ------- -------- -------- -------- ------- -------
-- 165 (14) (88) (418) (190) 125
------- ------- -------- -------- -------- ------- -------
Continental Power
Exchange, Inc.
Administrative and
development expense,
net................... -- -- -- (52) (2,346) (35) (739)
------- ------- -------- -------- -------- ------- -------
Corporate expenses..... (338) (795) (1,013) (1,553) (1,554) (389) (472)
------- ------- -------- -------- -------- ------- -------
Income before income
taxes................. 1,514 5,769 10,998 6,522 5,462 981 4,125
Provision for income
taxes................. 522 2,471 4,984 2,637 1,926 362 1,529
------- ------- -------- -------- -------- ------- -------
Net income............. $ 992 $ 3,298 $ 6,014 $ 3,885 $ 3,536 $ 619 $ 2,596
======= ======= ======== ======== ======== ======= =======
Average common shares
outstanding........... 7,928 7,928 7,928 7,928 7,928 7,928 7,928
Earnings per common
share................. $ 0.13 $ 0.42 $ 0.76 $ 0.49 $ 0.45 $ 0.08 $ 0.33
======= ======= ======== ======== ======== ======= =======
OTHER DATA:
EBITDA (1)............. $ 4,539 $14,372 $ 24,670 $ 25,356 $ 27,359 $ 6,179 $10,477
Capital expenditures... 34,585 24,839 73,700 43,491 43,522 11,155 14,310
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents........... $ 231 $ 1,356 $ 3,632 $ 5,127 $ 8,303 $ 4,805 $ 1,879
Working capital........ 1,078 5,889 6,336 10,233 11,511 7,391 1,761
Total assets........... 47,782 72,793 137,843 161,773 202,057 168,134 205,984
Long-term debt......... -- -- 46,368 60,724 52,907 58,117 47,000
Stockholder's equity... 42,994 61,629 71,716 83,431 103,296 85,219 105,892
</TABLE>
- --------
(1) EBITDA is income before income taxes, interest, depreciation, depletion and
amortization. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's historical financial position and results of operations as of and
for each year of the three-year period ended December 31, 1995 and the
unaudited three-month periods ended March 31, 1996 and 1995. The Company's
historical financial statements and notes thereto included elsewhere in this
Prospectus contain detailed information that should be referred to in
conjunction with the following discussion. Also included in this Prospectus
are (i) separate financial statements relating to producing natural gas and
oil properties acquired in April 1996 and (ii) unaudited pro forma combined
financial statements reflecting such acquisition, the acquisition of the
assets of a natural gas marketing company effective November 1995, and the
Offering.
OVERVIEW
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange, CPEX(TM),
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located
in Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves through a balanced focus on Extensional Infill
drilling, strategic acquisitions of producing properties and regionally
focused exploratory drilling. The Company believes its success has resulted
from its ability to (i) identify internally a large number of desirable
Extensional Infill drilling locations, (ii) apply strict economic and reserve
risk criteria to both drilling and acquisition operations, and (iii) operate
as an efficient low-cost producer.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Consolidated
The Company had net income of $2.6 million, or $0.33 per share, for the
three months ended March 31, 1996, compared to net income of $0.6 million, or
$0.08 per share, for the same period in 1995. The increase was primarily
attributable to the Company's natural gas and oil operations which contributed
pre-tax income of $5.2 million and $1.6 million for the quarters ended March
31, 1996 and 1995, respectively. The Company's energy marketing activity added
$0.1 million to pre-tax income for the three-month period ended March 31, 1996
as compared to the $0.2 million loss incurred by this activity for the same
period in 1995. In addition, Continental Power Exchange realized losses of
$0.7 million for the three months ended March 31, 1996 while essentially
breaking even in the same period of 1995. The Company also incurred during the
first quarter of 1996 $0.5 million and $1.5 million of corporate expenses and
income tax expense, respectively, as compared to $0.4 million of corporate
expenses and $0.4 million of income tax expense incurred during the same
period in 1995.
Natural Gas and Oil Operations
Production. The Company's production increased to 7.0 Bcfe during the first
three months of 1996 as compared to 5.6 Bcfe during the first three months of
1995, a 25% increase. This additional production primarily resulted from
successful drilling activity in north Louisiana, Gulf Coast--Texas, and
northwest Oklahoma and the Texas panhandle. The increase in production was
also due to the Company's exchange of certain non-operated limited partnership
interests for working interests in operated properties and the acquisition of
producing properties in south Louisiana, both of which took place after March
1995.
Gas and Oil Revenues. Revenues from natural gas and oil for the three months
ended March 31, 1996, increased from $11.0 million to $15.6 million, or 42%,
as compared to the same period during 1995, primarily due to increased
production. The Company also realized increases in product prices during the
first quarter of 1996 as compared to the same period in 1995. The Company's
natural gas price swap activity for the three
26
<PAGE>
months ended March 31, 1996 resulted in an average natural gas price of $2.00
per Mcf, or 87% of the $2.29 per Mcf average price that would have otherwise
been received, resulting in a $1.4 million decrease in gas and oil revenues.
For the same period in 1995, the average gas sales price realized by the
Company was $1.61 per Mcf, including the effects of natural gas price swap
arrangements, or 109% of the $1.48 per Mcf average natural gas price that
otherwise would have been received, resulting in a $0.6 million increase in
gas and oil revenues. The Company realized an average oil price of $17.64 per
Bbl during the first three months of 1996, which was a 7% increase over the
$16.41 per Bbl average oil price for the comparable period of 1995.
Gas and Oil Operating Expenses. Gas and oil operating expenses for the
three-month period ended March 31, 1996 decreased to $3.5 million, or $0.50
per Mcfe, from $3.6 million, or $0.65 per Mcfe, for the comparable period of
1995. This decrease was primarily the result of cost reduction procedures
implemented in the Newhall-Potrero Field, the disposition of the Company's
interests in the relatively high-cost Montague Field and lower relative
operating costs on the properties acquired as a result of the exchange of
certain of the Company's non-operated limited partnership interests for
working interests in operated properties. These operating expense reductions
were partially offset by higher production taxes resulting from increased
production volumes. Operating expenses included $0.6 million and $0.5 million
of production taxes during the first three months of 1996 and 1995,
respectively.
Depreciation, Depletion and Amortization Expense. During the three-month
period ended March 31, 1996, depreciation, depletion and amortization expense
increased to $6.2 million from $5.1 million for the comparable period of 1995.
This increase was attributable to the increase in natural gas and oil
production during the first quarter of 1996 as compared to the first quarter
of 1995 and was partially offset by a decline in the Company's depreciation,
depletion and amortization rate per unit to $0.89 per Mcfe during the three-
month period ended March 31, 1996, from $0.92 per Mcfe for the comparable
period in 1995. The decrease in the depreciation, depletion and amortization
rate was primarily due to the relatively low-cost reserve additions made
during 1995.
General and Administrative Expense, Net. General and administrative
expense, which is recorded net of overhead reimbursements received by the
Company from other working interest owners in Company-operated wells,
increased slightly to $0.7 million for the three months ended March 31, 1996,
as compared to $0.6 million for the same period in 1995. The increase was
primarily attributable to the hiring of additional personnel during 1995.
Overhead reimbursements from the Company-operated wells during the first three
months of each of 1996 and 1995 was $0.5 million.
Energy Marketing Operations
Natural Gas Sales Revenues and Cost of Gas Sold. The Company's natural gas
sales revenues for the first three months of 1996 increased to $36.9 million
as compared to $2.0 million during the same period of 1995, while cost of gas
sold increased to $36.1 million from $1.9 million during those periods. As a
result, the Company's natural gas sales margin improved to $0.8 million for
the first quarter of 1996 as compared to $0.1 million during the same period
in 1995. This margin improvement primarily resulted from increased marketed
volumes due to the acquisition of additional gas marketing assets effective
November 1995, increased marketed volumes from Company-operated wells and
generally higher natural gas prices.
Electric Power Sales Revenues and Cost of Electric Power Sold. During the
first quarter of 1996, the Company marketed approximately 17,000 MWh which
added $0.3 million to electric power sales revenues at a nominal margin. In
addition, the Company realized $0.1 million in brokered electric power
revenues during the three months ended March 31, 1996, on approximately
130,000 MWh brokered. As a result, the Company's electric power sales margin
for the first three months of 1996 was $0.1 million. The Company had no
electric power marketing activity during the first quarter of 1995.
Operating Expenses. Operating expenses increased to $0.6 million for the
three months ended March 31, 1996, as compared to $0.2 million during the same
period of 1995. This increase primarily resulted from the purchase of gas
marketing assets effective November 1995 and additional start-up operating
costs.
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Electric Energy Power Exchange
Administrative and Development Expense, Net. During the first three months
of 1996, the administrative and development expense of the Company's electric
energy power exchange operations increased to $0.7 million compared to nominal
amounts during the first three months of 1995. This increase was primarily
attributable to non-product development general and administrative expenses.
First quarter 1996 administrative and development expenses were partially
offset by transaction and fee revenues of $0.1 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Consolidated
The Company had net income of $3.5 million, or $0.45 per share, in 1995 as
compared to net income of $3.9 million, or $0.49 per share, in 1994. The
Company's natural gas and oil operations contributed pre-tax income in 1995 of
$9.8 million as compared to $8.2 million for 1994. The Company's energy
marketing activity reduced 1995 pre-tax income by $0.4 million as compared to
the $0.1 million loss incurred by this activity during 1994. Continental Power
Exchange realized losses of $2.3 million for 1995 and $0.1 million during
1994. Pre-tax income was further reduced by $1.6 million in corporate expenses
in both 1995 and 1994, while income tax expense of $1.9 million and $2.6
million, respectively, was also incurred during the same periods.
Natural Gas and Oil Operations
Production. The Company's production rose to 24.0 Bcfe in 1995 as compared
to 21.7 Bcfe in 1994, an increase of 11%. This increase primarily resulted
from increased gas production due to drilling and acquisition additions in
Louisiana, southeast New Mexico, Offshore Gulf of Mexico and Texas.
Gas and Oil Revenues. Gas and oil revenues for 1995 increased from $44.5
million to $48.1 million, or 8%, as compared to 1994, primarily due to
increases in production. This improvement was partially offset by a 9%
decrease in the average gas sales price from $1.82 per Mcf in 1994 to $1.65
per Mcf in 1995. After giving effect to the Company's natural gas price swap
activity, the 1995 price of $1.65 per Mcf was 106% of the $1.55 per Mcf
average gas sales price that would have otherwise been received, resulting in
a $1.8 million increase in gas and oil revenues. The Company did not have any
natural gas price swap arrangements in effect during 1994. The Company also
realized an average sales price for oil of $16.45 per Bbl in 1995 as compared
to $14.93 per Bbl during 1994, a 10% increase.
Gas and Oil Operating Expenses. Gas and oil operating expenses for 1995
decreased to $14.6 million, or $0.61 per Mcfe, from $15.0 million, or $0.69
per Mcfe, for 1994. This reduction was primarily due to the sale in mid-1994
of the Company's interest in the Sacatosa Field. At the time of this
disposition, the Sacatosa Field was uneconomic to the Company's interest and
represented approximately 25% of its total monthly gas and oil operating
expenses. These operating expense reductions were partially offset by
increases in production taxes from $1.8 million in 1994 to $2.1 million in
1995.
Depreciation, Depletion and Amortization Expense. During 1995, depreciation,
depletion and amortization expense increased to $21.5 million from $18.6
million for 1994. This increase was attributable to the increase in natural
gas and oil production during 1995 as compared to 1994. In addition, the
Company's depreciation, depletion and amortization rate per unit increased to
$0.90 per Mcfe during 1995 from $0.86 per Mcfe for 1994. The increase in the
depreciation, depletion and amortization rate was primarily due to revisions
in previous reserve estimates caused by low natural gas prices at the end of
1994.
General and Administrative Expense, Net. General and administrative expense,
which is recorded net of overhead reimbursements received by the Company from
other working interest owners in Company-operated wells, decreased to $2.3
million in 1995 as compared to $2.6 million in 1994. The decrease was
primarily attributable to an increase in overhead reimbursements from Company-
operated wells to $2.0 million in 1995 from $1.5 million in 1994.
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Energy Marketing Operations
Natural Gas Sales Revenues and Cost of Gas Sold. The Company's natural gas
sales revenues for 1995 increased to $24.1 million as compared to $13.7
million in 1994, while cost of gas sold increased to $23.2 million from $13.1
million during the same period. As a result, the Company's natural gas sales
margin improved to $0.9 million in 1995 as compared to $0.6 million in 1994.
This margin improvement primarily resulted from the acquisition of additional
gas marketing assets effective November 1995, but was partially offset by
generally lower natural gas prices in 1995 as compared to 1994.
Electric Power Sales Revenues and Cost of Electric Power Sold. The Company
began marketing electric power after its FERC certification as a power
marketer became effective in July 1995. During 1995, the Company marketed
20,000 MWh which added $0.3 million to electric power sales revenues at a
nominal margin. In addition, the Company realized $0.1 million in brokered
electric power revenues during 1995 as compared to $0.4 million of brokered
electric power revenues in 1994. As a result, the Company's electric power
sales margin for 1995 decreased to $0.1 million as compared to $0.4 million in
1994. The decrease in electric power sales margin was primarily due to lower
volumes brokered during 1995 of 99,000 MWh as compared to 640,000 MWh brokered
during 1994, but was partially offset by the addition of marketed volumes in
1995.
Operating Expenses. Operating expenses increased to $1.0 million in 1995 as
compared to $0.8 million in 1994 primarily due to the purchase of gas
marketing assets effective November 1995.
Electric Energy Power Exchange
Administrative and Development Expense, Net. During 1995, administrative and
development expenses increased to $2.3 million from $0.1 million in 1994. This
increase was primarily attributable to non-product development general and
administrative expenses in 1995. Administrative and development expenses
incurred during 1995 were partially offset by transaction and fee revenues of
$0.1 million.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Consolidated
The Company had net income of $3.9 million, or $0.49 per share, in 1994 as
compared to net income of $6.0 million, or $0.76 per share, in 1993. The
decrease was primarily attributable to the Company's natural gas and oil
operations which contributed pre-tax income in 1994 of $8.2 million as
compared to $12.0 million for 1993. The Company's energy marketing activity
reduced 1994 pre-tax income by $0.1 million while it was essentially break
even during 1993. Continental Power Exchange realized a loss of $0.1 million
in 1994 during its first year of operation. Pre-tax income was further reduced
by $1.6 million and $1.0 million of corporate expenses during 1994 and 1993,
respectively. In addition, the Company incurred income tax expense of $2.6
million and $5.0 million during 1994 and 1993, respectively.
Natural Gas and Oil Operations
Production. The Company's production increased 28% in 1994, to 21.7 Bcfe, as
compared to 16.9 Bcfe in 1993. This increase was primarily attributable to a
full twelve months of production from the Company's acquisition of DKM
Resources, Inc. ("DKM") in September 1993. The Company also realized increased
production from numerous acquisitions in 1994, principally the interests in 17
fields acquired from Union Oil Company of California in July 1994 and the
purchase of certain properties in the Elm Grove Field in August 1994.
Additionally, the Company realized production increases resulting from
significant reserve additions from its drilling activity during 1994.
Gas and Oil Revenues. Gas and oil revenues for 1994 increased from $37.4
million to $44.5 million, or 19%, as compared to 1993, primarily due to
increases in production. This improvement was tempered by decreases of 11% and
7%, respectively, in the Company's average sales price of natural gas and oil.
The
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Company realized an average natural gas price of $1.82 per Mcf in 1994 as
compared to an average natural gas price of $2.04 per Mcf in 1993. The Company
did not have any natural gas price swap arrangements in effect during 1994.
During 1993, however, the Company's natural gas price swap activity resulted
in a decrease in gas and oil revenues of $0.6 million, or $0.05 per Mcf, and
reduced its average natural gas price to 98% of the $2.09 per Mcf average
price that would have otherwise been realized. The Company's average oil sales
price was $14.93 per Bbl in 1994 as compared to an average oil sales price of
$16.07 per Bbl in 1993.
Gas and Oil Operating Expenses. Gas and oil operating expenses for 1994
increased to $15.0 million from $9.6 million for 1993. This increase was
primarily due to the acquisition of a substantial number of relatively higher
operating cost properties in the Company's acquisition of DKM and higher
production taxes resulting from increased production volumes. Operating
expenses included $1.8 million and $1.6 million of production taxes during
1994 and 1993, respectively.
Depreciation, Depletion and Amortization Expense. During 1994, depreciation,
depletion and amortization expense increased to $18.6 million from $13.5
million for 1993. This increase was attributable to increased natural gas and
oil production during 1994 as compared to 1993. In addition, the Company's
depreciation, depletion and amortization rate per unit increased to $0.86 per
Mcfe during 1994 from $0.80 per Mcfe for 1993. The increase in the
depreciation, depletion and amortization rate was primarily due to the
addition of relatively shorter-lived oil properties in the Company's
acquisition of DKM and revisions to previous reserve estimates.
General and Administrative Expense, Net. General and administrative expense,
which is recorded net of overhead reimbursements received by the Company from
other working interest owners in Company-operated wells, increased to $2.6
million in 1994 as compared to $2.2 million in 1993. This increase was
primarily attributable to additional personnel hired in late 1993 as a result
of the DKM acquisition and was partially offset by increased overhead
reimbursements from Company-operated wells which totaled $1.5 million in 1994
as compared to $0.9 million in 1993.
Energy Marketing Operations
Natural Gas Sales Revenues and Cost of Gas Sold. The Company's natural gas
sales revenues for 1994 decreased to $13.7 million as compared to $16.7
million in 1993, while cost of gas sold decreased to $13.1 million from $16.2
million during the same period. As a result, the Company's natural gas sales
margin improved slightly to $0.6 million in 1994 as compared to $0.5 million
in 1993.
Electric Power Sales Revenues and Cost of Electric Power Sold. The Company
realized $0.4 million in brokered electric power sales during 1994 as compared
to nominal amounts of brokered electric power sales in 1993. The increase in
electric power sales revenue and margin was primarily due to higher volumes
brokered during 1994 of 640,000 MWh as compared to 38,000 MWh brokered during
1993.
Operating Expenses. Operating expenses increased to $0.8 million in 1994 as
compared to $0.4 million in 1993 primarily due to increased staffing.
CORPORATE EXPENSES
Certain general and administrative costs reported by the Company are for
services provided by MidAmerican Energy or MidAmerican Capital. The Company
currently intends to utilize certain of such services on a transitional basis
through the end of 1996. The costs of the services received, including
overhead costs, are classified as directly assigned costs or allocable costs.
Allocable costs are allocated based on the Company's relative percentage of
three factors. The three factors are total revenues, total assets and total
payroll. Wages and salaries, of the Company's corporate staff, MidAmerican
Capital and MidAmerican Energy, are classified as directly assigned or
allocable based upon individual employee time reporting, along with associated
payroll taxes and the costs of benefits. In addition, certain directly
assigned Company expenses paid by MidAmerican Energy are billed to the
Company.
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The Company incurred corporate expenses of $1.6 million, $1.6 million and
$1.0 million in 1995, 1994 and 1993, respectively, and $0.5 million and $0.4
million during the first quarters of 1996 and 1995, respectively. Increases in
corporate expenses have been primarily due to increases in payroll and related
personnel expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $6.3 million, $10.2 million and $11.5
million at December 31, 1993, 1994 and 1995, respectively. Historically, the
Company has funded its operations principally through cash flow from natural
gas and oil operations, contributed capital and borrowings from MidAmerican
Capital.
The Company's net cash flow from operations for the first three months of
1996 was $13.8 million compared to $12.3 million for the same period in 1995.
The increase in cash flow was attributable to increases in both natural gas
and oil production and average realized product prices, the acquisition of
additional gas marketing assets effective November 1995, and the start-up of
another natural gas marketing operation in February 1996. Net cash flow from
operations during 1995 was $38.2 million as compared to $22.8 million and
$25.5 million for 1994 and 1993, respectively. The increase in cash flow for
1995 as compared to 1994 was principally due to increased natural gas and oil
production, reduced operating and administrative costs, and the acquisition of
additional natural gas marketing assets effective November 1995. The decrease
in cash flow for 1994 as compared to 1993 was primarily attributable to
increased general and administrative expense and corporate expense due to
Company growth.
In April 1996, the Company acquired the interests of Enron Oil & Gas Company
in certain properties located in the Sawyer Canyon Field, Sutton County,
Texas. The purchase price was financed with a floating interest rate note from
MidAmerican Capital in the amount of $45.2 million. The initial interest rate
was 6.55% for a six-month period. The pro forma pre-tax operating cash flows
for the year ended December 31, 1995 relating to the Sawyer Canyon Acquisition
were $11.4 million (excluding $3.0 million of pro forma interest expense).
From January 1, 1993 through March 31, 1996, after giving effect to the
Sawyer Canyon Acquisition described above, the Company had invested $220.3
million, principally in additions to natural gas and oil properties. The
Company's total capital budget for the last nine months of 1996 is
approximately $23.2 million. The Company has allocated $8.4 million of this
budget to Extensional Infill drilling, $2.3 million to exploratory drilling,
$5.0 million to enhancement of its existing natural gas and oil reserve base,
and $7.5 million to energy marketing and electric energy power exchange
activities. For the calendar year 1997, the Company currently anticipates
total capital expenditures of $57.0 million. Of this total 1997 capital
budget, the Company currently intends to allocate $14.0 million to Extensional
Infill drilling, $4.0 million to exploratory drilling, $25.0 million to
producing natural gas and oil property acquisitions, $9.5 million to
enhancement of its existing natural gas and oil reserve base, and $4.5 million
to energy marketing and electric energy power exchange activities. The
majority of the Company's capital expenditures are discretionary in nature and
actual levels of capital expenditures may vary significantly due to a variety
of factors, including drilling results, natural gas and oil prices, industry
conditions, the cost of goods and services and the extent to which proved
properties are acquired. The Company anticipates that these capital
expenditures will be funded principally from cash flow from natural gas and
oil operations, working capital and borrowings under credit facilities.
The Company is actively pursuing acquisitions of producing natural gas and
oil properties and natural gas marketing companies. The timing and size of any
acquisition and the related capital requirements are unpredictable. The
Company intends to fund acquisitions and operating activities through a
combination of cash flow from operations, working capital and borrowings under
credit facilities.
The Company has received a commitment from a bank to agent a five-year
unsecured $100 million revolving credit facility (the "Credit Facility"). The
agent has committed for up to $35 million of the Credit Facility. The Company
is currently negotiating the definitive terms of this new Credit Facility,
however, based on a preliminary term sheet provided by the agent, the Company
anticipates that the Credit Facility will be
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subject to the following terms. The Company's borrowing base under the Credit
Facility will be based upon the Company's natural gas and oil reserves and
will be subject to redetermination on a semi-annual basis. Advances under the
Credit Facility may be utilized by the Company for general working capital
purposes, including capital expenditures, operations and repayment of
indebtedness, and will bear interest at a rate based on LIBOR plus an
additional increment which varies based on the levels of borrowings. The
Company will pay a commitment fee on the unused portion of the Credit
Facility. The Credit Facility is expected to contain customary covenants which
will, among other things, restrict the sale of assets, mergers and
consolidations and limit additional indebtedness and the payment of dividends.
In addition, the Company will be required to maintain a minimum net worth,
which will be adjusted for the Offering, and an interest coverage ratio. Upon
completion of the Offering and the application of estimated net proceeds
therefrom as set forth in "Use of Proceeds," the Credit Facility will be
available to fund the Company's operating and acquisition activities.
ACCOUNTING AND TAX MATTERS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) regarding accounting for asset impairments. This
statement requires the Company to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The adoption of SFAS 121 did not have an
impact on the Company's results of operations or financial position. Although
the Company's electric energy power exchange operations are in the early stage
of commercial development and have incurred losses since inception, management
believes that future cash flows will be in excess of capitalized costs at
March 31, 1996.
The Company has been included in the consolidated federal and, where
appropriate, state income tax returns of MidAmerican Energy. The consolidated
income tax currently payable (or receivable) has been allocated among the
Company and other members of the affiliated income tax reporting group based
on the respective contributions of these group members to total consolidated
taxable income and tax credits. The Company has received (or made) payments
for the income tax reductions (or increases) attributable to its activities.
In 1995, the amount received was approximately $9.0 million. Actual current
income tax liabilities or benefits, including alternative minimum tax, may
vary primarily depending on the number of wells drilled, intangible drilling
costs incurred and other investments in natural gas and oil properties by the
Company. Subsequent to the Offering, the Company will no longer be included in
consolidated tax returns of MidAmerican Energy. See "Relationship Between the
Company and the Parent--Contractual Arrangements--Tax Sharing Agreement."
BUSINESS AND PROPERTIES
InterCoast is an energy company engaged primarily in (i) the development,
exploration, acquisition and production of natural gas and crude oil, (ii) the
marketing of natural gas and electricity, and (iii) the development and
operation of the first market-based national electronic exchange, CPEX(TM),
for the buying and selling of wholesale electric power and transmission
services. The Company's principal natural gas and oil operations are located
in Texas, Louisiana, Oklahoma and New Mexico. The Company has increased its
natural gas and oil reserves and cash flow through a balanced focus on
Extensional Infill drilling, strategic acquisitions of producing properties
and regionally focused exploratory drilling. The Company believes its success
has resulted from its ability to (i) identify internally a large number of
desirable Extensional Infill drilling locations, (ii) apply strict economic
and reserve risk criteria to both drilling and acquisition operations, and
(iii) operate as an efficient, low-cost producer. Through the implementation
of this approach, the Company has replaced 390% of its production at an
average finding cost from all sources of $0.84 per Mcfe for the three year
period ended December 31, 1995, after giving pro forma effect to the Sawyer
Canyon Acquisition.
In April 1996, the Company acquired properties in the Sawyer Canyon Field,
Sutton County, Texas from Enron Oil & Gas Company at a net purchase price of
$45.2 million. The acquired properties include 350 gross (319 net) wells (of
which approximately 95% are operated by the Company) and had estimated net
proved reserves of 58.3 Bcfe at December 31, 1995, virtually all of which are
natural gas. The acquired properties also include 37.2 miles of associated gas
gathering lines. After giving pro forma effect to the Sawyer Canyon
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Acquisition, the Company's estimated net proved reserves have grown by 201%,
from 83.5 Bcfe at December 31, 1992, to 251.0 Bcfe at December 31, 1995. At
December 31, 1995, on a pro forma basis, approximately 76% of the Company's
estimated net proved reserves were natural gas, and the Company's SEC-10
Reserve Value was $223.6 million. Average daily production has improved from
27.2 MMcfe during 1992 to 85.1 MMcfe during April 1996, representing an
increase of 213%. At March 31, 1996, on a pro forma basis, the net tangible
assets and properties of the Company's natural gas and oil operations
comprised over 97% of the Company's total tangible asset base.
The Company is also engaged in natural gas and wholesale electric power
marketing. The Company provides a range of natural gas marketing services to
industrial and utility customers and natural gas producers in addition to
marketing substantially all of the natural gas produced from Company-operated
wells. In the electric power sector, which is rapidly shifting from being
heavily regulated to becoming a more competitive industry, the Company
actively pursues opportunities for the wholesale brokering, purchasing and
marketing of electricity. The Company's FERC certification as a power marketer
became effective in July 1995, allowing it to purchase electricity and resell
it to wholesale purchasers. As a recent entrant into this business, the
Company's strategic thrust is to expand its electric power marketing business
to keep pace with the competitive changes in the electric industry. In a
further move, the Company established commercial operation of CPEX(TM) in May
1995. CPEX(TM) permits subscribers, including utilities and other electric
power generation, transmission and marketing companies, to electronically buy
and sell wholesale electricity and transmission services via the Company's
proprietary network.
BUSINESS STRENGTHS AND STRATEGIES
The Company believes that it has several key strengths and strategies that
position it to continue as a successful energy company and respond effectively
and rapidly to changing market opportunities. These include:
. Active Extensional Infill Drilling Program. The Company targets drilling
prospects that enhance the economic recovery of natural gas and oil in
producing areas to a level greater than that previously achieved by the
owners of the prevailing leasehold by increasing the density of wells that
penetrate known reservoirs. Typically, development of these prospects
requires that the Company obtain some or all of the rights to drill on
acreage that is held by production. The Company refers to this approach as
"Extensional Infill" drilling which has been implemented by various members
of the Company's current management team since 1985. The Company focuses on
internally generated Extensional Infill drilling opportunities within the
Mid-Continent region, with particular emphasis on north Louisiana,
northwest Oklahoma and the Texas panhandle, and southeast New Mexico.
Through its Extensional Infill drilling program, the Company has developed
approximately 53.7 Bcfe of estimated net proved reserves through the end of
1995 at an average cost of $0.75 per Mcfe. The Company utilizes an
experienced team of geologists, petroleum engineers and landmen to
generate, evaluate and acquire Extensional Infill prospects, applying
strict economic and reserve risk criteria. The Company's geologists
regularly monitor and analyze drilling and production activities within
their geographic areas of expertise to generate new drilling prospects.
Because a majority of the Company's Extensional Infill prospects involve
farmouts on acreage not currently leased by the Company, the Company is
able to maintain a large number of Extensional Infill prospects without
making a major capital investment in an inventory of undeveloped leasehold
acreage. As a result of this approach, the Company is able to drill
prospects on the basis of their technical and economic merits rather than
to retain expiring leasehold positions. During the three-year period ended
December 31, 1995, the Company drilled 87 Extensional Infill wells, 52 of
which were completed as commercial producers. At April 30, 1996, the
Company had in excess of 150 Extensional Infill prospects identified in the
core areas in which it operates and anticipates identifying at least 50
additional prospects during the remainder of 1996. The Company currently
plans to drill at least 27 Extensional Infill wells based on its $12
million 1996 capital budget for Extensional Infill drilling. See "Business
and Properties--Extensional Infill Drilling."
. Strategic Producing Property Acquisitions. The Company seeks strategic
acquisitions of producing properties where it can obtain operational
control and where opportunities exist both to reduce operating costs and
increase production and reserves through Extensional Infill drilling and
other exploitation
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activities. From April 1, 1992 through April 30, 1996, the Company acquired
188.6 Bcfe of estimated net proved reserves through 31 acquisitions at an
average acquisition cost of $0.67 per Mcfe. In many situations, the
Company's acquisition of producing properties originates from the
identification of Extensional Infill drilling prospects. The Company's most
successful acquisition involving this approach was the acquisition of its
interests in the Elm Grove Field, Bossier Parish, Louisiana. In early 1994,
a Company geologist generated a number of Extensional Infill drilling
prospects in the Elm Grove Field. The Company was able to acquire the 15
marginal producing wells in the field at a cost of $6.7 million in August
1994. It then assumed operations of the field and has since drilled 11
productive wells, recompleted 6 of the 15 existing wells to access the
behind pipe reserves and discovered a deeper productive zone not previously
produced in the field. As a result of the Company's enhancement efforts,
gross average daily production from the Elm Grove Field has increased from
2 MMcf when acquired to a current rate of 11 MMcf, and estimated net proved
reserves increased from 15.5 Bcfe at the time of acquisition to
approximately 31.8 Bcfe (including net production of 3.3 Bcfe since its
acquisition) at December 31, 1995. See "Business and Properties--Producing
Property Acquisitions."
. Regionally Focused Exploratory Drilling Program. The Company initiated a
regionally focused exploratory drilling program in 1994. The Company
generally seeks larger exploratory prospects which are based upon good
subsurface geologic control on unproved structures or features which
provide both significant reserve potential and an opportunity for multiple
well locations. The Company focuses its exploratory efforts primarily in
the Gulf Coast region where its personnel have extensive experience. The
Company currently plans to drill 5 to 7 exploratory wells in 1996,
primarily in the Gulf Coast region, based on a 1996 budget for exploratory
drilling of $4 million, which represents 25% of the Company's total
drilling budget. See "Business and Properties--Exploratory Drilling."
. Efficient Operator. The Company pursues workovers, recompletions and other
production optimization methods in order to exploit the additional
production capabilities of its existing reserve base, new well completions
and newly acquired properties. For this reason, the Company prefers to
operate its properties in order to enhance its ability to maximize their
present value and to maintain control of operating expenses and the timing
and amount of capital expenditures. At April 30, 1996, the Company owned
interests in 2,051 gross (667 net) wells, approximately 32% gross (83% net)
of which are operated by the Company. The Company believes that it is a
low-cost operator as indicated by its lease operating expenses of $0.61 per
Mcfe during 1995 ($0.50 per Mcfe during the first quarter of 1996). The
Company has generally found that it has been able to increase product
prices and reduce costs when compared to the prior operators of its newly
acquired properties. See "Business and Properties--Production, Prices and
Operating Expenses."
. Natural Gas Marketing. During the first quarter of 1996, the Company
marketed over 200 MMcf per day of natural gas, including approximately 50
MMcf per day of natural gas from its operated wells. The Company's natural
gas marketing activities provide the Company with the opportunity to
maximize both the current sales volumes and the price received for its
natural gas production and to minimize marketing and transportation costs.
The Company intends to expand its existing natural gas marketing business
and acquire other natural gas marketing companies where strategic synergies
exist. In December 1995, the Company acquired the assets of GED, a natural
gas marketing company that specializes in aggregating volumes purchased
from producers, and, in the first quarter of 1996, the Company opened a
natural gas marketing office to focus on market opportunities in the
northern end of the Mid-Continent area. See "Business and Properties--
Natural Gas and Oil Marketing Activities."
. Electric Power Marketing. The electric industry is rapidly shifting from
being heavily regulated to becoming a more competitive industry. In 1992,
Congress passed the Energy Policy Act which accelerated competitive trends
within the electric industry. The Company commenced electric wholesale
power brokering operations in October 1993. As a broker, the Company acts
as an intermediary between wholesale buyers and sellers. Effective July
1995, the Company's FERC certification as a power marketer became effective
which allows it to fully engage in the wholesale purchase and sale of
electricity. To date, the Company has brokered and marketed sales of
electricity among over 60 utilities. Since attaining marketer status, the
Company has experienced a steady increase in total quarterly sales. The
Company believes it
34
<PAGE>
will be able to capitalize on expanding marketing opportunities created
within the increasingly competitive electric power industry. See "Business
and Properties--Electric Power Marketing."
. First Market-Based National Electronic Power Exchange. In May 1995, the
Company launched commercial operation of CPEX(TM), the first market-based
national electronic exchange for the buying and selling of wholesale
electric power and transmission services. As of April 30, 1996, CPEX(TM) had
30 subscribers with operations in 25 states. Subscribers utilize CPEX(TM) to
electronically buy and sell electricity and transmission services through
on-site computers in the competitive wholesale market for the next one hour
and four hour durations. As both the number of CPEX(TM) subscribers and
their familiarity with the competitive exchange of electric power have
increased, the Company has seen a rapid rise in the amount of MWh traded on
CPEX(TM). The Company's strategy is to continually upgrade the capabilities
of CPEX(TM) and expand market penetration in order to maintain its industry
leading position in the market-based electronic trading of wholesale
electric power. See "Business and Properties--Continental Power Exchange,
Inc."
NATURAL GAS AND OIL EXPLORATION AND PRODUCTION
The Company implements its balanced approach of Extensional Infill drilling,
strategic producing property acquisitions and regionally focused exploratory
drilling by using an integrated team of geologists, reservoir engineers,
geologic engineers and landmen who have extensive experience in all facets of
oil and gas exploration and production. This integrated team approach allows
the Company to direct its professional and technical resources between its
drilling and acquisition efforts, as needed, with the result that the efforts
of each technical group serve to complement each other. The Company's
professionals perform subsurface and geologic analysis and a thorough reservoir
engineering evaluation of proved developed reserves to generate its drilling
and acquisition prospects. The Company also utilizes exploitation techniques
and seismic delineation to enhance the overall potential of its natural gas and
oil properties and prospects. Additionally, the Company markets production from
its operated properties for its own account as well as that of third parties.
EXTENSIONAL INFILL DRILLING
The Company's primary and continuing focus has been the drilling of
Extensional Infill wells throughout the southern half of the Mid-Continent
region of the United States. The Company employs a geological engineering
approach and an application of tight sands technology to this effort, and
specifically concentrates on drilling opportunities in northern Louisiana,
northwest Oklahoma and the Texas panhandle, and southeast New Mexico. The
Company has focused its Extensional Infill drilling program in these areas due
to attractive economic conditions (lower leasehold, drilling and operating cost
environment, and proximity to established markets), reservoir characteristics
(multiple, stacked pay potential; established, analog field data; and long-
lived reserves) and a favorable regulatory climate. In addition, the Company's
technical staff has many years of prospect generating and operating experience
in these regions.
The Company's Extensional Infill drilling prospects are generally
characterized by lower permeability reservoirs which lend themselves to
application of tight sand fracturing technology and sophisticated completion
engineering techniques. The Company's engineers have considerable experience in
these technologies. While with a previous employer, the Company's President was
directly involved (in conjunction with Halliburton Company engineers) in the
development and patenting of the CO/2/ Foam Fracturing process which enhances
the performance of tight sand reservoirs and, since its development in the
early 1980s, has become the prevalent completion technology in tight sand areas
throughout the Mid-Continent region.
The Company currently has geologists with regionally specific expertise and
an average of eighteen years experience in offices located in Tulsa, Oklahoma;
Dallas, Houston and Midland, Texas; and Shreveport, Louisiana. The Company
provides an incentive program to these professionals through the assignment of
an overriding royalty interest to the generating geologist on each prospect
drilled which allows for the attraction and retention of highly qualified,
experienced geologists who are motivated and rewarded based on success. In
addition, the Company believes that this program provides for effective
management of fixed overhead costs
35
<PAGE>
because the Company sets the base salaries of its geologists below the
industry average. The Company minimizes potential conflicts of interest in
this incentive program by subjecting each prospect proposal to intense
engineering, operational and economic scrutiny and by requiring that final
drilling and completion decisions be made by senior members of management who
do not receive overriding royalties.
Minimizing capital commitments to leasehold acreage positions is another key
component to the Company's Extensional Infill drilling approach. Many
companies commit large amounts of capital in acreage positions with the
potential for prospects. In contrast, the Company acquires ownership positions
only after identifying a specific geologic prospect. This approach delays the
required capital exposure on leasehold positions, thereby enhancing the
overall economic return on the Company's drilling activities. Moreover, as a
result of this approach, the Company is able to drill prospects on the basis
of their technical and economic merits and not because of expiring leasehold
positions. This approach demands a team of landmen who are skilled and
experienced at structuring transactions to acquire the necessary ownership
position by utilizing a variety of acquisition techniques and maintaining
close relationships with industry members. From 1992 through 1995, this team
has acquired drilling rights in 120 Extensional Infill drilling prospects, on
which the Company has drilled 87 wells, 52 of which were completed as
commercial producers. These wells have added reserves totaling 53.7 Bcfe
through the end of 1995 at an average finding cost of $0.75 per Mcfe. At April
30, 1996, the Company had in excess of 150 Extensional Infill prospects
identified in the core areas in which it operates and anticipates identifying
at least 50 additional prospects during the remainder of 1996. The Company
currently plans to drill at least 27 Extensional Infill wells based on its $12
million 1996 capital budget for Extensional Infill drilling. The Company's
approach to obtaining drilling rights for its Extensional Infill drilling
prospects depends upon the willingness of property owners to grant the
necessary drilling rights to the Company after the prospects have been
identified by the Company, and the Company may encounter difficulty in
obtaining, or may not be able to obtain, such rights. See "Risk Factors--
Reserve Replacement Risks."
EXPLORATORY DRILLING
The Company initiated an active, regionally focused exploratory drilling
program in 1994 which generally seeks larger exploratory prospects which are
based upon good subsurface geologic control on unproved structures or features
which provide both significant reserve potential and an opportunity for
multiple well locations. The Company believes that while these exploratory
prospects have an inherently higher risk profile, they have significantly
higher upside reward potential. The Company focuses its exploratory efforts
primarily in the Gulf Coast region where its personnel have extensive
experience.
The Company consistently applies its geological engineering approach to its
exploratory drilling effort and utilizes the strict economic criteria employed
in its Extensional Infill drilling analysis adjusted, however, for the
increased risk characteristics associated with exploratory drilling. The
Company broadens its exposure to a variety of exploration opportunities by
seeking to limit its risk capital in any individual prospect from 10% to 20%
of the exploratory drilling budget, depending on the Company's perception of
the risk associated with each individual prospect.
The Company's primary exploratory successes have come in the Louisiana Gulf
Coast region of the United States. The Company's most recent discovery on an
exploratory prospect occurred in April 1996. The new well, located in
Jefferson Parish, Louisiana, is perforated in the lower of two productive sand
lobes and is currently shut-in, pending connection to a gas pipeline. The
Company is also currently attempting to acquire offsetting leasehold. Upon
completion of the pipeline connection and testing of the lower sand, the
Company expects the upper sand lobe to be perforated and produced at an
estimated combined rate of 5 MMcf to 8 MMcf per day based upon its analysis of
logs and results of other wells in the surrounding area completed in that
zone. The Company has evaluated the prospect geology and determined that at
least one delineation well will be required in 1996 to exploit this discovery
further.
The Company's 1996 capital budget for exploratory drilling is $4 million,
representing 25% of the Company's total drilling budget. During 1996, the
Company currently plans to drill five to seven additional
36
<PAGE>
exploratory wells primarily in south Louisiana. The Company has also expanded
its exploration activity into southeast New Mexico where it currently intends
to drill a prospect generated as a result of a 3-D seismic survey.
PRODUCING PROPERTY ACQUISITIONS
The Company actively pursues acquisitions of producing natural gas and oil
properties that strategically complement its drilling and operational
activities. The Company's acquisition strategy focuses on negotiated
transactions where it can obtain operational control. In addition, the Company
directs its acquisition efforts toward properties where its technical team
perceives that opportunities exist to enhance value. These opportunities can
include reducing operating costs and increasing existing production and
reserves through Extensional Infill drilling and other exploitation
activities, including deeper tests to explore for new zones not currently
producing. These acquisition related efforts often result from a direct
synergy with the Company's other activities. For example, on several occasions
the Company's acquisitions have been the result of obtaining leasehold
positions to drill locations identified through its Extensional Infill
drilling program. In addition, the Company has successfully acquired
additional interests in fields and properties where it already owns
significant interests, thereby benefiting from the Company's prior operating
experience and existing marketing relationships.
The Company dedicates two professional employees to its natural gas and oil
acquisition activities. In keeping with the Company's integrated team
approach, these employees coordinate the expertise of other Company personnel
and, as needed, highly qualified independent consultants to review, negotiate,
close and assimilate significant acquisitions. In addition, these
professionals and the Company's management seek to ensure that all
acquisitions meet the Company's strict economic, operational and reserve risk
criteria. Although this approach results in fluctuating amounts spent on
acquisitions from year to year, the Company believes it has resulted in the
acquisition of higher quality properties.
From April 1, 1992 through April 30, 1996, the Company completed 31 natural
gas and oil property acquisitions, involving total acquisition costs of
approximately $126.5 million. Of these completed acquisitions, 18
transactions, at a cost of $10 million, were acquisitions of additional
interests in properties already owned by the Company.
The following table presents a summary of the Company's acquisitions of
estimated net proved reserves.
<TABLE>
<CAPTION>
PROVED ACQUISITION
RESERVES COST ACQUISITION
NUMBER OF (MMCFE) (THOUSANDS) COST
ACQUISITIONS ACQUISITIONS (1) (2) ($/MCFE)
------------ ------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
1992 6 7,964 $ 3,823 $0.48
1993 15 90,782 58,277 0.64
1994 7 32,743 17,358 0.53
1995 2 1,195 1,786 1.49
Sawyer Canyon 1 55,964 45,240 0.81
--- ------- -------- -----
Total 31 188,648 $126,484 $0.67
=== ======= ======== =====
</TABLE>
- --------
(1) Estimated net proved reserves at date of acquisition for properties
purchased prior to April 1996 are based on the first year-end reserve
report prepared following the acquisition date and adjusted for production
between the acquisition date and the first year-end. The estimated net
proved reserves are not identical to the current amount of such reserves
due to subsequent production and drilling activities.
(2) Acquisition cost is based on the price paid at the acquisition date.
Sawyer Canyon Acquisition
In April 1996, the Company purchased the interests of Enron Oil & Gas
Company in the Sawyer Canyon Field, Sutton County, Texas (the "Sawyer Canyon
Properties") at a net purchase price of approximately $45.2 million. The
Sawyer Canyon Properties include 350 gross (319 net) wells (of which virtually
all of the net wells are operated by the Company) that produced 17.4 MMcf of
natural gas and 48 Bbls of oil per day in April 1996
37
<PAGE>
net to the acquired interest. At December 31, 1995, the Company estimated the
proved reserves of the Sawyer Canyon Properties at 57.8 Bcf of natural gas and
78.6 MBbls of oil, of which 96% was proved developed. The Sawyer Canyon
Properties also include 37.2 miles of associated gas gathering lines. The
Company believes the attributes of the Sawyer Canyon Properties are similar to
previously acquired properties that the Company has enhanced through
operating, marketing and drilling activities, but there can be no assurance
that such enhancement will occur in the case of the Sawyer Canyon Properties.
See "--Significant Natural Gas and Oil Properties."
The Company conveyed certain of its interests in the Sawyer Canyon
Properties with production qualifying for credits under Section 29 of the
Internal Revenue Code of 1986, as amended (the "Code"), to another subsidiary
of MidAmerican Capital. See "Certain Transactions."
SIGNIFICANT NATURAL GAS AND OIL PROPERTIES
The following table sets forth certain information which relates to the
Company's principal natural gas and oil property areas, including the pro
forma effects of the Sawyer Canyon Acquisition, for the periods indicated.
<TABLE>
<CAPTION>
PRO FORMA DECEMBER 31, 1995
----------------------------------------------------------
NET PROVED RESERVES
----------------------------------------------------
SEC-10 SEC-10
NATURAL OIL AND RESERVE RESERVE
GROSS GAS LIQUIDS TOTAL VALUE VALUE
PROPERTY--AREA WELLS (MMCF) (MBBLS) (MMCFE) (IN THOUSANDS) (% OF TOTAL)
-------------- ----- ------- -------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sawyer Canyon Field......... 350 57,754 79 58,228 $ 55,412 25%
ArkLaTex Area............... 74 39,572 305 41,402 44,109 20
Anadarko Basin.............. 213 34,195 310 36,055 29,657 13
Gulf Coast Louisiana........ 38 10,396 546 13,672 22,511 10
Offshore Gulf of Mexico..... 76 11,226 514 14,310 19,977 9
Gulf Coast and South Texas.. 57 7,341 525 10,491 11,261 5
Newhall-Potrero............. 36 2,959 1,969 14,773 8,437 4
Other....................... 1,207 27,984 5,675 62,034 32,207 14
----- ------- ----- ------- -------- ---
Total..................... 2,051 191,427 9,923 250,965 $223,571 100%
===== ======= ===== ======= ======== ===
</TABLE>
Sawyer Canyon Field
The Company's largest concentration of reserve holdings, consisting of 23%
of its proved reserves as of December 31, 1995 on a pro forma basis, is the
Sawyer Canyon Field, Sutton County, Texas, which was purchased in April 1996.
See "--Producing Property Acquisitions--Sawyer Canyon Acquisition." The
Company owns interests in 350 gross (319 net) wells of which 327 gross (319
net) wells are operated by the Company. The Company's average working interest
in this field is 91%. The Company's leasehold position consists of
approximately 34,887 gross (34,053 net) acres. During April 1996, the Company
realized average daily production of 17.4 MMcf of natural gas and 48 Bbls of
oil from the Sawyer Canyon Field.
The main producing formation in the Sawyer Canyon Field is the Canyon
sandstone at a depth of approximately 5,500 feet. Natural gas in the Canyon
formation is stratigraphically trapped in lenticular sandstone reservoirs. A
typical Sawyer Canyon Field well encounters multiple productive reservoirs
within the 800 foot to 1,400 foot thickness of the Canyon formation. These
Canyon reservoirs tend to be discontinuous and generally exhibit lower
porosity and permeability, characteristics which reduce the area that can be
effectively drained by a single well to units as small as 40 acres.
The Company's 58.2 Bcfe of proved reserves attributable to the Sawyer Canyon
Field are 96% proved developed. The Company currently plans on drilling seven
additional infill locations to exploit the remaining proved undeveloped
reserves. The Company also believes that additional proved reserves may
ultimately be
38
<PAGE>
attributed to many of the 60 or more 40 acre locations remaining on the
property. The Company has also identified additional enhancement potential
through several recompletion possibilities in existing wellbores into Canyon
sand reservoirs not currently producing. In addition to exploiting these
Canyon sand development opportunities, the Company currently intends to
evaluate portions of the Sawyer Canyon Field for potential in the shallower
Wolfcamp and deeper Strawn formations which have been found to be productive
in the area.
ArkLaTex Area
The Company's second largest concentration of reserve holdings, representing
approximately 16% of total proved reserves as of December 31, 1995 on a pro
forma basis, is located in the ArkLaTex Area primarily in Bossier, Claiborne,
Lincoln, and Union Parishes in northern Louisiana. The Company owns an
interest in 74 gross (38 net) wells of which 42 gross (36 net) wells are
operated by the Company. The Company's average working interest in its
ArkLaTex Area operated wells is approximately 86%. Average daily production
from the ArkLaTex Area, net to the Company's interest, was approximately 10.7
MMcf of natural gas and 103 Bbls of oil during April 1996.
Certain members of the Company's management have been active in the ArkLaTex
Area since 1977. Production in the ArkLaTex Area is primarily from the
Hosston, Cotton Valley and Haynesville formations of Cretaceous and Jurassic
age at depths of 5,500 feet to 10,000 feet. These formations are lower
permeability sandstones which were developed on 640 acre spacing and require
Extensional Infill drilling and advanced fracture stimulations to drain the
reserves in place adequately.
Elm Grove Field. The Company's net proved reserves in the Elm Grove Field,
Bossier Parish, Louisiana, at December 31, 1995, were 28.5 Bcfe, of which 97%
was proved developed. Production out of the Elm Grove Field is natural gas
from the Hosston and Cotton Valley formations at depths of 7,000 feet to 9,600
feet. The Company owns an interest in 42 gross (27 net) wells, of which 30
gross (27 net) wells are operated by the Company. The Company's average
working interest in its operated properties in the Elm Grove Field is
approximately 90%. In addition, the Company acquired in 1995 non-operated
properties with an average working interest of approximately 4% with acreage
offsetting the Company's operated properties. The Company's operated leasehold
position consists of approximately 5,760 gross (5,649 net) acres. Average
daily production from the Elm Grove Field, net to the Company's interest, was
approximately 7.7 MMcf of natural gas and 30 Bbls of oil during April 1996.
Due to the Company's operational enhancements, average gross production from
the original properties have reached a current rate of 11 MMcf per day, up
from an average daily production level of 2 MMcf per day when the Company
assumed operations in August 1994. The Company has acquired additional
interests in the area through multiple acquisitions that have increased
reserves with minimal additional administrative costs. The Company has
identified several behind pipe zones and three to five additional infill
locations that have not been classified as proved reserves but which the
Company believes have significant potential to increase proved reserves.
Since the Company acquired its first interest in the Elm Grove Field, it has
drilled 11 productive wells, recompleted 6 of the 15 existing wells to access
behind pipe reserves and discovered a deeper productive zone not previously
produced in the field. The Company has also drilled 10 productive wells in
five ArkLaTex fields other than Elm Grove. The Company expects to continue to
generate drilling prospects in the fields in which it is currently active and
other ArkLaTex Area fields. The Company currently plans to drill at least 8
prospects during 1996 in the ArkLaTex Area.
Anadarko Basin Area
The Company's Anadarko Basin properties are located in northwest Oklahoma
and the Texas panhandle. The Company owns an interest in 213 gross (82 net)
wells of which it operates 153 gross (75 net) wells. Average
39
<PAGE>
daily production from the area, net to the Company's interest, was
approximately 10.1 MMcf of natural gas and 81 Bbls of oil during April 1996.
Certain members of the Company's management team have been actively involved
in the development of reserves in the Anadarko Basin since 1974. The majority
of the Company's properties in this area are located on the Northern Shelf and
are predominantly natural gas producing from various formations of
Pennsylvanian and Pre-Pennsylvanian age at depths of 7,000 feet to 12,000
feet. The Company's Mills Ranch Field, operated by Chevron, is in the deeper
part of the basin with production from depths of 10,000 feet to 20,000 feet.
Pre-Pennsylvanian reservoirs include the Mississippi, Chester and Hunton
formations and are typically fractured carbonates. Pennsylvanian reservoirs
include the Redfork, Atoka and Morrow sandstones.
Spacing across the Anadarko Basin is generally on 640 acre units with
extensive Extensional Infill drilling having occurred over the last 15 years.
The Company has participated in the drilling of 44 gross (37 net) Extensional
Infill wells in this area since 1992. Of the 36.1 Bcfe total proved reserves
as of December 31, 1995, net to the Company's interest and attributable to the
Anadarko Basin area, 82% are proved developed. The Company plans to continue
to exploit areas of the Anadarko Basin that require Extensional Infill
drilling for adequate reserve drainage.
Gulf Coast Louisiana Area
The Company's onshore Gulf Coast Louisiana properties are located in 10
fields in south Louisiana. The Company owns an interest in 38 gross (7 net)
wells of which it operates 9 gross (5 net) wells. During April 1996, average
daily production from the area, net to the Company's interest, was
approximately 6 MMcf of natural gas and 295 Bbls of oil.
The Company has 22 years of management experience in the Gulf Coast
Louisiana Area. Since 1992, the Company has actively developed its reserves in
the area through its Extensional Infill and exploratory drilling programs and
producing property acquisitions. The Company's proved reserves of 13.7 Bcfe in
the Gulf Coast Louisiana Area are 90% proved developed.
Offshore Gulf of Mexico Area
The Company has non-operated working interests ranging from 2% to 14% in 14
offshore fields (including blocks located in the Eugene Island, Ship Shoal,
South Timbalier, Vermilion, West Cameron and Galveston Island areas) which are
operated primarily by Newfield Exploration Company ("Newfield"). The Company
has interests in 76 gross (6 net) wells with an average working interest of
approximately 8%. During April 1996, average daily production from this area,
net to the Company's interest, was approximately 7.8 MMcf of natural gas and
350 Bbls of oil.
These fields produce from various Pleistocene, Pliocene and Miocene sands
ranging from 6,000 feet to 15,000 feet in depth. The Company's participation
with Newfield in the development of these offshore reserves was initiated in
1990. The last year of active participation in new leasehold acquisition with
Newfield was 1992, although the Company has continued to participate in the
development of the properties where it already owns leases.
In 1995, Newfield added reserves through drilling in the Ship Shoal 159,
South Timbalier 148 and South Timbalier 193 Fields which resulted in upward
revisions of 2.9 Bcfe of net proved reserves to the Company. In total, the
Company has net proved reserves of 14.3 Bcfe in the Offshore Gulf of Mexico
Area which are 92% proved developed.
Gulf Coast and South Texas
The Company's onshore Gulf Coast and South Texas properties are located in
eight fields in south Texas. The Company owns an interest in 57 gross (15 net)
wells, of which it operates 10 gross (4 net) wells. Average
40
<PAGE>
production from the area, net to the Company's interest, was approximately 4.6
MMcf of natural gas and 184 Bbls of oil per day during April 1996.
The Company has been developing its reserves in the onshore Gulf Coast and
South Texas Area that were acquired prior to 1992 through its participation in
various exploratory drilling programs. In 1993 and 1994, the Company expanded
its Gulf Coast and South Texas reserve base with the acquisition of one non-
operated and three operated fields. The Company has generally been successful
in improving the profitability of the properties acquired from other operators
by increasing production rates through an aggressive workover program,
improving marketing arrangements for natural gas and oil sales and lowering
the lifting cost per unit of production.
The Company's proved reserves of 10.5 Bcfe from the onshore Gulf Coast and
South Texas Area are 94% proved developed. The Company has identified three
workovers to re-establish production from currently shut-in wells that it
operates in the Gillock Field and is currently installing artificial lift and
a saltwater disposal system.
Newhall-Potrero Field
The Newhall-Potrero Field is located in Los Angeles County, California,
outside the city of Valencia. The Company owns a 100% working interest in 36
active wells, all of which are operated by the Company. The Company's
leasehold position consists of approximately 1,450 acres. During April 1996,
average daily production from the field, net to the Company's interest, was
approximately 360 Bbls of oil and 0.7 MMcf of natural gas.
The Company's interest in the Newhall-Potrero Field was acquired in 1993 and
is comprised of the Rancho San Francisco and Ferguson leases. Production is
predominantly oil produced from the multiple Modelo sands in the Miocene
formation at a depth range of 6,000 feet to 13,000 feet.
The Company has been able to increase oil production in April 1996 by 89
Bbls of oil per day over 1994 average daily levels by converting certain wells
from gas lift to pumping unit operations and reworking other wells. The
Company has also realized a 31% reduction in lifting costs from $6.32 per BOE
in 1994 to $4.35 per BOE in 1995. The Company believes that there are other
production enhancement opportunities in the Newhall-Potrero Field through the
recompletion of wells to undrained portions of the oil reservoirs and
installing additional pumping units. The Company currently plans 4 to 6
workovers in an attempt to enhance production further during 1996.
NATURAL GAS AND OIL RESERVES
The Company's estimated total proved and proved developed reserves of
natural gas and oil as of December 31, 1993, 1994 and 1995, and pro forma for
the Sawyer Canyon Acquisition as of December 31, 1995, were as follows:
<TABLE>
<CAPTION>
PROVED RESERVES (1) PROVED DEVELOPED RESERVES (2)
----------------------------------- -----------------------------------
NATURAL GAS OIL AND LIQUIDS TOTAL NATURAL GAS OIL AND LIQUIDS TOTAL
DECEMBER 31, (MMCF) (MBBL) (MMCFE) (MMCF) (MBBL) (MMCFE)
------------ ----------- --------------- ------- ----------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
1993.................... 112,023 8,955 165,754 100,660 8,173 149,698
1994.................... 148,611 7,304 192,434 115,099 6,717 155,401
1995.................... 133,673 9,844 192,737 111,189 8,255 160,719
Pro Forma 1995.......... 191,427 9,923 250,965 166,735 8,327 216,697
</TABLE>
- --------
(1) Estimated quantities of proved natural gas and oil reserves for 1994 and
1995 (on an historical and pro forma basis) are based upon reserve reports
prepared by Netherland, Sewell and Associates, Inc. ("Netherland,
Sewell"), the Company's independent petroleum engineers, except that, of
the quantities set forth above, (a) 35,872 MMcf of natural gas, 681 MBbls
of oil and 39,958 MMcfe of the Company's proved undeveloped reserves and
the Company's net APPL limited partnership proved reserves for 1994 and
(b) 20,736 MMcf of natural gas, 1,951 MBbls of oil and 32,442 MMcfe of the
Company's proved undeveloped reserves and the Company's net Merit limited
partnership proved reserves for 1995 (on an historical and pro forma
basis) are based upon estimates evaluated by the
41
<PAGE>
Company. Estimated quantities of natural gas and oil reserves for 1993 are
based upon compilations of estimates of independent petroleum engineers and
the Company's engineers.
(2) Estimated quantities of proved developed natural gas and oil reserves for
1994 and 1995 (on an historical and pro forma basis) are based upon reserve
reports prepared by Netherland, Sewell, except that, of the quantities set
forth above, (a) 2,360 MMcf of natural gas, 94 MBbls of oil and 2,924 MMcfe
of the Company's net APPL limited partnership proved developed reserves for
1994 and (b) 1,509 MMcf of natural gas, 401 MBbls of oil and 3,915 MMcfe of
the Company's net Merit limited partnership proved reserves for 1995 (on an
historical and pro forma basis) are based on estimates evaluated by the
Company. Estimated quantities of natural gas and oil reserves for 1993 are
based upon compilations of estimates of independent petroleum engineers and
the Company's engineers.
The following table sets forth the estimated future net cash flows from the
Company's estimated proved reserves as of December 31, 1993, 1994 and 1995, and
pro forma for the Sawyer Canyon Acquisition as of December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- DECEMBER 31,
1993 1994 1995 1995
-------- -------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated future net cash flows
before income
taxes (1).......................... $220,335 $221,513 $258,220 $346,803
Estimated future net cash flows be-
fore income taxes, discounted at
10% (2)............................ $137,711 $144,595 $168,159 $223,571
Standardized measure of discounted
future net cash flows.............. $118,202 $126,044 $136,924 $189,778
</TABLE>
- --------
(1) Estimated future net cash flows before income taxes for 1994 and 1995 (on
an historical and pro forma basis) are based upon reserve estimates
prepared by Netherland, Sewell, except that, of the estimates of such cash
flows set forth above, (a) $47,155,000 of such estimates for 1994 is
attributable to the Company's proved undeveloped reserves and the Company's
net APPL Limited Partnership proved reserves which are based upon reserve
estimates evaluated by the Company and (b) $30,232,000 of such estimate for
1995 (on an historical and pro forma basis) is attributable to the
Company's proved undeveloped reserves and the Company's net Merit Limited
Partnership proved reserves which are also based upon reserve estimates
evaluated by the Company. Such estimate for 1993 is based upon compilations
of reserve estimates of independent petroleum engineers and the Company's
engineers.
(2) Estimated future net cash flows before income taxes, discounted at 10%, for
1994 and 1995 (on an historical and pro forma basis) are based upon reserve
estimates prepared by Netherland, Sewell, except that, of the estimates of
such cash flows set forth above, (a) $28,400,000 of such estimate for 1994
is attributable to the Company's proved undeveloped reserves and the
Company's net APPL limited partnership proved reserves which are based upon
reserve estimates evaluated by the Company and (b) $15,717,000 of such
estimate for 1995 (on an historical and pro forma basis) is attributable to
the Company's proved undeveloped reserves and the Company's net Merit
limited partnership proved reserves which are also based upon reserve
estimates evaluated by the Company. Such estimate for 1993 is based upon
compilations of reserve estimates of independent petroleum engineers and
the Company's engineers.
The reserve data set forth in this Prospectus represent only estimates of
Netherland, Sewell, other third-party engineers and the Company. A summary of
Netherland, Sewell's report dated May 13, 1996 for pro forma December 31, 1995
is filed as an exhibit to the registration statement of which this Prospectus
is a part. Reserve engineering is a subjective process of estimating the
recovery of underground accumulations of natural gas and oil that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is the
function of the quality of the available data, of the assumptions made, and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable natural gas and oil reserves and of future net cash
flows therefrom necessarily depend upon a number of variable factors and
assumptions, such as historical production from the area compared with
production from other producing areas, the assumed effects of regulations by
governmental agencies and assumptions concerning future natural gas and oil
prices, future operating costs, severance and excise taxes, development costs
and workover and remedial costs, all of which may in fact vary considerably
from actual results. For those reasons, estimates of the economically
recoverable natural gas and oil reserves attributable to any particular group
of properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
All such estimates are to some degree speculative, and classifications of
reserves are only attempts to define the degree of speculation involved. Actual
prices, production, development expenditures, operating expenses and quantities
of recoverable natural gas and oil reserves will vary from those assumed in the
estimates and such variances may be significant. Any significant
42
<PAGE>
variance from the assumptions could result in the actual quantity of the
Company's reserves and future net cash flow therefrom being materially
different from the estimates set forth herein. In addition, the Company's
estimated reserves may be subject to downward or upward revision, based upon
production history, results of future exploration and development, prevailing
natural gas and oil prices, operating and development costs and other factors.
Estimates with respect to proved undeveloped reserves that may be developed
and produced in the future are often based upon volumetric calculations and
upon analogy to similar types of reserves rather than actual production
history. Estimates based on these methods are generally less reliable than
those based on actual production history. Subsequent evaluation of the same
reserves based upon production history will result in variations, which may be
substantial, in the estimated reserves.
The present worth of future net cash flows shown above should not be
construed as the current market value, or the market value as of December 31,
1995, or any prior date, of the estimated natural gas and oil reserves
attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net revenues
from estimated proved reserves are based on prices and costs as of the date of
the estimate unless such prices or costs are contractually determined at such
date. Actual future prices and costs may be materially higher or lower. Actual
future net revenues also will be affected by factors such as actual
production, supply and demand for natural gas and oil, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
In accordance with methodology approved by the Commission, specific
assumptions were applied in the estimates of future net cash flows. Under this
methodology, estimated future net cash flows are determined by reducing
estimated future gross cash flows to the Company for natural gas and oil sales
by the estimated costs to develop and produce the underlying reserves,
including future capital expenditures, operating costs, transportation costs,
royalty and overriding royalty burdens. Estimated future production costs were
based on actual annual production costs incurred during the reported period. A
portion of the Company's proved reserves are undeveloped, and future
development costs thereon were calculated based on a continuation of present
economic conditions.
Future net cash flows were discounted at 10% per annum to arrive at
discounted future net cash flows. The 10% discount factor used to calculate
present value is required by the Commission, but such rate is not necessarily
the most appropriate discount rate. Present worth of future net cash flows,
irrespective of the discount rate used, is materially affected by assumptions
as to timing of future natural gas and oil prices and production, which may
prove to be inaccurate. In addition, the calculations of estimated net
revenues do not take into account the effect of certain cash outlays,
including, among other things, general and administrative costs, interest
expense and dividends.
The Company does not file reserve reports with any federal agency other than
the Commission.
PRODUCTIVE WELLS
The following table sets forth the number of productive natural gas and oil
wells in which the Company owned an interest as of April 30, 1996. Productive
wells consist of producing wells and wells capable of production, including
natural gas wells awaiting pipeline connections to commence deliveries and oil
wells awaiting connection to production facilities. Wells which are completed
in more than one producing horizon are counted as one well. Of the gross wells
reported below, five had multiple completions.
<TABLE>
<CAPTION>
GROSS NET
----- -----
<S> <C> <C>
Natural gas wells............................................. 999 532.8
Oil wells..................................................... 1,052 134.4
----- -----
Total....................................................... 2,051 667.2
===== =====
</TABLE>
43
<PAGE>
ACREAGE DATA
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of April 30, 1996.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE
----------------- -------------------
STATE GROSS NET GROSS NET
- ----- ----------------- -------------------
<S> <C> <C> <C> <C>
Oklahoma.................................. 41,360 32,848 17,011 11,229
Texas (1)................................. 71,577 51,458 9,931 8,403
Louisiana................................. 20,338 6,915 7,133 6,172
Montana................................... 21,946 8,955 -- --
Colorado.................................. 16,985 3,913 4,186 2,699
Wyoming................................... 9,823 6,255 -- --
Other..................................... 20,757 13,081 4,443 3,367
-------- -------- --------- ---------
Total................................... 202,786 123,425 42,704 31,870
======== ======== ========= =========
</TABLE>
- --------
(1) 34,887 gross (34,053 net) acres of the developed acreage and none of the
gross undeveloped acreage are attributable to the Sawyer Canyon
Acquisition.
DRILLING ACTIVITIES
During the periods indicated, the Company drilled or participated in the
drilling of the following exploratory and development wells:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------- ENDED
1993 1994 1995 MARCH 31, 1996
---------- ---------- ---------- ----------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive................. 9 1.1 11 1.1 9 0.8 1 0.4
Non-Productive............. 7 1.9 8 4.0 7 3.4 1 1.0
--- ---- --- ---- --- ---- ------- -------
Total.................... 16 3.0 19 5.1 16 4.2 2 1.4
=== ==== === ==== === ==== ======= =======
Development:
Productive................. 20 10.2 22 15.7 32 21.4 2 2.0
Non-Productive............. 7 6.5 15 10.4 17 12.3 3 2.2
--- ---- --- ---- --- ---- ------- -------
Total.................... 27 16.7 37 26.1 49 33.7 5 4.2
=== ==== === ==== === ==== ======= =======
</TABLE>
At April 30, 1996, the Company was participating in the drilling or
completion of 6 gross (4.3 net) wells, 2 of which are still being drilled and
4 of which were determined to be productive. All of the Company's drilling
activities are conducted with independent contractors. The Company owns no
drilling equipment.
The information contained in the foregoing table should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled and
the natural gas and oil reserves generated therefrom.
44
<PAGE>
PRODUCTION, PRICES AND OPERATING EXPENSES
The following table sets forth the Company's net production of natural gas
and oil, average sales prices and certain production data during the periods
indicated on a historical and pro forma basis:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ ---------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 1995 1996 1996
------ ------ ------ --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net production volumes:
Natural gas (MMcf)..... 12,742 15,591 17,835 25,980 4,066 5,113 6,727
Oil and liquids
(MBbls)............... 691 1,024 1,028 1,045 252 316 320
Average sales prices:
Natural gas (per Mcf)
(1)................... $ 2.04 $ 1.82 $ 1.65 $ 1.63 $1.61 $2.00 $2.02
Oil (per Bbl).......... 16.07 14.93 16.45 17.54 16.41 17.64 17.65
Average production costs
per Mcfe (2)............ $ 0.57 $ 0.69 $ 0.61 $ 0.54 $0.65 $0.50 $0.48
</TABLE>
- --------
(1) Includes the results of the Company's price risk management activities.
See "--Natural Gas and Oil Production Marketing Activities."
(2) Production costs are equivalent to lease operating expenses and may vary
substantially among wells depending on the methods of recovery employed
and other factors.
NATURAL GAS AND OIL PRODUCTION MARKETING ACTIVITIES
The Company markets substantially all of the natural gas production from
Company-operated wells to pipelines and third party gas marketers. The Company
believes that its marketing activities add value by giving the Company
opportunities to obtain competitive prices for products, rapidly connect new
wells to pipelines, minimize pipeline and purchaser balancing problems,
maintain continuous sales of production and secure prompt payment. The
Company's production marketing group utilizes strict economic and risk-reward
analysis and the experience of other technical groups to evaluate the various
marketing alternatives for each project.
Substantially all of the Company's natural gas is sold either under short-
term contracts (one year or less) providing for variable or market sensitive
prices or under various long-term contracts providing for fixed prices which
dedicate the natural gas to a single purchaser for an extended period of time.
In connection with the marketing of its natural gas production, the Company
engages in natural gas price risk management activities primarily through the
use of fixed for floating price swap agreements on notional volumes that
require payments to (or the receipt of payments from) counterparties to such
agreements based on the differential between a fixed and variable price for
natural gas. The Company maintains coverage of such notional volumes with
adequate physical volume deliveries at the hub points used to price such
arrangements. The Company intends to continue to consider various risk
management arrangements to stabilize cash flow and earnings and reduce the
Company's susceptibility to volatility in natural gas prices. These agreements
involve certain risks, see "Risk Factors--Price Risk Management."
The Company utilizes, from time to time, natural gas price swaps for a
portion of its natural gas production to achieve a more predictable cash flow
and to reduce its exposure to product price fluctuations. The Company records
these transactions under settlement accounting guidelines and, accordingly,
includes gains or losses in gas and oil revenues in the period of the swapped
production. The Company currently has three separate natural gas price swaps
in place. Effective January 1, 1995, the Company effectively fixed the sales
price for a portion of its natural gas production at a NYMEX price of $1.905
per MMBtu for a five-year term. In September 1995, the Company effectively
fixed the sales price for an additional portion of its natural gas production
at a NYMEX price of $2.055 per MMBtu for ten years. In May 1996, the Company
effectively fixed the sales price for an additional portion of its natural gas
production at a NYMEX price of $2.23 MMBtu for a one-year term. The Company,
in May 1996, also fixed a basis component, relative to the NYMEX, of the net
wellhead sales price for a portion of its natural gas production at $0.096
MMBtu. For the calendar years 1996, 1997 and 1998, these transactions cover
aggregate notional volumes of 9,040,000 MMBtus, 8,120,000 MMBtus and 4,800,000
45
<PAGE>
MMBtus, respectively, and result at annual weighted average prices per MMBtu
of $2.0325, $1.9936 and $1.9838, respectively. The Company currently intends
to limit its natural gas price swap activity to no more than 50% of its
natural gas production.
Since early 1995, the Company has been more aggressively marketing a portion
of the oil production from its properties through the off lease marketing of
volumes in its core oil producing areas. As a result of this marketing
activity, the Company has realized improvements to the price received for its
oil production in these areas.
The Company, in May 1996, in order to integrate its various natural gas
marketing activities, reorganized its corporate structure so that all of its
natural gas marketing operations are conducted through InterCoast Gas
Services. This action coordinates the Company's natural gas and oil production
marketing activities described above with the natural gas marketing operations
described below, which the Company has recently acquired and started. The
Company intends that InterCoast Gas Services will be able to provide an
assorted range of services and believes that it can provide value to its
natural gas and oil exploration and production operations and to its electric
marketing and brokering business.
In late 1995, the Company initiated a plan to grow its wholesale natural gas
marketing business. This plan involved two components: (i) strategic
acquisitions of other natural gas marketing companies and (ii) the start-up of
its own natural gas marketing company. During that time period, the Company
acquired for $1.8 million the assets of GED, a small natural gas marketing
company located in Tulsa, Oklahoma. This operation focuses on efficiently
aggregating natural gas volumes from producers and providing services
(including nomination, pipeline balancing, royalty payment administration, and
other accounting and administrative services) to these producers. As of April
30, 1996, this portion of InterCoast Gas Services purchased natural gas from
over 600 wells located primarily in Oklahoma and the Texas panhandle. The
volumes of natural gas purchased from these producers are aggregated with
volumes purchased from other gas marketing companies and resold to natural gas
distribution companies, industrial end-users and other natural gas marketing
companies. This portion of InterCoast Gas Services' operations enters into
sales agreements on both a short-term basis and a long-term basis, as well as
utilizes various price risk management contracts and arrangements, including
NYMEX options and basis swap agreements, fixed for floating price swap
agreements, fixed price forward purchase and sale agreements, options and
other similar contractual arrangements. See "Risk Factors--Price Risk
Management."
In the first quarter of 1996, the Company opened a natural gas marketing
office to focus on market opportunities in the northern end of the Mid-
Continent region, concentrating on wholesale customers in that region. This
portion of InterCoast Gas Services' operations purchases natural gas from
producers, pipelines and other marketing companies and resells the natural gas
to industrial end-users, natural gas distribution companies, producing
companies, pipelines and other marketing companies. Sales and purchases are
made generally on a firm basis but may also be on a swing or interruptible
basis. The terms of the agreements have been for periods of less than one
year; however, longer term contracts may be entered into in the future. This
operation also utilizes various price risk management contracts and
arrangements, including NYMEX options and basis swap agreements, fixed for
floating price swap agreements, fixed price forward purchase and sale
agreements, over the counter option contracts and other similar contractual
arrangements. See "Risk Factors--Price Risk Management."
ELECTRIC POWER MARKETING
The Company engages in the purchase and sale of wholesale electric power,
both as a broker and marketer. As a broker, the Company acts as an
intermediary by facilitating transactions between buyers and sellers of
electricity. When acting as a marketer, the Company purchases and takes title
to electricity and resells that electricity to other utilities. In connection
with its marketing activity, the Company may also contract with electric
utilities for transmission services. The Company began its electric marketing
business in October 1993, and its FERC certification as a power marketer
became effective in July 1995. Prior to the effectiveness of its power
marketer certification, the Company's electric marketing business was limited
to brokering transactions.
46
<PAGE>
Through the first quarter of 1996, the Company had brokered and marketed
approximately 925,000 MWh among over 60 utilities. The Company's strategy is
to establish itself as a reliable trading and marketing partner for wholesale
electricity transactions throughout the United States and Canada.
The Company has secured interchange and transmission agreements which
specify the terms and conditions under which market participants transact
business with one another. Through April 1996, the Company has executed 82
interchange agreements and 29 transmission agreements with utilities and other
clients across the United States. The Company is currently negotiating the
terms of approximately 50 additional such agreements. The Company has also
applied to become a member of the Western Systems Power Pool which would allow
it to transact business with over 100 additional market participants.
The Company's electric power marketing operations currently do not use price
risk management contracts and arrangements, however, the Company in the future
may utilize such contracts and arrangements in its electric power marketing
business. See "Risk Factors--Price Risk Management."
Although in the early stages of development, the wholesale electric power
marketing business is very competitive. Many of these competitors have greater
financial resources than the Company and have direct access to generating
resources. The Company neither owns nor has any long-term rights to any
electric generating resources. See "Risk Factors--Certain Risks Affecting
Power Marketing Operations."
The Company believes it will be able to capitalize on expanding market
opportunities created by the deregulation of the electric power industry, the
most recent of which is FERC Order Numbers 888 and 889 which effectively
mandate open access transmission for the electric industry but there can be no
assurance that the Company will be successful in this area. See "Risk
Factors--Regulation."
CONTINENTAL POWER EXCHANGE, INC.
The Company's wholly owned subsidiary, Continental Power Exchange, developed
and launched in May 1995 commercial operation of the first market-based
national electronic exchange for the buying and selling of wholesale
electricity and transmission services, CPEX(TM). CPEX(TM) is an on-line
computer and telecommunications system that links subscribers electronically
for the purpose of buying, selling and wheeling wholesale electric power. The
first-of-its-kind software and network automatically determines the least-cost
transmission path for moving wholesale electricity between two points. In a
matter of seconds, CPEX(TM) identifies the least-cost transmission path and
electronically displays to subscribers offers to buy and sell electricity.
Subscribers are able to electronically initiate and consummate transactions
through the CPEX(TM) system and clear transactions through its electric funds
network.
The Company commenced commercial operation of CPEX(TM) in May 1995 with 11
charter subscribers and had 30 subscribers with operations in 25 states as of
April 30, 1996. Until February 1996, CPEX(TM) subscribers were limited to
trades of only one-hour duration for the following hour. Currently, CPEX(TM)
has been expanded to permit trades over the next four-hour duration also.
The Company focuses on continuous enhancements to its electronic network, as
well as the expansion of marketing and sales efforts. In an effort to
accelerate the pace of its software development and marketing activities, the
Company may attempt to form strategic alliances with other participants which
may involve equity investments by such participants.
During 1996, the number of trades conducted by CPEX(TM) subscribers and the
aggregate amount and value of energy traded have increased each month. The
Company's current target customers are electric generation and transmission
companies, including investor owned utilities, municipally owned and operated
power systems, public power authorities, and rural electric generation and
transmission systems. Subject to regulatory changes implemented by the FERC
and state regulatory authorities, the Company expects that future target
customers will also include large industrial and commercial end-users,
independent power producers, co-generators, power
47
<PAGE>
marketers, energy aggregators and power marketers. CPEX(TM) is still in its
introductory stage, however, and there can be no assurances that it will be
commercially accepted on a widespread basis. See "Risk Factors--Certain Risks
Affecting CPEX(TM)."
COMPETITION
Natural Gas and Oil Activities and Natural Gas Marketing Activities
The oil and gas industry is highly competitive. The Company faces
competition both from major and independent oil and gas companies and from
numerous individuals in seeking to acquire producing properties, in obtaining
labor and equipment to conduct its operations, and in marketing. Many of these
competitors have financial and other resources substantially in excess of
those available to the Company.
Competitors of the Company in the natural gas marketing business include
other producers, natural gas pipelines and their affiliated marketing
companies, local gas distribution companies, independent marketers and
providers of alternate energy supplies. Increases in worldwide energy
production capability have brought about surpluses in energy supplies in
recent years. This, in turn, has resulted in substantial competition in
markets historically served by domestic natural gas from alternative sources
of energy, such as residual fuel oil, and among domestic natural gas
suppliers. Changes in government regulations relating to the production,
transportation and marketing of natural gas have also resulted in significant
changes in the historical marketing patterns of the industry. Generally, these
changes have resulted in the shifting of the focus of pipeline companies from
the regulated purchase of natural gas to the provision of transportation
services, the development by natural gas producers of their own marketing
programs to take advantage of new regulations requiring pipelines to transport
natural gas for regulated fees, and the emergence of various types of
marketing companies and other aggregators of natural gas supplies. As a
consequence, natural gas prices, which were once effectively determined by
government regulations, are now largely established by competition.
CPEX(TM)
Competition in electronic energy exchange networks is emerging. The
Company's principal competitors at this time come primarily from within the
electric industry or from the natural gas industry which was partially
deregulated several years ago. Nevertheless, the Company believes that the
size of the wholesale and retail energy markets, and the expected cost savings
resulting from less regulation, will likely cause numerous competitors to
develop their own electronic energy trading networks. Competitive networks are
being developed by companies with greater financial and other resources than
the Company. The Company believes its ability to compete successfully in this
business depends on a number of factors both within and outside its control,
including product pricing, quality and performance; success in developing new
products; effectiveness of sales and marketing resources and strategies;
strategic relationships with other energy management system vendors; timing of
new product and service launchings by the Company and its competitors; general
market and economic conditions; and government and regulatory authority
actions. Further, some utilities may still regard the effects of less
regulation, with the resultant creation of market economies, as a threat to
their current market dominance. Accordingly, these utilities may attempt to
delay the implementation of regulatory changes, which could diminish the
benefits of certain of the Company's products and services. In addition,
utilities have formed regional and national reliability councils whose main
purpose is to monitor and control the interconnected transmission grid.
Through their actions, these councils could adopt rules to circumvent or delay
the introduction of competition or to otherwise diminish the benefits of
certain of the Company's products and services.
Power Marketing
Several hundred companies are competing today to serve the same markets that
the Company is serving, and the Company anticipates that numerous additional
companies will soon be competing with it. The number of power marketers that
currently have applications either accepted or pending with FERC is
approximately 200. A significant number of these power marketers are backed by
companies having greater financial and other
48
<PAGE>
resources than the Company, including energy companies, natural gas marketing
companies, electric utilities and financial trading companies.
REGULATION
General
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation affecting the oil and gas industry is under
constant review for amendment or expansion. Numerous departments and agencies
have issued rules and regulations affecting the oil and gas industry and its
individual members, some of which carry substantial penalties for the failure
to comply. The regulatory burden on the oil and gas industry increases its
cost of doing business and, consequently, affects its profitability. Inasmuch
as such laws and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
regulations.
Exploration and Production
Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring drilling permits, requiring the maintenance of bonds in
order to drill or operate wells, and regulating the location of wells
(including limitation on the spacing and density of field development), the
method of drilling and casing wells, the surface use and restoration of
properties upon which wells are drilled, and the plugging and abandoning of
wells. The Company's operations are also subject to various conservation
regulations, including regulation of the size of drilling and spacing units or
proration units, the density of wells which may be drilled, and the
unitization or pooling of oil and gas properties. In this regard, some states,
including the states in which the Company operates, allow the forced pooling
or integration of lands and leases to facilitate exploration, while other
states rely on voluntary pooling of lands and leases. In addition, state
conservation laws establish maximum rates of production from oil and gas
wells, generally prohibit the venting or flaring of gas, and may impose
certain requirements regarding the ratability of production. The effect of
these regulations is to limit the amounts of crude oil and natural gas the
Company can produce from its wells and the number of wells or the locations at
which the Company can drill.
Oklahoma and Texas have adopted limits on natural gas production that
attempt to match production with market demand. In March 1992, Oklahoma
enacted legislation which places statewide limits on natural gas production.
The Oklahoma Corporation Commission sets production levels quarterly. The
production of natural gas from a single well is limited to the greater of a
specified Mcf per day or a percentage of the total daily production capacity
of the well. In April 1992, the Texas Railroad Commission (the "TRC"), which
is the state agency that regulates oil and gas production in Texas,
unanimously approved a new proration system that eliminated monthly purchaser
nominations as the starting point for determining reservoir market demand.
Instead, the TRC relies upon certain information filed monthly by well
operators, in addition to using historical production data for each well
during the same month from the previous year, subject to certain adjustments,
to arrive at a production allowable. The Company cannot predict whether other
states will adopt similar regulations or legislation governing natural gas
production. However, the effect of such legislation and regulations may be to
decrease the allowable daily production and the revenues from natural gas
properties, including properties that produce both oil and natural gas. It is
also possible that such legislation and regulations may result in a decrease
in natural gas production in such states, which could exert upward pressure on
the price of natural gas.
Various federal, state and local laws and regulations covering the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, may affect the exploration, development and production
operations of the Company. Both operators and non-operators may be liable for
obligations such as the proper plugging and abandoning of wells and
remediation of oil spills. The costs of compliance with such obligations, and
penalties for violations of environmental laws, can be substantial. The
Company is also subject to laws and regulations concerning occupational safety
and health. It is not anticipated that the Company will be required in the
near future to expend amounts that are material to its overall operations by
reason of
49
<PAGE>
environmental or occupational safety and health laws and regulations, but
because such laws and regulations are frequently changed, the Company is
unable to predict the ultimate costs of compliance.
Natural Gas Sales, Gathering and Transportation
Federal legislation and regulatory controls have historically affected the
price of the natural gas produced and sold by the Company and the manner in
which such production is marketed. Historically, the transportation and sale
for resale of natural gas in interstate commerce were regulated pursuant to
the Natural Gas Act of 1938 (the "NGA"), the Natural Gas Policy Act of 1978
(the "NGPA") and the regulations promulgated thereunder by the FERC. Since
1978, maximum selling prices of certain categories of natural gas sold in so-
called "first sales" (which include sales from the Company's own production),
whether sold in interstate or intrastate commerce, were regulated pursuant to
the NGPA. Pursuant to provisions of the NGPA and the Natural Gas Decontrol Act
of 1989, price and non-price controls were removed at various times with all
remaining controls for "first sales" lifted as of January 1, 1993.
In addition, in December 1992, the FERC issued Order 547, which is a blanket
certificate of public convenience and necessity pursuant to Section 7 of the
NGA and which authorizes any company which is not an interstate natural gas
pipeline or an affiliate thereof to make certain sales for resale in
interstate commerce that would otherwise be subject to the FERC's NGA
jurisdiction. The blanket certificate which covers the Company's non-first
sale marketing activities was effective January 7, 1993, and permits sales at
negotiated rates on an effectively deregulated basis.
The cumulative impact on the Company of the NGPA, the Natural Gas Wellhead
Decontrol Act and Order 547 is that none of the Company's natural gas sales
are subject to price regulation. Rather, the Company is able to obtain that
price contractually agreed upon with the purchaser. Under current market
conditions, natural gas prices under recently negotiated contracts tend to be
lower than most regulated price ceilings previously prescribed by the NGPA.
Historically, interstate pipeline companies generally acted as wholesale
merchants by purchasing natural gas from producers and reselling the natural
gas to local distribution companies and large end-users. Under the NGA and
NGPA, the transportation and sale of natural gas by interstate pipeline
companies have been subject to extensive regulation, and the construction of
new pipelines, the extension of existing pipelines and the commencement and
cessation of sales or transportation services by pipeline companies generally
have required prior FERC authorization.
Commencing in 1985, the FERC promulgated a series of orders and regulations
adopting changes that significantly altered the transportation and marketing
of natural gas. These changes were intended to foster competition in the
natural gas industry by, among other things, inducing or mandating that
interstate pipeline companies provide nondiscriminatory transportation
services to producers, distributors and other shippers (so-called "open
access" requirements).
In April 1992 (and clarified in August 1992 and finalized in November 1992),
the FERC issued Order 636, a complex regulation which had a major impact on
natural gas pipeline operations, services and rates. Among other things, Order
636 required each interstate pipeline company to "unbundle" its traditional
wholesale services and create and make available on an open and
nondiscriminatory basis numerous constituent services (such as gathering
services, storage services, firm and interruptible transportation services,
and stand-by sales services) and to adopt a new rate making methodology to
determine appropriate rates for those services. To the extent the pipeline
company or its sales affiliate makes natural gas sales as a merchant in the
future, they must do so in direct competition with all other sellers pursuant
to private contracts; however, pipeline companies are not required to remain
"merchants" of natural gas. Most of the interstate pipeline companies have
transferred their sales activities to marketing affiliates and have become
transporters only. Order 636 and various pipeline filings to implement Order
636 are the subject of numerous appeals. The Company cannot predict whether
and to what extent judicial review will affect these matters.
50
<PAGE>
As a result of Order 636, a number of interstate pipeline companies have (i)
"spun down" their gathering systems from regulated pipeline transportation
companies to unregulated affiliates, (ii) spun-off gathering systems to non-
related entities, and/or (iii) "refunctionalized" portions of their pipeline
facilities from transmission to gathering. A consequence of this divestiture
of gathering facilities could be separate, and higher, gathering fees.
With respect to oil pipeline rates subject to the FERC's jurisdiction, in
October 1993 the FERC issued Order 561 in order to fulfill the requirements of
Title XVIII of the Energy Policy Act of 1992. Order 561 establishes an
indexing system, effective January 1, 1995, under which oil pipelines will be
able to readily change their rates to track changes in the Producer Price
Index for Finished Goods (PPI-FG), minus one percent. This index will
establish ceiling levels for rates. Order 561 also permits cost-of-service
proceedings to establish just and reasonable rates for initial rates for new
service. Cost-of-service review may also be invoked when an oil pipeline
company claims it is significantly under-recovering its costs, or when
customers claim the pipeline's rates are excessive in relation to actual
costs. The order does not alter the right of a pipeline to seek FERC
authorization to charge market-based rates. However, until the FERC makes the
finding that the pipeline does not exercise significant market power, the
pipeline's rates cannot exceed the applicable index ceiling level or a level
justified by the pipeline's cost of service.
Environmental Matters
The Company's operations and properties are subject to extensive federal,
state and local laws and regulations relating to the generation, storage,
handling, emission, transportation and discharge of materials into the
environment. Permits are required for various of the Company's operations, and
these permits are subject to revocation, modification and renewal by issuing
authorities. Governmental authorities have the power to enforce compliance
with their regulations, and violations are subject to fines or injunctions, or
both. It is possible that increasingly strict requirements will be imposed by
environmental laws and enforcement policies thereunder. Based on the existing
regulatory structure, the Company does not anticipate that it will be required
in the near future to expend amounts that are material in relation to its
total capital expenditure program by reason of environmental laws and
regulations, but because such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of such compliance.
Natural Gas Marketing Operations
Although the Company's natural gas marketing business is generally not
subject to federal or state regulation, many of the parties with whom the
Company does business (including interstate and intrastate pipeline, gathering
and storage companies, and local distribution companies) are subject to
federal and state regulation. As a result, changes in governmental regulations
may have an adverse impact on the Company's natural gas marketing business. In
addition, such parties may also file tariffs at the federal and/or state level
on account of their regulated status, changes in which may have an adverse
effect on the Company's natural gas marketing business. Finally, because the
Company's natural gas marketing business is affiliated with a regulated
utility, it is possible that government regulation could directly or
indirectly adversely affect such a business.
CPEX(TM) and Power Marketing
Federal and state regulations currently prohibit open competition for retail
electric customers. CPEX(TM) can thus only be used by utilities and power
marketers in the wholesale electric market. The timing and direction of future
federal and state regulatory actions will likely impact the Company's power
marketing and electricity trading exchange operations. The Company has
designed CPEX(TM) and has plans for future system developments predicated on
its assumption that the development of increased regulatory freedom for
wholesale and, eventually retail, electricity users to choose among supply
sources and transmission paths. Federal and state legislation and decisions
that federal and various state regulators make about whether, when and how
retail competition may come about, and the terms and conditions under which
traditional utilities will be allowed to compete, will likely have a
significant bearing on the Company's ability to compete in this market.
Additionally, the possibility of changes in the regulation of power marketers
and the regulation of power marketing in general by the FERC and
51
<PAGE>
various state regulators cannot be ruled out. The Company is essentially free
to compete for wholesale electricity customers across the United States,
except for certain transactions involving MidAmerican Energy. While there are
no regulatory proceedings currently pending or in the planning stages of which
the Company is aware that would further restrict the Company's ability to
compete, there can be no assurance that regulatory changes might not take
place in the future that could adversely impact the Company's ability to
compete.
In April 1996, the FERC released Order Number 888 which establishes the
criteria by which the nation's public electric utilities must open their
transmission lines to wholesale competitors. Companion FERC Order Number 889
requires the same public utilities to establish electronic bulletin boards to
share information openly about available transmission capacity. The Company
believes the practical result of these orders will be to increase
significantly the volume of competitive wholesale electric power transactions
creating new business opportunities for power marketers.
OPERATIONAL HAZARDS AND INSURANCE
The operations of the Company are subject to all risks inherent in the
exploration for, and development and production of, natural gas and oil
(including natural hazards such as blowouts, cratering and fires) which could
result in damage or injury to, or destruction of, drilling rigs and equipment,
formations, producing facilities or other property, or could result in
personal injury, loss of life, pollution or other environmental damage. Any
such event could result in substantial cost to the Company which could have a
material adverse effect upon the financial condition of the Company in the
event it is not fully insured against such risk. Although the Company
maintains insurance coverage considered to be customary in the industry, it is
not fully insured against certain of these risks, either because such
insurance is not available or because of the high premium costs. There can be
no assurance that any insurance obtained by the Company will be adequate to
cover any losses or liabilities, or that such insurance will continue to be
available or available on terms which are acceptable to the Company. Although
such operational risks and hazards may to some extent be minimized, no
combination of experience, knowledge and scientific evaluation can eliminate
the risk of investment or assure a profit to any company engaged in oil and
gas operations.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
natural gas and oil properties in accordance with standards generally accepted
in the oil and gas industry. The Company's properties are subject to customary
royalty interests, liens for current taxes and other burdens which the Company
believes do not materially interfere with the use of or affect the value of
such properties.
EMPLOYEES
The Company had a total of approximately 130 full-time employees as of April
30, 1996. From time to time the Company uses the services of independent
contractors for various field and other services. Management believes that its
relations with its employees are excellent.
LEGAL PROCEEDINGS
The Company is a defendant in certain legal proceedings that have resulted
from the ordinary conduct of its business. In the opinion of the Company's
management, none of these proceedings will have a material adverse effect on
the Company's financial condition or results of operations.
52
<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND THE PARENT
OWNERSHIP OF STOCK
MidAmerican Energy, through its wholly owned subsidiary MidAmerican Capital,
owns 7,927,500 shares of Common Stock, which will represent approximately 56%
(or 53% if the Underwriters exercise their over-allotment option in full) of
the outstanding Common Stock after the Offering. Such concentration of
ownership of Common Stock may have an adverse effect on the market price of
the Common Stock. As a result of such stock ownership, MidAmerican Capital,
and its parent company, MidAmerican Energy, will be able to elect all members
of the Board of Directors and to control the vote on all matters submitted to
the Board of Directors or stockholders, including, without limitation, matters
relating to the Company's exploration, development, capital, operating and
acquisition expenditure plans. It is contemplated that upon completion of the
Offering the Board of Directors will be comprised of seven members, five of
whom will be directors or current or former officers of MidAmerican Energy,
MidAmerican Capital or the Company.
CONTRACTUAL ARRANGEMENTS
The Company and MidAmerican Capital anticipate entering into a number of
agreements for the purpose of defining the ongoing relationship between them.
These agreements will be developed in connection with the establishment of the
Company by MidAmerican Capital and therefore will not be the result of arm's
length negotiations between independent parties. The Company intends that all
future transactions between the Company, MidAmerican Capital and other
affiliates will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. Because of its affiliate status, the
Company is restricted from entering into certain agreements with MidAmerican
Energy without regulatory approval.
Registration Rights Agreement. Prior to the consummation of the Offering,
the Company and MidAmerican Capital anticipate entering into a Registration
Rights Agreement (the "Registration Rights Agreement"), which, among other
things, will provide that upon the request of MidAmerican Capital, the Company
will register under the Securities Act any of the shares of Common Stock
currently held by or acquired in the future by MidAmerican Capital, for sale
in accordance with MidAmerican Capital's intended method of disposition
thereof (a "Demand Registration"). MidAmerican Capital will have the right to
request two Demand Registrations. MidAmerican Capital also will have "piggy-
back" registration rights to include the shares of Common Stock then held by
it in certain other registrations of Common Stock. MidAmerican Capital has
agreed to pay its pro rata share of all costs and expenses in connection with
each registration of its shares of Common Stock. Under the Registration Rights
Agreement, MidAmerican Capital cannot exercise a Demand Registration for at
least six months after completion of the Offering.
Tax Sharing Agreement. For federal income tax purposes, the Company has been
included in the affiliated group of which MidAmerican Energy is the parent
corporation (the "Tax Group"). The Company has also been included in certain
state and local tax returns of MidAmerican Energy or its subsidiaries. The
consolidated income tax payable (or receivable) has historically been
allocated among the Company and other members of the Tax Group based on the
respective contributions to the consolidated taxable income and tax credits of
the Tax Group. The Company has received (or made) payments for the income tax
reductions (or increases) contributed to the Tax Group. Prior to the
consummation of the Offering, the Company and MidAmerican Capital anticipate
entering into a Tax Sharing Agreement (the "Tax Sharing Agreement") whereby
MidAmerican Capital will reimburse the Company with respect to all tax
benefits which reduce the Company's income tax liability or increase the
amount of an income tax refund for the Company. The Tax Sharing Agreement will
also provide for the allocation of responsibility for filing of tax returns
and other related matters. As a result of the Offering, the Company will no
longer be included in the Tax Group.
Administrative Services Agreement. Prior to the consummation of the
Offering, the Company and MidAmerican Capital anticipate entering into an
Administrative Services Agreement (the "Administrative Services Agreement"),
under which MidAmerican Capital may provide or procure from other MidAmerican
53
<PAGE>
Capital subsidiaries certain administrative services. The services which will
be included under the Administrative Services Agreement and which may be
provided to the Company include the use of office facilities and equipment,
airplanes, vehicles and personal services by executives, management,
professional and technical employees, which include accounting, tax, legal,
information processing, financial/treasury, risk management/ insurance, fuel
supply, transportation and other administrative services. The Administrative
Services Agreement will be reciprocal in that it also provides that the Company
may provide or procure similar administrative services for MidAmerican Capital.
MidAmerican Capital has a reciprocal administrative services agreement with
MidAmerican Energy for services similar to those provided under the
Administrative Services Agreement. Under the Administrative Services Agreement,
it is planned that either party may terminate all or particular services upon
50 days' prior written notice to the other and that each party to the
Administrative Services Agreement will agree to indemnify the other party for
damages caused by its negligence or willful misconduct. The charges for the
personal services will be based on the direct and indirect labor costs
attributable to the provision of such services. The office and equipment rental
charges will be set based upon cost and value studies.
Upon completion of the Offering, it is intended that the Company and
MidAmerican Energy will participate as separate employers in a "multiple
employer" plan under Section 401(k) of the Code. In addition, it is anticipated
that the Company will be a participating employer in various health and welfare
(e.g., medical, disability, dental and life insurance) benefit plans
administered by MidAmerican Energy. The Company is charged the costs of such
administration pursuant to the Administrative Services Agreement. The Company
currently intends to establish its own 401(k) plan and health and welfare
benefits plans in the future.
Indemnification Agreement. Prior to the consummation of the Offering, the
Company and MidAmerican Capital anticipate entering into an Indemnification
Agreement (the "Indemnification Agreement") whereby the Company will indemnify
MidAmerican Capital and its affiliates against certain losses, claims, damages
and liabilities, including those arising out of: (i) the conduct by the Company
of its businesses, (ii) employment-related matters, and (iii) the Offering
(other than those arising from written information supplied by MidAmerican
Capital for inclusion in this Prospectus).
POTENTIAL CONFLICTS OF INTEREST
The relationship between the Company and MidAmerican Energy and its other
affiliates may give rise to conflicts of interest with respect to, among other
things, transactions and agreements among the Company and MidAmerican Energy
and its other affiliates, potential competitive business activities, issuances
of additional shares of voting securities, the election of directors or the
payment of dividends, if any, by the Company or the exercise by MidAmerican
Energy of its ability to control the management and affairs of the Company.
Further, there are no contractual or other restrictions on the ability of
MidAmerican Energy to engage in oil and gas exploration and production, natural
gas marketing or electric wholesale power marketing or the operation of an
electric power trading exchange. The Company and MidAmerican Energy presently
compete to a certain extent in energy marketing, and other circumstances could
arise in which the Company and MidAmerican Energy would engage in activities in
competition with one another. One of MidAmerican Capital's other wholly owned
subsidiaries is presently engaged in the business of retail marketing of
natural gas.
The Company and MidAmerican Energy may enter into material transactions and
agreements in the future in addition to those described above under "--
Contractual Arrangements." The Board of Directors will utilize procedures in
evaluating the terms and provisions of any material transactions between the
Company and MidAmerican Energy or its affiliates as the Board of Directors may
deem appropriate in light of its fiduciary duties under state law. The Company
intends that all future transactions and agreements between the Company and
MidAmerican Energy or its affiliates will be at least as favorable to the
Company as could be obtained from third parties.
Directors and executive officers of the Company who are also directors or
executive officers of MidAmerican Energy or MidAmerican Capital may have
conflicts of interest with respect to matters potentially or actually involving
or affecting the Company, including acquisitions, financings and other
corporate
54
<PAGE>
opportunities that may be suitable for the Company and MidAmerican Energy or
MidAmerican Capital. To the extent such conflicts arise, such directors and
executive officers may consult with their legal advisors and make a
determination after consideration of a number of factors, including whether
such opportunity is presented to any such director or executive officer in his
or her capacity as a director or officer of the Company, whether such
opportunity is within the Company's line of business or consistent with its
strategic objectives and whether the Company will be able to undertake or
benefit from such opportunity. In addition, determinations may be made by the
Board of Directors, when appropriate, by a vote of disinterested directors
only. See "Risk Factors--Principal Stockholder."
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about each of the persons that will
serve as directors and executive officers of the Company upon completion of
the Offering. The Company will have a total of seven directors, including two
who are not affiliated with the Company, MidAmerican Energy or MidAmerican
Capital. Directors will hold office for one-year terms and will be elected at
each annual meeting of the stockholders of the Company. The Company's
executive officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Donald C. Heppermann..... 53 Chairman and Chief Executive Officer of the
Company, Director
William E. Warnock, Jr... 43 President of the Company and President and
Chief Executive Officer of InterCoast Oil
and Gas, Director
Russell E. Christiansen.. 61 Director
Stanley J. Bright........ 56 Director
John A. Rasmussen, Jr.... 50 Director
Dr. George G. Daly....... 55 Director
Robert C. Thomas......... 67 Director
Norman R. Foreman........ 58 President and Chief Executive Officer of
Continental Power Exchange
Senior Vice President-Energy Marketing of
Lon P. Compton........... 52 the Company
Daniel E. Lonergan....... 39 Vice President-Finance, Controller and
Treasurer of the Company
Gene C. Daley............ 46 Senior Vice President-Exploration and
Development of InterCoast Oil and Gas
J. Chris Jacobsen........ 40 Senior Vice President-Reserves and
Production of InterCoast Oil and Gas
Brian L. Cantrell........ 36 Vice President-Finance, Secretary and
Treasurer of InterCoast Oil and Gas
John P. Stojka........... 51 Senior Vice President and Chief Operating
Officer of Continental Power Exchange
</TABLE>
Donald C. Heppermann serves as Chairman and Chief Executive Officer and is
currently sole Director of the Company. Mr. Heppermann joined the Company in
1990 and served as its President and Chief Operating Officer from 1990 to
1996. Prior to joining the Company, he was Vice President and Treasurer of
Pinnacle West Capital Corp. (the holding company of Arizona Public Service
Company), Phoenix, Arizona. Prior to joining Pinnacle West, he was Vice
President-Finance and Administration for the pipeline group of Enron Corp.,
Houston, Texas, and had earlier served in other capacities with a predecessor
of Enron, InterNorth Inc., Omaha, Nebraska. Mr. Heppermann holds a Bachelor of
Science degree in Accounting from the University of Missouri and an M.B.A.
from Creighton University.
William E. Warnock, Jr. is the President and, upon completion of the
Offering, will become a Director of the Company and he also serves as
President and Chief Executive Officer of InterCoast Oil and Gas. Mr. Warnock
joined InterCoast Oil and Gas in 1992 as its President and Chief Operating
Officer. Prior to joining InterCoast Oil and Gas, Mr. Warnock co-founded
Medallion Petroleum, Inc. in 1985 and served as its President. Prior to
founding Medallion Petroleum, Inc., Mr. Warnock was Senior Vice President of
Oil and Gas Operations with Crystal Oil Company. Prior to that time, he was
Reservoir Engineering Manager of the Offshore Division with Exxon Company
U.S.A. Mr. Warnock graduated magna cum laude from Auburn University with a
Bachelor of
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<PAGE>
Science in Civil Engineering, and he is a registered professional engineer in
both petroleum and civil engineering. Mr. Warnock is a member of the Young
President's Organization and a regional director of the Independent Petroleum
Association of America (and on its Natural Gas Committee); he is also a charter
member of U.S. Representative Steve Largent's Energy Roundtable and a member of
Energy Advocates of America, the Society of Petroleum Engineers and the
Oklahoma Independent Petroleum Association.
Russell E. Christiansen will become a Director of the Company upon completion
of the Offering. Mr. Christiansen is Chairman, Office of the CEO, and a
Director of MidAmerican Energy. Mr. Christiansen was Chairman, President and
Chief Executive Officer of Midwest Resources Inc. ("Midwest Resources") and its
utility and non-utility operations, a predecessor of MidAmerican Energy. Mr.
Christiansen earned his Bachelor of Science degree in engineering from South
Dakota State University in Brookings and is a graduate of Edison Electric
Institute's Executive Graduate School. Mr. Christiansen joined Midwest
Resources in 1959 as an engineer. Mr. Christiansen is a past director and
executive committee member of Edison Electric Institute. He serves on the Board
of Directors of Des Moines Development Corp., Norwest Bank Iowa, N.A., Greater
Des Moines Committee, Iowa Association of Business & Industry, Siouxland
Foundation and Greater Siouxland, Inc. He is past president of the North
Central Electric Association and past chairman of the Iowa Nature Conservancy.
Stanley J. Bright will become a Director of the Company upon completion of
the Offering. Mr. Bright is President, Office of the CEO, and a Director of
MidAmerican Energy, and is a Director of Utilx Corporation. He was Chairman,
President and Chief Executive Officer of Iowa-Illinois Gas and Electric Company
("Iowa-Illinois"), a predecessor of MidAmerican Energy. Mr. Bright joined Iowa-
Illinois in September 1986 as Vice President-Finance and Chief Financial
Officer. He was elected President and a Director of Iowa-Illinois Investment
Co. (a predecessor of MidAmerican Capital) upon that company's formation in
June 1987. Mr. Bright was elected President and Chief Operating Officer of
Iowa-Illinois in April 1990 and assumed the additional positions of Chairman
and Chief Executive Officer in May 1991. Previously, Mr. Bright was a financial
officer of Potomac Electric Power Company ("PEPCO"), Washington, D.C. He was
also President and a Director of Potomac Capital Investment Corporation, a
wholly owned subsidiary of PEPCO. Prior to joining PEPCO, Mr. Bright was
associated with Price Waterhouse. He is a graduate of George Washington
University and is a certified public accountant.
John A. Rasmussen, Jr. will become a Director of the Company upon completion
of the Offering. Mr. Rasmussen serves as Group Vice President and General
Counsel of MidAmerican Energy. Mr. Rasmussen was Group Vice President, Midwest
Capital Group, Inc., a subsidiary of Midwest Resources, from 1992 to 1995 and
Vice President and General Counsel of Midwest Resources from 1989 to 1995. Mr.
Rasmussen joined Midwest Resources in 1987 as Associate General Counsel.
Previously, he was Vice President and General Counsel at Enron Oil & Gas
Company, a subsidiary of Enron Corp., and held positions with Enron Corp.
predecessors, InterNorth Inc. and Northern Natural Gas. Mr. Rasmussen has a
Bachelor of Arts degree and Doctor of Jurisprudence from the University of
Nebraska.
Dr. George G. Daly will become a Director of the Company upon completion of
the Offering. Dr. Daly is Dean and Professor of Economics and Management at the
Leonard N. Stern School of Business, New York University. Prior to joining NYU
in 1993, he served for ten years as the Dean of the University of Iowa's School
of Business. He has served as an Assistant Director at the Institute for
Defense Analyses in Washington, D.C., and Chief Economist at the Office of
Energy Research and Development in the White House. He received an A.B. from
Miami University in Ohio and both his M.A. and Ph.D. from Northwestern
University.
Robert C. Thomas will become a Director of the Company upon completion of the
Offering. Mr. Thomas served as Chairman and Chief Executive Officer of Tenneco
Gas from 1990 until his retirement in 1994. During that time, he had executive
responsibility for all of Tenneco Inc.'s gas pipeline companies and natural gas
liquids, methanol and MTBE interests. He joined Tenneco in 1956 and held
successively higher management positions in Tenneco's exploration and
production and natural gas operations. He is a past board member of the
Interstate Natural Gas Association of America, American Gas Association, Gas
Research Institute, and Institute of Gas Technology. He is currently serving as
Chairman of the Board of The Sarkey's Energy Center at the University of
Oklahoma, as a Vice President of the International Association of LNG Importers
and as a Senior Associate
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<PAGE>
of Cambridge Energy Research Associates. He is a graduate of the University of
Oklahoma with a Bachelor of Science degree in Geological Engineering.
Norman R. Foreman is President and Chief Executive Officer of Continental
Power Exchange. Mr. Foreman joined the Company in 1992 as Executive Vice
President-Corporate Development and has served as the President of its energy
services group since 1994. Prior to joining the Company, Mr. Foreman served as
Vice President, Industries Group of Midwest Resources from 1991 to 1992 and
held several other senior executive positions at Midwest Resources. Prior to
joining Midwest Resources, he was Vice President and General Manager-Enron
Liquids Marketing at Enron Corp., Houston, Texas, and had earlier served in
other executive capacities with a predecessor of Enron, InterNorth Inc., Omaha,
Nebraska. Mr. Foreman holds a business organization and management degree from
the University of Nebraska.
Lon P. Compton is the Company's Senior Vice President-Energy Marketing. Mr.
Compton joined AmGas Inc., a subsidiary of MidAmerican Capital, in September
1995 as its Director of Sales and Business Development and was made its Vice
President and General Manager in April 1996. Prior to joining AmGas Inc., he
had been President and Chief Operating Officer of Sunrise Energy Company, a
natural gas marketing company, since 1989. Sunrise Energy Company filed for
protection under the federal bankruptcy laws in October 1994. Prior to joining
Sunrise Energy Company, he was President and Chief Operating Officer of
NAGASCO, Inc., a natural gas marketing company. He has also held natural gas
marketing and supply management positions with Lear Petroleum Corporation,
Tennessee Gas Pipeline Company and Valero Energy Company. He graduated with a
degree in economics and finance from the University of Houston.
Daniel E. Lonergan is Vice President-Finance, Controller and Treasurer of the
Company. Mr. Lonergan joined the Company in 1987 and held a variety of
positions prior to his appointment to Treasurer and General Manager Finance in
1991. He was appointed Vice President-Finance and Controller in 1993. Mr.
Lonergan joined Iowa-Illinois in 1984. Mr. Lonergan is a graduate of the
University of Iowa with Bachelor of Arts and M.B.A. degrees.
Gene C. Daley has served as Senior Vice President-Exploration and Development
of InterCoast Oil and Gas since 1993. Mr. Daley had previously served as
Executive Vice President-Oil & Gas Operations of InterCoast Oil and Gas since
1993 and as Vice President and General Manager Oil & Gas since 1991. His
association with the Company began with the acquisition of Carter Resources,
Inc., where Mr. Daley served as President from the inception of that company
until its acquisition in 1991, a period of 16 years. Prior to that, Mr. Daley
was an offshore exploration geologist for Texaco, Inc. Mr. Daley graduated from
South Dakota School of Mines and Technology with a Bachelor of Science degree
in Geological Engineering. He is a member of the Oklahoma Independent Petroleum
Association.
J. Chris Jacobsen has served as Senior Vice President-Reserves and Production
of InterCoast Oil and Gas since 1995 and had been its Vice President--Reserves
and Production since 1994. Mr. Jacobsen had formerly been a Senior Vice
President of Netherland, Sewell & Associates, Inc. since 1989, where he
performed field and well reserve analyses for over 12 years. In addition, Mr.
Jacobsen had been involved through Netherland, Sewell in the supervision and
management of Hamon Operating Company's oil and gas operations for five years.
Mr. Jacobsen has 17 years of experience in petroleum engineering. His career
commenced in 1977 with Exxon Company U.S.A., where he held various engineering
and supervisory assignments for five years. Mr. Jacobsen graduated from Rose-
Hulman Institute of Technology with a Bachelor of Science degree in Chemical
Engineering. He is a registered professional engineer in petroleum engineering
and is a member of the Oklahoma Independent Petroleum Association.
Brian L. Cantrell serves as Vice President-Finance, Secretary and Treasurer
of InterCoast Oil and Gas. Prior to his association with InterCoast Oil and Gas
in 1992, Mr. Cantrell had been Vice President of Medallion Petroleum, Inc.
since 1985. Prior to that time, Mr. Cantrell was associated with Peat, Marwick,
Mitchell and Company. Mr. Cantrell is a certified public accountant and
graduated with honors from the University of Oklahoma earning a Bachelor of
Accountancy degree and a Masters Degree in Accountancy (Taxation). He is a
member of the American Institute of Certified Public Accountants, the Oklahoma
Society of Certified Public Accountants and the Oklahoma Independent Petroleum
Association.
John P. Stojka is Senior Vice President and Chief Operating Officer of
Continental Power Exchange. Mr. Stojka joined Continental Power Exchange as its
Vice President and General Manager in 1994. Prior to joining
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<PAGE>
the Company, Mr. Stojka was Director-Business Development with Electronic Data
Systems from 1992 to 1994 and was Director, Consulting of Energy Management
Associates, Inc. from 1989 to 1991. Prior to that time he held several
positions with Niagara Mohawk Power Corporation. Mr. Stojka holds a Bachelor of
Science in electrical engineering from Clarkson University and an M.B.A. from
Syracuse University.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Bylaws provide that the Board of Directors may elect such
directorate committees as it may from time to time determine. Two committees of
the Board of Directors are expected to be established: the Audit Committee and
the Compensation Committee. It is expected that Dr. George G. Daly and Robert
C. Thomas will be the only members of these committees.
COMPENSATION OF DIRECTORS
Each Director of the Company is reimbursed for expenses incurred in attending
meetings of the Board of Directors and meetings of committees of the Board of
Directors. Each Director is paid $12,000 annually, and each Director that is
not an employee of the Company, MidAmerican Energy or one of their affiliates
receives $750 for each meeting of the Board of Directors or committee thereof
attended by the Director in person and $400 for each such meeting attended by
telephone and also receives Common Stock under the Company's Non-Employee
Director Stock Plan. See "--Director Stock Plan."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the
compensation of, and the grant of options to purchase shares of common stock of
MidAmerican Energy to, the Company's chief executive officer and for each of
its four other most highly compensated executive officers (the "named executive
officers") during fiscal 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------
AWARDS PAYOUTS
--------------------- ---------
SECURITIES
RESTRICTED UNDERLYING LONG-TERM
OTHER ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) ($) ($) (1)(2) ($) (#) ($) ($) (3)
------------------ ------- ------ ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Donald C. Heppermann.... 205,000 46,125 61,775 5,607 60,000 -- 5,850
Chairman and Chief
Executive Officer
William E. Warnock,
Jr. ................... 158,000 39,067 0 -- -- -- 5,023
President
Norman R. Foreman....... 147,750 30,015 20,211 -- -- -- 4,955
President and Chief
Executive Officer of
Continental Power
Exchange
John P. Stojka.......... 160,620 15,000 3,717 -- -- -- 3,771
Senior Vice President
and Chief Operating
Officer of Continental
Power Exchange
J. Chris Jacobsen....... 131,875 13,350 21,852 -- -- -- --
Senior Vice President--
Reserves and Production
of InterCoast Oil and
Gas
</TABLE>
- --------
(1) Does not include the value of perquisites and other personal benefits
because the aggregate amount of such compensation, if any, does not exceed
the lesser of $50,000 or 10 percent of the total amount of annual salary
and bonus for the named executive officers.
(2) Consists of (i) compensation provided by MidAmerican Capital's employee
relocation policy and reimbursement for income taxes, if any, paid in
connection with the executive's relocation of $61,775, $20,211 and $21,852
to Messrs. Heppermann, Foreman and Jacobsen, respectively, and (ii) a
reimbursement payment of $3,717 to Mr. Stojka pursuant to his employment
arrangement with the Company.
(3) Amounts consist of matching contributions by the Company to the Company's
401(k) Plan.
59
<PAGE>
The following table sets forth information concerning stock option grants to
named executive officers to purchase shares of MidAmerican Energy's common
stock.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#) FISCAL YEAR (1) ($/SHARE) DATE (2) ($) (3)
---- ---------- ------------------ --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Donald C. Heppermann.... 60,000 8% 14.50 7/26/05 94,800
William E. Warnock,
Jr..................... 0 -- -- -- --
Norman R. Foreman....... 0 -- -- -- --
John P. Stojka.......... 0 -- -- -- --
J. Chris Jacobsen....... 0 -- -- -- --
</TABLE>
- --------
(1) Represents percentage of total options to purchase shares of MidAmerican
Energy common stock granted to all employees of MidAmerican Energy,
including employees of the Company.
(2) During the exercise period the recipient of the option grant may exercise
25% of the total options granted after one year from the date of the
grant, 50% after two years from the date of the grant, 75% after three
years from the date of the grant and all of the options after four years
from the date of the grant. Options become fully exercisable in the event
of termination of employment with the Company by reason of disability,
retirement at age 55 and after five years of service with the Company,
death or a change in control as defined in the plan.
(3) The Black-Scholes Option Pricing Model was used to determine the grant
date present value of the stock options granted in 1995 by MidAmerican
Energy to the named executive officers. Under the Black-Scholes Option
Pricing Model, the grant date present value of the stock options referred
to in the table was $1.58.
The ultimate values of the options will depend on the future market price of
MidAmerican Energy's common stock, which cannot be forecast with reasonable
accuracy. The actual value, if any, an optionholder will realize upon exercise
of an option will depend on the excess of the market price of MidAmerican
Energy's common stock over the exercise price on the date the option is
exercised.
The material assumptions and adjustments incorporated in the model in
estimating the value of the options include the following:
--An exercise price of the option of $14.50, equal to the fair market value
of the underlying stock on the date of the grant.
--An option term of ten years.
--An interest rate of 6.28% that represents the interest rate on a U.S.
Treasury security on the date of the grant with a maturity date
corresponding to that of the option term.
--Volatility of 23% calculated using daily stock prices, including
predecessor companies, for the six month period prior to the grant date.
--Dividends at the rate of $1.20 per share representing the annualized
dividends paid with respect to a share of MidAmerican Energy common stock
at the date of the grant.
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<PAGE>
The following table sets forth information concerning year end option values
of options to purchase shares of MidAmerican Energy common stock held by the
named executive officers.
FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, 1995 DECEMBER 31, 1995 (1)
-------------------- ---------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---- -------------------- ---------------------
<S> <C> <C>
Donald C. Heppermann................. 0/60,000 0/135,000
William E. Warnock, Jr. ............. 0/0 N/A
Norman R. Foreman.................... 0/0 N/A
John P. Stojka....................... 0/0 N/A
J. Chris Jacobsen.................... 0/0 N/A
</TABLE>
- --------
(1) Based on the closing price of MidAmerican Energy's common stock at
December 31, 1995 of $16.75 per share.
No options were exercised during 1995.
The following table sets forth information concerning the awards of
restricted shares of common stock of MidAmerican Energy to named executive
officers in 1995.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SHARES, PERFORMANCE OR OTHER
UNITS OR OTHER PERIOD UNTIL
NAME RIGHTS(#) (1) MATURATION OR PAYOUT
---- ----------------- --------------------
<S> <C> <C>
Donald C. Heppermann.................... 5,607 6/30/98
William E. Warnock, Jr.................. 0 N/A
Norman R. Foreman....................... 0 N/A
John P. Stojka.......................... 0 N/A
J. Chris Jacobsen....................... 0 N/A
</TABLE>
- --------
(1) The restricted stock awards shown in the foregoing table were made
pursuant to the MidAmerican Energy Company 1995 Long-Term Incentive Plan.
Such awards consist of restricted shares of common stock of MidAmerican
Energy and are subject to the achievement by MidAmerican Energy of
specific performance measures during a three-year performance period
ending June 30, 1998. During this performance period, the holder of the
restricted stock will be entitled to receive the dividends on the
restricted stock and vote the stock; however, the stock will not be vested
until the achievement of the performance measures. The restrictions will
lapse, however, in the event of termination of employment with MidAmerican
Energy by reason of retirement, disability, death or a change in control
as defined in the plan.
RETIREMENT PLANS
MidAmerican Energy maintains an unfunded Supplemental Retirement Plan
("Supplemental Plan") for certain designated officers of MidAmerican Energy,
including certain officers of the Company, to provide additional retirement
benefits to designated participants, as determined by the Board of Directors
of MidAmerican Energy. Messrs. Heppermann, Warnock, and Foreman participated
in the Supplemental Plan in fiscal 1995. The Supplemental Plan provides
retirement benefits up to sixty-five percent of a participant's Total Cash
Compensation in effect immediately prior to retirement. "Total Cash
Compensation" means the highest amount payable to a participant as annual base
salary during the five years immediately prior to retirement plus the average
of the participant's last three years' awards under an annual incentive bonus
program. Participants must be credited with five years service in order to be
eligible to receive benefits under the Supplemental Plan. A participant who
elects early retirement is entitled to reduced benefits under the Supplemental
Plan.
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<PAGE>
The supplemental retirement benefit will be reduced by the amount of the
participant's regular retirement benefit under the Iowa-Illinois Gas and
Electric Company Pension Plan ("Iowa-Illinois Pension Plan") and by benefits
under the Iowa-Illinois Gas and Electric Company Supplemental Retirement Plan.
The Iowa-Illinois Pension Plan provides for the payment of fixed pension
benefits upon retirement determined under a formula based on the eligibility
date of the employee, age at retirement, final average compensation and years
of credited service. Final average compensation is determined by the highest
sixty consecutive months of compensation during the ten years prior to
retirement.
A survivor benefit is payable to a surviving spouse under the Supplemental
Plan. Benefits from the Supplemental Plan will be paid out of general
corporate funds. Deferred compensation is considered part of the salary
covered by the Supplemental Plan.
The table below shows the estimated aggregate annual benefits payable under
the Supplemental Plan and the Midwest Power Retirement Plan and the Iowa-
Illinois Pension Plan. The amounts exclude Social Security and are based on a
straight life annuity and retirement at ages 55, 60 and 65. Federal law limits
the amount of benefits payable to an individual through the tax qualified
defined benefit plans, and benefits exceeding such limitation are payable
under the Supplemental Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFIT
--------------------------------------
TOTAL CASH AGE AT RETIREMENT
COMPENSATION AT --------------------------------------
RETIREMENT 55 60 65
--------------- -------- -------- --------
<S> <C> <C> <C>
$100,000 $ 55,000 $ 60,000 $ 65,000
150,000 82,500 90,000 97,500
200,000 110,000 120,000 130,000
250,000 137,500 150,000 162,500
300,000 165,000 180,000 195,000
350,000 192,500 210,000 227,500
400,000 220,000 240,000 260,000
450,000 247,500 270,000 292,500
500,000 275,000 300,000 325,000
</TABLE>
Compensation Committee Interlocks and Insider Participation. For fiscal
1995, all compensation decisions with respect to executive officers of the
Company were made by the Compensation Committee of the Board of Directors of
MidAmerican Capital. Stanley J. Bright, Russell E. Christiansen, Lance E.
Cooper and John A. Rasmussen, Jr., each an executive officer of MidAmerican
Energy, served as members of the Compensation Committee during 1995. See
"Relationship Between the Company and the Parent" and "Certain Transactions."
Messrs. Bright, Christiansen and Rasmussen are also directors of the Company.
See "--Directors and Executive Officers."
LONG-TERM INCENTIVE STOCK PLAN
The Board of Directors and MidAmerican Capital, the sole stockholder of the
Company, have approved the InterCoast Energy Company Long-Term Incentive Stock
Plan (the "Stock Plan"). The Stock Plan will become effective upon, and only
in the event of, consummation of the Offering. A copy of the Stock Plan has
been filed as an exhibit to the registration statement of which this
Prospectus is a part, and the following summary is qualified in its entirety
by reference to the text of the Stock Plan.
That number of shares of Common Stock which equals 10% of the number of such
shares issued and outstanding immediately after the closing of the Offering,
including any shares of Common Stock issuable upon
62
<PAGE>
exercise of the Underwriters' over-allotment option, are available for sale
upon exercise of options granted under the Stock Plan. The Board of Directors
may use authorized but unissued shares of the Common Stock or shares held in
the treasury of the Company for the exercise of options. The Stock Plan is not
subject to the provisions of the Employee Retirement Income Security Act of
1974 and the options granted thereunder are not and will not be "incentive
stock options," as such term is defined at Section 422 of the Code.
Administration. The Stock Plan will be administered by the Company's
Compensation Committee (the "Committee"), the composition of which shall,
unless otherwise determined by the Board of Directors, at all times satisfy the
provisions of Rule 16b-3 of the Securities Exchange Act of 1934, as from time
to time in effect, and Section 162(m) of the Code. The Committee has the
authority, in its discretion, to select the eligible officers and employees to
whom options shall be granted and the number of shares of Common Stock covered
by such options. The Committee has the power to construe and interpret the
Stock Plan and to establish and amend rules and regulations for its
administration subject to the express provisions of the Stock Plan. Any
determination by the Committee is final and binding upon all persons.
Eligible Employees. Any key officer or employee who is an active full-time
employee of the Company, or a subsidiary of the Company, is eligible for
selection by the Committee as an optionee under the Stock Plan.
Purchase Price. The purchase price of a share of Common Stock under each
option granted under the Stock Plan shall be no less than the fair market value
of a share of Common Stock on the date of grant.
Vesting of Rights to Exercise Option. Each option granted under the Stock
Plan will become exercisable in full or in installments as determined by the
Committee at the time of the grant. The Committee has the authority to
accelerate the vesting of any option for which vesting requirements are
established and such vesting will accelerate automatically upon the occurrence
of certain events. Subject to any vesting provisions, each option may be
exercised at any time, or from time to time, during the option period of 10
years, as to all or any part of the shares of Common Stock covered thereby.
Method of Exercise. Each option granted may be exercised, at the optionee's
election, by: (i) cash payment of the full amount of the exercise price, (ii)
through the delivery of shares of Common Stock previously held by the optionee
with a fair market value equal to the full amount of the exercise price,
(iii) by the withholding by the Company from the shares of Common Stock upon
any exercise of the option that number of shares having a fair market value
equal to the full amount of the exercise price, or (iv) by a combination of
such methods. The optionee will be required to pay the Company an amount
necessary to satisfy federal, state and local income taxes incurred by reason
of exercise, or at the optionee's election, shares having a market value equal
to such income taxes may be withheld by the Company. No fractional shares of
Common Stock will be issued upon the exercise of options.
Effect of Termination of Employment. If, during the option period, the
optionee's employment with the Company or one of its subsidiaries terminates
other than for cause or by reason of the optionee's death, disability or
retirement in accordance with the terms of a Company retirement plan, the
option may thereafter be exercised only to the extent it was exercisable at the
time of such termination of employment until the earlier of the expiration of
the option or ninety days following such termination. In the event of the
death, disability or retirement of the optionee while employed by the Company
or one of its subsidiaries, the option granted to such optionee will become
fully vested to the extent it is not otherwise and the optionee, his or her
guardian or personal representative, or distributees or heirs will be permitted
to exercise such option at any time before the earlier of the expiration of
such option or three years after the optionee's death, disability or
retirement. In the event an optionee's employment with the Company or a
subsidiary of the Company is terminated for cause, any options granted to such
optionee and not previously exercised will be forfeited.
Option Agreement. Options granted under the Stock Plan are and will be
subject to the terms and conditions of the Stock Plan and will be evidenced by
a written agreement between the optionee and the Company. The option agreement
will incorporate the Stock Plan by reference, set forth the number of shares,
the
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<PAGE>
time or times at and after which the option is exercisable in whole or in part,
the expiration date of the option, and other details deemed pertinent by the
Committee.
Adjustments Resulting from Changes in Capitalization. The Stock Plan provides
that in the event of a merger, consolidation, reorganization, recapitalization,
stock dividend, "split-up" or other change in the corporate structure or
capitalization of the Company, the number and kind of shares subject to options
then outstanding, the exercise price of outstanding options and the aggregate
number of shares for which options may be granted under the Stock Plan may be
subject to appropriate adjustments as may be deemed equitable by the Board of
Directors in its sole discretion.
Amendment and Termination. The Board of Directors may suspend or terminate
the Stock Plan at any time and may amend the Stock Plan from time to time in
such respects as the Board of Directors may deem advisable. Without shareholder
approval the Board of Directors may not (i) increase the maximum number of
shares for which options may be granted under the Stock Plan except to make
appropriate adjustments in the event of certain changes in the capital
structure of the Company; or (ii) change the eligibility requirements for
individuals entitled to receive options under the Stock Plan. No amendments or
termination of the Stock Plan may affect or impair the rights or obligations
under any options theretofore granted without the consent of the optionee.
Federal Income Tax Aspects
Under applicable provisions of the Code: (i) the grant of an option under the
Stock Plan results in no taxable income to the optionee or deductions to the
Company at the time it is granted, (ii) upon exercise of the option the
optionee will realize taxable income, and the Company will realize a deduction,
in an amount equal to the amount, if any, by which the then fair market value
of the shares thereby acquired exceeds the purchase price for such shares, and
(iii) upon the disposition of the shares so acquired the optionee will realize
a gain or loss if the amount realized on such disposition differs from the fair
market value of the shares at the time of the exercise of the option.
The following table sets forth information concerning stock option grants
made by the Company, subject to consummation of the Offering, to certain
directors and employees of the Company. Options to purchase an aggregate of
546,600 shares of Common Stock have been granted under the Stock Plan at the
date of this Prospectus. The purchase price per share of Common Stock subject
to the options will be the initial offering price of the Common Stock in the
Offering. The outstanding options become exercisable with respect to one-third
of the shares of Common Stock covered thereby on each anniversary of the date
of grant and will expire on the tenth anniversary of the date of grant.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
----------------- ------------------
<S> <C>
Donald C. Heppermann,....................................... 85,000
Chairman and Chief Executive Officer
William E. Warnock, Jr.,.................................... 85,000
President
Norman R. Foreman,.......................................... 38,500
President and Chief Executive Officer of Continental Power
Exchange
John P. Stojka,............................................. 25,800
Senior Vice President and Chief Operating Officer of Conti-
nental Power Exchange
J. Chris Jacobsen,.......................................... 40,000
Senior Vice President--Reserves and Production of Inter-
Coast Oil and Gas
All executive officers, including the above................. 402,300
All directors who are not executive officers................ 0
All employees, excluding executive officers................. 144,300
</TABLE>
64
<PAGE>
DIRECTOR STOCK PLAN
The Board of Directors and MidAmerican Capital, the sole stockholder of the
Company, have approved and adopted the InterCoast Energy Company Non-Employee
Director Stock Plan (the "Director Plan"). The Director Plan will become
effective upon, and only in the event of, consummation of the Offering. A copy
of the Director Plan has been filed as an exhibit to the registration
statement of which this Prospectus is a part, and the following summary is
qualified in its entirety by reference to the text of the Director Plan.
A total of 50,000 shares of Common Stock has been reserved for issuance
under the Director Plan. The Director Plan provides for the automatic award of
shares of Common Stock to directors of the Company who are not also officers
or employees of the Company (each, an "Eligible Director"). The Director Plan
is not subject to the provisions of the Employee Retirement Income Security
Act of 1974.
Under the Director Plan, each Eligible Director will be awarded 1,000
restricted shares of Common Stock on the date such director is first elected
or appointed to the Board of Directors (the "Initial Awards"). Thereafter, on
the day of each successive annual meeting of the Company's stockholders, each
Eligible Director who will continue to serve as a director of the Company
after such meeting will be awarded an additional 800 restricted shares of
Common Stock (the "Annual Awards"). The restrictions on the shares granted
under the Director Plan lapse upon a director's termination of service as a
director and become nonforfeitable upon death or disability while serving as a
director, failure to be re-elected to the Board after being duly nominated,
retirement from the Board or failure to be nominated for re-election following
a change in control of the Company.
The term of the Director Plan is ten years and no shares of Common Stock may
be awarded to Eligible Directors after the tenth anniversary of the Director
Plan's approval by the sole stockholder of the Company. The Board of Directors
may terminate the Director Plan at any time.
Federal Income Tax Consequences
An Eligible Director will realize income for federal income tax purposes,
and the Company will be entitled to a deduction, on the dates shares of Common
Stock are issued in respect of Initial Awards and Annual Awards. Income
realized by an Eligible Director by reason of the receipt of an Initial Award
or an Annual Award will constitute self-employment income of such Eligible
Director.
ANNUAL INCENTIVE COMPENSATION PLANS
The Company and its subsidiary InterCoast Oil and Gas each maintains a
Performance Incentive Plan under which cash awards are made to eligible
participants. The plans are designed to reward eligible employees for the
respective company's attainment of certain performance goals approved by the
Compensation Committee of the Company's Board of Directors. Bonus payments are
awarded under the plans upon the achievement of the pre-established operating
and financial performance goals and, with respect to certain participants, a
portion of each award is discretionary based on individual performance. The
Compensation Committee establishes target, minimum and maximum award levels
for all participants and, with respect to certain participants, a mega-maximum
award level, all expressed as a percentage of salary. The largest targeted
award opportunity levels under each plan in 1995 ranged from 20% to 120% of
base salary. The minimum target levels ranged from 5% to 20% under the
Company's plan and 2% to 8% under the InterCoast Oil and Gas plan.
Participation in the Company's Performance Incentive Plan is limited to key
employees of the Company as selected by the Compensation Committee. All
employees of InterCoast Oil and Gas are eligible to participate in the
InterCoast Oil and Gas Performance Incentive Plan.
401(K) PLAN
The Company currently participates in the MidAmerican Energy 401(k) Plan
(the "401(k) Plan"). All full-time employees of the Company and its
subsidiaries are eligible to participate in the 401(k) Plan. Each eligible
employee may elect to contribute to the 401(k) Plan, through payroll
deductions, up to 15% of his or her salary,
65
<PAGE>
subject to a statutorily prescribed annual limit. The Company currently makes
a matching contribution on behalf of participating employees equal to 65% of
the first 6% of compensation contributed by an employee. Employee and Company
contributions are held and invested by the 401(k) Plan's trustee.
Distributions may be made from a participating employee's account upon
termination of employment, retirement, termination of the 401(k) Plan or in
the event of financial hardship.
OFFICER AND DIRECTOR LIABILITY
As permitted by the provisions of the Delaware General Corporation Law (the
"DGCL"), the Certificate of Incorporation provides that no director of the
Company shall be held personally liable to the Company or its stockholders for
monetary damages for breach of their fiduciary duty as director, except for
liability (a) for any breach of the director's duty of loyalty to the Company
or its stockholders, (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c) for unlawful
dividend payments or stock redemptions or repurchases or (d) for any
transaction from which the director derived an improper personal benefit. The
effect of such provisions of the Certificate of Incorporation will be to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits brought on behalf of the Company) to recover
monetary damages against a director for breach of fiduciary duty as a director
(including breaches resulting from negligence or gross negligence), except in
situations described above. The provisions of the Certificate of Incorporation
do not eliminate the liability of a director for violation of federal
securities laws or limit the rights of the Company or its stockholders, in
appropriate circumstances, to seek equitable remedies such as injunctive or
other forms of non-monetary relief. Such remedies may not be available in all
cases.
The Certificate of Incorporation and the Company's Bylaws (the "Bylaws")
provide that the Company shall indemnify all directors and officers of the
Company to the fullest extent permitted by the DGCL. Under such provisions,
any director or officer, who in his capacity as such, is made or threatened to
be made a party to any suit or proceeding may be indemnified if the Board of
Directors determines such director of officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company. The Bylaws and the DGCL further provide that such indemnification
is not exclusive of any other rights to which such individuals may be entitled
under the Certificate of Incorporation, the Bylaws, any agreement, vote of
stockholders or disinterested directors or otherwise. The Company intends to
enter into certain agreements ("Indemnity Agreements") with each of its
directors and certain executive officers designed to give effect to the
foregoing provisions of the Certificate of Incorporation and to provide
additional protection against the possibility of uninsured liability. Pursuant
to the Indemnity Agreements, the Company will, to the extent permitted under
applicable law, indemnify such persons against all expenses, judgments, fines,
ERISA excise taxes and penalties incurred in connection with the defense,
settlement or appeal of any actions or proceedings brought against them by
reason of the fact that they are or were directors or officers of the Company.
CERTAIN TRANSACTIONS
The Company receives general and administrative services from MidAmerican
Capital and MidAmerican Energy. The cost of such services received, including
overhead costs, are billed to the Company. Overhead costs are allocated to the
Company based on measures of use such as percent of payroll hours and number
of employees. Wages and salaries are charged directly to the Company based
upon individual employee time reporting, along with associated payroll taxes
and the costs of benefits. In addition, certain Company expenses paid by
MidAmerican Capital are billed to the Company. The amounts of such MidAmerican
Energy costs billed to general and administrative expense during 1993, 1994
and 1995 were $355,000, $393,000 and $516,000, respectively. See "Relationship
Between the Company and the Parent."
In September 1993, InterCoast Oil and Gas assigned to Medallion Petroleum
Inc. ("Medallion Petroleum"), of which William E. Warnock, Jr. and Brian L.
Cantrell are officers, directors and stockholders, a 0.692% overriding royalty
interest in the oil and gas properties of DKM Resources, Inc. and its
subsidiary in satisfaction of a finder's fee earned by one of Medallion
Petroleum's stockholders in connection with the acquisition by
66
<PAGE>
InterCoast Oil and Gas of the outstanding capital stock of DKM Resources, Inc.
For the years ended December 31, 1993, 1994 and 1995, Medallion Petroleum
received $18,377, $63,720 and $71,219, respectively, on account of such
overriding royalty interest.
Production from a significant number of wells included in the Sawyer Canyon
Acquisition qualifies for Section 29 tax credits under the Code ("Section 29
Credits"). The Company is not able to take full advantage of Section 29 Credits
because it is subject to alternative minimum tax which, among other things,
limits a taxpayer's ability to utilize Section 29 Credits. Subsequent to the
Sawyer Canyon Acquisition and in order to realize value from the Section 29
Credits, the Company conveyed certain interests in such wells to InterCoast
Global Management, Inc., a wholly owned subsidiary of MidAmerican Capital, and
retained a production payment on 100% of the net proceeds of production from
such wells until approximately 80% of the estimated proved developed natural
gas reserves attributable to the wells (approximately 24 Bcf of natural gas)
has been produced. In consideration of its conveyance, the Company received
from InterCoast Global Management, Inc. $5,615,000 in cash and a promissory
note in the amount of $2,315,000, which is payable in 48 monthly installments
over four years and bears interest at the prime rate. The Company manages the
operations of the Section 29 Wells and has the option to purchase at any time
all or a portion of the Section 29 Wells for their then fair market value.
PRINCIPAL STOCKHOLDER
MidAmerican Energy, through its wholly owned subsidiary MidAmerican Capital,
owns 7,927,500 shares of Common Stock, which constitutes all of the outstanding
shares of Common Stock. Upon completion of the Offering, MidAmerican Energy,
through MidAmerican Capital, will own approximately 56% (or 53% if the
Underwriters exercise their over-allotment option in full) of the outstanding
shares of Common Stock after the Offering. See "Relationship Between the
Company and the Parent." MidAmerican Energy's address is 666 Grand Avenue, Des
Moines, Iowa 50309.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Under the Certificate of Incorporation, the Company is currently authorized
to issue 25,000,000 shares of Common Stock, par value $0.01 per share. As of
the date of this Prospectus, there were 7,927,500 shares of Common Stock
outstanding. All of such outstanding shares of Common Stock are fully paid and
nonassessable. Each share of Common Stock has an equal and ratable right to
receive dividends when, as and if declared by the Board of Directors out of
assets legally available therefor, subject to any preferential dividend rights
of any preferred stock then outstanding.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the assets
available for distribution after payment of all liabilities, and subject to any
prior rights of any holders of preferred stock that at the time may be
outstanding. The holders of Common Stock have no preemptive, subscription,
conversion or redemption rights. Each share of Common Stock is entitled to one
vote in the election of directors and on all other matters submitted to a vote
of stockholders. Holders of Common Stock do not have cumulative voting rights,
which means that the holders of a majority of shares voting for the election of
directors can elect all members of the Board of Directors subject to election.
PREFERRED STOCK
Under the Certificate of Incorporation, the Board of Directors is authorized,
without further approval or action by the stockholders of the Company, to issue
5,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred
Stock"), from time to time in one or more series, and to fix the dividend rates
and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund and any other
67
<PAGE>
rights, preferences, privileges and restrictions applicable to each series of
Preferred Stock. The purpose of authorizing the Board of Directors to
determine such rights, preferences, privileges and restrictions is to
eliminate delays associated with a stockholder vote on specific issuances of
Preferred Stock. The issuance of Preferred Stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could,
among other things, adversely affect the voting power of the holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current
plans to issue any shares of Preferred Stock.
SECTION 203 OF THE DGCL
The Certificate of Incorporation provides that the Company has opted out of
Section 203 of the DGCL which, under certain circumstances, prevents an
interested stockholder (generally defined as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a business
combination with a Delaware corporation for a period of three years following
the date such person became an interested stockholder of such corporation.
MidAmerican Capital is presently not an interested stockholder for purposes of
Section 203 of the DGCL.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Chicago Trust
Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock. Future
sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock.
Upon completion of the Offering, the Company will have outstanding an
aggregate of 14,079,500 shares of Common Stock (an aggregate of 15,002,000
shares if the Underwriters' over-allotment option is exercised in full). All
of the 6,150,000 shares sold in the Offering (7,072,500 shares if the over-
allotment option granted to the Underwriters is exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act (whose
sales would be subject to certain limitations and restrictions described
below).
The 7,927,500 shares of Common Stock held by the Company's existing sole
stockholder, MidAmerican Capital, were issued and sold by the Company in
reliance on an exemption from the registration requirements of the Securities
Act. Such outstanding shares will be subject to the "lock-up" agreement
described below. After expiration of such lock-up agreement 180 days after the
date of this Prospectus, the Common Stock owned by MidAmerican Capital may be
resold only upon registration under the Securities Act (see "Relationship
Between the Company and the Parent--Contract Arrangements--Registration Rights
Agreement") or pursuant to an exemption from such registration requirements,
including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years (including the holding period of any prior owner except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) 1% of
the number of shares of Common Stock then outstanding (approximately 140,000
shares immediately after the Offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
the required filing of a Form 144 with respect to such sale. Sales under Rule
144 are generally subject to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale,
and who
68
<PAGE>
has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the
manner of sale, public information, volume limitation or notice filing
provisions of Rule 144. Under Rule 701 under the Securities Act, persons who
purchase shares upon exercise of options granted prior to the effective date
of the Offering are entitled to sell such shares 90 days after the effective
date of the Offering in reliance on Rule 144, without having to comply with
the holding period and notice filing requirements of Rule 144 and, in the case
of non-affiliates, without having to comply with the public information,
volume limitation or notice filing provisions of Rule 144. The Commission has
proposed certain amendments to Rule 144 that would reduce the requisite
holding period from two years to one year.
As soon as practicable following the Offering, the Company intends to file a
registration statement on Form S-8 under the Securities Act covering an
aggregate of up to 1,550,000 shares of Common Stock reserved for issuance
pursuant to the Stock Plan and Director Plan. Shares of Common Stock issued
upon exercise of the stock options granted under the Stock Plan or issued
pursuant to the Director Plan after the effective date of such registration
statement will be freely tradeable, except for any such shares acquired by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act.
The Company and MidAmerican Capital have agreed not to offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of, directly or
indirectly, any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for any capital stock or
warrants or other rights to purchase shares of capital stock of the Company
owned by any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with
the prior written consent of PaineWebber Incorporated and (iii) in the case of
the Company, for the issuance of shares of Common Stock upon the exercise of
options, or the grant of options to purchase shares of Common Stock under the
Stock Plan or the grant of restricted stock awards under the Director Plan.
69
<PAGE>
UNDERWRITING
The Underwriters named below, acting through PaineWebber Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement by and among the Company and the Representatives (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters, the number of shares of Common Stock set
forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
PaineWebber Incorporated.......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
---
Total........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares listed above are subject to certain conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase, and the Company is obligated to sell, all of the shares of Common
Stock offered by this Prospectus, if any of the shares of Common Stock being
sold pursuant to the Underwriting Agreement are purchased (without
consideration of any shares that may be purchased through the exercise of the
Underwriters' over-allotment option).
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession to other
dealers not in excess of $ per share. After the initial public offering of
the shares of Common Stock, the public offering price, the concessions to
selected dealers and the reallowance to other dealers may be changed by the
Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 922,500 shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option only to
cover over-allotments, if any, incurred in the sales of shares of Common
Stock. To the extent the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
such percentage of such additional shares of Common Stock as is approximately
equal to the percentage of shares of Common Stock that it is obligated to
purchase as shown in the table set forth above.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
70
<PAGE>
Each of the Representatives has from time to time performed various
investment banking and financial advisory services for MidAmerican Energy or
certain of its subsidiaries, for which they have received customary fees and
reimbursement of their out-of-pocket expenses.
The Company and its existing stockholder, MidAmerican Capital, have agreed
not to offer, sell, contract to sell, or grant any option to purchase or
otherwise dispose of, directly or indirectly, any shares of capital stock of
the Company or any securities convertible into or exercisable or exchangeable
for any capital stock or warrants or other rights to purchase shares of
capital stock of the Company owned by any of them prior to the expiration of
180 days from the date of this Prospectus, except (i) for the shares of Common
Stock offered hereby, (ii) with the prior written consent of PaineWebber
Incorporated, and (iii) in the case of the Company, for the issuance of shares
of Common Stock upon the exercise of options, or the grant of options to
purchase shares of Common Stock under the Stock Plan or the grant of
restricted stock awards under the Director Plan.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price was determined pursuant to negotiations
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price, in addition to prevailing
market conditions, were certain financial information of the Company, the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future revenues of the Company,
the present state of the Company's development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering
price set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price
is subject to change as a result of market conditions and other factors. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to
the Offering at or above the initial public offering price.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Conner & Winters, A Professional
Corporation, Tulsa, Oklahoma. Certain legal matters in connection with the
Common Stock offered hereby will be passed upon for the Underwriters by Baker
& Botts, L.L.P., Houston, Texas.
EXPERTS
The audited financial statements of the Company included in this Prospectus
or elsewhere in the Registration Statement of which this Prospectus is a part
and the statement of revenues and direct operating expenses of the Sawyer
Canyon Properties for the year ended December 31, 1995, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
Information appearing in this Prospectus regarding the Company's estimated
quantities of natural gas and oil reserves and the discounted present value of
future pre-tax cash flows therefrom is based, to the extent described herein,
upon estimates of such reserves and present values prepared by Netherland,
Sewell and Associates, Inc., independent petroleum engineers. Such information
has been so included herein in reliance upon the authority of such firm
experts in petroleum engineering.
71
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") with respect to the shares of Common Stock offered
hereby with the Securities and Exchange Commission (the "Commission") under
the Securities Act. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference.
Upon completion of the Offering, the Company will be subject to the
informational reporting requirements of the Securities Exchange Act of 1934,
as amended, and, in accordance therewith, will file reports, proxy statements
and other information with the Commission. The Registration Statement and the
exhibits and schedules forming a part thereof, as well as such reports, proxy
statements and other information, may be inspected and copied at the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048,
and Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission at its Washington address at prescribed
rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
72
<PAGE>
GLOSSARY
The following are definitions of certain terms used in this Prospectus.
BBL. One barrel of crude oil, condensate or other liquids equal to 42 U.S.
gallons.
BCF. Billion cubic feet.
BCFE. Billion cubic feet of natural gas equivalent.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 degrees Fahrenheit to 59.5
degrees Fahrenheit under specific conditions.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
EXTENSIONAL INFILL DRILLING. Drilling of a well to enhance the economic
recovery of natural gas and oil in producing areas to a level greater than that
previously achieved by the owners of the prevailing leasehold by increasing the
density of wells that penetrate known reservoirs. Typically, development of
these prospects requires that the Company obtain some or all of the rights to
drill on acreage that is held by production.
FARMOUT. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well or the establishment of
production on that location. The assignor usually retains a royalty interest or
a working interest after payout in the lease.
FINDING COSTS. Expressed in terms of dollars per Mcfe, calculated by dividing
the amount of total costs incurred for oil and gas activities by the amount of
proved reserves added during the same period (including the effect on proved
reserves of reserve revisions).
GROSS ACRES OR GROSS WELLS. The number of acres or wells in which the Company
has a working interest.
LEASE OPERATING EXPENSE. Costs incurred to operate and maintain wells and
related equipment and facilities including depreciation and applicable
operating costs of support equipment and facilities and other costs of
operating and maintaining those wells and related equipment and facilities.
MBBL. One thousand barrels.
MCF. One thousand cubic feet.
MCFE. One thousand cubic feet of natural gas equivalent.
MMBBL. One million barrels.
MMBTU. One million Btus.
MMCF. One million cubic feet.
73
<PAGE>
MMCFE. One million cubic feet of natural gas equivalent.
MWH. Megawatt hour, a unit of power equal to that expended by one million
watts in one hour.
NATURAL GAS EQUIVALENT. Cubic feet of natural gas equivalent, determined
using the ratio of one Bbl of crude oil, condensate or natural gas liquids to
six Mcf of natural gas.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned in
gross acres or gross wells.
NET PROFITS INTEREST. An interest in an oil and gas property entitling the
owner to a share of the gross revenues from oil and gas production less all
operating, production, development, transportation, transmission and marketing
expenses, production, sales and ad valorem taxes attributable to such
production.
OVERRIDING ROYALTY INTEREST. A royalty interest which is carved out of a
lessee's interest under an oil and gas lease.
PRODUCTIVE WELL. A well that is producing oil and gas or that is capable of
production.
PROVED DEVELOPED NONPRODUCING RESERVES. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
RESERVE LIFE INDEX. Calculated by dividing year-end proved reserves by
annual production for the most recent year.
ROYALTY INTEREST. An interest in an oil and gas property entitling the owner
to a share of oil or gas production free of costs of production.
SEC-10 RESERVE VALUE. The pre-tax present value, discounted at 10% per
annum, of future net cash flows from estimated proved reserves, calculated
holding prices and costs constant at amounts in effect on the date of the
estimate (unless such prices or costs are subject to change pursuant to
contractual provisions) and otherwise in accordance with the Commission's
rules for inclusion of oil and gas reserve information in financial statements
filed with the Commission.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been participated
in or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains proved
reserves.
WHEELING. Involves the movement of electricity through the transmission
systems of transmission owners who do not own title to the electricity.
WORKING INTEREST. A cost bearing interest which gives the owner the right to
drill, produce and conduct oil and gas operations on the property, as well as
a right to a share of production therefrom.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
InterCoast Energy Company Consolidated Financial Statements
Report of independent public accountants................................ F-2
Consolidated balance sheets as of December 31, 1994 and 1995............ F-3
Consolidated statements of income for the years ended December 31, 1993,
1994 and 1995.......................................................... F-4
Consolidated statements of stockholder's equity for the years ended
December 31, 1993, 1994 and 1995....................................... F-5
Consolidated statements of cash flows for the years ended December 31,
1993, 1994 and 1995.................................................... F-6
Notes to consolidated financial statements.............................. F-7
InterCoast Energy Company Interim Consolidated Financial Statements
(Unaudited)
Consolidated balance sheets as of December 31, 1995 and March 31, 1996.. F-17
Consolidated statements of income for the three months ended March 31,
1995 and 1996.......................................................... F-18
Consolidated statement of stockholder's equity for the three months
ended March 31, 1996................................................... F-19
Consolidated statements of cash flows for the three months ended March
31, 1995 and 1996...................................................... F-20
Notes to unaudited consolidated financial statements.................... F-21
Sawyer Canyon Properties
Report of independent public accountants................................ F-22
Statement of revenues and direct operating expenses for the year ended
December 31, 1995...................................................... F-23
Notes to statement of revenues and direct operating expenses............ F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the transfer of InterCoast Power Marketing Company to the Company as
described in Note 1 to the accompanying consolidated financial statements is
effected, we expect to be in a position to issue the following audit report.
Arthur Andersen LLP
May 24, 1996
To the Stockholder and Board of Directors of
InterCoast Energy Company:
We have audited the accompanying consolidated balance sheets of InterCoast
Energy Company (a Delaware corporation and an indirect wholly owned subsidiary
of MidAmerican Energy Company) and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterCoast Energy Company
and Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
F-2
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 5,127 $ 8,303
Accounts receivable........................................ 6,641 23,016
Other...................................................... 2,562 1,640
-------- --------
Total current assets..................................... 14,330 32,959
Gas and oil properties, net.................................. 141,070 158,597
Continental Power Exchange, Inc., net........................ 3,875 5,923
Intangible and other assets, net............................. 2,498 4,578
-------- --------
Total assets............................................. 161,773 202,057
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable........................................... 3,104 17,482
Other current liabilities.................................. 993 3,966
-------- --------
Total current liabilities................................ 4,097 21,448
-------- --------
Accumulated deferred income taxes, net....................... 13,521 24,406
-------- --------
Long-term debt due to MidAmerican Capital.................... 60,724 52,907
-------- --------
Stockholder's equity
Common stock ($0.01 par value, 25,000,000 shares
authorized, 7,927,500 shares issued and outstanding)...... 79 79
Additional paid-in capital................................. 69,666 85,995
Retained earnings.......................................... 13,686 17,222
-------- --------
Total stockholder's equity............................... 83,431 103,296
-------- --------
Total liabilities and stockholder's equity............... $161,773 $202,057
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTERCOAST OIL AND GAS COMPANY
Gas and oil revenues............ $ 37,359 $ 44,466 $ 48,109
Gas and oil operating expenses.. (9,616) (15,016) (14,552)
Depreciation, depletion and
amortization expense........... (13,535) (18,602) (21,489)
General and administrative
expense, net................... (2,183) (2,633) (2,288)
------------- ------------- -------------
12,025 8,215 9,780
------------- ------------- -------------
INTERCOAST ENERGY MARKETING
Natural gas sales revenues...... 16,715 13,700 24,066
Cost of gas sold................ (16,216) (13,142) (23,218)
Electric power sales revenues... 19 446 421
Cost of electric power sold..... -- -- (325)
Operating expenses.............. (369) (778) (952)
General and administrative
expense........................ (163) (314) (410)
------------- ------------- -------------
(14) (88) (418)
------------- ------------- -------------
CONTINENTAL POWER EXCHANGE, INC.
Administrative and development
expense, net................... -- (52) (2,346)
------------- ------------- -------------
Corporate expenses................ (1,013) (1,553) (1,554)
------------- ------------- -------------
Income before income taxes........ 10,998 6,522 5,462
Provision for income taxes........ 4,984 2,637 1,926
------------- ------------- -------------
Net income........................ $ 6,014 $ 3,885 $ 3,536
============= ============= =============
Average common shares
outstanding...................... 7,928 7,928 7,928
============= ============= =============
Earnings per common share......... $ 0.76 $ 0.49 $ 0.45
============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON SHARES
------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
------ ------ --------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992... 7,928 $79 $57,763 $ 3,787 $ 61,629
Net income..................... -- -- -- 6,014 6,014
Additional paid-in capital..... -- -- 4,073 -- 4,073
----- --- ------- ------- --------
BALANCE AT DECEMBER 31, 1993... 7,928 79 61,836 9,801 71,716
Net income..................... -- -- -- 3,885 3,885
Additional paid-in capital..... -- -- 7,830 -- 7,830
----- --- ------- ------- --------
BALANCE AT DECEMBER 31, 1994... 7,928 79 69,666 13,686 83,431
Net income..................... -- -- -- 3,536 3,536
Additional paid-in capital..... -- -- 16,329 -- 16,329
----- --- ------- ------- --------
BALANCE AT DECEMBER 31, 1995... 7,928 $79 $85,995 $17,222 $103,296
===== === ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 6,014 $ 3,885 $ 3,536
Adjustments to reconcile net income to net cash
from operating activities:
Deferred income taxes, net..................... 4,020 2,481 10,855
Provision for depreciation, depletion and
amortization.................................. 13,672 18,834 21,897
Change in working capital items:
Accounts receivable........................... (2,791) 3,254 (16,375)
Other current assets.......................... 45 (1,032) 922
Accounts payable.............................. 2,869 (2,782) 14,378
Other current liabilities..................... 1,706 (1,840) 2,973
-------- -------- --------
Net cash from operating activities........... 25,535 22,800 38,186
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in:
Gas and oil properties......................... (74,984) (42,849) (40,845)
Continental Power Exchange, Inc................ -- (3,846) (2,135)
Other.......................................... (162) (261) (2,371)
Proceeds from sale of gas and oil properties.... 1,446 3,465 1,829
-------- -------- --------
Net cash from investing activities........... (73,700) (43,491) (43,522)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of borrowings from MidAmerican
Capital....................................... 47,486 16,716 --
Repayments of borrowings from MidAmerican
Capital....................................... (1,118) (2,360) (7,817)
Additional paid-in capital..................... 4,073 7,830 16,329
-------- -------- --------
Net cash from financing activities........... 50,441 22,186 8,512
-------- -------- --------
Net increase in cash and cash equivalents........ 2,276 1,495 3,176
Cash and cash equivalents at beginning of
period.......................................... 1,356 3,632 5,127
-------- -------- --------
Cash and cash equivalents at end of period....... $ 3,632 $ 5,127 $ 8,303
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the period for:
Income taxes................................... $ 964 $ 156 $ (8,929)
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ACCOUNTING POLICIES
Corporate Structure
InterCoast Energy Company (InterCoast or the Company), a Delaware
corporation, is a wholly owned subsidiary of MidAmerican Capital Company
(MidAmerican Capital). MidAmerican Capital, a Delaware corporation, is a
wholly owned subsidiary of MidAmerican Energy Company (MidAmerican Energy).
MidAmerican Capital reorganized its businesses and formed the Company on May
17, 1996 as a holding company for four wholly owned subsidiaries: InterCoast
Oil and Gas Company (formerly Medallion Production Company), primarily engaged
in the acquisition, development, exploration and production of natural gas and
oil, InterCoast Gas Services Company, primarily engaged in the marketing of
natural gas, InterCoast Power Marketing Company, primarily engaged in the
wholesale marketing and brokering of electric power, and Continental Power
Exchange, Inc., developer and operator of a proprietary network facilitating
electronic electric power exchange. InterCoast Gas Services Company and
InterCoast Power Marketing Company are combined as InterCoast Energy Marketing
on the Consolidated Statements of Income. The Company accounted for the
reorganization in a manner similar to that in pooling-of-interests accounting.
The transfer of the ownership of InterCoast Power Marketing Company to the
Company had not been effected as of May 24, 1996 but management expects such
transfer to take place no later than the date the registration statement
discussed in Note 12 becomes effective.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly
owned subsidiaries. Intercompany transactions have been eliminated.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results may differ from those estimates.
Common Stock Conversion and Split
The financial statements and notes thereto reflect retroactively the common
shares authorized, issued and outstanding at the date of formation.
Earnings Per Share
Net income per share is calculated by dividing net income by the weighted
average shares of common stock and common stock equivalents outstanding.
Gas and Oil Properties
The Company accounts for its gas and oil properties using the full cost
method of accounting which provides for the capitalization of all acquisition,
exploration and development costs incurred for the purpose of finding natural
gas and oil reserves. The unamortized cost of gas and oil properties,
including estimated future development and abandonment costs, are amortized
using the unit-of-production method based on the ratio of volumes produced to
proved reserves.
Unevaluated properties and associated costs not currently being amortized
and included in gas and oil properties were $1.5 million, $1.6 million and
$2.1 million at December 31, 1993, 1994 and 1995, respectively. Such costs
relate to projects which were at such dates undergoing exploration or
development activities or in which the Company intends to commence such
activities in the future. The Company will begin to amortize these costs when
proved reserves are established or impairment is determined.
F-7
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's unamortized costs of gas and oil properties are limited to the
sum of the future net revenues attributable to proved gas and oil reserves
discounted at ten percent plus the cost of any unproved properties. If the
Company's unamortized costs in gas and oil properties exceed this ceiling
amount, a provision for additional depreciation, depletion and amortization is
required. At December 31, 1993, 1994 and 1995, the Company's unamortized costs
of gas and oil properties did not exceed such ceiling amount.
Proceeds from the sale of gas and oil properties are applied to reduce the
costs in the full cost pool unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss would be
recognized.
The Company conducts certain of its drilling activities (Programs), on a
joint venture basis, together with working interest participants. The
agreements under which these investors participate provide the Company with
certain reversionary interests in the properties in the Programs and current
reimbursement of proportionate amounts of overhead and seismic costs. Overhead
reimbursements of $872,000, $1,520,000 and $2,047,000 are included in the
Consolidated Statements of Income as a reduction of general and administrative
expenses for InterCoast Oil and Gas Company for 1993, 1994 and 1995,
respectively.
Production Imbalances
Joint interest owners may take more or less than their ownership interest of
natural gas volumes from jointly owned reservoirs. The Company follows the
sales method of accounting for imbalances, whereby the Company recognizes
revenues based on the actual volumes of gas sold to purchasers. The Company
records a liability if its sales of gas volumes in excess of its entitlements
from a jointly owned reservoir exceed its interest in the remaining estimated
gas reserves of such reservoir. Volumetric production is monitored to minimize
imbalances, and such imbalances were not significant at December 31, 1993,
1994 and 1995.
Amortization of Goodwill
Goodwill was recognized with the acquisition of certain assets and personnel
of Medallion Petroleum, Inc. in 1992 and GED Gas Services, L.L.C. in 1995.
Goodwill is amortized over the expected period of benefit of forty years using
the straight line method. The unamortized balance of goodwill included on the
Consolidated Balance Sheets as Intangible and Other Assets at December 31,
1994 and 1995 is $1,829,000 and $3,486,000, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of". This statement, which the Company plans to
adopt for reporting periods after January 1, 1996, requires the Company to
review long-lived assets for impairment whenever circumstances indicate that
the carrying amount of an asset may not be recoverable. Adoption of SFAS No.
121 is not expected to have a material impact on the Company's results of
operations or financial position at the time of adoption.
Stock-Based Compensation Plans
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" regarding accounting for stock-based compensation plans. This
statement, which is effective for reporting periods beginning January 1, 1996,
allows for alternative methods of adoption. The Company does not expect the
accounting provisions or the alternative disclosure provisions of SFAS No. 123
to have a material impact on the Company's compensation costs.
F-8
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Consolidated Statements of Cash Flows
For purposes of the Consolidated Balance Sheets and Statements of Cash
Flows, the Company considers all highly liquid debt instruments purchased with
a remaining maturity of three months or less to be cash equivalents. There
were no material non-cash investing or financing activities in 1993, 1994 or
1995.
2) GAS AND OIL PROPERTIES, NET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gas and oil properties............................ $186,131 $225,147
Accumulated depreciation, depletion and
amortization..................................... (45,061) (66,550)
-------- --------
Gas and oil properties, net....................... $141,070 $158,597
======== ========
</TABLE>
The 1993, 1994 and 1995 provision for depreciation, depletion and
amortization of the Company's gas and oil properties was recorded at the rate
of $0.80, $0.86 and $0.90, respectively, per equivalent thousand cubic feet of
natural gas production.
3) CONTINENTAL POWER EXCHANGE, INC., NET
Continental Power Exchange, Inc. (Continental), a development stage company,
was established in 1994 to operate a computerized information system
facilitating the real-time exchange of power in the electric industry. At
December 31, 1994 and 1995, the Company's capitalized costs which primarily
represent capitalized network development costs including hardware,
communication systems and software development costs, net of accumulated
depreciation and amortization, were $3,875,000 and $5,923,000, respectively.
Such capitalized costs will be depreciated and amortized on a straight-line
method for a period of five years.
Revenues representing primarily initial sign-up fees and testing period
transaction revenues of $80,000 for the year ending December 31, 1995 are
included in the Consolidated Statements of Income as a reduction to
Administrative and Development Expense.
4) INCOME TAXES
The Company is included in the consolidated federal and, where appropriate,
state income tax returns of MidAmerican Energy. The consolidated income tax
currently payable (or receivable) has been allocated among the Company and
other members of the affiliated income tax reporting group (Group) based on
the respective contributions to the consolidated taxable income and tax
credits of the Group. The Company has received (or made) payments for the
income tax reductions (or increases) contributed to the Group.
The components of the provision for income taxes are shown below:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current--Federal................................... $ 804 $ 107 $(7,980)
--State......................................... 160 49 (949)
Deferred--Federal.................................. 3,135 1,755 9,849
--State......................................... 885 726 1,006
------ ------ -------
Total.............................................. $4,984 $2,637 $ 1,926
====== ====== =======
</TABLE>
F-9
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory federal income tax rate to the overall
effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit... 1.9 2.4 1.5
State tax true-ups...................................... 3.6 -- --
Other items, net........................................ 4.8 3.0 (1.2)
---- ---- ----
Overall effective income tax rate....................... 45.3% 40.4% 35.3%
==== ==== ====
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accelerated depreciation/depletion methods............. $(4,291) $(14,622)
Intangible drilling costs.............................. 17,062 38,278
Other.................................................. 750 750
------- --------
Accumulated deferred income taxes...................... $13,521 $ 24,406
======= ========
</TABLE>
5) LONG-TERM DEBT DUE TO MIDAMERICAN CAPITAL
At December 31, 1994 and 1995, the Company had $60,724,000 and $52,907,000,
respectively, relating to intercompany loans from MidAmerican Capital due
December 31, 1997. Borrowings under the loans are non-interest bearing. The
proceeds of the loans were primarily used to acquire natural gas and oil
reserves. The Company may prepay the loans without incurring any penalty.
6) RELATED PARTY TRANSACTIONS
The Company receives general and administrative services from MidAmerican
Capital and MidAmerican Energy. The costs of such services received, including
overhead costs, are classified as directly assigned costs or allocable costs.
Directly assigned costs are assigned (and billed) to the Company. Costs that
are not directly assigned are allocated based on the Company's relative
percentage of three factors. The three factors are total revenues, total
assets and total payroll. Wages and salaries of the Company's corporate staff,
MidAmerican Capital and MidAmerican Energy, are classified as directly
assigned or allocable based upon individual employee time reporting, along
with associated payroll taxes and the costs of benefits. In addition, certain
directly assigned Company expenses paid by MidAmerican Capital are billed to
the Company. The amounts of such allocated MidAmerican Energy costs billed and
charged to corporate expense during 1993, 1994 and 1995 were $355,000,
$393,000 and $516,000, respectively.
7) EMPLOYEE BENEFITS
MidAmerican Energy provides certain health care benefits for certain Company
employees upon retirement. MidAmerican Energy is amortizing the discounted
present value of the obligation at January 1, 1993 to expense over 20 years.
Provisions for post-retirement benefits other than pensions are allocated to
the Company based on participants' compensation. The amount expensed during
1993, 1994 and 1995 was $16,000, $45,000 and $49,000, respectively.
The Company's employees participate in MidAmerican Energy's noncontributory
defined benefit retirement income plan. Benefits under the plan are based on
participants' compensation, years of service and
F-10
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
age at retirement. Funding is based on the actuarially determined costs of the
plan and the requirements of the Internal Revenue Code and the Employee
Retirement Income Security Act.
As of December 31, 1993, 1994 and 1995, the Company has not been required to
contribute to the plan. Pension costs are allocated to the Company based on
participants' compensation. The amount the Company expensed during 1993, 1994
and 1995 was $17,000, $73,000 and $2,000, respectively. At December 31, 1994
and 1995, the Company's pension accrual included in the Consolidated Balance
Sheets as Other Current Liabilities was $90,000 and $92,000, respectively.
8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company has entered into certain commodity price swap agreements with
brokerage firms to manage a portion of the market risk associated with
fluctuations in the prices of natural gas. The agreements require the Company
to make payments to (or receive payments from) the brokerage firms based upon
the differential between a fixed and a variable price as specified in the
contract. The Company accounts for these transactions on a settlement basis
and, accordingly, gains or losses are included in gas and oil revenues or
natural gas sales revenues in the period of the hedged production.
At December 31, 1995, the Company had swapped approximately 8.0 Bcf of its
anticipated 1996 natural gas production at an average fixed price of
approximately $1.98 per MMBtu. The Company has not received collateral on its
open swap arrangements.
The Company has also entered into certain futures and options contracts to
hedge a portion of the risk associated with fluctuations in the price of
natural gas relating to natural gas marketing activities. Gains or losses on
futures and option contracts are being deferred until the underlying physical
gas revenues are recognized. The futures contracts mandate initial margin
requirements, and daily settlements relating to the futures contracts are
funded in cash. The Company believes that exchange traded futures contracts
and options have little credit risk.
At December 31, 1995, the Company had hedged approximately 14.7 Bcf of
anticipated future natural gas marketed sales with an associated unrecognized
gain of $486,000.
The Company has entered into letters of credit and financial guarantees to
support certain well costs and the natural gas and electric power purchases of
the marketing companies. Letters of credit and financial guarantees are
conditional commitments issued by the Company to guarantee performance to a
third party.
The Company has letters of credit totaling $1,103,000 and $1,914,000 and
financial guarantees amounting to $0 and $2,750,000 which are not reflected on
the Consolidated Balance Sheets as of December 31, 1994 and 1995,
respectively.
The fair value of the Company's letters of credit is $8,000 and $14,000 for
at December 31, 1994 and 1995, respectively, estimated based on fees currently
charged for similar agreements. The fair value of the Company's financial
guarantees is not determinable based on the specific characteristics of the
guarantees.
9) CONCENTRATION OF CREDIT RISK
Although credit risk is inherent to the foregoing types of financial
instruments and the Company is exposed to losses in the event of non-
performance by the counterparties, the Company believes that the aggregate
credit risk associated with its present swap and hedge arrangements is not
significant due to the nature of the contracts and the counterparties thereto.
F-11
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's gas and oil production purchasers consist primarily of
independent marketers and major gas pipeline companies. The Company performs
credit evaluations of its customers' financial condition and obtains credit
support if the Company believes it is warranted. The Company has not
experienced any significant losses from uncollectible accounts.
10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of current assets and current liabilities approximate
fair value due to the short-term nature of those instruments. The fair value
of the Company's long-term debt due to MidAmerican Capital based on current
rates offered to the Company for debt of similar maturity at December 31, 1994
and 1995 was $50,270,000 and $46,822,000, respectively, as compared to a book
value at December 31, 1994 and 1995 of $60,724,000 and $52,907,000,
respectively.
11) COMMITMENTS
The Company is a lessee in several agreements to lease office space at
various locations. The lease agreements expire in 1999 through 2001, with
various options for renewal. The following is a schedule by year of estimated
future rent expense on such leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996....................................................... $ 514,000
1997....................................................... 519,000
1998....................................................... 524,000
1999....................................................... 472,000
2000....................................................... 318,000
Thereafter................................................. 205,000
----------
Total.................................................. $2,552,000
==========
</TABLE>
12) SUBSEQUENT EVENTS
In April 1996, the Company acquired the interests of Enron Oil & Gas Company
in certain gas and oil properties, associated gas gathering lines and other
well equipment located in Texas. The total adjusted purchase price was
$45,240,000. The revenues and direct operating expenses for the acquired
properties and gathering systems for 1995 were $14,678,000 and $3,058,000,
respectively.
On May 22, 1996, the Company's Board of Directors and sole stockholder
approved the Intercoast Energy Long-Term Incentive Stock Plan (the Stock Plan)
which is to become effective upon, and only in the event of, consummation of
the offering contemplated by the Registration Statement described below. The
number of shares of Common Stock reserved for issuance upon exercise of
options to be granted under the Stock Plan equals 10% of the number of shares
issued and outstanding immediately after closing of the offering. The Board
has granted options for 546,600 shares at a purchase price equal to the
initial offering price at which shares are to be issued to the public. These
options vest at a rate of one-third per year commencing one year from the date
of the grant and expire ten years from date of grant.
On May 24, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to the proposed public offering by
the Company of 6,150,000 previously unissued shares of its common stock.
F-12
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The results of operations by quarter for the years ended December 31, 1994
and 1995 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1994 QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues....................... $ 15,612 $ 15,529 $ 14,139 $ 13,332
======== ======== ======== ========
Income before income taxes........... $ 2,010 $ 2,428 $ 1,444 $ 640
======== ======== ======== ========
Net income........................... $ 1,256 $ 1,337 $ 709 $ 583
======== ======== ======== ========
Net income per share................. $ 0.16 $ 0.17 $ 0.09 $ 0.07
======== ======== ======== ========
<CAPTION>
1995 QUARTER ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues....................... $ 12,991 $ 14,223 $ 14,047 $ 31,335
======== ======== ======== ========
Income before income taxes........... $ 981 $ 1,582 $ 787 $ 2,112
======== ======== ======== ========
Net income........................... $ 619 $ 807 $ 336 $ 1,774
======== ======== ======== ========
Net income per share................. $ 0.08 $ 0.10 $ 0.04 $ 0.23
======== ======== ======== ========
</TABLE>
14) SUPPLEMENTARY OIL AND GAS DISCLOSURES
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed oil and gas reserves is
very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir.
The data for a given reservoir may also change substantially over time as a
result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessment possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
economic and operating conditions existing at the time the estimates were
made.
Proved developed reserves are proved reserves that can be expected to be
recovered through wells and equipment in place and under operating methods
being utilized at the time the estimates were made.
F-13
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Capitalized costs for oil and gas producing activities consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proved properties............................... $146,422 $184,502 $223,088
Unproved properties............................. 1,487 1,629 2,059
Accumulated depletion, depreciation and
amortization................................... (26,459) (45,061) (66,550)
-------- -------- --------
Net capitalized costs....................... $121,450 $141,070 $158,597
======== ======== ========
</TABLE>
Costs incurred for oil and gas property acquisition, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Development............................................. $12,749 $22,000 $34,639
Property acquisitions................................... 59,913 18,705 2,726
Exploration............................................. 2,322 2,144 3,480
------- ------- -------
$74,984 $42,849 $40,845
======= ======= =======
</TABLE>
Estimated Net Quantities of Oil and Gas Reserves--(Unaudited)
The following table sets forth the Company's net proved reserves, including
the changes therein, and proved developed reserves (all within the United
States) at the end of each of the three years in the period ended December 31,
1995:
<TABLE>
<CAPTION>
NATURAL OIL AND
GAS LIQUIDS TOTAL
(MMCF) (MBBL) (MMCFE)
--------- -------- ---------
<S> <C> <C> <C>
Net proved reserves at December 31, 1992........ 64,806.5 3,111.0 83,472.5
Revisions of previous estimates............... (6,649.3) 441.8 (3,998.5)
Extensions, discoveries and other additions... 14,911.6 288.4 16,642.0
Purchases of reserves in place................ 55,740.1 5,840.3 90,781.9
Production.................................... (12,741.8) (690.8) (16,886.6)
Sales of reserves in place.................... (4,043.7) (35.6) (4,257.3)
--------- -------- ---------
Net proved reserves at December 31, 1993........ 112,023.4 8,955.1 165,754.0
Revisions of previous estimates............... (10,931.0) (1,089.0) (17,465.0)
Extensions, discoveries and other additions... 39,713.5 375.0 41,963.5
Purchases of reserves in place................ 23,804.9 1,489.6 32,742.5
Production.................................... (15,590.9) (1,024.4) (21,737.3)
Sales of reserves in place.................... (408.9) (1,402.5) (8,823.9)
--------- -------- ---------
Net proved reserves at December 31, 1994........ 148,611.0 7,303.8 192,433.8
Revisions of previous estimates............... (22,594.8) 3,265.8 (3,000.0)
Extensions, discoveries and other additions... 24,372.5 514.0 27,456.5
Purchases of reserves in place................ 1,119.2 12.7 1,195.4
Production.................................... (17,835.4) (1,027.9) (24,002.8)
Sales of reserves in place.................... 0.0 (224.4) (1,346.4)
--------- -------- ---------
Net proved reserves at December 31, 1995........ 133,672.5 9,844.0 192,736.5
========= ======== =========
Net proved developed reserves
at December 31, 1993.......................... 100,660.0 8,173.0 149,698.0
at December 31, 1994.......................... 115,099.0 6,717.0 155,401.0
at December 31, 1995.......................... 111,189.0 8,255.0 160,719.0
</TABLE>
F-14
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves (Unaudited)
The following information has been developed utilizing procedures prescribed
by Statement of Financial Accounting Standards No. 69 "Disclosures about Oil
and Gas Producing Activities" (SFAS No. 69) and based on natural gas and crude
oil reserve and production volumes estimated, in part by the Company, but
primarily by the Company's independent petroleum engineers, Netherland, Sewell
and Associates, Inc. It may be useful for certain comparative purposes, but
should not be solely relied upon in evaluating the Company or its performance.
Further, information contained in the following table should not be considered
as representative of realistic assessments of future cash flows, nor should
the Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.
The Company believes that the following factors should be taken into account
in reviewing the following information: (1) future costs and selling prices
will probably differ from those required to be used in these calculations; (2)
due to future market conditions and governmental regulations, actual rates of
production achieved in future years may vary significantly from the rate of
production assumed in the calculations; (3) selection of a 10% discount rate
is arbitrary and may not be reasonable as a measure of the relative risk
inherent in realizing future net oil and gas revenues; and (4) future net
revenues may be subject to different rates of income taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end reserves. As of
December 31, 1995, approximately 8 Bcf of gas of the Company's future
production was subject to commodity price swap agreements (see Note 8). Future
cash inflows were reduced by estimated future development, abandonment and
production costs based on period-end costs in order to arrive at future net
cash flow before tax. Future income tax expense has been computed by applying
period-end statutory tax rates to aggregate future pre-tax net cash flows,
reduced by the tax basis of the properties involved and tax carryforwards. Use
of a 10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as possible reserves and
varying price and cost assumptions considered more representative of a range
of possible economic conditions that may be anticipated.
F-15
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows....................... $ 354,076 $ 369,430 $ 430,282
Future production costs................... (119,855) (123,914) (155,984)
Future development and abandonment costs.. (13,886) (24,003) (16,078)
--------- --------- ---------
Future net cash flows before income
taxes.................................... 220,335 221,513 258,220
Future income tax expense................. (50,633) (47,526) (65,314)
10% annual discount for estimating timing
of cash flows............................ (51,500) (47,943) (55,982)
--------- --------- ---------
Standardized measure of discounted future
net cash flows........................... $ 118,202 $ 126,044 $ 136,924
========= ========= =========
</TABLE>
A summary of the principal changes in the standardized measure of discounted
future net cash flows applicable to proved oil and gas reserves is as follows
(unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the period...................... $ 62,177 $118,202 $126,044
-------- -------- --------
Revisions of previous estimates:
Changes in prices and costs.................. (551) (25,715) 8,275
Changes in quantities........................ (3,957) (13,134) (2,627)
Changes in future development costs.......... (6,016) (7,323) (2,948)
Previously estimated development costs
incurred during the period.................. 8,951 11,572 17,954
Additions to proved reserves resulting from
extensions and discoveries, less related
costs....................................... 16,314 31,935 26,998
Sales of reserves in place................... (2,763) (663) (769)
Purchases of reserves in place............... 68,074 27,006 2,085
Accretion of discount........................ 7,760 13,771 14,460
Sales of oil and gas, net of production
costs....................................... (27,728) (29,129) (32,961)
Net changes in income taxes.................. (4,089) 958 (12,684)
Changes in estimated timing of production and
other....................................... 30 (1,436) (6,903)
-------- -------- --------
Net increase................................. 56,025 7,842 10,880
-------- -------- --------
End of period................................ $118,202 $126,044 $136,924
======== ======== ========
</TABLE>
F-16
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................... $ 8,303 $ 1,879
Accounts receivable......................... 23,016 25,656
Other....................................... 1,640 1,393
-------- --------
Total current assets...................... 32,959 28,928
Gas and oil properties, net................... 158,597 166,231
Continental Power Exchange, Inc., net......... 5,923 6,231
Intangible and other assets, net.............. 4,578 4,594
-------- --------
Total assets.............................. 202,057 205,984
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable............................ 17,482 22,642
Other current liabilities................... 3,966 4,525
-------- --------
Total current liabilities................. 21,448 27,167
-------- --------
Accumulated deferred income taxes, net........ 24,406 25,925
-------- --------
Long-term debt due to MidAmerican Capital..... 52,907 47,000
-------- --------
Stockholder's equity
Common stock ($.01 par value, 25,000,000
shares authorized, 7,927,500 shares issued
and outstanding)........................... 79 79
Additional paid-in capital.................. 85,995 85,995
Retained earnings........................... 17,222 19,818
-------- --------
Total stockholder's equity................ 103,296 105,892
-------- --------
Total liabilities and stockholder's
equity................................... $202,057 $205,984
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-17
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1995 1996
-------------- --------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
INTERCOAST OIL AND GAS COMPANY
Gas and oil revenues.......................... $ 10,995 $ 15,647
Gas and oil operating expenses................ (3,645) (3,508)
Depreciation, depletion and amortization
expense...................................... (5,115) (6,214)
General and administrative expense, net....... (640) (714)
------------- --------------
1,595 5,211
------------- --------------
INTERCOAST ENERGY MARKETING
Natural gas sales revenues.................... 1,996 36,868
Cost of gas sold.............................. (1,874) (36,080)
Electric power sales revenues................. -- 406
Cost of electric power sold................... -- (292)
Operating expenses............................ (209) (596)
General and administrative expense............ (103) (181)
------------- --------------
(190) 125
------------- --------------
CONTINENTAL POWER EXCHANGE, INC.
Administrative and development expense, net... (35) (739)
------------- --------------
Corporate expenses.............................. (389) (472)
------------- --------------
Income before income taxes...................... 981 4,125
Provision for income taxes...................... 362 1,529
------------- --------------
Net income...................................... $ 619 $ 2,596
============= ==============
Average common shares outstanding............... 7,928 7,928
============= ==============
Earnings per common share....................... $ 0.08 $ 0.33
============= ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-18
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
UNAUDITED
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
------------- PAID- RETAINED
SHARES AMOUNT IN CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995........ 7,928 $79 $85,995 $17,222 $103,296
Net income.......................... -- -- -- 2,596 2,596
----- --- ------- ------- --------
BALANCE AT MARCH 31, 1996........... 7,928 $79 $85,995 $19,818 $105,892
===== === ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
F-19
<PAGE>
INTERCOAST ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 619 $ 2,596
Adjustments to reconcile net income to net
cash from operating activities:
Deferred income taxes, net................... 3,934 1,519
Provision for depreciation, depletion and
amortization................................ 5,198 6,352
Change in working capital items:
Accounts receivable......................... (1,046) (2,640)
Other current assets........................ 320 247
Accounts payable............................ 1,560 5,160
Other current liabilities................... 1,686 559
-------------- --------------
Net cash from operating activities......... 12,271 13,793
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in:
Gas and oil properties....................... (10,389) (13,847)
Continental Power Exchange, Inc.............. (752) (362)
Other......................................... (14) (101)
-------------- --------------
Net cash from investing activities......... (11,155) (14,310)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of borrowings from MidAmerican
Capital...................................... -- 3,246
Repayments of borrowings from MidAmerican
Capital...................................... (2,607) (9,153)
Additional paid-in capital.................... 1,169 --
-------------- --------------
Net cash from financing activities......... (1,438) (5,907)
-------------- --------------
Net decrease in cash and cash equivalents...... (322) (6,424)
Cash and cash equivalents at beginning of
period........................................ 5,127 8,303
-------------- --------------
Cash and cash equivalents at end of period..... $ 4,805 $ 1,879
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the period for:
Income taxes................................. $ (3,573) $ 10
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
INTERCOAST ENERGY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1) GENERAL
The accompanying consolidated financial statements have been prepared by
InterCoast Energy Company (Company), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, all
adjustments have been made to present fairly the financial position, the
results of operations, the changes in cash flows and the changes in
stockholder's equity for the periods presented. Although the Company believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the audited, consolidated financial statements and notes
thereto included in this Prospectus.
The transfer of ownership of InterCoast Power Marketing to the Company had
not been effected as of May 24, 1996 but management expects such transfer to
take place no later than the date the registration statement discussed in Note
3 becomes effective.
2) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
On January 1, 1996, the Company adopted SFAS No. 121 regarding accounting
for asset impairments. This statement requires the Company to review long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS 121 did not have a material impact on the Company's results
of operations or financial position.
3) SUBSEQUENT EVENTS
In April 1996, the Company acquired the interests of Enron Oil & Gas Company
in certain gas and oil properties, associated gas gathering lines and other
well equipment located in Texas. The total adjusted purchase price was
$45,240,000. The revenues and direct operating expenses for the acquired
properties and gathering systems which were not included in the Company's
results of operations for the first quarter of 1996 were $3,740,000 and
$645,000, respectively.
On May 22, 1996, the Company's Board of Directors and sole stockholder
approved the Intercoast Energy Long-Term Incentive Stock Plan (the Stock Plan)
which is to become effective upon, and only in the event of, consummation of
the offering contemplated by the Registration Statement described below. The
number of shares of Common Stock reserved for issuance upon exercise of
options to be granted under the Stock Plan equals 10% of the number of shares
issued and outstanding immediately after closing of the offering. The Board
has granted options for 546,600 shares at a purchase price equal to the
initial offering price at which shares are to be issued to the public. These
options vest at a rate of one-third per year commencing one year from the date
of the grant and expire ten years from date of grant.
On May 24, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to the proposed offering by the
Company of 6,150,000 previously unissued shares of its Common Stock.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Directors of
InterCoast Energy Company:
We have audited the accompanying statement of revenues and direct operating
expenses of the Sawyer Canyon Properties (see Note 1) for the year ended
December 31, 1995. This statement is the responsibility of InterCoast Energy
Company's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenues and direct
operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of revenues and direct operating expenses
referred to above presents fairly, in all material respects, the revenues and
direct operating expenses of the Sawyer Canyon Properties (see Note 1) for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Houston, Texas
May 3, 1996
F-22
<PAGE>
SAWYER CANYON PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
REVENUES:
Gas and oil................................................. $13,084
Gathering systems........................................... 1,594
-------
Total revenues............................................ 14,678
-------
DIRECT OPERATING EXPENSES:
Gas and oil operating....................................... 2,953
Gathering systems........................................... 105
-------
Total expenses............................................ 3,058
-------
Excess of revenues over direct operating expenses............. $11,620
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-23
<PAGE>
SAWYER CANYON PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(1) THE SAWYER CANYON PROPERTIES
On March 30, 1996, Enron Oil & Gas Company (EOG) entered into a purchase and
sale agreement (the Agreement) to sell certain gas and oil properties and
related assets and two gathering systems (collectively, the Sawyer Canyon
Properties) to InterCoast Oil and Gas Company (the Company). The purchase
price as of the January 1, 1996 effective date, $55.5 million, was subject to
certain adjustments including the net revenues (as defined in the Agreement)
between the effective date and the closing date. The net purchase price at
closing, April 12, 1996, was approximately $53.2 million of which $3.0 million
was assigned to the carrying value of related gathering systems which were
transferred to InterCoast Gas Services Company, an affiliated company. The
properties, predominantly natural gas, and the associated gathering systems
are located in West Texas.
After the closing of the acquisition of the Sawyer Canyon Properties from
EOG, the Company conveyed certain interests in particular wells to InterCoast
Global Management, Inc., a wholly owned subsidiary of MidAmerican Capital
Company, the Company's indirect parent. The Company retained a production
payment on 100 percent of the net proceeds of production of such wells until
approximately 80 percent of the estimated proved developed natural gas
reserves attributable to the wells has been produced. The Company received
from InterCoast Global Management, Inc. $5.6 million in cash and a promissory
note in the amount of $2.3 million, which is payable in 48 monthly
installments over four years and bears interest at the prime rate.
(2) BASIS OF PRESENTATION
Certain costs, such as depreciation, depletion and amortization, general and
administrative expenses and federal and state income taxes were not allocated
to the above properties. Accordingly, full separate financial statements
prepared in accordance with generally accepted accounting principles do not
exist and are not practicable to obtain in these circumstances.
Revenues and direct operating expenses for the gas and oil properties
included in the accompanying statement represent EOG's interest in the
properties and are presented on the accrual basis of accounting and may not be
representative of future operations. Revenues on the gas and oil properties
are shown net of any applicable severance taxes. Certain of the gas and oil
properties are qualified as high-cost natural gas wells and are currently
exempt from Texas severance taxes. Depreciation, depletion and amortization;
allocated general and administrative expenses and federal and state income
taxes have been excluded.
Revenues and direct operating expenses for the two gathering systems are
presented on the accrual basis of accounting and may not be representative of
future operations. Depreciation, depletion and amortization, allocated general
and administrative expenses and federal and state income taxes have been
excluded.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and direct operating
expenses during the reporting period. Actual results could differ from those
estimates.
(3) RELATED PARTY TRANSACTIONS
Included in gas and oil revenues (excluding severance taxes and gathering
and transportation expenses) for the gas and oil properties is approximately
$13.0 million for the sale of natural gas and crude oil and condensate volumes
to affiliates of EOG.
Included in revenues for the two gathering systems is approximately $1.2
million from the transportation of natural gas for EOG's production volumes,
which are shown as a reduction in the related gas and oil revenues.
F-24
<PAGE>
SAWYER CANYON PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--(CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of the Agreement, certain claims, litigation, or
disputes pending as of the effective date and certain matters arising in
connection with ownership of the properties or the gathering systems prior to
the effective date are retained by EOG.
(5) SUPPLEMENTAL FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed crude oil and natural gas
reserves is very complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering and economic data for each
reservoir. The data for a given reservoir may also change substantially over
time as a result of numerous factors including, but not limited to, additional
development activity, evolving production history, and continual reassessment
of the viability of production under varying economic conditions.
Consequently, material revisions to existing reserve estimates occur from time
to time. Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
significance of the subjective decisions required and variances in available
data for various reservoirs make these estimates generally less precise than
other estimates presented in connection with financial statement disclosures.
Proved reserves represent estimated quantities of crude oil, condensate,
natural gas and natural gas liquids that geological and engineering data
demonstrate, with reasonable certainty, to be recoverable in future years from
known reservoirs under economic and operating conditions existing at the time
the estimates were made.
Proved developed reserves are proved reserves expected to be recovered
through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
Estimates of proved and proved developed reserves at December 31, 1994, were
based on studies performed by the engineering staff of EOG. Estimates of
proved and proved developed reserves at December 31, 1995 are based on
estimates prepared by Netherland, Sewell and Associates, Inc.
Reserve Information
<TABLE>
<CAPTION>
OIL AND
GAS LIQUIDS
(MMCF) (MBBL)
------ --------
<S> <C> <C>
Net Proved Reserves at December 31, 1994.................... 68,711 19
Production................................................ (8,145) (17)
Revisions of previous estimates and other................. (2,812) 77
------ ---
Net Proved Reserves at December 31, 1995.................... 57,754 79
====== ===
Net Proved Developed Reserves at December 31, 1995.......... 55,546 72
====== ===
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The following information has been developed utilizing procedures described
by Statement of Financial Accounting Standards No. 69 "Disclosures About Oil
and Gas Producing Activities" and based on natural gas and crude oil reserve
and production volumes estimated by the engineering staff of Netherland,
Sewell and Associates, Inc. It may be useful for certain comparison purposes,
but should not be solely relied upon in evaluating the oil and gas properties
or their performance. Further, information contained in the following table
should not be considered as representative of realistic assessments of future
cash flows, nor should the Standardized Measure of Discounted Future Net Cash
Flows be viewed as representative of the current value of the oil and gas
properties.
F-25
<PAGE>
SAWYER CANYON PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES--(CONTINUED)
The future cash flows presented below are based on sales prices, cost rates,
and statutory income tax rates in existence as of the date of the projections
estimated by Netherland, Sewell and Associates, Inc. It is possible that
material revisions to some estimates of natural gas and crude oil reserves may
occur in the future, development and production of the reserves may occur in
periods other than those assumed, and actual prices realized and costs
incurred may vary significantly from those used.
The future cash flows presented by the Company in the future will be based
on the Company's cost structure and timing of future development and
production and accordingly may be significantly different from those of EOG.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Future cash inflows...................................... $133,190
Future production costs.................................. (43,034)
Future development costs................................. (1,573)
--------
Future net cash flows.................................... 88,583
Discount to present value at 10% annual rate............. (33,171)
--------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves................. $ 55,412
========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
The following table sets forth the changes in the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves for
the year ended December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Standardized measure of discounted future net cash flows
at December 31, 1994................................... $ 59,585
Accretion of discount................................... 5,958
Sales, net of production costs.......................... (10,131)
--------
Standardized measure of discounted future net cash flows
at December 31, 1995................................... $ 55,412
========
</TABLE>
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
The Company.............................................................. 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Unaudited Pro Forma Combined Financial Statements........................ 20
Selected Historical Financial Data....................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business and Properties.................................................. 32
Relationship Between the Company and the Parent.......................... 53
Management............................................................... 56
Certain Transactions..................................................... 66
Principal Stockholder.................................................... 67
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 70
Legal Matters............................................................ 71
Experts.................................................................. 71
Additional Information................................................... 72
Glossary................................................................. 73
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,150,000 SHARES
INTERCOAST ENERGY
COMPANY
COMMON STOCK
----------------
PROSPECTUS
----------------
PAINEWEBBER INCORPORATED
MERRILL LYNCH & CO.
----------------
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All amounts, except SEC and NASD fees, are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $39,021
NASD filing fee.................................................. 11,860
New York Stock Exchange listing fee.............................. *
Transfer agent's fees............................................ *
Printing, engraving and shipping expenses........................ *
Legal fees and expenses.......................................... *
Blue sky fees and expenses....................................... *
Accounting fees.................................................. *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
--------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides generally that
a corporation may indemnify any person who was or is a party to or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
in nature, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) and, in a proceeding not by or in the right of the
corporation, judgments, fines and amounts paid in settlement, actually and
reasonably incurred by him in connection with such suit or proceeding, if he
acted in good faith and in a manner 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 reason to believe his conduct was unlawful. Delaware law
further provides that a corporation may not indemnify any person against
expenses incurred in connection with an action by or in the right of the
corporation if such person shall have been adjudged to be liable in the
performance of his duty to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine that,
despite the adjudication of liability but in the view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
the expenses which such court shall deem proper. The Certificate of
Incorporation and Bylaws provide that the Company shall indemnify an officer
or director against liabilities incurred by such person as authorized under
the Delaware General Corporation Law. In addition, the Company has entered
into specific agreements with the directors and officers of the Company
providing for indemnification of such persons under certain circumstances. The
Certificate of Incorporation also eliminates, subject to certain limitations,
the liability of the Company's directors for monetary damages for breach of
their fiduciary duty as directors.
The form of Underwriting Agreement included as Exhibit 1.1 provides for
indemnification of the Company and certain controlling persons under certain
circumstances, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information is furnished as to securities of the Company sold
within the past three years which were not registered under the Securities
Act. Each of the issuances and sales described below was effected and relies
upon an exemption from registration under Section 4(2) of the Securities Act,
for transactions by an
II-1
<PAGE>
issuer not involving any public offering, or other exemptions as set forth
below. Grants of options are included only to the extent that such grants are
considered to be sales. No underwriting discounts or commissions were paid in
connection with such issuances and sales.
1. Effective May 17, 1996, in connection with the organization of the
Company, the Company issued 7,927,500 shares of Common Stock to MidAmerican
Capital.
2. Effective May 22, 1996, the Company granted stock options for the
purchase of 546,600 shares of the Common Stock to certain officers and key
employees of the Company pursuant to the Company's Stock Plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits*:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1** Form of stock certificate for the Company's Common Stock, par
value $0.01 per share.
5.1** Opinion of Conner & Winters, A Professional Corporation.
10.1 Purchase and Sale Agreement dated March 30, 1996, between the
Company and Enron Oil & Gas Company and Enron Oil & Gas
Marketing Inc.
10.2 Amendment to Purchase and Sale Agreement dated April 10, 1996,
between the Company and Enron Oil & Gas Company and Enron Oil
& Gas Marketing, Inc.
10.3** Revolving Credit Facility dated , 1996, between the
Company and .
10.4** Administrative Services Agreement dated as of , 1996,
between the Company and MidAmerican Capital Company.
10.5 InterCoast Energy Company Long-Term Incentive Plan.
10.6 InterCoast Energy Company Non-Employee Director Stock Plan.
10.7 Purchase and Sale Agreement dated April 12, 1996, between the
Company and InterCoast Global Management, Inc.
10.8** Tax Sharing Agreement dated as of , 1996, between the
Company and MidAmerican Capital Company.
10.9** Indemnification Agreement dated as of , 1996, between the
Company and MidAmerican Capital.
10.10** Promissory Note dated April 12, 1996, in the original
principal amount of $45,240,000 made by the Company in favor
of MidAmerican Capital.
10.11** Promissory Note dated March 31, 1996, in the original
principal amount of $47,000,000 made by the Company in favor
of MidAmerican Capital.
10.12 InterCoast Energy Company Performance Incentive Plan.
10.13 Medallion Production Company Performance Incentive Plan dated
April 1992, and addendums dated January 1994 and March 1994.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Netherland, Sewell and Associates, Inc.
23.3 Consent of Conner & Winters, A Professional Corporation
(included in Exhibit 5).
23.4 Consent of William E. Warnock, Jr.
23.5 Consent of Russell E. Christiansen.
23.6 Consent of Stanley J. Bright.
23.7 Consent of John A. Rasmussen, Jr.
23.8 Consent of George G. Daly.
23.9 Consent of Robert C. Thomas.
24.1 Power of Attorney (included in this Part II).
27.1 Financial Data Schedule.
99.1** Summary reserve report of Netherland, Sewell & Associates,
Inc. dated May 13, 1996.
</TABLE>
--------
* Exhibits excluded are not applicable.
** To be filed by amendment.
II-2
<PAGE>
(b) Financial Statement Schedules:
None.
All other schedules are omitted as inapplicable or because the required
information is contained in the financial statements or included in the
footnotes thereto.
ITEM 17. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closings specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
3. The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DES MOINES AND STATE OF
IOWA ON THE 23RD DAY OF MAY, 1996.
InterCoast Energy Company
By: /s/ Donald C. Heppermann
------------------------------------
DONALD C. HEPPERMANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Donald C. Heppermann and William E. Warnock,
Jr., and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any subsequent registration
statement filed by the Registrant pursuant to Rule 462(b) of the Securities
Act of 1933, which relates to this Registration Statement, and to file the
same, with all exhibits thereto, and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or
their substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Donald C. Heppermann Chairman, Chief May 23, 1996
- ------------------------------------- Executive Officer
DONALD C. HEPPERMANN and Director
(Principal
Executive Officer)
/s/ Daniel E. Lonergan Vice President-- May 23, 1996
- ------------------------------------- Finance, Controller
DANIEL E. LONERGAN and Treasurer
(Principal
Accounting Officer
and Principal
Financial Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
INTERCOAST ENERGY COMPANY
ARTICLE I. CORPORATE NAME. The name of this corporation is InterCoast
--------------
Energy Company (hereinafter also referred to as the "Corporation").
ARTICLE II. REGISTERED OFFICE AND AGENT. The address of the registered
---------------------------
office of the Corporation in the State of Delaware is The Corporation Trust
Center, 1209 Orange Street, in the City of Wilmington, County of New Castle
19801. The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
ARTICLE III. EXISTENCE. The term of corporate existence of the
---------
Corporation is perpetual.
ARTICLE IV. NATURE OF BUSINESS OR PURPOSES TO BE CONDUCTED OR PROMOTED.
----------------------------------------------------------
The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE V. AUTHORIZED SHARES OF STOCK. The aggregate number of shares of
--------------------------
all classes of stock which the Corporation shall have authority to issue is
30,000,000 shares, consisting of (i) 25,000,000 shares of common stock, having a
par value of $.01 per share ("Common Stock"), and (ii) 5,000,000 shares of
preferred stock, having a par value of $.01 per share ("Preferred Stock"). The
Corporation shall be entitled to treat the person in whose name any share of
Common Stock or Preferred Stock is registered as the owner thereof for all
purposes and shall not be bound to recognize any equitable or other claim to, or
interest in, such shares on the part of any person, whether or not the
Corporation shall have notice thereof, except as may be expressly provided
otherwise by the laws of the state of Delaware.
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation:
A. COMMON STOCK.
------------
1. General. The shares of authorized Common Stock shall be identical in
-------
all respects and shall, as to each other, have equal rights and privileges. The
voting, dividend and liquidation rights of the holders of the Common Stock are
subject to and qualified by the rights of the holders of the Preferred Stock of
any series as may be designated by the Board of Directors upon any issuance of
the Preferred Stock of such series.
2. Voting. The holders of the Common Stock are entitled to one vote for
------
each share
<PAGE>
held at all meetings of stockholders and in cases of written actions in lieu of
meetings. There shall be no cumulative voting.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issuance of such series adopted by
the Board of Directors of the Corporation as hereinafter provided. Any shares
of Preferred Stock which may be redeemed, purchased or acquired by the
Corporation may be reissued except as otherwise provided by law. Different
series of Preferred Stock shall not be construed to constitute different classes
of shares for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix the distinctive
designation of and the number of shares constituting that series, and such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions all to the full extent now or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law. No vote of
the holders of the Preferred Stock or Common Stock shall be a prerequisite to
the issuance of any shares of any series of the Preferred Stock authorized by
and complying with the conditions of the Certificate of Incorporation, the right
to have such vote being expressly waived by all present and future holders of
the capital stock of the Corporation.
ARTICLE VI. INCORPORATOR. The name and mailing address of the incorporator
------------
is James R. Barnett, 666 Grand Avenue, P.O. Box 657, Des Moines, Iowa 50303.
-2-
<PAGE>
ARTICLE VII. INITIAL DIRECTOR. The name and mailing address of the person
----------------
who is to act as the initial director of the Corporation until the first annual
meeting of stockholders or until his successor is elected and qualifies is
Donald C. Heppermann, 666 Grand Avenue, P.O. Box 657, Des Moines, Iowa 50303.
ARTICLE VIII. DIRECTOR LIABILITY. A director of the Corporation shall not
------------------
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 General
Corporation Law of the State of Delaware, or (iv) for any transaction from which
the director derived any improper personal benefit. If the General Corporation
Law of the State of Delaware is amended after the filing of the Certificate of
Incorporation of which this article is a part to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the General Corporation Law of the State of
Delaware, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE IX. INDEMNIFICATION. (a) Each person who was or is a party or is
---------------
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative or
arbitration and whether formal or informal (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director, officer or employee of the Corporation or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, limited liability
company, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity while serving as a director, officer,
employee or agent in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than the General
Corporation Law of the State of Delaware permitted the Corporation to provide
prior to such amendment), against all reasonable expenses, liability and loss
(including, without limitation, attorneys' fees, all costs, judgments, fines,
Employee Retirement Income Security Act excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection therewith. Such right shall be a contract right and shall include
the right to be paid by the Corporation expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, the
payment of such expenses incurred by a director, officer or employee in his or
her capacity as a director, officer or employee (and not in any other capacity
in which service was
-3-
<PAGE>
or is rendered by such person while a director, officer or employee including,
without limitation, service to an employee benefit plan) in advance of the final
disposition of such proceeding, shall be made only upon delivery to the
Corporation of a written undertaking, by or on behalf of such director, officer
or employee to repay all amounts so advanced if it should be determined
ultimately that such director, officer or employee is not entitled to be
indemnified under this Section or otherwise.
(b) If a claim under paragraph (a) of this Article IX is not paid in full
by the Corporation within 30 days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action that the
claimant has not met the applicable standards of conduct which make it
permissible under the General Corporation Law of the State of Delaware for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. The failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standards of conduct set forth in the
General Corporation Law of the State of Delaware, shall not be a defense to the
action or create a presumption that claimant had not met the applicable
standards of conduct.
(c) Indemnification provided hereunder shall, in the case of the death of
the person entitled to indemnification, inure to the benefit of such person's
heirs, executors or other lawful representatives. The invalidity or
unenforceability of any provision contained in this Article IX shall not affect
the validity or enforceability of any other provision of this Article IX.
(d) Unless finally determined, the termination of any litigation, whether
by judgment, order, settlement, conviction or upon a plea of nolo contendere, or
---------------
its equivalent, shall not, of itself, create a presumption that the action taken
or omitted to be taken by the person seeking indemnification did not comply with
the applicable standards of conduct set forth in the General Corporation Law of
the State of Delaware.
(e) The rights conferred on any person by this Article IX shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, Bylaws,
agreement, vote of shareholders or disinterested directors or otherwise.
(f) The Corporation may maintain insurance, at its expense, to protect
itself and any such director, officer or employee of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
General Corporation Law of the State of Delaware.
-4-
<PAGE>
(g) The Corporation may grant rights to indemnification and to the
advancement of expenses to, and may maintain insurance to protect, any agent of
the Corporation to the fullest extent of the provisions of this Article IX with
respect to the indemnification and advancement of expenses of, and the
maintenance of insurance to protect, directors, officers and employees of the
Corporation.
ARTICLE X. AUTHORITY OF DIRECTORS TO MAKE BYLAWS. The Board of Directors
-------------------------------------
may adopt, amend or repeal Bylaws; provided, however, that such authority shall
not divest the stockholders of their power, nor limit their power, under the
General Corporation Law of the State of Delaware to adopt, amend or repeal the
Bylaws of the Corporation.
ARTICLE XI. BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS. The
--------------------------------------------------
Corporation hereby elects not to be governed by the provisions of Section 203 of
the General Corporation Law of the State of Delaware, such Section 203 being
captioned "Business combinations with interested stockholders".
ARTICLE XII. COMPROMISES OR ARRANGEMENTS WITH CREDITORS AND/OR
-------------------------------------------------
STOCKHOLDERS. Whenever a compromise or arrangement is proposed between this
- ------------
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the application has been made, be binding on all the
creditors or class of creditors and/or on all the stockholders or class of
stockholders of this Corporation, as the case may be, and also on this
Corporation.
For the purpose of forming a corporation under the General Corporation Law
of the State of Delaware, I, the undersigned, being the incorporator
hereinbefore named, hereby make, adopt, file and record this Certificate of
Incorporation as my act and deed, certify that the facts stated herein are true,
and accordingly hereunto set my hand this 16th day of May, 1996.
\s\ James R. Barnett
--------------------------------------------
James R. Barnett, Incorporator
-5-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
INTERCOAST ENERGY COMPANY
(a Delaware corporation)
ARTICLE I
Offices
-------
Section 1.1 Registered Office. The initial registered office of the
-----------------
Corporation required by the General Corporation Law of the State of Delaware be
maintained in the State of Delaware shall be located in the City of Wilmington,
County of New Castle. The location of the registered office of the Corporation
in the State of Delaware may be changed from time to time by the Board of
Directors in the manner provided by law.
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 may from time to time determine or the business of the Corporation may
require.
ARTICLE II
Shareholders' Meetings
----------------------
Section 2.1 Place of Meetings. Meetings of the shareholders of the
-----------------
Corporation shall be held at such place, either within or without the State of
Delaware, as may be fixed from time to time by the Board of Directors.
Section 2.2 Annual Meeting. An annual meeting of the shareholders, for
--------------
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held on such date and at such time as the Board of Directors shall each
year fix, which date shall be within 13 months of the last annual meeting of
shareholders or, if no such meeting has been held, the date of incorporation.
Section 2.3 Special Meetings. Special meetings of the shareholders may be
----------------
called by a majority of the members of the Board of Directors and shall be held
on such date and at such time as they shall fix. The business transacted at any
special meeting of shareholders shall be limited to matters relating to the
purpose or purposes stated in the notice of such meeting.
Section 2.4 Notice of Meetings. Except as otherwise herein provided or
------------------
required by law (meaning, here and hereinafter, as required from time to time by
the General Corporation Law of the State of Delaware or the Certificate of
Incorporation of the Corporation), written notice of each meeting of
shareholders, whether annual or special, shall be given, not less than
<PAGE>
10 nor more than 60 days before the date on which the meeting is to be held, to
each shareholder entitled to vote at such meeting. All notices of meetings of
shareholders shall state the place, date and hour of the meeting. The notice of
a special meeting shall state, in addition, the purpose or purposes for which
such meeting is called. If mailed, such notice shall be given when deposited in
the United States mail, postage prepaid, directed to the shareholder at such
shareholder's address as it appears on the records of the Corporation.
Section 2.5 Determination of Shareholders. For the purposes of
-----------------------------
determining those shareholders entitled to notice of a meeting, to vote at any
meeting of the shareholders or any adjournment thereof, to consent to corporate
action in writing without a meeting or to receive payment of any dividend, or in
order to make a determination of shareholders for any other proper purpose, the
Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date shall not be more than 60 days before
such meeting, consent or other action. If the record date is being set for the
purposes of determining those shareholders entitled to notice of or to vote at a
meeting or to consent to corporate action in writing, such record date shall
also be not less than 10 days before the date of such meeting or consent. If no
record date is fixed by the Board of Directors, the record date shall be such
date as is required by the General Corporation Law of Delaware.
Section 2.6 Voting List. The officer or agent having charge of the share
-----------
ledger of the corporation shall prepare and make, at least 10 days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting, arranged in alphabetical order for each class of stock, together
with the address of and the number of shares registered in the name of each such
shareholder. Such list shall be open to the examination of any shareholder, for
any purpose germane to the meeting, during ordinary business hours for a period
of at least 10 days prior to such meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. Such list shall also be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any shareholder during the
whole time of the meeting. The share ledger, or a duplicate thereof, shall be
the only evidence as to the identity of the shareholders entitled to examine
such list or share ledger or to vote in person or by proxy at any meeting of
shareholders.
Section 2.7 Quorum. At any meeting of the shareholders, the holders of a
------
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law. Where a separate vote by a class or classes is required, a
majority of the shares of such class or classes present in person or represented
by proxy shall constitute a quorum entitled to take action with respect to that
vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
2
<PAGE>
Section 2.8 Adjournments. Any meeting of shareholders may be adjourned to
------------
any other date or time or to any other place at which a meeting of shareholders
may be held under these Bylaws by a majority of the shareholders present or
represented at the meeting and entitled to vote, although less than a quorum,
or, if no shareholder is present, by any officer entitled to preside at or to
act as Secretary of such meeting. When a meeting of shareholders is so
adjourned, written notice of the adjourned meeting need not be given if the
place, date and time thereof are announced at the meeting at which such
adjournment is taken; provided, however, that if the date of any adjourned
meeting is more than 30 days after the date for which the meeting was originally
noticed, or if after the adjournment, a new record date is fixed for the
adjourned meeting, a written notice of the adjourned meeting shall be given to
each shareholder of record entitled to vote at such meeting.
Section 2.9 Voting and Proxies. Unless otherwise provided in the
------------------
Certificate of Incorporation or in a resolution adopted by the Board of
Directors pursuant to Section 151 of the General Corporation Law of the State of
Delaware and subject to Section 213 of such law, each shareholder shall have one
vote for each share of stock entitled to vote and held of record by such
shareholder and a proportionate vote for each fractional share so held. Each
shareholder of record entitled to vote at a meeting of shareholders, or to
express consent or dissent to corporate action in writing without a meeting, may
vote or express such consent or dissent in person or may authorize another
person or persons to vote or act for such shareholder by written proxy executed
by such shareholder or such shareholder's duly authorized agent and delivered to
the Secretary of the Corporation. An agent so appointed need not be a
shareholder. No such proxy shall be voted or acted upon after 3 years from its
date, unless the proxy expressly provides for a longer period. There shall be
no cumulative voting.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a shareholder entitled to vote or by his, her or its proxy,
a stock vote shall be taken. Every stock vote shall be taken by ballots, each
of which shall state the name of the shareholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
The Corporation may, and to the extent required by law, shall, in advance of any
meeting of shareholders, appoint one or more inspectors to act at the meeting
and make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate is able to act at a meeting of shareholders, the
person presiding at the meeting may, and to the extent required by law, shall,
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. Every vote taken by ballots shall
be counted by an inspector or inspectors appointed by the chairman of the
meeting.
Section 2.10 Action at Meeting. When a quorum is present at any meeting
-----------------
of the shareholders, the holders of a majority of the votes of the shares of
stock present or represented and voting on any matters other than the election
of directors shall decide any matter to be voted upon by the shareholders at
such meeting, except when a different vote is required by express
3
<PAGE>
provision of law. Where a separate vote by a class or classes is required and a
quorum for that class or classes is present at a meeting, the affirmative vote
of a majority of such shares of such class or classes present or represented by
proxy at the meeting shall be the act of such class, unless otherwise required
by express provision of law. Any election of directors by shareholders shall be
determined by a plurality of the votes cast by the shareholders present in
person or represented by proxy at such meeting and entitled to vote on such
election. The holders of a majority of the votes of the shares present in person
or represented by proxy at any meeting and entitled to vote thereat shall have
power successively to adjourn the meeting to a specified date whether or not a
quorum is present.
Section 2.11 Action without Meeting. Any action required or permitted to
----------------------
be taken at any meeting of shareholders of the Corporation may be taken without
a meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares of stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted, and is delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of shareholders are recorded.
Delivery made to the Corporation's registered office shall be made by hand or by
certified or registered mail, return receipt requested. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those shareholders who have not so consented in
writing.
Every written consent shall bear the date of signature of each shareholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within 60 days of the date of the
earliest dated consent delivered to the Corporation, a written consent or
consents signed by a sufficient number of holders to take action are delivered
to the Corporation in the manner prescribed in the first paragraph of this
Section.
Section 2.12 Officers of the Meeting-Powers. The Chairman of the Board of
------------------------------
Directors, or, in the absence of the Chairman of the Board of Directors, the
Vice Chairman of the Board of Directors (if there be one), or, in the absence of
the Chairman and the Vice Chairman of the Board of Directors, the President of
the Corporation shall call meetings of the shareholders to order and shall act
as chairman thereof. The Board of Directors may appoint any shareholder to act
as chairman of any meeting in the absence of the Chairman of the Board of
Directors, the Vice Chairman of the Board of Directors and the President, and in
the case of the failure of the Board to appoint a chairman, the shareholders
present, in person or by proxy, at the meeting shall elect a chairman who shall
be either a shareholder or a proxy of a shareholder or another director or
officer of the Corporation present at the meeting.
The Secretary of the Corporation shall act as secretary at all meetings of
shareholders. In the absence of the Secretary at any meeting of shareholders,
the chairman of the meeting may appoint any other person to act as secretary of
the meeting.
Section 2.13 Power of Chairman. The chairman of any shareholders' meeting
-----------------
shall
4
<PAGE>
determine the order of business and the procedure at the meeting, including the
conduct of discussion as seems to him or her in order, and shall have power to
regulate the manner of voting and determine the eligibility of votes, and may
reject votes, whether cast in person or by proxy, as irregular, unauthorized, or
not cast in accordance with the Certificate of Incorporation, as amended, or
these Bylaws. The decisions of such chairman as to such matters shall be final
unless challenged from the floor, immediately after being announced, and
overruled by the vote of the holders of a majority of the votes of the shares
represented at the meeting. Such chairman may appoint the inspectors of election
to count ballots, whenever voting is by ballot. Such chairman shall have power
to order any unauthorized persons to leave the meeting and to enforce such
orders, and shall have and exercise all power and authority, and perform all
duties customarily possessed and performed by the presiding officer of such a
meeting.
ARTICLE III
Directors
---------
Section 3.1 General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of a Board of Directors. Except as
otherwise provided by law or these Bylaws, the Board of Directors may exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation.
Section 3.2 Number, Election, Term and Qualification. The number of
----------------------------------------
directors which shall constitute the Board of Directors shall be fixed by
resolution of the Board of Directors and shall in no event be more than 9 nor
less than 1. The directors who are to serve on the Board of Directors for the
ensuing year shall be elected at the annual meeting, or any special meeting held
in lieu thereof, of the shareholders by such shareholders as have the right to
vote on such election. Each director shall hold office until the next annual
meeting of the shareholders and until such director's successor is elected and
qualified, or until such director's earlier death, resignation or removal. All
directors of the corporation shall be natural persons of full age; but no
director need be a resident of Delaware or a shareholder of the corporation.
Section 3.3 Enlargement or Reduction of the Board. The number of
-------------------------------------
directors may be increased or decreased within the range provided by these
Bylaws at any time and from time to time by resolution of the Board of
Directors.
Whenever the authorized number of directors is increased between annual
meetings of the shareholders, a majority of the directors then in office shall
have the power to elect such new directors for the balance of a term and until
their successors are elected and qualified. Any decrease in the authorized
number of directors shall not become effective until the expiration of the term
of the directors then in office unless, at the time of such decrease, there
shall be vacancies on the board which are being eliminated by the decrease.
Section 3.4 Nominations. Nominations for the election of directors may be
-----------
made by the Board of Directors or a committee appointed by the Board of
Directors or by any shareholder entitled to vote in the election of directors
generally. However, any shareholder entitled to vote
5
<PAGE>
in the election of directors generally may nominate one or more persons for
election as directors at a meeting only if written notice of such shareholder's
intent to make such nomination or nominations has been given, either by personal
delivery or by United States mail, postage prepaid, to the Secretary of the
Corporation not later than (a) with respect to an election to be held at an
annual meeting of shareholders, 120 days in advance of such meeting, and (b)
with respect to an election to be held at a special meeting of shareholders for
the election of directors, the close of business on the seventh day following
the date on which notice of such meeting is first given to shareholders. Each
such notice shall set forth: (i) the name and address of the shareholder who
intends to make the nomination and of the person or persons to be nominated;
(ii) a representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) a description of all arrangements or understandings between the
shareholder 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
the shareholder; (iv) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (v) the consent of each nominee to serve as a director of the Corporation if
so elected. The Chairman of the meeting may refuse to acknowledge the nomination
of any person not made in compliance with the foregoing procedure.
3.5 Vacancies. Any vacancy in the Board of Directors, however occurring,
---------
including a vacancy resulting from an enlargement of the Board, may be filled by
a majority of the directors remaining in office, though less than a quorum,
including a sole remaining director. A director elected to fill a vacancy shall
be elected for the unexpired term of such director's predecessor in office and a
director chosen to fill a position resulting from an increase in the number of
directors shall hold office until the next annual meeting of shareholders, and,
in each case, until such director's successor is elected and qualified or until
such director's earlier death, resignation or removal. In the event of a
vacancy in the Board of Directors, the remaining directors may, except as
otherwise provided by law, exercise the powers of the full Board until the
vacancy is filled.
Section 3.6 Resignation. Any director may resign by delivering his or her
-----------
written resignation to the President or Secretary of the Corporation at its
principal office. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
Section 3.7 Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held without notice on such date and at such time and place, either
within or without the State of Delaware, as shall be determined from time to
time by the Board of Directors; provided that any director who is absent when
such a determination is made shall be given notice of the determination.
Section 3.8 Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the Chairman of the Board of Directors, the Vice Chairman of
the Board of Directors
6
<PAGE>
(if there be one) or a majority of the members of the Board of Directors and may
be held at any time and place, within or without the State of Delaware.
Section 3.9 Notice and Waiver of Notice of Special Meetings. Notice of
-----------------------------------------------
any special meeting of the Board of Directors, and the date, time and place of
such meeting, shall be given to each director by the Secretary or an Assistant
Secretary not less than 2 days in advance of such meeting. Notice may be given
to any director by telephone, facsimile or by telegram addressed to such
director at such address as last appears in the records of the Secretary of the
Corporation or by mail by depositing the same in the post office or letter box
in a postpaid sealed envelope addressed to such director at such address or by
placing with a courier or delivery service with instructions for express
delivery to such director at such address. It shall be the duty of each director
to furnish the Secretary of the Corporation with the post office address of such
director and to notify the Secretary of any change therein. A director may waive
notice of any meeting by providing the Corporation with a written statement
thereof, either before, at or after the time of the meeting. The attendance of a
director at any meeting shall constitute a waiver of notice of that meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting was not lawfully called
or convened. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes nor the business to be transacted at the meeting.
Section 3.10 Meetings by Telephone Conference Call. Members of the Board
-------------------------------------
of Directors, or of any committee thereof, may participate in a meeting of such
Board or 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 participation by such means shall constitute presence in person
at such meeting.
Section 3.11 Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum for all purposes at all meetings of the
Board of Directors. In the absence of a quorum at any such meeting, a majority
of the directors present may adjourn the meeting from time to time without
further notice other than announcement at the meeting, until a quorum shall be
present.
Section 3.12 Action at Meeting. At any meeting of the Board of Directors
-----------------
at which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law or
these Bylaws.
Section 3.13 Action by Consent. Any action required or permitted to be
-----------------
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting, if all members of the Board of Directors or such
committee, as the case may be, consent to the action in writing and the written
consents are filed with the minutes of proceedings of the Board of Directors or
such committee.
Section 3.14 Removal. Except as otherwise provided by law, any one or
-------
more or all of the directors may be removed from office at any time with cause
by the affirmative vote of the holders of at least a majority of the shares of
capital stock of the corporation then entitled to vote
7
<PAGE>
at an election of directors.
Section 3.15 Committees. The Board of Directors may, by resolution passed
----------
by a majority of the whole Board of Directors, designate from time to time one
or more committees to serve at the pleasure of the Board of Directors, each
committee to consist of one or more of the directors of the Corporation. 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. In the absence or disqualification of a member of a committee,
the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he, she 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 such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation.
Each such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by the directors or in such rules, its
business shall be conducted as nearly as possible in the same manner as is
provided in these Bylaws for the Board of Directors. Unless otherwise provided
by resolution of the Board of Directors, a quorum of each such committee shall
consist of a majority of its members, and if a quorum is present when a vote is
taken, the affirmative vote of a majority of the members present shall be the
act of such committee.
3.16 Conduct of Business. At every meeting of the Board of Directors, the
-------------------
Chairman of the Board of Directors, or, if the Chairman is absent, the Vice
Chairman of the Board of Directors (if there be one), or if the Vice Chairman is
absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in the Secretary's absence, an Assistant Secretary directed to
do so by the President, or in the absence of an Assistant Secretary, such other
officer or director of the corporation as is appointed by the chairman of the
meeting shall act as secretary of the meeting. Minutes of all meetings of the
Board of Directors shall be kept by the Secretary and all minutes shall be
signed by the secretary of the meeting. The Board of Directors shall have the
power to formulate rules and regulations governing the conduct of its meetings
and the procedure thereat.
3.17 Compensation of Directors. Directors may receive such compensation
-------------------------
for their services as members of the Board of Directors, and as members of
committees thereof, as the Board of Directors may from time to time determine.
Nothing contained in this Section 3.17 shall preclude any director from serving
the Corporation or any of its affiliates in any other capacity and receiving
compensation for such service.
ARTICLE IV
Officers
--------
8
<PAGE>
Section 4.1 Generally. The officers of the Corporation shall consist of a
---------
Chairman of the Board, a President, one or more Vice Presidents, a Secretary, a
Treasurer and such other officers with such other titles as the Board of
Directors shall determine, including a Vice Chairman of the Board of Directors
and one or more Assistant Treasurers and Assistant Secretaries.
Section 4.2 Election. The officers of the Corporation shall be elected by
--------
the Board of Directors. Each officer shall have such authority and perform such
duties as are provided in these Bylaws or as the Board of Directors may from
time to time determine.
Section 4.3 Qualification. The Chairman of the Board of Directors and the
-------------
Vice Chairman of the Board of Directors (if there be one) shall be selected from
among the members of the Board of Directors. The officers of the Corporation
may be, but are not required to be, shareholders or, except for the Chairman and
the Vice Chairman of the Board of Directors, directors of the Corporation. Any
two or more offices may be held by the same person.
Section 4.4 Tenure. Except as otherwise provided by law or by these
------
Bylaws, each officer shall hold office at the pleasure of the Board of Directors
until such officer's successor is elected and qualified, or until such officer's
earlier death, resignation or removal.
Section 4.5 Resignation and Removal. Any officer may resign at any time
-----------------------
by delivering his or her written resignation to the Corporation at its principal
office or to the Chairman of the Board of Directors, the Vice Chairman of the
Board of Directors (if there be one), the President or the Secretary. Such
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event. Unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.
Any officer may be removed at any time, with or without cause, by the Board
of Directors or by any officer upon whom such power of removal may be conferred
by the Board of Directors.
Section 4.6 Vacancies. The Board of Directors may fill any vacancy
---------
occurring in any office for any reason and may, in its discretion, leave any
such office unfilled for such period as it may determine. Each successor to an
officer shall hold office for the unexpired term of his or her predecessor and
until his or her successor is elected and qualified, or until his or her earlier
death, resignation or removal.
Section 4.7 Compensation and Duties. The Board of Directors shall, among
-----------------------
other things, have the power to fix the compensation of each officer, to
prescribe the duties of such officer, to increase or decrease such compensation
and to change the nature of each duties.
Section 4.8 Chairman of the Board of Directors. The Chairman of the Board
----------------------------------
of Directors shall preside at all meetings of the shareholders and of the Board
of Directors at which he or she is present. The Chairman of the Board of
Directors shall perform all duties incident to the office of Chairman of the
Board of Directors and shall perform such other duties and
9
<PAGE>
possess such other powers as are assigned to him or her by the Board of
Directors. The Chairman of the Board may sign certificates for shares of the
Corporation, deeds, mortgages, bonds, contracts and other instruments, except in
cases where the signing and execution thereof shall be expressly delegated by
law, by the Board of Directors or by these Bylaws to some other officer of the
Corporation.
Section 4.9 Vice Chairman of the Board of Directors. The Board of
---------------------------------------
Directors may elect or appoint a Vice Chairman of the Board of Directors who
shall, in the event of the absence or disability of the Chairman of the Board of
Directors or in case of vacancy in such office, assume all duties of the
Chairman of the Board of Directors and such other duties as, from time to time,
may be assigned to the Vice Chairman by the Board of Directors.
Section 4.10 President. The President of the Corporation shall, subject
---------
to the direction of the Board of Directors, have general and active management
of and exercise general supervision of the business and affairs of the
Corporation. The President shall have concurrent power with the Chairman of the
Board of Directors to sign certificates for shares of the Corporation, deeds,
mortgages, bonds, contracts and other instruments. In the absence of the
Chairman of the Board of Directors or in the event of the disability or refusal
of the Chairman to act, and in the absence of the Vice Chairman of the Board of
Directors or in the event of the disability or refusal of the Vice Chairman to
act, the President shall have such other powers as are vested in the Chairman of
the Board of Directors. In general, the President shall perform the duties
incident to the office of President and such other duties as may be prescribed
by the Board of Directors or the Chairman of the Board of Directors from time to
time.
Section 4.11 Vice Presidents. Each Vice President shall perform such of
---------------
the duties and exercise such of the powers of the President as shall be assigned
to him or her from time to time by the Board of Directors, the Chairman of the
Board of Directors or the President, and shall perform such other duties as the
Board of Directors, the Chairman of the Board of Directors or the President
shall from time to time prescribe. Any Vice President may sign certificates for
shares of the Corporation and any deeds, mortgages, bonds, contracts or other
instruments which the Board of Directors has authorized to be executed, which
authorizations may be either specific or general. In the event of the absence
or disability of the President or in case of a vacancy in such office, the Vice
President (or if there be more than one, the Vice Presidents in the order
determined by the Board of Directors, or in the absence of such determination,
then in the order of their first election) shall perform the duties of the
President, including interim duties, and when so acting shall have all the
powers of and be subject to all restrictions upon the President.
Section 4.12 Secretary. The Secretary shall attend all meetings of the
---------
shareholders and of the Board of Directors and shall keep the minutes of such
meetings. The Secretary shall perform like duties for the standing committees
of the Board of Directors when required. Except as otherwise provided by these
Bylaws or by the General Corporation Law of the State of Delaware, the Secretary
shall give, or cause to be given, notice of all meetings of the shareholders and
of the Board of Directors.
The Secretary shall have custody of the minutes books, containing the
minutes of
10
<PAGE>
shareholders' and directors' meetings, of the stock books of the Corporation,
and of all other corporate records, except such as shall be in the custody of
the Treasurer by reason of these Bylaws. The Secretary shall, in general,
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him or her by the Board of Directors, the
Chairman of the Board of Directors or the President.
Section 4.13 Treasurer. The Treasurer shall have the custody of all funds
---------
and securities of the Corporation. The Treasurer is authorized to receive and
receipt for stocks, bonds, notes and other securities belonging to the
Corporation or which are received for its account, and to place and keep the
same in safety deposit vaults rented for such purpose, or in safes or vaults
belonging to the Corporation. The Treasurer is authorized to collect and
receive all moneys due the Corporation and to receipt therefor, and to endorse
all checks, drafts, vouchers or other instruments for the payment of money
payable to the Corporation when necessary or proper and to deposit the same to
the credit of the Corporation in such depositaries as the Treasurer may
designate for such purpose, and the Treasurer may endorse all commercial
documents for or on behalf of the Corporation. The Treasurer is authorized to
pay interest on obligations when due and dividends on stock when duly declared
and payable. The Treasurer shall, when necessary or proper, disburse the funds
of the Corporation, taking proper vouchers for such disbursements. The Treasurer
shall cause to be kept in the office of the Treasurer true and full accounts of
all receipts and disbursements, and shall render to the Board of Directors and
the Chairman of the Board of Directors or the President, whenever they may
require it, an account of all the transactions as Treasurer and of the financial
condition of the Corporation. The Treasurer shall also perform such other duties
as may be prescribed by the Board of Directors, the Chairman of the Board of
Directors or the President. The Treasurer shall, in general, perform all duties
usually incident to the office of Treasurer.
4.14 Assistant Secretaries and Assistant Treasurers. The Assistant
----------------------------------------------
Secretaries and Assistant Treasurers shall perform such duties as may be
assigned to them by the Secretary or the Treasurer, respectively, or as may be
prescribed by the Board of Directors, the Chairman of the Board of Directors or
the President. The Assistant Secretary and the Assistant Treasurer (or if there
shall be more than one, the Assistant Secretaries or Assistant Treasurers, as
the case may be, in the order determined by the Board of Directors or, in the
absence of such determination, in the order of their first election) shall act
for and in the place of the Secretary or the Treasurer, respectively, in case of
such officer's death, disability or absence and when so acting shall have all of
the powers of and be subject to all of the restrictions and limitations placed
upon such officer.
Section 4.15 Delegation of Authority. The Board of Directors may from
-----------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.16 Removal. Any officer of the Corporation may be removed at
-------
any time, with or without cause, by the Board of Directors.
ARTICLE V
11
<PAGE>
Indemnification of Directors, Officers and Employees
----------------------------------------------------
Section 5.1 Right to Indemnification. Each person who was or is a party
------------------------
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative or
arbitration and whether formal or informal (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director, officer or employee of the Corporation or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, limited liability
company, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity while serving as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than the General
Corporation Law of the State of Delaware permitted the Corporation to provide
prior to such amendment), against all reasonable expenses, liability and loss
(including, without limitation, attorneys' fees, all costs, judgments, fines,
Employee Retirement Income Security Act excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection therewith. Such right shall be a contract right and shall include
the right to be paid by the Corporation expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, the
payment of such expenses incurred by a director, officer or employee in his or
her capacity as a director, officer or employee (and not in any other capacity
in which service was or is rendered by such person while a director, officer or
employee including, without limitation, service to an employee benefit plan) in
advance of the final disposition of such proceeding, shall be made only upon
delivery to the Corporation of a written undertaking, by or on behalf of such
director, officer or employee to repay all amounts so advanced if it should be
determined ultimately that such director, officer or employee is not entitled to
be indemnified under this Section or otherwise.
Section 5.2 Right of Claimant to Bring Suit. If a claim under Section 5.1
-------------------------------
is not paid in full by the Corporation within 30 days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expenses of prosecuting such claim. It shall be a defense to any such action
that the claimant has not met the applicable standards of conduct which make it
permissible under the General Corporation Law of the State of Delaware for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. The failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standards of conduct set forth in the
General Corporation Law of the State of Delaware shall not be a defense to the
action or create a presumption that claimant had not met the applicable
standards of conduct.
12
<PAGE>
Section 5.3 Benefit. Indemnification provided hereunder shall, in the
-------
case of the death of the person entitled to indemnification, inure to the
benefit of such person's heirs, executors or other lawful representatives. The
invalidity or unenforceability of any provision contained in this Article V
shall not affect the validity or enforceability of any other provision of this
Article V.
Section 5.4 Litigation; Presumption of Standard of Conduct. Unless
----------------------------------------------
finally determined, the termination of any litigation, whether by judgment,
order, settlement, conviction or upon a plea of nolo contendere, or its
---------------
equivalent, shall not, of itself, create a presumption that the action taken or
omitted to be taken by the person seeking indemnification did not comply with
the applicable standards of conduct set forth in the General Corporation Law of
the State of Delaware.
13
<PAGE>
Section 5.5 Non-Exclusivity of Rights. The rights conferred on any person
-------------------------
by this Article V shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of shareholders or disinterested
directors or otherwise.
Section 5.6 Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any such director, officer or employee of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
Section 5.7 Indemnification of Agents of the Corporation. The Corporation
--------------------------------------------
may grant rights to indemnification and to the advancement of expenses to, and
may maintain insurance to protect, any agent of the Corporation to the fullest
extent of the provisions of this Article V with respect to the indemnification
and advancement of expenses of, and the maintenance of insurance to protect,
directors, officers and employees of the Corporation.
ARTICLE VI
Execution of Corporation Instruments and
Voting of Securities Owned by the Corporation
---------------------------------------------
Section 6.1 Execution of Corporate Instruments. Except where otherwise
----------------------------------
provided by law or these Bylaws, the Board of Directors may, in its discretion,
determine the method and designate the signatory officer or officers, or other
person or persons, to execute on behalf of the Corporation any corporate
instrument or document, or to sign on behalf of the Corporation the corporate
name without limitation, or to enter into contracts on behalf of the Corporation
and such execution or signature shall be binding upon the Corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the Corporation or in special accounts of the Corporation shall be
signed by such person or persons as the Board of Directors shall authorize to do
so.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the Corporation by any contract or engagement or to pledge
its credit to render it liable for any purpose or for any amount.
Section 6.2 Action with Respect to Securities of Other Corporations.
-------------------------------------------------------
Unless otherwise directed by the Board of Directors, the Chairman of the Board
of Directors or the President or any officer of the Corporation authorized by
the Chairman of the Board of Directors or the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of shareholders of any other corporation in which this Corporation may
hold securities and otherwise to exercise any and all rights and powers which
this Corporation may possess by reason of its ownership of securities in such
other corporation.
14
<PAGE>
ARTICLE VII
Stocks
------
Section 7.1 Certificates of Stock. Each shareholder shall be entitled to
---------------------
a certificate signed by, or in the name of the Corporation by, the Chairman of
the Board of Directors, the President or a Vice President, and by the Secretary
or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 7.2 Transfers. Transfers of shares shall be made only by the
---------
registered owner thereof shown on the books of the Corporation (or the legal
representative of such owner, upon satisfactory proof of authority therefor), or
by the attorney of such owner lawfully constituted in writing by documents filed
with the Secretary or transfer agent of the Corporation, and only upon surrender
of the certificate to be transferred, or delivery of any order of such owner if
such shares are not represented by a certificate, and payment of applicable
taxes with respect to such transfer, unless otherwise ordered by the Board of
Directors.
Section 7.3 Lost or Destroyed Certificates. New certificates may be
------------------------------
issued to replace lost, stolen or destroyed certificates, upon such terms and
conditions as the Board of Directors may prescribe.
Section 7.4 Rights of Registered Owners. The Corporation shall be
---------------------------
entitled to recognize the exclusive right of a person registered or shown on its
books as the owner of shares of its stock to receive dividends or any other
distribution thereon, or to vote such shares, and to treat such person as the
owner of such shares for all purposes and the Corporation shall not be bound to
recognize any equitable or claim to or interest in its shares on the part of any
person other than the registered or record owner thereof, whether or not it
shall have notice thereof.
Section 7.5 Regulations. The issue, transfer, conversion and registration
-----------
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
ARTICLE VIII
General Provisions
------------------
Section 8.1 Fiscal Year. The fiscal year of the Corporation shall be the
-----------
calendar year, unless otherwise fixed by resolution of the Board of Directors.
Section 8.2 Annual Report. As soon as practicable after the close of each
-------------
fiscal year, the Board of Directors shall cause an annual report of the business
and affairs of the Corporation to be made to the shareholders.
Section 8.3 No Corporate Seal. The Corporation shall have no corporate
-----------------
seal.
15
<PAGE>
Section 8.4 Waiver of Notice. Whenever any notice whatsoever is required
----------------
to be given by law or by these Bylaws, a written waiver of such notice, signed
by the person entitled to such notice whether before, at or after the time
stated in such waiver, or the attendance of such person or persons, in person or
by proxy, at such meeting shall be equivalent to the giving of such notice,
except when such person attends such meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
Section 8.5 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
shareholders, directors, a committee of the Board of Directors or any officer or
representative of the corporation shall, as to all persons who rely on the
certificate in good faith, be conclusive evidence of such action.
Section 8.6 Certificate of Incorporation. All references in these Bylaws
----------------------------
to the Certificate of Incorporation shall be deemed to refer to the Certificate
of Incorporation of the Corporation, as amended and in effect from time to time.
To the extent any provision of these Bylaws conflicts with the Certificate of
Incorporation, the provisions of the Certificate of Incorporation shall control.
Section 8.7 Severability. Any determination that any provision of these
------------
Bylaws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these Bylaws.
Section 8.8 Pronouns. All pronouns used in these Bylaws shall be deemed
--------
to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person or persons may require.
Section 8.9 Time Periods. In applying any provision of these Bylaws which
------------
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE IX
Amendments
----------
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by vote of a majority of the number of directors fixed by these Bylaws;
provided, however, that such authority shall not divest the stockholders of
their power, nor limit their power under the General Corporation Law of the
State of Delaware to adopt, amend or repeal Bylaws of the Corporation.
16
<PAGE>
EXHIBIT 10.1
PURCHASE AND SALE AGREEMENT
BETWEEN
ENRON OIL & GAS COMPANY
AS SELLER,
ENRON OIL & GAS MARKETING, INC.
AND
MEDALLION PRODUCTION COMPANY
AS BUYER
SAWYER AREA
SUTTON COUNTY, TEXAS
<PAGE>
PURCHASE AND SALE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
ARTICLE 1. PURCHASE AND SALE............................... 1
-----------------
1.1 The Property.................................... 1
------------
1.2 Exclusions...................................... 3
------------
1.3 Ownership of Production from the Property....... 4
-----------------------------------------
1.4 Designation of Affiliate........................ 5
------------------------
ARTICLE 2. PURCHASE PRICE.................................. 5
--------------
2.1 Purchase Price.................................. 5
--------------
2.2 Allocated Values................................ 6
----------------
ARTICLE 3. REPRESENTATIONS AND WARRANTIES.................. 6
------------------------------
3.1 Reciprocal Representations and Warranties....... 6
-----------------------------------------
3.2 BUYER's Representations and Warranties.......... 7
--------------------------------------
3.3 SELLER's Representations and Warranties......... 8
---------------------------------------
3.4 Notice.......................................... 10
------
3.5 Representations and Warranties Exclusive........ 10
----------------------------------------
3.6 Survival of Representations and Warranties...... 11
------------------------------------------
3.7 EOGM Knowledge.................................. 11
--------------
ARTICLE 4. WARRANTIES...................................... 11
----------
4.1 Title; Encumbrances............................. 11
-------------------
4.2 Other Property Warranties....................... 12
-------------------------
4.3 Information About the Property.................. 12
------------------------------
4.4 Modifications................................... 13
-------------
ARTICLE 5. PHYSICAL INSPECTION; ENVIRONMENTAL ASSESSMENT;
----------------------------------------------
CASUALTY LOSS................................... 13
-------------
5.1 Access to Records............................... 13
-----------------
5.2 Inspection...................................... 13
----------
5.3 Environmental Assessment and Indemnification.... 14
--------------------------------------------
5.4 Casualty Losses................................. 17
---------------
ARTICLE 6. PREFERENTIAL RIGHTS/CONSENTS; TITLE DEFECTS..... 18
-------------------------------------------
</TABLE>
-i-
<PAGE>
<TABLE>
<C> <S> <C>
6.1 Preferential Rights and Consents to Assign............. 18
------------------------------------------
6.2 Title Defects.......................................... 19
-------------
6.3 Right to Terminate..................................... 24
------------------
ARTICLE 7. CLOSING; FINAL SETTLEMENT.............................. 25
-------------------------
7.1 Closing Date........................................... 25
------------
7.2 Conditions to Closing.................................. 26
---------------------
7.3 Closing................................................ 27
-------
7.4 Post-Closing Obligations............................... 32
------------------------
ARTICLE 8. ASSUMPTION OF OBLIGATIONS.............................. 33
-------------------------
8.1 Ownership and Operations............................... 33
------------------------
8.2 Plugging and Abandonment Obligations................... 34
------------------------------------
ARTICLE 9. INDEMNITIES............................................ 35
-----------
9.1 Definition of Claims................................... 35
--------------------
9.2 APPLICATION OF INDEMNITIES............................. 35
--------------------------
9.3 BUYER's Indemnity...................................... 35
-----------------
9.4 SELLER's Indemnity..................................... 36
------------------
ARTICLE 10. TAXES AND EXPENSES..................................... 36
------------------
10.1 Recording Expenses..................................... 36
------------------
10.2 Ad Valorem, Real Property and Personal Property Taxes.. 36
-----------------------------------------------------
10.3 Severance Taxes........................................ 37
---------------
10.4 Tax Reporting.......................................... 37
-------------
10.5 Sales Taxes............................................ 37
-----------
ARTICLE 11. INTERIM OPERATIONS OF THE PROPERTY..................... 37
----------------------------------
11.1 Operations by SELLER AND EOGM.......................... 37
-----------------------------
11.2 BUYER's Approval....................................... 38
----------------
11.3 Marketing of Production................................ 38
-----------------------
11.4 Saltwater Disposal Matter.............................. 38
-------------------------
ARTICLE 12. MISCELLANEOUS.......................................... 39
-------------
12.1 Production and Gathering Imbalances.................... 39
-----------------------------------
12.2 Press Releases......................................... 39
--------------
12.3 Notices................................................ 39
-------
12.4 Hart-Scott-Rodino Act.................................. 40
---------------------
12.5 Entirety of Agreement; Amendment....................... 40
--------------------------------
12.6 Successors and Assigns................................. 40
----------------------
12.7 GOVERNING LAW.......................................... 41
-------------
12.8 Sale of Property....................................... 41
----------------
12.9 Exhibits............................................... 41
--------
</TABLE>
-ii-
<PAGE>
<TABLE>
<C> <S> <C>
12.10 Litigation Costs............................ 41
----------------
12.11 General..................................... 41
-------
12.12 Texas Deceptive Trade Practices Act Waiver.. 42
------------------------------------------
</TABLE>
EXHIBITS
A Leases
B Gas Gathering and Pipeline Systems
C Warranted Property
D Nonforeign Affidavit
E Assignments and Bill of Sales
F Transition Services Agreement
G Section 29 Wells
H Wells Qualifying for Severance Tax Exemption
SCHEDULES
1.2.6 Reserved Overriding Royalty Interest
1.2.7 Schedule 1.2.7 Equipment
3.3.3 Permits
3.3.5 Imbalances
3.3.9 Approvals
3.3.10 Suspense of Revenue Distribution
3.3.13 Removed Equipment
-iii-
<PAGE>
PURCHASE AND SALE AGREEMENT
---------------------------
This Purchase and Sale Agreement (the "Agreement"), dated March 30, 1996,
but effective as hereinafter set forth at 7:00 a.m., Central Standard Time, on
January 1, 1996 (the "Effective Date"), is between ENRON OIL & GAS COMPANY, a
Delaware corporation ("SELLER"), and ENRON OIL & GAS MARKETING, INC., a Delaware
corporation ("EOGM") and MEDALLION PRODUCTION COMPANY, a Delaware corporation
("BUYER").
RECITALS:
---------
SELLER and EOGM own certain oil and gas properties located in Sutton
County, Texas, and related contractual rights and desire to sell these
properties and transfer these contractual rights.
BUYER desires to purchase these properties and acquire these contractual
rights.
Accordingly, in consideration of the mutual promises contained in this
Agreement, BUYER and SELLER agree as follows:
ARTICLE 1. PURCHASE AND SALE
-----------------
1.1 The Property. Subject to the terms of this Agreement (including,
------------
without limitation, the exclusions provided in Section 1.2), SELLER agrees to
sell and assign to BUYER and BUYER agrees to purchase and acquire from SELLER
all of SELLER's right and title to, and interest in, the EOG Property (as
hereinafter defined), and SELLER agrees to cause EOGM to sell and assign (and
EOGM agrees to sell and assign) to BUYER or, as hereinafter provided, to an
Affiliate (as hereinafter defined) of BUYER, and BUYER agrees to purchase and
acquire (or to cause such Affiliate to purchase and acquire) from EOGM, all of
EOGM's right and title to, and interest in, the EOGM Property (as hereinafter
defined).
The term "EOG Property" shall have the following meaning:
1.1.1 The oil, gas and mineral leases and other interests in oil and
gas described in Exhibit A attached hereto (the "Leases") and all rights and
privileges appurtenant to the Leases INSOFAR AND ONLY INSOFAR AS the Leases
cover and include the lands, depths and rights described in Exhibit A;
<PAGE>
1.1.2 All rights in any unit in which the Leases are included, to the
extent that these rights arise from and are associated with the Leases,
including without limitation all rights derived from any unitization, pooling,
operating, communitization or other agreement or from any declaration or order
of any governmental authority;
1.1.3 All oil, gas and condensate wells (whether producing, not
producing or abandoned), and water source, water injection and other injection
or disposal wells located on the Leases or lands unitized or pooled with the
Leases;
1.1.4 All equipment, facilities and other personal property on the
lands described or referred to in Exhibit A and used in developing or operating
the Leases or producing, treating, storing, compressing, processing or
transporting hydrocarbons on or from the Leases, including but not limited to
the compressors and other personal property described in Exhibit A;
1.1.5 All easements, rights-of-way, licenses, permits, servitudes and
similar interests applicable to or used in operating the Leases or the personal
property described above, including without limitation those described in
Exhibit A, in each case to the extent they are assignable or transferable and
subject to any consents to assignment or transfer to which they may be subject;
1.1.6 All contracts and contractual rights and interests relating to
the Leases and the other property described or referred to in this Section 1.1,
including without limitation unit agreements, farmout agreements, farmin
agreements, operating agreements, and hydrocarbon sales, purchase, gathering,
transportation, treating, marketing, exchange, processing and fractionating
agreements (the "Related Contracts"; such term shall also include the contracts
and agreements referenced or listed in Section 1.1.8 or Exhibit B-1 attached
hereto), including without limitation those Related Contracts described in
Exhibit A, in each case to the extent they are assignable or transferable and
subject to any consents to assignment or transfer to which they may be subject;
1.1.7 All seismic data and interpretive geological maps owned by and
in the possession of SELLER to the extent, but only to the extent, such maps and
data cover the lands covered by the Leases or lands pooled with lands covered by
the Leases, to the extent the same is assignable or transferable and subject to
any consents to assignment or transfer to which the same may be subject;
1.1.8 The gas gathering and pipeline systems described on Exhibit B-l
attached hereto and made a part hereof together with all property, interests and
rights incident or in any way
-2-
<PAGE>
relating thereto, including but not limited to gas gathering equipment,
pipelines, compressors, separators, connections, rights-of-way, easements,
licenses, permits, and marketing and transportation contracts and agreements
(collectively, the "EOG Pipeline Property"); and
1.1.9 Without limiting and in addition to the foregoing, all of
SELLER's rights, titles and interests in and to the Leases, the lands described
in the Leases and the lands described or referred to in Exhibit A, and in and to
oil and gas leases, working interests, overriding royalty interests, mineral
interests, royalty interests and all other interests and property of every kind
and character, insofar as the same cover or relate to such lands, without
limitation as to depth, and the physical property thereon or used or obtained
for use in connection therewith, even though such rights, titles and interests
be incorrectly or insufficiently described or referred to in, or a description
thereof be omitted from, Exhibit A.
The term "EOGM Property" shall have the following meaning:
The gas gathering and pipeline systems described on Exhibit B-2
attached hereto and made a part hereof together with all property,
interests and rights incident or in any way relating thereto,
including but not limited to gas gathering equipment, pipelines,
compressors, separators, connections, rights-of-way, easements,
licenses, permits, and marketing and transportation contracts and
agreements.
The term "EOG Property" and "EOGM Property" are collectively referred to in
this Agreement as the "Property".
1.2 Exclusions. The Property sold and assigned under this Agreement
----------
does not include:
1.2.1 Except to the extent as specifically designated as part of the
Property in Exhibit A, SELLER's and EOGM's intellectual property used in
developing or operating the Property, including without limitation proprietary
computer software, patents, trade secrets, copyrights, names, marks and logos,
all of which SELLER and EOGM will remove before or as soon as possible after
Closing;
1.2.2 Trade credits, accounts and notes receivable, and adjustments
or refunds (including without limitation transportation tariff refunds, take-or-
pay claims, and audit adjustments) attributable to the Property with respect to
any period before the Effective Date or with respect to any production prior to
the Effective Date;
-3-
<PAGE>
1.2.3 Radio towers, remote terminal units, computer equipment,
vehicles, communication equipment, photocopy machines, or housing/office
facilities located on the Leases or lands described in Exhibit A or used in
connection with the Leases, except to the extent specifically designated as part
of the Property in Exhibit A;
1.2.4 Except for the seismic data and interpretative maps referred to
in Section 1.1.7, Geographix reports, reserve reports and any other reports or
analyses of data;
1.2.5 All claims, causes of action, rights under contracts or
applicable law, and other rights (a) relating to or arising out of the ownership
or operation of the Leases and other property described in Section 1.1 prior to
the Effective Date except to the extent to which BUYER has agreed to indemnify
SELLER with respect to matters related to or arising out of such claims, causes
of action, rights under contracts or applicable law, and other rights, or (b)
relating to any liabilities and obligations retained by SELLER or for which
SELLER is obligated to indemnify BUYER hereunder arising out of the ownership or
operation of the Leases and other property described in Section 1.1 between the
Effective Date and the Closing;
1.2.6 That certain overriding royalty interest described on Schedule
1.2.6; and
1.2.7 The items of equipment described on Schedule 1.2.7, but only if
on or before the Closing the BUYER requests SELLER to retain ownership of such
items of equipment and to remove the same from the lands included in the
Property pursuant to Section 8.2 (the "Schedule 1.2.7 Equipment").
1.3 Ownership of Production from the Property. SELLER owns all
-----------------------------------------
merchantable oil, gas, condensate and distillate ("Hydrocarbons") produced from
the Property before the Effective Date. BUYER owns all Hydrocarbons produced
from the Property on and after the Effective Date. Notwithstanding anything
herein to the contrary, the parties understand and agree that, for federal and
applicable state or local income tax purposes, (i) for periods ending on or
before the time of the Closing, SELLER shall be considered the owner of the
Property, and shall include in its applicable tax returns all items of income,
gain, loss, deduction and credit in respect of the Property attributable to such
periods, and (ii) for periods ending on or after the time of the Closing, BUYER
shall be considered the owner of the Property, and shall include in its
applicable income tax returns all items of income, gain, loss, deduction and
credit in respect of the Property attributable to such
-4-
<PAGE>
periods. Each party further agrees that it shall not take any position
inconsistent with the foregoing on any return filed with any taxing authority
having jurisdiction.
1.4 Designation of Affiliate. BUYER shall have the right, by notice in
------------------------
writing given to SELLER at least three (3) business days prior to Closing, to
designate that the EOGM Property be assigned and transferred to an Affiliate (as
defined in Section 3.2.3) of BUYER at the Closing.
ARTICLE 2. PURCHASE PRICE
--------------
2.1 Purchase Price. BUYER shall pay SELLER $55,500,000 for the Property
--------------
(the "Purchase Price"), subject to any adjustments to the Purchase Price made at
Closing. BUYER has, upon execution of this Agreement, paid SELLER by certified
check ten percent (10%) of the above-stated unadjusted Purchase Price (the
"Earnest Money Deposit"), receipt of which is hereby acknowledged by SELLER. In
the event the Closing occurs, the Earnest Money Deposit shall be applied upon
the Purchase Price as set forth in Section 7.3.2(i). Anything in this Agreement
to the contrary notwithstanding, in the event the Closing does not occur, SELLER
shall be entitled to retain the Earnest Money Deposit only in the event that:
(i) this Agreement is not terminated by BUYER or SELLER as permitted by the
terms of this Agreement, (ii) the conditions contained in this Agreement to
which the duties and obligations of BUYER are subject as set forth in Section
7.2 shall have been fulfilled, (iii) neither SELLER nor EOGM shall have
materially breached this Agreement, and (iv) BUYER materially breaches this
Agreement by failing or refusing to close the sale as provided herein on the
Closing Date. In the event such sale is not closed and SELLER rightfully retains
the Earnest Money Deposit as hereinabove provided in this Section 2.1, the
Earnest Money Deposit shall constitute liquidated damages in lieu of all other
damages (and as SELLER's sole remedy in such event). The parties hereby
acknowledge that the extent of damages to SELLER occasioned by such failure or
refusal by BUYER would be impossible or extremely impractical to ascertain and
that the amount of the Earnest Money Deposit is a fair and reasonable estimate
of such damages under the circumstances. In the event the Earnest Money Deposit
is neither applied upon the Purchase Price pursuant to Section 7.3.2(i) nor
retained by SELLER pursuant to the foregoing provisions of this Section 2.1,
SELLER shall return the Earnest Money Deposit to BUYER on or before the date on
or before which BUYER is entitled to receive it pursuant to the other provisions
of this Agreement or, in all other cases, on or before five days after BUYER's
written demand
-5-
<PAGE>
therefor, together with interest thereon at the Interest Rate (as hereinafter
defined) from the date of its payment to SELLER until the date paid to BUYER. If
the sale contemplated hereby is not consummated at Closing because of a breach
of SELLER's or EOGM's obligations hereunder, this Agreement shall not terminate
and BUYER shall have the right of specific performance of the obligations of
SELLER and EOGM hereunder by giving written notice of such election to SELLER
within thirty (30) days after the scheduled Closing. If BUYER fails to notify
SELLER of its election to exercise specific performance within such thirty (30)
day period, this Agreement shall terminate and neither party shall have any
further obligation to the other hereunder, other than liabilities hereunder
arising prior to such termination and those obligations that by their terms
survive termination. In the event BUYER elects to seek specific performance as
provided for above and it is subsequently determined by the court in which such
proceeding is filed that specific performance cannot be granted to BUYER because
such remedy is unavailable to BUYER, then, in such event, BUYER shall be
entitled to all other remedies available in law or in equity.
2.2 Allocated Values. The Purchase Price has been allocated by BUYER and
----------------
SELLER among certain wells and pipeline and gathering systems that are included
as part of the Property. The wells and the pipeline and gathering systems
described or referred to in Exhibit C are herein collectively referred to as the
"Warranted Property." The portion of the Purchase Price allocated to each
Warranted Property (the "Allocated Value") is set forth in Exhibit C.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 Reciprocal Representations and Warranties. SELLER and BUYER each
-----------------------------------------
represent and warrant to the other that:
3.1.1 Corporate Authority. It is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the State of Delaware,
is duly qualified to carry on its business in the State of Texas and has all the
requisite power and authority to enter into and perform this Agreement.
References to "it" or "its" in this Section 3.1, in respect of SELLER, shall be
deemed to include EOGM.
3.1.2 Requisite Approvals. It has taken all necessary actions
-------------------
pursuant to its Certificate of Incorporation, By-laws and other governing
documents to fully authorize it to consummate the transaction contemplated by
this Agreement.
-6-
<PAGE>
3.1.3 Validity of Obligation. This Agreement and all documents it is
----------------------
to execute and deliver on or before the Closing Date have been or will be duly
executed by its appropriate officials and constitute or will constitute valid
and legally binding obligations, enforceable against it in accordance with the
terms of this Agreement and such documents, except as such enforceability may be
limited by applicable bankruptcy, insolvency, and other statutes and laws
affecting the rights of creditors, and except in respect of equitable remedies.
3.1.4 Impediments to Consummation of Agreement. Its executing,
----------------------------------------
delivering and performing this Agreement does not conflict with or violate any
agreement or instrument to which it (or, with respect to SELLER's representation
and warranty, SELLER and EOGM) is a party, or any law, rule, regulation,
ordinance, judgment, decree or order to which it is subject.
3.1.5 Bankruptcy. There are no bankruptcy, reorganization or
----------
receivership proceedings pending, being contemplated by, or to its actual
knowledge, threatened against it (or, with respect to SELLER's representation
and warranty, SELLER and EOGM).
3.1.6 Broker's Fees. It has not incurred any obligation for brokers,
-------------
finders or similar fees for which the other party would be liable.
3.2 BUYER's Representations and Warranties. BUYER represents and warrants
--------------------------------------
to SELLER that:
3.2.1 Independent Evaluation. BUYER is an experienced and
----------------------
knowledgeable investor in the oil and gas business. BUYER has been advised by
and has relied solely on its own expertise and legal, tax, reservoir engineering
and other professional counsel concerning this transaction, the Property and the
value thereof, as determined by BUYER's examination of SELLER's records and
inspection of the Property, and the representations, warranties and covenants
made by the SELLER in this Agreement.
3.2.2 Eligibility. BUYER is eligible under all applicable laws and
-----------
regulations to own the Property, including without limitation the Leases.
3.2.3 Securities Laws. BUYER is acquiring the Property for its own
---------------
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof. Notwithstanding the foregoing, it is
understood and agreed that at or after the Closing BUYER may transfer the
Property or any portion thereof to one or more corporations, partnerships, or
other entities affiliated with BUYER through common ownership ("Affiliates")
provided that (a) by such
-7-
<PAGE>
transfer the BUYER shall not be thereby effecting a "distribution" of the
Property within the meaning of the Securities Act of 1933, as amended, or any
applicable state securities acts, and (b) as a condition to the transfer, the
Affiliate shall represent and warrant to or for the benefit of SELLER that it is
acquiring the Property for its own account for the purpose of investment and not
with a view to or for sale in connection with any distribution thereof.
3.3 SELLER's Representations and Warranties. SELLER represents and
---------------------------------------
warrants to BUYER that:
3.3.1 Compliance with Laws. To the best of SELLER's knowledge, (a)
--------------------
SELLER (or with respect to any portion of the Property operated by a third
party, such third party operator) and EOGM have operated the Property prior to
the Effective Date in compliance with all applicable laws, rules, regulations
and orders of all governmental authorities with jurisdiction over the Property,
and (b) SELLER and EOGM are not in default under any permit, license or
agreement relating to the operation and maintenance of the Property.
3.3.2 Lawsuits and Claims. There is no judgment, order, decree or
-------------------
award, or suit, action or administrative, arbitration or other proceeding or
governmental investigation of any kind in existence or pending or, to SELLER's
knowledge, threatened in writing against SELLER or EOGM which has an adverse
effect on the Property or the value thereof, and SELLER and EOGM have not
received or been advised in writing of any unsatisfied request for information,
notice, administrative inquiry or claim (including but not limited to those from
the U.S. Environmental Protection Agency or a state or local environmental
agency or claims pertaining to ownership or operation of the Property after the
Effective Date arising from joint interest audits) with respect to the Property.
3.3.3 Permits. Except as set forth in Schedule 3.3.3, SELLER and
-------
EOGM have all governmental permits necessary for the operation of the Property
it is transferring under this Agreement and, to the best of SELLER's knowledge,
is not in default under any permit, license or agreement relating to the
operation and maintenance of the Property.
3.3.4 Contracts. To the best of SELLER's knowledge, there are no
---------
material Related Contracts other than those described in Exhibit A. SELLER and
EOGM have not received any written notice of termination of any material Related
Contract by any party thereto.
-8-
<PAGE>
3.3.5 Imbalances. Except as set forth in Schedule 3.3.5, to the best
----------
of SELLER's knowledge, there are no production or gathering imbalances from the
Property (provided, however, that if there are imbalances, BUYER's remedy is
limited to that set forth in Section 12.1).
3.3.6 Section 29 Matters.
------------------
(1) Production from the intervals listed on Exhibit G attached hereto
and made a part hereof within the wells listed on Exhibit G (as to such
intervals, collectively the "Section 29 Wells" and individually a "Section
29 Well"): (i) has been determined in accordance with Section 503 of the
Natural Gas Policy Act of 1978, as amended, to be production from "a tight
formation" within the meaning of and to the extent required under Section
29(c)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), and
(ii) to the extent indicated on Exhibit G, qualifies (upon sale to an
unrelated person) for the tax credits available for "tight formation" gas
pursuant to Section 29 of the Code ("Section 29 Tax Credits").
(2) No production from the Section 29 Wells qualifies or has qualified
for the enhanced oil recovery credit or any other credit under Section 43
of the Code, and no such credit has been claimed or taken on such
production.
(3) No portion of any drilling, equipping, seismic or other
development costs of the Property was financed by any state, local or
federal agency, directly or indirectly, including without limitation by way
of grant, loan, expenditure or loan guaranty.
(4) No credits referred to in Section 29(b)(4) of the Code have been
claimed with respect to the Property.
(5) Each of the Section 29 Wells is presently producing from all or
part of one or more of the intervals set forth on Exhibit G for such well.
3.3.7 Severance Tax Exemption. Production from the intervals listed
-----------------------
on Exhibit H attached hereto and made a part hereof within the wells listed on
Exhibit H qualifies for the exemption from Texas severance tax for high-cost gas
wells pursuant to Texas Tax Code Section 201.057 (Vernon's Supp. 1996). All
actions that are required to obtain and maintain such qualification have been
taken.
3.3.8 Drilling Obligations and Capital Expenditures. SELLER and EOGM
---------------------------------------------
have not executed or agreed to any authority for expenditure or other document
which purports to (i) require the drilling or recompletion of wells or other
material development operations relating to the
-9-
<PAGE>
Property subsequent to the Effective Date or (ii) obligate SELLER or EOGM to
make other material capital expenditures relating to the Property subsequent to
the Effective Date.
3.3.9 Approvals. SELLER and EOGM have made a thorough search of
---------
their files and, to the best of SELLER's and EOGM's knowledge, the Property is
not subject to any preferential right to purchase by any third person and there
are no restrictions on assignability or consents, authorizations or approvals of
third persons required in connection with the sale or transfer of the Property
to BUYER, except as listed on Schedule 3.3.9 attached hereto and made a part
hereof.
3.3.10 Suspense of Revenue Distribution. Except as listed on
--------------------------------
Schedule 3.3.10 attached hereto and made a part hereof, neither SELLER nor any
third person acting on behalf of SELLER is holding in suspense any funds owing
to third persons on account of production from the Leases.
3.3.11 Tax Partnerships. The Property is not subject to any tax
----------------
partnerships.
3.3.12 Business Segment. The Property constitutes a separate
----------------
identifiable segment of SELLER's business, the income and expenses attributable
to which can be separately ascertained from SELLER's books of account or
records.
3.3.13 Equipment. Except as set forth on Schedule 3.3.13, no
---------
material items of equipment, hardware or buildings used in connection with the
day-to-day operation of the Property have been removed therefrom after the
Effective Date.
3.3.14 Throughput Commitments. As of the Effective Date and Closing,
----------------------
all third party volume throughput commitments of SELLER or EOGM under that
certain Gas Processing Rights Assignment and Agreement between Valero
Hydrocarbons, L. P. and Enron Oil & Gas Marketing, Inc., dated November 23, 1992
pertaining to the Pipeline Property have been satisfied.
3.3.15 EOGM. EOGM is a wholly owned subsidiary of SELLER.
----
3.4 Notice. SELLER and BUYER shall each give the other prompt written
------
notice upon becoming aware of any matter materially affecting any of its
representations or warranties or those of the other party under this Article 3
or rendering any such warranty or representation untrue.
3.5 Representations and Warranties Exclusive. All representations and
----------------------------------------
warranties contained in this Agreement are exclusive, and are given in lieu of
all other representations and warranties, express or implied.
-10-
<PAGE>
3.6 Survival of Representations and Warranties. With the exception of the
------------------------------------------
representations and warranties contained in Sections 3.3.6 and 3.3.7 (which
shall expire at Closing but shall remain as conditions to Closing), all of the
representations, warranties, and agreements of or by the parties to this
Agreement shall survive the execution and delivery of the Assignment and Bill of
Sale and the transfer of the Property to BUYER; provided, however, without
limiting the provisions of Section 5.3, that BUYER may not bring any claim
against SELLER for any breach of its representations and warranties under
Section 3.3.1 in respect of Environmental Laws (as that term is defined in
Section 5.3.1) unless BUYER gives SELLER written notice of such breach within
three hundred sixty five (365) days following the Closing Date, and provided
further that neither party may bring any claim against the other for any other
breach of its representations and warranties under this Article 3 which survive
the Closing unless it gives such party written notice of the breach within two
years following the Closing Date, and provided further that SELLER's liability
for breach of warranties and representations made by SELLER pursuant to this
Agreement shall in any event not exceed the Purchase Price as adjusted
hereunder. Nothing herein shall limit the survival of the limited warranty of
title contained in each Assignment and Bill of Sale to be delivered pursuant to
Section 7.3.1.
3.7 EOGM Knowledge. Certain of the representations and warranties made by
--------------
SELLER in Section 3.3 are limited to SELLER's knowledge or the best of SELLER's
knowledge. To the extent such warranty limitations relate to the EOGM Property,
such limitations shall be deemed to refer to the knowledge of SELLER and EOGM.
ARTICLE 4. Warranties.
----------
4.1 Title; Encumbrances. IF THE CLOSING OCCURS, (i) SELLER SHALL WARRANT
-------------------
AND DEFEND DEFENSIBLE TITLE TO THE WARRANTED PROPERTY THAT IS EOG PROPERTY
AGAINST ALL PERSONS CLAIMING TITLE TO SUCH WARRANTED PROPERTY BY, THROUGH OR
UNDER SELLER, BUT NOT OTHERWISE, AS PROVIDED IN THE ASSIGNMENT AND BILL OF SALE
SET FORTH IN EXHIBIT E-1 TO BE DELIVERED PURSUANT TO SECTION 7.3.1, AND (ii)
EOGM SHALL WARRANT AND DEFEND DEFENSIBLE TITLE TO THE WARRANTED PROPERTY THAT IS
EOGM PROPERTY AGAINST ALL PERSONS CLAIMING TITLE TO SUCH WARRANTED PROPERTY BY,
THROUGH OR UNDER EOGM, BUT NOT OTHERWISE, AS PROVIDED IN
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THE ASSIGNMENT AND BILL OF SALE SET FORTH IN EXHIBIT E-2 TO BE DELIVERED
PURSUANT TO SECTION 7.3.1
4.2 Other Property Warranties. EXCEPT AS PROVIDED IN SECTION 4.1, SELLER
-------------------------
AND EOGM SELL AND TRANSFER THE PROPERTY TO BUYER WITHOUT ANY EXPRESS, STATUTORY
OR IMPLIED WARRANTY OR REPRESENTATION OF ANY KIND, INCLUDING WARRANTIES RELATING
TO (i) THE CONDITION OR MERCHANTABILITY OF THE PROPERTY, (ii) THE FITNESS OF THE
PROPERTY FOR A PARTICULAR PURPOSE, OR (iii) TITLE TO THE PROPERTY. SUBJECT TO
THE PROVISIONS OF SECTION 5.3, BUYER HAS INSPECTED, OR BEFORE CLOSING WILL HAVE
INSPECTED OR BEEN GIVEN THE OPPORTUNITY TO INSPECT, THE PROPERTY AND IS
SATISFIED AS TO THE PHYSICAL AND ENVIRONMENTAL CONDITION (BOTH SURFACE AND
SUBSURFACE) OF THE PROPERTY AND ACCEPTS THE PROPERTY "AS IS", "WHERE IS", AND
"WITH ALL FAULTS."
4.3 Information About the Property. EXCEPT FOR THE REPRESENTATIONS AND
------------------------------
WARRANTIES PROVIDED IN ARTICLE 3, SELLER AND EOGM MAKE NO WARRANTY OR
REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY,
COMPLETENESS, OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO
BUYER IN CONNECTION WITH THE PROPERTY; (ii) THE QUALITY AND QUANTITY OF
HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTY; (iii) THE ABILITY OF
THE PROPERTY TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT LIMITATION PRODUCTION
RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES; (iv) GAS BALANCING
INFORMATION, ALLOWABLES OR OTHER REGULATORY MATTERS, (v) THE PRESENT OR FUTURE
VALUE OF THE ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM
THE PROPERTY, OR (vi) THE ENVIRONMENTAL CONDITION OF THE PROPERTY. ANY AND ALL
DATA, INFORMATION OR OTHER RECORDS FURNISHED BY SELLER ARE PROVIDED TO BUYER AS
A CONVENIENCE AND BUYER'S RELIANCE ON OR USE OF THE SAME IS AT BUYER'S SOLE
RISK.
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4.4 Modifications. The provisions of Section 4.2 and 4.3 shall not
-------------
nullify or modify any express covenants and agreements in any other provisions
of this Agreement, which covenants and agreements shall continue in full force
and effect as written.
ARTICLE 5. PHYSICAL INSPECTION; ENVIRONMENTAL ASSESSMENT; CASUALTY LOSS
------------------------------------------------------- ----
5.1 Access to Records. Except to the extent SELLER or EOGM is restricted
-----------------
from disclosing such information by existing agreements with third parties (as
of the date of execution of this Agreement, neither SELLER nor EOGM is aware of
any such agreements that would restrict such disclosure), SELLER shall give
BUYER and shall cause EOGM to give BUYER and BUYER's authorized representatives,
at mutually agreeable times before Closing, access to all of SELLER's and EOGM's
contract, land, lease, accounting, well, production and engineering records and
pipeline and gathering system files (excluding any valuation or interpretive
data or documentation and other assets excluded under Section 1.2) and all
environmental permits and filings and supporting documentation for such filings
in connection with compliance with environmental requirements, but excluding
that certain internal environmental report prepared by Marilyn Fish of SELLER
dated February 26, 1996 and that SELLER deems to be privileged, to the extent
such data, records, files and documents are in SELLER's possession and relate to
the Property (all of the foregoing, subject to the exclusions stated above,
being herein collectively called "Property Records"). BUYER may photocopy the
Property Records at its sole expense. BUYER shall keep (and cause its
representatives to keep) confidential all information made available to BUYER in
accordance with the provisions of the confidentiality agreement previously
executed by BUYER, unless and until Closing occurs. The confidentiality
agreement previously executed by BUYER will continue in force unless and until
Closing occurs, at which time it will terminate.
5.2 Inspection. Before Closing, SELLER will permit and will cause EOGM to
----------
permit BUYER and its representatives, at their sole risk and expense, to conduct
reasonable inspections of the portion of the Property operated by SELLER and/or
EOGM at times approved by SELLER. SELLER shall also cooperate with BUYER in
attempting to secure from any third party operators similar access to any
portion of the Property operated by SELLER and/or EOGM. BUYER SHALL REPAIR ANY
DAMAGE TO THE PROPERTY RESULTING FROM ITS INSPECTION AND
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SHALL INDEMNIFY, DEFEND AND HOLD SELLER, EOGM AND EACH SUCH THIRD PARTY OPERATOR
HARMLESS FROM AND AGAINST ANY AND ALL LOSSES, DAMAGES, OBLIGATIONS, CLAIMS,
LIABILITIES, EXPENSES (INCLUDING COURT COSTS AND ATTORNEY'S FEES), OR CAUSES OF
ACTION ARISING FROM BUYER INSPECTING AND OBSERVING THE PROPERTY, INCLUDING,
WITHOUT LIMITATION, CLAIMS FOR PERSONAL INJURIES OR DEATH OF EMPLOYEES OF THE
BUYER, ITS CONTRACTORS, AGENTS, CONSULTANTS AND REPRESENTATIVES, AND PROPERTY
DAMAGES, REGARDLESS OF WHETHER SUCH CLAIMS ARE CAUSED BY THE SOLE OR CONCURRENT
NEGLIGENCE OF SELLER OR EOGM OR ANY SUCH THIRD PARTY OPERATOR OR THE CONDITION
OF THE PROPERTY.
5.3 Environmental Assessment and Indemnification.
--------------------------------------------
5.3.1 "Adverse Environmental Conditions" means contaminations or
conditions that would require in the aggregate $50,000 or more of out of pocket
costs and expenses to remedy and that are not otherwise permanently authorized
by permit or law, resulting from the existence or any discharge, release,
disposal, production, storage, treatment, or any other activities on, in or from
the Property, or the migration or transportation from other lands to the
Property, prior to the Closing Date, of any wastes, pollutants, contaminants,
hazardous materials or other materials or substances that are subject to
regulation under any laws, rules or regulations relating to the protection of
health or the environment ("Environmental Laws"), including, but not limited to,
the Clean Air Act, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Federal Water Pollution Control Act, the Safe
Drinking Water Act, the Toxic Substance Control Act, the Hazardous and Solid
Waste Amendments Act of 1984, the Superfund Amendments and Reauthorization Act
of 1986, the Hazardous Materials Transportation Act, the Clean Water Act, the
National Environmental Policy Act, the Endangered Species Act, the Fish and
Wildlife Coordination Act, the National Historic Preservation Act and the Oil
Pollution Act of 1990, as well as any state and local regulation or law
governing the same, similar or related matters. The term "Adverse Environmental
Conditions" shall include but not be limited to (i) any such contaminations or
conditions that are temporarily authorized by permit, fee agreement or other
arrangement and (ii) items of Property that have been permanently abandoned for
use in the operation of the Property and
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that are contaminated by naturally occurring radioactive material ("NORM") in
excess of limits established by the Environmental Laws.
5.3.2 BUYER shall advise SELLER promptly of any Adverse Environmental
Conditions discovered after the date hereof as a result of its investigation of
the Property and the estimated costs for remediating such conditions. BUYER
shall provide such information regarding such Adverse Environmental Conditions
as SELLER may reasonably request. If SELLER receives timely notice from BUYER no
later than two business days prior to Closing of any Adverse Environmental
Conditions, (a) SELLER shall have the right (i) to agree to remedy the Adverse
Environmental Conditions to BUYER's reasonable satisfaction, all at SELLER's
sole cost and expense, in which case there shall be no adjustment to the
Purchase Price in respect of such Adverse Environmental Conditions, or (ii) if
the parties have agreed upon an adjustment to the Purchase Price in respect of
such Adverse Environmental Conditions, to reduce the Purchase Price by the
amount of such adjustment, in which event SELLER shall have no obligation or
liability in respect of such Adverse Environmental Conditions, and (b) if the
reasonable cost of remedying all of the Adverse Environmental Conditions exceeds
2% of the Purchase Price, either party shall have the right to terminate this
Agreement. Each party shall notify the other of any election under the preceding
sentence no later than two business days prior to Closing. In the event of an
election by either party to terminate this Agreement pursuant to the foregoing
provision, SELLER shall return the Earnest Money Deposit paid by BUYER pursuant
to Section 2.1 within three (3) business days of receipt of such cancellation
notice by the party to whom it was addressed, together with interest as provided
in Section 2.1. If SELLER receives timely notice from BUYER of any Adverse
Environmental Condition after Closing but on or before the 365th day following
the Closing Date, SELLER shall remedy the Adverse Environmental Condition to
BUYER's reasonable satisfaction, all at SELLER's sole cost and expense. SELLER
shall have no liability or obligation to BUYER under this Section 5.3.2 for any
Adverse Environmental Condition for which SELLER did not receive timely written
notice of such condition on or before the 365th day following the Closing Date.
If SELLER elects or is obligated to remedy an Adverse Environmental Condition
under this Section 5.3.2, SELLER agrees that it will exercise all reasonable
efforts and diligence to complete any required remediation within six (6)
months, but any failure to complete such effort by such time shall not relieve
SELLER of its duty to fully and completely satisfy its obligation hereunder.
BUYER shall grant SELLER and
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its representatives such access to the Property as may be reasonably necessary
provided such access does not interfere with BUYER's operations. SELLER SHALL
INDEMNIFY, DEFEND AND HOLD BUYER HARMLESS FROM AND AGAINST ANY AND ALL LOSSES,
DAMAGES, OBLIGATIONS, CLAIMS, LIABILITIES, EXPENSES (INCLUDING COURT COSTS AND
ATTORNEY'S FEES) OR CAUSES OF ACTION ARISING FROM SELLER'S REMEDIATION
ACTIVITIES UNDER THIS SECTION 5.3.2, INCLUDING, WITHOUT LIMITATION, CLAIMS FOR
PERSONAL INJURIES OR DEATH OF EMPLOYEES OF SELLER, ITS CONTRACTORS, AGENTS,
CONSULTANTS AND REPRESENTATIVES AND PROPERTY DAMAGES, REGARDLESS OF WHETHER SUCH
CLAIMS ARE CAUSED BY THE SOLE, CONCURRENT OR GROSS NEGLIGENCE OF BUYER OR THE
CONDITION OF THE PROPERTY. Notwithstanding the foregoing, if SELLER elects to
remedy an Adverse Environmental Condition and the parties agree in writing on
the cost of such remediation, BUYER shall have the right to remedy the Adverse
Environmental Condition by giving written notice to SELLER within 10 days after
the parties agree on the cost of the remediation, in which event BUYER shall
have assumed SELLER's obligation to remedy the Adverse Environmental Condition,
and SELLER shall reimburse BUYER for all costs and expenses incurred by BUYER in
effecting such remediation, but not to exceed the agreed upon cost of such
remediation.
5.3.3 Except for any costs or expenses incurred by SELLER in
discharging any remediation obligations under Section 5.3.2 or for which BUYER
is entitled to reimbursement under the last sentence of Section 5.3.2, and
except in respect of matters constituting a breach by SELLER of its
representations and warranties under Section 3.3.1 for which BUYER has given
SELLER written notice within the applicable period provided in Section 3.6, if
the Closing occurs BUYER shall indemnify, defend and hold SELLER and EOGM
harmless from and against any and all claims, demands, causes of action,
liabilities and obligations, and all costs and expenses (including, without
limitation, reasonable attorneys' fees) associated therewith, arising out of or
relating to any discharge, release, disposal, production, storage, treatment or
any activities on, in or from the Property, or the migration or transportation
from any other lands to the Property, whether before or after the Effective
Date, of materials or substances that are presently, or become in the future,
subject to regulation under Environmental Laws, whether such Environmental Laws
are presently existing or are hereafter enacted, INCLUDING, WITHOUT LIMITATION,
ANY CLAIMS,
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DEMANDS, CAUSES OF ACTION, LIABILITIES, OR OBLIGATIONS ARISING IN WHOLE OR IN
PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE OF SELLER OR
EOGM.
5.3.4 SELLER shall indemnify, defend and hold harmless BUYER from and
against any and all claims, demands, causes of action, liabilities and
obligations, and all costs and expenses (including, without limitation,
reasonable attorneys' fees) associated therewith, arising out of or relating to
any migration or transportation from the Property to any other lands or body of
water, prior to the Closing Date, of materials or substances that are presently,
or become in the future, subject to regulation under Environmental Laws, whether
such Environmental Laws are presently existing or are hereafter enacted.
5.4 Casualty Losses. If there is any loss resulting from destruction of
---------------
Property by fire or other casualty (a "Casualty Loss") before the Closing Date,
SELLER shall notify BUYER promptly after SELLER learns of such event. SELLER
shall have the right, but not the obligation to cure the Casualty Loss by
repairing such damage or, in the case of personal property or fixtures,
replacing them with equivalent items, no later than the date of Closing, all to
BUYER's reasonable satisfaction. If any uncured Casualty Loss exists at
Closing, the Purchase Price shall be reduced by the aggregate reduction in the
value of the Property as a result of such Casualty Loss, as determined by the
mutual agreement of the parties. If the parties are unable to agree on the
reduction in the value of the Property as a result of such Casualty Loss, such
reduction in value shall be determined by arbitration pursuant to Section 6.2.5,
the Property will be conveyed to BUYER at Closing without a reduction in the
Purchase Price because of the Casualty Loss, and within ten business days after
the parties receive the determination of the arbitrators SELLER shall pay to
BUYER, by wire transfer of immediately available funds, the amount of the
reduction in value of the Property as a result of the Casualty Loss, together
with interest at 9% per annum (the "Interest Rate") from (and including) the
Closing Date to (but excluding) the date such payment is made. Notwithstanding
the foregoing, if an uncured Casualty Loss exists at Closing, and either SELLER
OR BUYER reasonably believes that the reduction in the value of the Property
because of the Casualty Loss exceeds 10% of the Purchase Price, such party may
terminate this Agreement by giving written notice to the other party at Closing.
In the event of an election by either SELLER OR BUYER to terminate this
Agreement pursuant to the foregoing provision, SELLER shall return the Earnest
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Money Deposit paid by BUYER pursuant to Section 2.1 within three (3) business
days of receipt of such cancellation notice by the party to whom it was
addressed, together with interest as provided in Section 2.1.
ARTICLE 6. PREFERENTIAL RIGHTS/CONSENTS; TITLE DEFECTS
-------------------------------------------
6.1 Preferential Rights and Consents to Assign.
------------------------------------------
6.1.1 If any of the Property is subject to preferential purchase
rights, rights of first refusal, or similar rights (collectively "Preferential
Rights"), or consents to assign, lessor's approvals or similar rights
(collectively, "Consents"), SELLER shall on the date of this Agreement (i)
notify the holders of the Preferential Rights and Consents that it intends to
sell the Property to BUYER, (ii) in the case of a Preferential Right, notify the
holder of such right that the price for the portion of the Property covered by
the Preferential Right is the Allocated Value of such interest, subject to
adjustment in the same manner that the Purchase Price is subject to adjustment
hereunder, (iii) provide them with any other information about the sale of the
Property to which they are entitled, and (iv) in the case of Consents, ask the
holders of the Consents to consent to the assignment of the affected Property to
BUYER. In the event it is appropriate for EOGM to give such notices or make such
requests, SELLER shall cause EOGM to do the same. BUYER shall have the right of
prior approval of such notices and requests. SELLER shall promptly notify BUYER
whether Preferential Rights are exercised, waived or deemed waived because of
the expiration of the period within which the Preferential Right may be
exercised, or if any Consents are given or denied. SELLER will not be liable to
BUYER if any Preferential Rights are exercised, or any Consents are denied, but
the Purchase Price shall be subject to adjustment to the extent provided below.
6.1.2 If, before Closing, (i) any Preferential Right is validly
exercised or (ii) any Consent (other than consent on a Related Contract that
would not materially and adversely affect the operation of the affected
Property) is denied, SELLER and BUYER shall exclude the affected Property at
Closing and deduct the Allocated Value of the affected Property from the
Purchase Price.
6.1.3 If SELLER is unable before Closing to obtain a Consent (other
than Consents on the Related Contracts that would not materially and adversely
affect the operation of the affected Property and other than a Consent referred
to in Section 6.1.2) or is unable to obtain the waiver of a Preferential Right
for which the period within which such Preferential Right may be exercised has
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not expired (other than a Preferential Right referred to in Section 6.1.2),
then, unless mutually agreed, BUYER shall exclude the affected Property at
Closing and deduct the Allocated Value of the affected Property from the
Purchase Price. Upon receipt of such Consent, the waiver of such Preferential
Right following Closing, or the expiration of the period within which the
Preferential Right may be exercised (if such right is not exercised during such
period), such Property will be purchased by and conveyed to BUYER for an amount
equal to the Allocated Value of such Property, appropriately adjusted in a
manner consistent with this Agreement, at a subsequent closing to be held within
ten days following receipt by SELLER and forwarding to BUYER of such Consent or
waiver, or the expiration of the period within which the Preferential Right may
be exercised, as the case may be; provided, however, that in the case of a
Consent, if such Consent is not obtained and provided to SELLER and BUYER within
120 days following the Closing, then the Property so affected shall be
eliminated from this Agreement and shall be excluded from the assets covered
hereby (unless BUYER agrees to proceed with the Closing on such Property and
BUYER further agrees to indemnify SELLER and EOGM against claims arising from
such sale and assignment on terms acceptable to SELLER, in which event BUYER
shall be deemed to have waived any objections with respect to failing to obtain
such Consent).
6.1.4 Notwithstanding the foregoing, BUYER retains the right to waive
the receipt of any Consent or waiver of any Preferential Right prior to the
Closing provided that BUYER further agrees to indemnify SELLER and EOGM against
claims arising from such sale and assignment on terms acceptable to SELLER, and
thereupon BUYER will be deemed to have waived any objections with respect to
failing to obtain such Consent or Preferential Right.
6.2 Title Defects.
-------------
6.2.1 For the purposes of this Agreement, the following terms shall
have the meanings given them below:
"Defensible Title" shall mean:
(a) with respect to a well listed on Exhibit C, such record title, as
will entitle BUYER to receive a percentage of the Hydrocarbons produced and
saved from such well (subject to any depth restriction noted in Exhibit A
other than depth restrictions that would have the effect of excluding
intervals that are open for production as of the Effective Date) after
deducting all applicable Production Burdens,
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that is not less than the "Net Revenue Interest" shown for such well on
Exhibit C throughout the productive life of such well, and will obligate
BUYER to bear and pay a portion of the costs and expenses of operating the
well that is no greater than the "Working Interest" shown for such well on
Exhibit C throughout the productive life of such well and is free and clear
of Material Title Deficiencies (as hereinafter defined); and
(b) with respect to the EOGM Property and the EOG Pipeline Property
(including but not limited to the easements and rights-of-way related
thereto, and contracts and operational rights in respect thereof), such
record title, as will entitle BUYER to own and operate the same free of
adverse claims that would materially affect the ability of BUYER to own and
operate such systems in the same manner as presently owned and operated by
SELLER or EOGM, free and clear of Material Title Deficiencies.
"Interest Increase" means, with respect to a Warranted Property, that
the actual Net Revenue Interest for the Warranted Property is greater than
the Net Revenue Interest for the Warranted Property shown on Exhibit C.
"Interest Increase Amount" means the amount by which an Interest
Increase increases the fair market value of a Warranted Property above its
Allocated Value.
"Material Title Deficiency" means a material deficiency in one or more
of the following respects: (i) SELLER's or EOGM's title is subject to an
outstanding mortgage, deed of trust, lien, encumbrance, contractual burden
(other than Production Burdens that do not have the effect of reducing
SELLER's or EOGM's net revenue interest below that reflected on Exhibit C),
adverse claim or defect which substantially and adversely affects the value
or operation of the Property in question; (ii) SELLER's or EOGM's rights
and interests are subject to being reduced by virtue of the exercise by a
third party of a reversionary, back-in or other similar right not reflected
in Exhibit C; or (iii) SELLER or EOGM is in default under some material
provision of a lease, farmout or other agreement or a right of way,
easement, permit or license affecting the Property in question.
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"Net Revenue Interest" means in respect of any lease, well or unit,
the interest (expressed as a percentage) in and to oil and gas produced
from or allocated to such lease, well or unit after deducting all
applicable Production Burdens.
"Production Burdens" means all royalty interests, overriding royalty
interests, production payments, net profits interests or other similar
interests that constitute a burden on, are measured by or are payable out
of the production of Hydrocarbons or the proceeds realized from the sale or
other disposition thereof.
"Title Defect" is any matter that causes the title to a Warranted
Property to fail to qualify as Defensible Title. Neither the environmental
condition of a Warranted Property nor any failure to obtain Consents to the
transfer of Related Contracts will be considered a Title Defect.
"Title Defect Amount" is the amount by which a Title Defect reduces
the fair market value of a Warranted Property below its Allocated Value.
"Working Interest" means, in respect of any lease, well or unit, the
interest (expressed as a percentage) in such lease, well or unit before
giving effect to any applicable Production Burdens, and the percentage of
all costs and expenses required to be borne that are associated with the
exploration, development and operation of such lease, well or unit.
6.2.2 BUYER may review title to the Warranted Property before Closing
and notify SELLER in writing of any Title Defect it discovers as soon as
reasonably practicable after its discovery, but in no event less than two (2)
business days before the Closing Date. BUYER will be deemed to have conclusively
waived any Title Defect for which BUYER has failed to notify SELLER in writing
at least two (2) business days prior to the Closing Date; provided, however,
that nothing herein shall limit the survival or effectiveness of the limited
warranty of title contained in the Assignments and Bills of Sale to be delivered
pursuant to Section 7.3.1.
6.2.3 If SELLER discovers an Interest Increase for any Warranted
Property, SELLER may request that the Purchase Price be increased by the
Interest Increase Amount attributable to such Interest Increase by giving
written notice to BUYER not less than two (2) business days before the Closing
Date. SELLER will be deemed to have conclusively waived any
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adjustment to the Purchase Price for an Interest Increase for which SELLER has
failed to notify BUYER in writing at least two business days prior to the
Closing Date.
6.2.4 If BUYER properly notifies SELLER of any alleged Title Defect,
or SELLER properly notifies BUYER of any alleged Interest Increase, BUYER and
SELLER shall meet and use their best efforts to agree on the validity of the
alleged Title Defect or Interest Increase and the corresponding Title Defect
Amount or Interest Increase Amount based on the Allocated Value of such
Property, and the following provisions shall apply:
(i) If BUYER and SELLER agree that there is a Title Defect and agree
to a Title Defect Amount, the affected Property will be conveyed to BUYER
or its designee pursuant to Section 1.4 and the Title Defect Amount will be
deducted from the Purchase Price at Closing.
(ii) If BUYER and SELLER are unable to agree on whether a Title Defect
exists or if BUYER and SELLER agree that a Title Defect exists but are
unable to agree on the Title Defect Amount, SELLER must elect one of the
following options: (x) to submit the determination of whether the Title
Defect exists or the Title Defect Amount (as the case may be) to
arbitration in accordance with the provisions of Section 6.2.5, or (y) to
agree in writing (the form and substance of which shall be reasonably
satisfactory to BUYER) to indemnify, defend and hold BUYER harmless from
and against any Claims (as hereinafter defined) resulting from the alleged
or agreed Title Defect (provided, however, that SELLER's indemnification
liability in respect of such Title Defect shall in no event exceed the
Allocated Value of the affected Property). If SELLER elects to arbitrate
the issue of the existence of a Title Defect or the Title Defect Amount,
the provisions of Section 6.2.5 shall apply, the affected Property will be
conveyed at Closing to BUYER or its designee pursuant to Section 1.4
without a reduction in the Purchase Price because of the Title Defect, and
if the arbitrators determine that a Title Defect or the Title Defect Amount
does exist, within ten (10) business days after the parties receive the
determination of the arbitrators SELLER shall pay to BUYER, by wire
transfer of immediately available funds, the Title Defect Amount determined
by the arbitrators, together with interest at the Interest Rate from (and
including) the Closing Date to (but excluding) the date
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such payment is made. If SELLER elects to indemnify BUYER from loss or
liability resulting from the alleged or agreed Title Defect, the affected
Property will be conveyed at Closing to BUYER or its designee pursuant to
Section 1.4 and there will be no adjustment of the Purchase Price in
respect of the alleged or agreed Title Defect. Notwithstanding the
foregoing, however, if the proceeds which SELLER is receiving from the sale
of production from or attributable to a well referred to in Exhibit C and
affected by the alleged or agreed Title Defect are less than the net
revenue interest shown for such well in Exhibit C (other than as a result
of an unintentional correctable accounting error), then SELLER shall not be
entitled to exercise the indemnification option set forth in clause (y) of
this subsection (ii).
(iii) If BUYER and SELLER are unable to agree on whether an Interest
Increase exists or on the Interest Increase Amount in respect of an
Interest Increase, SELLER must submit the determination of whether the
Interest Increase exist or the amount of the Interest Increase Amount (as
applicable) to arbitration in accordance with the provisions of Section
6.2.5. In such event, the provisions of Section 6.2.5 shall apply, the
affected Property will be conveyed at Closing to BUYER or its designee
pursuant to Section 1.4 without an increase in the Purchase Price because
of the Interest Increase, and if the arbitrators determine that the
Interest Increase does exist or the amount of the Interest Increase Amount
(as applicable), BUYER will pay to SELLER by wire transfer of immediately
available funds within ten business days after the parties receive the
determination of the arbitrators the applicable Interest Increase Amount,
together with interest at the Interest Rate from (and including) the
Closing Date to (but excluding) the date such payment is made.
(iv) If BUYER and SELLER agree that an Interest Increase exists and
agree on the Interest Increase Amount, the affected Property will be
conveyed at Closing to BUYER or its designee pursuant to Section 1.4 and
the Purchase Price will be increased at Closing by an amount equal to the
Interest Increase Amount for the Interest Increase.
6.2.5 Any arbitration conducted pursuant to this Agreement shall be
conducted in Dallas, Texas, in accordance with the Commercial Arbitration Rules
of the American Arbitration
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Association; provided, however, that the parties hereby agree to modify those
rules by adoption of the following provisions of this Section, which the
arbitrators shall be bound to apply. On or before the fifth day after the
Closing Date, SELLER must name its choice of an arbitrator and BUYER must name
its choice of an arbitrator. Within seven days thereafter, the two arbitrators
so chosen shall name a third arbitrator. If any of the three arbitrators has not
been named within the appointed time, then any party may apply to the American
Arbitration Association for appointment of the arbitrator(s) necessary to
complete the panel within ten days. SELLER shall pay the compensation and
expenses of the arbitrator named by or for it, BUYER shall pay the compensation
and expenses of the arbitrator named by or for it, and SELLER and BUYER shall
each pay one-half of the compensation and expenses of the third arbitrator.
Within five days following the date that a three-person panel is established,
the three arbitrators shall meet and proceed with due dispatch to hear the
parties with respect to such matters. The decision of the arbitration panel, or
a majority thereof, shall be rendered in writing no later than 15 days after the
arbitrators have met and heard the parties. Such decision shall be final and
binding on the parties.
6.2.6 SELLER shall have the right, but not the obligation to cure any
Title Defect after the Closing Date. If SELLER cures a Title Defect to the
reasonable satisfaction of BUYER within 90 days after the Closing Date, and the
Purchase Price was reduced at Closing by the Title Defect Amount under Section
6.2.4(i) or SELLER has paid to BUYER the Title Defect Amount pursuant to Section
6.2.4(ii), BUYER shall pay to SELLER within ten days after the Title Defect is
cured to BUYER's reasonable satisfaction, by wire transfer of immediately
available funds, the Title Defect Amount in respect of such Title Defect,
together with interest at the Interest Rate from (and including) the Closing
Date, to (but excluding) the date such payment is made by BUYER.
6.3 Right to Terminate. Either SELLER or BUYER shall have the right to
-------------------
terminate this Agreement by giving written notice to terminate to the other
party hereto two (2) business days prior to Closing (the "Notice Date") if the
requirements of Section 6 3.1, 6.3.2 or 6.3.3 are satisfied.
6.3.1 Either SELLER or BUYER may terminate if, on or before the Notice
Date, the sum of the net downward adjustments to be made to the Purchase Price
as the result of application of Section 6.1 exceeds fifteen percent (15%) of the
Purchase Price.
6.3.2 Either SELLER or BUYER may terminate if, on or before the Notice
Date, the sum of (i) the aggregate Title Defect Amounts asserted by Buyer as the
result of application of Section
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6.2 and (ii) the reasonable cost of remedying all of the Adverse Environmental
Conditions asserted by BUYER pursuant to Section 5.3 exceeds ten percent (10%)
of the Purchase Price.
6.3.3 Either SELLER or BUYER may terminate if, on or before the Notice
Date, (i) either (A) BUYER reasonably and in good faith asserts a Title Defect
with respect to the EOGM Property or the EOG Pipeline Property and the same
remains uncured as of the Notice Date or (B) any Preferential Right is validly
exercised with respect to the EOGM Property or the EOG Pipeline Property or a
portion thereof, or SELLER has failed by the Notice Date to obtain a Consent
necessary for the conveyance of the EOGM Property or the EOG Pipeline Property
or a portion thereof or is unable to obtain the waiver of a Preferential Right
with respect to the EOGM Property or the EOGM Pipeline Property for which the
period within which such Preferential Right may be exercised has not expired,
and (ii) the existence of such asserted Title Defects or the exercise of such
Preferential Rights or the denial of such Consents would singly or collectively
adversely and materially affect the ability of the BUYER to operate the Property
taken as a whole.
6.3.4 In the event of a termination pursuant to any of the preceding
provisions of this Section 6.3, SELLER shall return the Earnest Money Deposit
paid by BUYER pursuant to Section 2.1 within three (3) business days of receipt
of such cancellation notice by the party to whom it was addressed, together with
interest as provided in Section 2.1.
ARTICLE 7. CLOSING: FINAL SETTLEMENT
-------------------------
7.1 Closing Date. Unless BUYER and SELLER, otherwise agree, the closing
------------
of this purchase and sale (the "Closing") will occur on the later to occur of
April 12, 1996, or the third business day following the date when the condition
to Closing referred to in Section 7.2.3 has been satisfied (the actual date on
which Closing occurs being the "Closing Date"), at 10:00 a.m. local time in
SELLER's offices in Houston, Texas. Provided such party is not in material
default of its obligations under this Agreement, either party may terminate this
Agreement by giving written notice to the other if the Closing has not occurred
on or before April 30, 1996. In the event of an election by either party to
terminate this Agreement pursuant to the foregoing provision, SELLER shall
return the Earnest Money Deposit paid by BUYER pursuant to Section 2.1 within
three (3) business
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days of receipt of such cancellation notice by the party to whom it was
addressed, together with interest as provided in Section 2.1.
7.2 Conditions to Closing. BUYER or SELLER shall not be obligated to
---------------------
close the transaction that is the subject of this Agreement if:
7.2.1 Any matter represented or warranted by the other party in this
Agreement is not true in any material respect, or is misleading in any material
respect, as of the Closing Date, or there has been a material breach by the
other party of its obligations under this Agreement and such breach is not cured
by the Closing Date;
7.2.2 Any suit or other proceeding (other than a suit or proceeding
initiated by such party hereto) is pending or threatened before any court or
governmental agency seeking to restrain, prohibit, or declare illegal, or
seeking substantial damages in connection with, the transaction that is the
subject of this Agreement;
7.2.3 Any necessary consent of the Federal Trade Commission or any
other federal governmental authority relating to this Agreement has not been
obtained or waived, or applicable waiting periods prescribed by the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 have not elapsed or terminated; or
7.2.4 With respect to BUYER's obligation to close, the Saltwater
Disposal Agreement referred to in Section 11 4 (the terms of which agreement
shall be reasonably satisfactory to BUYER) shall not have been executed by
SELLER and the Sawyer Group (as defined in Section 11.4).
7.2.5 In the case of BUYER's obligation to close, SELLER fails to
deliver to BUYER an opinion dated as of the Closing Date from SELLER's general
counsel or outside legal counsel, reasonably satisfactory to BUYER in form and
substance to the effect that: (A) each of SELLER and EOGM is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation, (B) each of SELLER and EOGM has the corporate
power and authority to own the Property, to execute and deliver this Agreement,
and to consummate the transactions contemplated hereby, (C) all corporate acts
and other proceedings required to be taken by or on the part of SELLER and EOGM
to execute and deliver this Agreement and to consummate the transactions and
contemplated hereby have been duly and validly taken, and (D) SELLER and EOGM
have duly executed and delivered this Agreement, which is a legal, valid, and
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binding agreement of SELLER and EOGM, enforceable against SELLER and EOGM in
accordance with its terms, subject however to bankruptcy, insolvency,
moratorium, reorganization, and other laws and court decisions affecting
creditor's rights generally and to general equitable principles (whether
considered in a proceeding in equity or otherwise) and to other customary
qualifications. Such counsel may rely on the opinions of other legal counsel to
the extent necessary for such opinion.
7.2.6 In the case of the SELLER's obligation to close, BUYER fails to
deliver to SELLER an opinion dated as of the Closing Date from BUYER's general
counsel or outside legal counsel, reasonably satisfactory to BUYER in form and
substance to the effect that: (A) BUYER is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation, (B) BUYER has the corporate power and authority to own the
Property, to execute and deliver this Agreement, and to consummate the
transactions contemplated hereby, (C) all corporate acts and other proceedings
required to be taken by or on the part of BUYER to execute and deliver this
Agreement and to consummate the transactions contemplated hereby have been duly
and validly taken, and (D) BUYER has duly executed and delivered this Agreement,
which is a legal, valid, and binding agreement of BUYER, enforceable against
BUYER in accordance with its terms, subject however to bankruptcy, insolvency,
moratorium, reorganization, and other laws and court decisions affecting
creditor's rights generally and to general equitable principles (whether
considered in a proceeding in equity or otherwise and to other customary
qualifications. Such counsel may rely on the opinions of other legal counsel to
the extent necessary for such opinion.
7.3 Closing. SELLER and BUYER have the following obligations at Closing:
-------
7.3.1 SELLER's Obligations. At Closing, SELLER shall deliver to BUYER:
--------------------
(i) A duly executed Nonforeign Affidavit in the form of
Exhibit D;
(ii) An Assignment and Bill of Sale (in sufficient
counterparts for recording) executed and acknowledged by SELLER
covering the EOG Property in the form of Exhibit E-1, and an
Assignment and Bill of Sale (in sufficient counterparts for
recording) executed and acknowledged by EOGM covering the EOGM
Property in the form of Exhibit E-2 (collectively the
"Assignments and Bills of Sale");
(iii) A duly executed Transition Services Agreement
covering the Property in the form of Exhibit F (the "Transition
Services Agreement"); and
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(iv) Any other appropriate instruments necessary to effect
or support the transaction contemplated in this Agreement,
including, without limitation, any lease assignment forms or
other forms or filings required by federal or state agencies to
transfer ownership or operation of the Property; and
(v) Letters in lieu of transfer orders, executed by SELLER
and BUYER, in form and substance satisfactory to BUYER, directing
all purchasers of production to make payment of proceeds
attributable to production from the Property after the Effective
Date to BUYER;
(vi) Letters to third party pipeline operators, executed by
SELLER or EOGM in form and substance reasonably satisfactory to
BUYER, notifying such operators that BUYER (or if applicable, its
Affiliate) shall operate all pipeline meters included in the
Property which are currently being operated by SELLER or EOGM;
and
(vii) A Certificate, dated as of the Closing Date, executed
by a duly authorized officer of SELLER, to the effect that to the
best of such officer's knowledge, the representations and
warranties of SELLER contained in this Agreement are true at and
as of the Closing as if such representations and warranties were
made at and as of the Closing, and that SELLER has performed and
satisfied all agreements required by this Agreement to be
performed and satisfied by SELLER at or prior to the Closing.
7.3.2 BUYER's Obligations. At Closing, BUYER shall:
--------------------
(i) Pay SELLER the Purchase Price, as adjusted under 7.3.3
and any other provisions of this Agreement (less the amount of
the Earnest Money Deposit plus interest thereon from the date of
its payment to SELLER until the Closing Date), by wire transfer
of immediately available funds into an account designated by
SELLER according to SELLER's instructions;
(ii) Furnish evidence that BUYER has obtained all required
operating and plugging bonds and will be accepted by the State of
Texas, if BUYER becomes operator, including two fully executed
change of operator
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notices prepared by SELLER and executed by BUYER and SELLER, one
of which SELLER may file with the appropriate regulatory
authorities if BUYER fails to make the required filing;
(iii) Execute any ratification and joinder instruments
required to transfer SELLER's rights, obligations and interests
in the Related Contracts and other Property. (SELLER shall notify
BUYER as and when SELLER identifies any Related Contracts and
other Property that are subject to such requirements);
(iv) Execute any applications necessary to transfer
regulatory permits to which the Property is subject, and which
SELLER and EOGM have agreed to transfer under this Agreement;
(v) Execute, acknowledge and deliver to SELLER the
Assignments and Bills of Sale and the Transition Services
Agreement; and
(vi) Deliver to SELLER a Certificate, dated as of the
Closing Date, executed by a duly authorized officer of BUYER, to
the effect that to the best of such officer's knowledge, the
representations and warranties of BUYER contained in this
Agreement are true at and as of the Closing as if such
representations and warranties were made at and as of the
Closing, and that BUYER has performed and satisfied all
agreements required by this Agreement to be performed and
satisfied by BUYER at or prior to the Closing.
7.3.3 Purchase Price Adjustment.
-------------------------
7.3.3.1 The Purchase Price shall be adjusted upward by the
following:
(i) The amount of (1) all overhead charges and administrative
expenses paid by SELLER and EOGM (disregarding for purposes of this Section
7.3.3.1 any payments between SELLER and EOGM) to third parties under the
terms of applicable joint operating agreements, (2) all actual direct
operating expenses paid by SELLER, and (3) all actual direct capital
expenditures paid by SELLER; but only to the extent that the expenses and
expenditures described in clauses (1), (2) and (3) above arise from, or are
otherwise properly allocable to, the ownership or operation
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of the Property after the Effective Date, and do not result from or relate
to remediation of Adverse Environmental Conditions, curing of Title Defects
or a breach by SELLER of its obligations under Section 11.1; and
(ii) An amount equal to all upward adjustments to the Purchase
Price provided in Sections 6.1, 6.2 and 12 1.
7.3.3.2 The Purchase Price shall be adjusted downward by the
following:
(i) The gross proceeds, net of production taxes paid with respect
thereto, actually received by SELLER and EOGM (disregarding for purposes of
this Section 7.3.3.2 any payments between SELLER and EOGM), whether before
or after Closing, that are attributable to the ownership or operation of
the Property from and after the Effective Date (excluding any proceeds from
the sale of the Hydrocarbons in storage on the Effective Date, and
excluding any overhead and administrative payments to SELLER as operator
under the terms of applicable joint operating agreements) (the amount of
proceeds received by SELLER shall be determined on the basis of applicable
sales and marketing agreements and not on the basis of swap or other
hedging agreements, which swap or hedging agreements shall be solely for
the account of SELLER); and
(ii) An amount equal to all downward adjustments to the Purchase
Price provided in Sections 5.3, 5.4, 6.1, 6.2 and 12.1; and
(iii) The amount determined by multiplying $0.52 times the
SELLER's net revenue interest share of the MMBTUs of gas produced and sold
by SELLER from the designated intervals of each Section 29 Well set forth
on Exhibit G from the Effective Date to the Closing Date times the
percentage set forth on Exhibit G opposite the name of such well and
intervals;
(iv) An amount equal to the sum of the suspense items reflected
on Schedule 3.3.10; and
(v) An amount equal to one-half of the filing fee paid by BUYER
in connection with its filings under the Hart-Scott-Rodino Act with respect
to the transactions contemplated by this Agreement as described in Section
12.4.
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<PAGE>
7.3.3.3 At least five (5) days prior to the Closing Date, SELLER
shall estimate the amount of the Purchase Price adjustment under Sections
7.3.3.1 and 7.3.3.2 in good faith and in a bona fide manner and deliver to BUYER
a certificate of the Chief Financial Officer of SELLER setting forth in
reasonable detail the calculation thereof. The Purchase Price shall be adjusted
as set forth in such certificate, and the resulting amount shall be the
initially adjusted Purchase Price.
7.3.3.4 As soon as reasonably practicable, and in any event within
120 days following the Closing Date, SELLER shall deliver to BUYER a statement
of the actual Purchase Price adjustment under Sections 7.3.3.1 and 7.3.3.2
(specifying whether the Purchase Price is to be increased or decreased by such
amount), which shall be certified by the Chief Financial Officer of SELLER (the
"Purchase Price Adjustment Certificate"), and all supporting documentation.
Within 30 days after delivery of the Purchase Price Adjustment Certificate,
BUYER shall notify SELLER whether BUYER agrees or disagrees with the
determination of the Purchase Price adjustment set forth in the Purchase Price
Adjustment Certificate. If BUYER disagrees with such determination,
representatives of BUYER and SELLER shall meet and endeavor to resolve their
differences regarding the determination of the Purchase Price adjustment as soon
as reasonably possible. If the representatives of BUYER and SELLER are unable to
agree upon such determination of the Purchase Price adjustment within 20
business days, the independent accounting firm of Ernst & Young shall audit the
Purchase Price Adjustment Certificate and determine the Purchase Price
adjustment as soon as reasonably possible. The decision of such independent
accounting firm shall be binding on SELLER and BUYER, and the fees and expenses
of such independent accounting firm shall be borne one-half by SELLER and one-
half by BUYER. If the Purchase Price adjustment as finally determined pursuant
to this Section 7.3.3.4 is a smaller upward adjustment or a larger downward
adjustment than that estimated pursuant to Section 7.3.3.3, SELLER shall pay to
BUYER the amount of such excess, plus interest thereon at the Interest Rate from
(and including) the Closing Date to (but excluding) the date of payment. If the
Purchase Price Adjustment Amount as finally determined pursuant to this Section
7.3.3.4 is a larger upward adjustment or a smaller downward adjustment than that
estimated pursuant to Section 7.3.3.3, BUYER shall pay to SELLER the amount of
such deficiency, plus interest thereon at the Interest Rate from (and including)
the Closing Date to (but excluding) the date of payment. Any payment
contemplated by this Section 7.3.3.4 shall be
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made by wire transfer in federal or other immediately available funds on or
before the fifth business day following the final determination of the amount
thereof.
7.3.4 Strapping and Gauging. On the Effective Date, the volume of
---------------------
liquid Hydrocarbons produced from the Property and in storage above the pipeline
connection was 3,357 barrels, which remained the property of SELLER.
7.3.5 Document Preparation. Unless SELLER and BUYER otherwise agree,
--------------------
SELLER will prepare any Closing documents to be executed and delivered under
Sections 7.3.1 and 7 3.2 at Closing and will furnish copies of the same to BUYER
at least two days before the Closing, except as provided elsewhere in this
Agreement for an earlier date.
7.4. Post-Closing Obligations. SELLER and BUYER have the following post-
------------------------
closing obligations:
7.4.1 Property Records. Within five (5) days after Closing, SELLER
----------------
shall deliver to BUYER the originals (if in SELLER's possession) of the Property
Records at a location designated by BUYER.
7.4.2 Recording and Filing. BUYER, within thirty (30) days after
--------------------
Closing, shall (i) file for record each Assignment and Bill of Sale and all
other instruments that must be recorded to effectuate the transfer of the
Property; and (ii) file for approval with the applicable government agencies all
state and federal transfer and assignment documents for the Property. BUYER
shall provide SELLER a recorded copy of each Assignment and Bill of Sale and
other recorded instruments, and approved copies of the state and federal
transfer and assignment documents as soon as they are available. If BUYER fails,
within thirty (30) days after Closing, to file for record the Assignments and
Bills of Sale and all other instruments that must be recorded to effectuate the
transfer of the Property, and file for approval with the applicable government
agencies all state and federal transfer and assignment documents for the
Property, SELLER, in addition to any other rights available to it, shall have
the right to specific performance of BUYER's obligations under this Section.
7.4.3 Audit Rights. For a period of two (2) years following the
------------
Closing Date, any party hereto may at its expense audit the other party's
accounting for any item adjusted between them at Closing or in any pre-Closing
or post-Closing statement, billing, invoice or accounting made on the Property.
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7.4.4 Further Assurances. BUYER and SELLER agree (and SELLER agrees
------------------
to cause EOGM) to execute and deliver from time to time such further instruments
and do such other acts as may be reasonably necessary to effectuate the purposes
of this Agreement.
7.4.5 SEC Verification. If and to the extent necessary for BUYER to
----------------
comply with Regulation S-X of the Securities and Exchange Commission, SELLER
shall make available to BUYER, without warranty or representation, such records
as SELLER and EOGM may have relating to revenues and operating expenses,
property detail, standardized measure data and reserve information, maintained
in connection with the Property for a period not exceeding three years prior to
the Effective Date.
ARTICLE 8. ASSUMPTION OF OBLIGATIONS
-------------------------
8.1 Ownership and Operations. If the Closing occurs, and in addition to
------------------------
the liabilities and obligations for which BUYER indemnifies SELLER and EOGM or
which BUYER assumes in this Agreement, BUYER shall assume and perform the
following rights, duties, obligations and liabilities of ownership and operation
of the Property on and after the Effective Date: (i) all of SELLER's and EOGM's
express and implied obligations and covenants under the terms of the Leases and
the Related Contracts described in Exhibit A and Exhibit B; and all other orders
and contracts to which the Property is subject and of which BUYER has actual or
constructive notice; (ii) responsibility for all royalties, overriding
royalties, production payments, net profits obligations, rentals and shut-in
payments and other burdens or encumbrances to which the Property is subject and
of which BUYER has actual or constructive notice; (iii) responsibility for
compliance with all applicable laws, ordinances, rules and regulations
pertaining to the Property, and the procurement and maintenance of all permits
required by public authorities in connection with the Property; (iv)
responsibility for all liabilities of SELLER for net proceeds from production
attributable to the Property as currently held in suspense because of lack of
identity or address of owners, title questions, change of ownership, or similar
questions, to the extent such net proceeds are transferred and delivered to
BUYER at the Closing (or a downward adjustment of the Purchase Price is made in
respect thereof pursuant to Section 7.3.3.2); and (v) all other obligations
assumed by BUYER under this Agreement; provided, however, that, except to the
extent provided in Sections 5.2 and 5.3, BUYER does not assume any liabilities
and obligations to third parties for loss or damage to property or injury to or
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death of persons arising from the operation of the Property during the period
from the Effective Date to the Closing. SELLER and EOGM shall remain responsible
for all costs, expenses and liabilities incurred by SELLER or EOGM in connection
with the ownership or operation of the Property before the Effective Date and
for all liabilities and obligations to third parties for loss or damage to
property or injury to or death of persons arising from the operation of the
Property during the period from the Effective Date to the Closing (except, in
each case, for those costs, expenses, liabilities and obligations for which
BUYER indemnifies SELLER or EOGM or which BUYER assumes under the provisions of
this Agreement).
8.2 Plugging and Abandonment Obligations. From and after the Closing
------------------------------------
Date, BUYER assumes full responsibility and liability for the following
obligations related to the Property (the "Plugging and Abandonment
Obligations"): (i) plugging, replugging and abandoning all wells on the Property
(except wells previously permanently plugged and abandoned by SELLER); (ii)
removing and disposing of all structures and equipment comprising part of the
Property; (iii) the necessary and proper capping and burying of all associated
flow lines comprising part of the Property; (iv) restoring the leasehold
premises of the Property, both surface and subsurface, to the condition they
were in before commencement of oil and gas operations, as may be required by
applicable laws, regulation or contract; and (v) any necessary disposal of
Property contaminated by NORM other than items of Property that both (a) have
been permanently abandoned for use in the operation of the Property as of the
Closing and are not subsequently so used and (b) are contaminated by NORM in
excess of the limits established by the Environmental Laws. SELLER agrees at its
cost after the Closing to remove from the lands covered by the Property all of
the Schedule 1.2.7 Equipment that BUYER, on or before the Closing, requests in
writing SELLER to remove. SELLER shall retain full ownership of and
responsibility for all such equipment that BUYER requests SELLER to remove.
BUYER's obligations under this Section 8.2 include without limitation
obligations arising from contractual requirements and demands made by authorized
regulatory bodies or parties claiming a vested interest in the Property. With
respect to any non-operating interests in the Property being transferred to
BUYER under this Agreement, BUYER shall assume full responsibility and
liability, from and after the Closing Date, for that portion of the Plugging and
Abandonment Obligations for which nonoperators are responsible.
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ARTICLE 9. INDEMNITIES
-----------
9.1 Definition of Claims. As used in this Agreement, the term "Claims"
--------------------
means any and all losses, liabilities, damages, obligations, expenses, fines,
demands, suits, penalties, costs, claims, causes of action and judgments for (i)
breaches of contract; (ii) loss or damage to property, injury to or death of
persons, and other tortious injury; and (iii) violations of applicable laws,
rules, regulations, orders, or any other legal right or duty actionable at law
or equity. The term "Claims" also includes attorneys fees and court costs
resulting from the defense of any claim or cause of action within the scope of
the indemnities in this Agreement.
9.2 APPLICATION OF INDEMNITIES. UNLESS THIS AGREEMENT EXPRESSLY PROVIDES
--------------------------
TO THE CONTRARY, THE INDEMNITIES SET FORTH IN THIS AGREEMENT APPLY REGARDLESS OF
WHETHER: (I) AN INDEMNIFIED CLAIM ARISES OUT OF OR RESULTS FROM THE INDEMNIFIED
PARTY'S (OR ITS EMPLOYEES', AGENTS', CONTRACTORS', SUCCESSORS' OR ASSIGNS') SOLE
OR CONCURRENT NEGLIGENCE, (II) THE INDEMNIFIED PARTY (OR ITS EMPLOYEES, AGENTS,
CONTRACTORS, SUCCESSORS OR ASSIGNS) IS DEEMED TO BE STRICTLY LIABLE, IN WHOLE OR
PART, FOR AN INDEMNIFIED CLAIM; OR (III) ANY PART OF AN INDEMNIFIED CLAIM IS THE
RESULT OF THE IMPOSITION OF PUNITIVE DAMAGES. ALL INDEMNITIES SET FORTH IN THIS
AGREEMENT EXTEND TO THE OFFICERS, DIRECTORS, EMPLOYEES AND AFFILIATES OF THE
PARTY INDEMNIFIED, AND COVER THE ACTS AND OMISSIONS OF THE OFFICERS, DIRECTORS,
EMPLOYEES, CONTRACTORS, SUCCESSORS AND ASSIGNS OF THE INDEMNIFYING PARTY.
9.3 BUYER's Indemnity. Except as provided below in this Section 9.3,
-----------------
BUYER shall indemnify, defend and hold SELLER and EOGM harmless from and against
any and all Claims caused by, resulting from or incidental to (a) the ownership
or operation of the Property on and after the Effective Date, or (b) the
obligations assumed by BUYER under the other provisions of this Agreement. The
foregoing indemnity shall not apply to third party Claims for loss or damage to
property or injury to or death of persons arising out of the operation of the
Property during the period from the Effective Date to the Closing. Moreover, the
foregoing indemnity shall not apply to any Claims covered by the provisions of
Section 5.3.
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9.4 SELLER's Indemnity. Except as provided below in this Section 9.4,
-------------------
SELLER shall indemnify, defend and hold BUYER harmless from and against (a) any
and all Claims caused by, resulting from or incidental to SELLER's or EOGM's
ownership or operation of the Property before the Effective Date, except those
arising out of, resulting from or incidental to the obligations assumed by BUYER
under the other provisions of this Agreement, and (b) any and all third party
Claims for loss or damage to property or injury to or death of persons arising
out of the operation of the Property during the period from the Effective Date
to the Closing. The foregoing indemnity shall not apply to any Claims covered by
the provisions of Sections 5.2 or 5.3.
ARTICLE 10. TAXES AND EXPENSES.
------------------
10.1 Recording Expenses. BUYER shall pay all costs of recording and filing
------------------
the Assignment and Bill of Sale for the Property, all state and federal transfer
and assignment documents, and all other instruments.
10.2 Ad Valorem, Real Property and Personal Property Taxes. All Ad Valorem
-----------------------------------------------------
Taxes, Real Property Taxes, Personal Property Taxes, and similar obligations
("Property Taxes") on the Property are SELLER's and EOGM's obligation for
periods before the Effective Date and BUYER's obligation for periods after the
Effective Date. If Property Taxes for the current tax year have not been
assessed and paid as of the Closing Date, the BUYER shall file all required
reports and returns incident to the Property Taxes and pay the Property Taxes
for the current tax year and subsequent periods. The SELLER will reimburse the
BUYER promptly for the SELLER's and EOGM's proportionate share of these taxes,
prorated as of the Effective Date, upon receipt of evidence of the BUYER's
payment of the taxes. If Property Taxes for the current tax year have been
assessed and paid as of the Closing Date, the BUYER will reimburse the SELLER
and EOGM for its proportionate share of these taxes, prorated as of the
Effective Date. SELLER shall furnish to BUYER upon request any information in
SELLER's possession regarding the Property to assist BUYER in its preparation
and filing of all required reports and returns incident to the Property Taxes
for the current tax year.
10.3 Severance Taxes. SELLER shall bear and pay all severance or other
---------------
taxes measured by Hydrocarbon production from the Property, or the receipt of
proceeds therefrom, to the extent attributable to production from the Property
before the Effective Date. SELLER shall withhold and
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pay (or cause EOGM or the first purchaser to withhold and pay) on behalf of
BUYER all such taxes on production from the Property between the Effective Date
and the Closing Date. Subject to the obligations of SELLER under the preceding
sentence, BUYER shall bear and pay all such taxes on production from the
Property on and after the Effective Date. If either party pays taxes owed by the
other, upon receipt of evidence of payment, the nonpaying party will reimburse
the paying party promptly for its proportionate share of such taxes.
10.4 Tax Reporting. SELLER and BUYER agree that this transaction is not
-------------
subject to the reporting requirement of Section 1060 of the Internal Revenue
Code of 1986, as amended, and that, accordingly, IRS Form 8594, Asset
Acquisition Statement, is not required and will not be filed for this
transaction. If the parties mutually agree that a filing of Form 8594 is
required, the parties will confer and cooperate in the preparation and filing of
their respective forms to reflect a consistent reporting of the agreed upon
allocation of the value of the Property.
10.5 Sales Taxes. The Purchase Price is exclusive of any applicable sales
-----------
tax. In the event any sales tax is due in connection with the transactions
contemplated by this Agreement, BUYER shall be responsible for the same and
indemnify SELLER and EOGM against the same.
ARTICLE 11. INTERIM OPERATION OF THE PROPERTY
---------------------------------
11.1 Operations by SELLER and EOGM. During the period between the Effective
-----------------------------
Date to the date this Agreement is executed (the "First Interim Period"), SELLER
and EOGM have operated the portion of the Property operated by each, and SELLER
and EOGM shall continue to operate such portion of the Property during the
period between the date this Agreement is executed and the Closing Date (the
"Second Interim Period"), but SELLER has no obligation to operate the Property
after the Second Interim Period. Subject to the provisions of Sections 11.2 and
11.3, SELLER and EOGM have operated such portion of the Property during the
First Interim Period and shall operate such portion of the Property during the
Second Interim Period as a reasonably prudent operator and in a manner
consistent with generally accepted industry practices. SELLER makes no
representation or warranty that BUYER will become operator of any portion of the
Property, as that matter is controlled by the applicable operating agreements
and governmental regulatory requirements. On or before the Closing, SELLER shall
take all actions reasonably necessary for its resignation as operator of the
portion of the Property currently operated by SELLER.
-37-
<PAGE>
11.2 BUYER's Approval. In conducting operations during the Second Interim
----------------
Period, SELLER shall, except for emergency action taken in the face of serious
risk of life, property or the environment, (i) obtain BUYER's prior written
approval of all expenditures and proposed contracts and agreements, or
amendments to existing contracts and agreements relating to the Property that
involve individual commitments of more than $25,000; (ii) consult with and
advise BUYER regarding all material matters concerning the operation, management
and administration of the Property; and (iii) obtain BUYER's written approval
before voting under any operating, unit, joint venture or similar agreement.
SELLER shall notify BUYER of any emergency action taken, and to the extent
reasonably practicable, obtain BUYER's prior approval of such actions.
11.3 Marketing of Production. For that portion of the Property operated by
-----------------------
SELLER or EOGM, during the First Interim Period SELLER and EOGM have continued
and during the Second Interim Period will continue to market production,
disburse proceeds of production, bill and collect amounts due from the non-
operating interest owners, and pay delay rentals, minimum royalties, shutin
royalties and other lease payments in accordance with SELLER's or EOGM's past
practices. SELLER may set the rates of production of such wells in accordance
with its customary practices.
11.4 Saltwater Disposal Matter. SELLER shall consult with BUYER with
-------------------------
respect to the terms of the agreement (the "Saltwater Disposal Agreement") that
SELLER is negotiating with Lura Ward Sawyer, Trustee of the Lura Ward Sawyer
Residuary Trust, Lura Ward Sawyer, Trustee of the Lura Ward Sawyer Marital
Deduction Trust, Sarah Sawyer Neely, Edwin E. Sawyer III, Jane Sawyer Davis and
Molly Sawyer Campbell (collectively, the "Sawyer Group"), concerning the
disposal of saltwater into an injection well.
-38-
<PAGE>
ARTICLE 12. MISCELLANEOUS
-------------
12.1 Production and Gathering Imbalances. If there are any production or
-----------------------------------
gathering imbalances relating to the Property (including, but not limited to
production and gathering imbalances set forth in Schedule 3.3.5), SELLER
transfers all imbalances as of the Effective Date to BUYER. BUYER and SELLER
hereby agree that if SELLER is in fact underproduced as of the Effective Date,
the Purchase Price will be increased by $1.25 for each thousand cubic feet (Mcf)
that SELLER is underproduced (with respect to production imbalances and/or
gathering imbalances). BUYER and SELLER hereby agree that if SELLER is in fact
overproduced as of the Effective Date, the Purchase Price will be decreased by
$1.25 for each thousand cubic feet (Mcf) that SELLER is overproduced (with
respect to production imbalances and/or gathering imbalances).
12.2 Press Releases. The parties agree that prior to making any public
--------------
announcement or statement with respect to the transactions contemplated by this
Agreement, the party desiring to make such public announcement or statement
shall consult with the other parties hereto and exercise their best good faith
efforts to (i) agree upon the text of a joint public announcement or statement
to be made by both of such parties or (ii) obtain approval of the other parties
hereto to the text of a public announcement or statement to be made solely by
SELLER or BUYER, as the case may be; provided, however, if SELLER or BUYER is
required by law to make such public announcement or statement, then the same may
be made without the approval of the other party, and provided further that
neither party will publicly announce the Purchase Price within sixty (60) days
after the Closing unless required by law. The opinion of counsel of either party
shall be conclusive evidence of such requirement by law.
12.3 Notices. All notices under this Agreement must be in writing. Any
-------
notice under this Agreement may be given by personal delivery, facsimile
transmission, U.S. mail (postage prepaid), or commercial delivery service, and
will be deemed duly given when received by the party charged with such notice
and addressed as follows:
-39-
<PAGE>
SELLER: ENRON OIL & GAS COMPANY BUYER: MEDALLION PRODUCTION
- --------- 4000 North Big Spring Street --------- COMPANY
Suite 500 7130 South Lewis Avenue
P. O. Box 2267 Suite 700
Midland, Texas 79702 Tulsa, Oklahoma 74136
Attn: Frank C. Estep Attn: W. E. Warnock, Jr.
FAX: (915) 686-3773 FAX: (918) 488-8182
EOGM: ENRON OIL & GAS MARKETING, INC.
- ----- 1400 Smith Street
Suite 2344
P.O. Box 4362
Houston, Texas 77210-4362
Attn: Andrew N. Hoyle
FAX: (713) 646-2113
Any party, by written notice to the other, may change the address or the
individual to which or to whom notices are to be sent under this Agreement.
12.4 Hart-Scott-Rodino Act. This Agreement is subject in all respects to
---------------------
and conditioned upon compliance by the parties with Title II of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the"Hart-Scott-Rodino Act"), and
rules and regulations promulgated pursuant thereto, to the extent that said act,
rules and regulations are applicable to the transaction contemplated by this
Agreement. BUYER and SELLER have made such filings with and provided such
information to the Federal Trade Commission and the Department of Justice with
respect to the transaction contemplated by this Agreement as are required in
connection with the Hart-Scott-Rodino Act.
12.5 Entirety of Agreement; Amendment. This Agreement constitutes the
--------------------------------
entire understanding between the parties with respect to the subject matter
hereof, superseding all negotiations, prior discussions, representations, and
prior agreements and understandings relating to such subject matter. This
Agreement may be amended, modified, and supplemented only in a writing duly
executed by BUYER and SELLER.
12.6 Successors and Assigns. This Agreement binds and inures to the
----------------------
benefit of the parties hereto and their respective permitted successors and
assigns, and nothing contained in this Agreement, express or implied, is
intended to confer upon any other person or entity any benefits, rights, or
remedies. Except as provided in Section 12.6 and Section 1.4, no party may
assign any of its rights or obligations under this Agreement prior to the
Closing without the prior written consent of the other party, which consent may
be given or withheld in such party's sole discretion.
-40-
<PAGE>
No permitted assignment by a party of its rights or obligations under this
Agreement shall release such party from its obligations hereunder.
12.7 GOVERNING LAW. THIS AGREEMENT IS GOVERNED BY AND MUST BE CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY
CONFLICTS-OF-LAW RULE OR PRINCIPLE THAT MIGHT APPLY THE LAW OF ANOTHER
JURISDICTION.
12.8 Sale of Property. BUYER or its designee pursuant to Section 1.4 may
----------------
freely sell or assign all or portions of the Property without SELLER's consent
after the Closing. Nevertheless, if BUYER or its designee pursuant to Section
1.4 sells or assigns all or a portion of the Property to a subsequent purchaser,
this Agreement and all rights and obligations under this Agreement will remain
in effect between BUYER and SELLER as to all of the Property, notwithstanding
such sale or assignment.
12.9 Exhibits. The Exhibits attached to this Agreement are incorporated
--------
into and made a part of this Agreement. In the event of a conflict between the
provisions of the Exhibits or the executed Assignments and Bills of Sale and the
foregoing provisions of this Agreement, the provisions of the Exhibits and the
executed Assignments and Bills of Sale take precedence over the foregoing
provisions of this Agreement. In the event of a conflict between the provisions
of the pro forma Assignments and Bills of Sale attached to this Agreement as
Exhibits E-l and E-2 and the executed Assignments and Bills of Sale, the
provisions of the executed Assignments and Bills of Sale take precedence.
12.10 Litigation Costs. If any party hereto should hereafter institute
----------------
litigation against any other party hereto alleging that such other party has
breached this Agreement or any agreement or other instrument attached hereto or
delivered pursuant hereto, the nonprevailing party or parties (whether plaintiff
or defendant) in such action shall reimburse the prevailing party or parties for
the prevailing party's or parties' reasonable attorneys' fees, witness fees,
court costs and all other costs in connection with such litigation.
12.11 General. References in this Agreement to Articles, Sections,
-------
subsections, Exhibits and Schedules shall be deemed to refer to articles,
Sections and subsections of and Exhibits and Schedules to this Agreement except
as provided otherwise in this Agreement. As used in this
-41-
<PAGE>
Agreement, "person" means any natural person or corporation, partnership,
limited liability company, trust, estate, governmental unit or other entity.
12.12 Texas Deceptive Trade Practices Act Waiver. BUYER represents and
------------------------------------------
warrants to SELLER that BUYER: (a) is acquiring the Property for commercial or
business use, (b) has assets of $25,000,000 or more or is owned or controlled by
a corporation or entity with assets of $25,000,000 or more, and (c) has
knowledge and experience in financial and business matters that enable it to
evaluate the merits and risks of the transactions contemplated by this agreement
and is not in a significantly disparate bargaining position with respect to
SELLER.
MOREOVER, BUYER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY AND ALL RIGHTS
OR REMEDIES THAT IT MAY HAVE UNDER THE DECEPTIVE TRADE PRACTICES -- CONSUMER
PROTECTION ACT OF THE STATE OF TEXAS, BUSINESS AND COMMERCE CODE SECTION 17.41
THROUGH SECTION 17.63 (OTHER THAN SECTION 17.555).
The authorized representatives of SELLER, EOGM and BUYER sign below
indicating their agreement to the terms of this Agreement on March 30, 1996.
SELLER: BUYER:
ENRON OIL & GAS COMPANY MEDALLION PRODUCTION COMPANY
By: \s\ Lewis P. Chandler, Jr. By: \s\ David M. Harber
-------------------------- -------------------
Name: Lewis P. Chandler, Jr. Name: David M. Harber
Title: Sr. Vice President, Law Title: Vice President-Engineering and
Acquisitions
ENRON OIL & GAS MARKETING, INC.
By: \s\ Andrew N. Hoyle
-------------------
Name: Andrew N. Hoyle
Title: Vice President - Marketing
-42-
<PAGE>
The following schedules have been omitted, and the Registrant agrees to
furnish supplementally a copy of any such omitted schedule to the Securities and
Exchange Commission upon its request:
Exhibits
A Leases, Compressors, Personal Property, Easements,
Right-of-Ways, Surface Leases, Related Contracts and Lands
B Gas Gathering and Pipeline Systems
C Warranted Property
D Nonforeign Affidavit
E Assignments and Bill of Sales
F Transition Services Agreement
G Section 29 Tax Credit Wells
H Severance Tax Exemption Wells
Schedules
1.2.6 Reserved Overriding Royalty Interest
1.2.7 Schedule 1.2.7 Equipment
3.3.3 Permits
3.3.5 Production Imbalances
3.3.9 Preferential Rights to Purchase and Consents to Assign
3.3.10 Suspense of Revenue Distribution
3.3.13 Removed Equipment
<PAGE>
EXHIBIT 10.2
AMENDMENT TO PURCHASE AND SALE AGREEMENT
----------------------------------------
This Amendment to Purchase and Sale Agreement, dated April 10, 1996,
is between ENRON OIL & GAS COMPANY, a Delaware corporation ("SELLER"), and ENRON
OIL & GAS MARKETING, INC., a Delaware corporation ("EOGM"), and MEDALLION
PRODUCTION COMPANY, a Delaware corporation ("BUYER").
WHEREAS, the parties hereto have entered into a Purchase and Sale
Agreement (the "Purchase Agreement") dated March 30, 1996, providing for the
purchase and sale of certain property of SELLER and EOGM located in Sutton
County, Texas; and
WHEREAS, the parties hereto have agreed to the amendments to the
Purchase Agreement hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
hereby agree as follows:
1. The first sentence of Section 1.1 of the Purchase Agreement is
hereby amended to read in its entirety as follows:
Subject to the terms of this Agreement (including, without limitation,
the exclusions provided in Section 1.2): (i) SELLER agrees to sell and
assign to BUYER and BUYER agrees to purchase and acquire from SELLER
all of SELLER's right and title to, and interest in, the EOG Property
(as hereinafter defined) except for the EOG Pipeline Property (as
hereinafter defined) and all Related Contracts (as hereinafter
defined) with respect to the EOG Pipeline Property, (ii) SELLER agrees
to sell and assign to IGS (as hereinafter defined) and BUYER agrees to
cause IGS to purchase and acquire from SELLER all of SELLER's right
and title to, and interest in, the EOG Pipeline Property and all
Related Contracts with respect to the EOG Pipeline Property, (iii)
SELLER agrees to cause EOGM to sell and assign (and EOGM agrees to
sell and assign) to IGS and BUYER agrees to cause IGS to purchase and
acquire from EOGM all of EOGM's right and title to, and interest in,
the EOGM Property (as hereinafter defined), and (iv) SELLER agrees to
cause EOGM to sell and assign (and EOGM agrees to sell and assign) to
BUYER (or its designee) and BUYER agrees to purchase and acquire from
EOGM all of EOGM's right and title to, and interest in, the EOGM
Contracts (as hereinafter defined).
2. The last sentence of Section 1.1 of the Purchase Agreement is
hereby replaced in its entirety by the following two sentences:
The term "EOGM Contracts" shall mean the contracts referred to in
Exhibit E-3 attached hereto and made a part hereof. The terms "EOG
<PAGE>
Property," "EOGM Property" and "EOGM Contracts" are collectively
referred to in this Agreement as the "Property."
3. Section 1.4 of the Purchase Agreement is hereby amended to read
in its entirety as follows:
1.4 Designation of Affiliate. BUYER hereby designates InterCoast Gas
------------------------
Services Company, an Oklahoma corporation ("IGS"), a wholly owned
subsidiary of BUYER, as the entity to which the EOGM Property, the EOG
Pipeline Property and the Related Contracts with respect to the EOG
Pipeline Property shall be assigned and transferred at the Closing.
4. The first sentence of Section 3.3.4 of the Purchase Agreement is
hereby amended to read in its entirety as follows:
To the best of SELLER's knowledge, there are no material Related
Contracts other than those described in Exhibits A and B-1 attached to
this Agreement.
5. Section 4.1 of the Purchase Agreement is hereby amended to read
in its entirety as follows:
5.1 Title; Encumbrances. IF THE CLOSING OCCURS, (i) SELLER SHALL
-------------------
WARRANT AND DEFEND DEFENSIBLE TITLE TO THE WARRANTED PROPERTY THAT IS
EOG PROPERTY AGAINST ALL PERSONS CLAIMING TITLE TO SUCH WARRANTED
PROPERTY BY, THROUGH OR UNDER SELLER, BUT NOT OTHERWISE, AS PROVIDED
IN THE ASSIGNMENTS AND BILLS OF SALE SET FORTH IN EXHIBITS E-1 AND E-2
TO BE DELIVERED PURSUANT TO SECTION 7.3.1, AND (ii) EOGM SHALL WARRANT
AND DEFEND DEFENSIBLE TITLE TO THE WARRANTED PROPERTY THAT IS EOGM
PROPERTY AGAINST ALL PERSONS CLAIMING TITLE TO SUCH WARRANTED PROPERTY
BY, THROUGH OR UNDER EOGM, BUT NOT OTHERWISE, AS PROVIDED IN THE
ASSIGNMENT AND BILL OF SALE SET FORTH IN EXHIBIT E-2 TO BE DELIVERED
PURSUANT TO SECTION 7.3.1.
6. Clause (b) of the definition of "Defensible Title" in Section
6.2.1 of the Purchase Agreement is hereby amended to read in its entirety as
follows:
(b) with respect to the EOGM Property and the EOG Pipeline
Property (including but not limited to the easements and rights-of-way
related thereto, and contracts and operational rights in respect
thereof),
-2-
<PAGE>
such record title as will entitle IGS to own and operate the same free
of adverse claims that would materially affect the ability of IGS to
own and operate such systems in the same manner as presently owned and
operated by SELLER or EOGM, free and clear of Material Title
Deficiencies.
7. Section 7.3.1(ii) of the Purchase Agreement is hereby amended to
read in its entirety as follows:
(ii) (A) An Assignment and Bill of Sale (in sufficient
counterparts for recording) executed and acknowledged by SELLER
covering the EOG Property (other than the EOG Pipeline Property and
the Related Contracts with respect thereto) in the form of Exhibit
E-1, (B) an Assignment and Bill of Sale (in sufficient counterparts
for recording) executed and acknowledged by EOGM and SELLER covering
the EOGM Property, the EOG Pipeline Property and the Related Contracts
with respect to the EOG Pipeline Property in the form of Exhibit E-2,
and (C) an Assignment of Contracts executed and acknowledged by EOGM
covering the EOGM Contracts in the form of Exhibit E-3 and conveying
the same to BUYER or its designee (the Assignments and Bills of Sale
described in clauses (A) and (B) and the Assignment of Contracts
described in clause (C) being herein collectively called the
"Assignments and Bills of Sale");
8. Section 7.3.1(vi) of the Purchase Agreement is hereby amended to
read in its entirety as follows:
(vi) Letters to third party pipeline operators, executed by
SELLER or EOGM in form and substance reasonably satisfactory to BUYER,
notifying such operators that IGS shall operate all pipeline meters
included in the Property which are currently being operated by SELLER
or EOGM; and
9. Although referred to on page 25 of Exhibit "A" to the Purchase
Agreement, Exhibit "A-1" was not attached to the Purchase Agreement.
Accordingly, Exhibit "A-1" attached hereto and made a part hereof is hereby
added to the Purchase Agreement.
10. Pages 20 through 25 of Exhibit "A" to the Purchase Agreement are
hereby replaced with the pages of Appendix "1" attached hereto and made a part
hereof.
11. Parts II and III of Exhibit "B-1" to the Purchase Agreement and
Parts II and III of Exhibit "B-2" to the Purchase Agreement are hereby replaced
with Parts
-3-
<PAGE>
II and III of Exhibit "B-1" and Parts II and III of Exhibit "B-2" attached
hereto and made a part hereof.
12. Part IV of Exhibit "B-1" to the Purchase Agreement is hereby
deleted from the Purchase Agreement.
13. Exhibits "E-1" and "E-2" to the Purchase Agreement are hereby
replaced with Exhibits "E-1" and "E-2" attached hereto and made a part hereof.
14. Exhibit "E-3" attached hereto and made a part hereof is hereby
added to the Purchase Agreement.
15. Except as hereinabove provided, the Purchase Agreement shall
remain in full force and effect as written.
The authorized representatives of SELLER, EOGM and BUYER sign below
indicating their agreement to the terms of this Amendment to Purchase Agreement
as of the date first above stated.
ENRON OIL & GAS COMPANY MEDALLION PRODUCTION
COMPANY
By:\s\ Lewis P. Chandler, Jr. By:\s\ David M. Harber
-------------------------- -------------------
Name: Lewis P. Chandler, Jr. Name: David M. Harber
Title: Sr. Vice President, Law Title: Vice President-Engineering
and Acquisitions
ENRON OIL & GAS MARKETING, INC.
By:\s\ Andrew N. Hoyle
-------------------
Name: Andrew N. Hoyle
Title: Vice President-Marketing
-4-
<PAGE>
The following schedules have been omitted, and the Registrant agrees
to furnish supplementally a copy of any such omitted schedule to the Securities
and Exchange Commission upon its request:
Exhibits
A-1 Depiction of Lands
B Gas Gathering and Pipeline Systems
E Assignments and Bill of Sales
Appendix
1 Related Contracts
<PAGE>
EXHIBIT 10.5
INTERCOAST ENERGY COMPANY
LONG TERM INCENTIVE PLAN
------------------------
1. PURPOSE. This InterCoast Energy Company Long Term Incentive Plan
-------
(this "Plan") is designed to retain executives and other selected key employees
of InterCoast Energy Company ("InterCoast") and its subsidiaries (collectively,
the "Company") and reward them for making major contributions to the success of
the Company. This is accomplished by means of grants of Stock Options (as
hereinafter defined) in accordance with the provisions, terms and conditions set
forth below.
2. DEFINITIONS. Unless the context clearly indicates otherwise, the
-----------
following terms, when used in this Plan, shall have the following meanings:
(a) "Board of Directors" means the Board of Directors of InterCoast.
------------------
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" and "Special Committee" have the meanings set forth in
--------- -----------------
Section 4 hereof.
(d) "Common Stock" means the authorized and issued or unissued shares
------------
of InterCoast's common stock, par value $0.01 per share.
(e) "Company" means InterCoast and its subsidiary companies, including
-------
subsidiaries of subsidiaries.
(f) "Covered Employees" means those employees of the Company who are
-----------------
considered "covered employees" under Section 162(m) of the Code.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(h) "Fair Market Value" means the closing price of a share of the
-----------------
Common Stock on the date as of which Fair Market Value is to be determined,
which closing price shall be the last reported sales price regular way or,
in case no such reported sales took place on such date, the average of the
last reported bid and ask prices regular way, in either case on the
principal national securities exchange on which the Common Stock is listed
or admitted to trading, or if not listed or admitted to trading on any
national
<PAGE>
securities exchange, the average of the highest bid and the lowest ask
prices quoted on NASDAQ; provided, however, that if the Common Stock is not
traded in such manner that the prices or quotations referred to above are
available, or if a majority of the members of the Committee in their sole
discretion shall determine that, because of the occurrence of events
relating to the Company or the Common Stock, such closing price does not
properly reflect the fair market value of a share of the Common Stock, Fair
Market Value shall be determined in good faith by the Committee, in which
case the determination of the Committee shall be binding and conclusive.
(I) "Initial Public Offering" shall mean that offering and sale of
-----------------------
shares of Common Stock to the public pursuant to a registration statement
to be filed with the SEC in accordance with the Securities Act expected to
be consummated on or before September 1, 1996 and after which such shares
are registered under Section 12(b) or (g) of the Exchange Act and listed
for trading on a national stock exchange or approved for trading on Nasdaq.
(j) "Insiders" means those directors, officers and key employees of
--------
the Company who are otherwise eligible to receive Options pursuant to
Section 5 hereof and who are subject to the limitations of Section 16(b) of
the Exchange Act.
(k) "Option" or "Stock Option" means a right granted under this Plan
------ ------------
to an Optionee to purchase a stated number of shares of Common Stock at a
fixed price for a specified period of time.
(l) "Optionee" means an employee of the Company who has received an
--------
Option granted under this Plan.
(m) "InterCoast" means InterCoast Energy Company, a Delaware
----------
corporation.
(n) "SEC" means the Securities and Exchange Commission.
---
(o) "Securities Act" means the Securities Act of 1933, as amended.
--------------
(p) "Stock Option Agreement" means the agreement between InterCoast
----------------------
and an Optionee which sets forth the terms and conditions of Options
granted to such Optionee.
3. GENERAL. That number of shares of InterCoast's Common Stock equal to
-------
ten percent (10%) of the number of shares of Common Stock outstanding
immediately after the issuance of shares of Common Stock pursuant to the Initial
Public Offering (including any shares issued pursuant to an over allotment
option granted) have been reserved for issuance under this Plan. All options
granted under this Plan shall be nonstatutory (non-qualified) options.
-2-
<PAGE>
4. ADMINISTRATION. This Plan shall be administered by the Compensation
--------------
Committee (the "Committee") of the Board of Directors. The Committee shall be
appointed by and serve at the pleasure of the Board of Directors. A majority of
the Committee members shall constitute a quorum, and the act of a majority of
the members present at any meeting at which a quorum is present, and any act
approved in writing by a majority of the members without a meeting, shall be the
act of the Committee. Any such act shall be final and binding upon all persons.
The Committee shall have full power to construe and interpret this Plan and to
adopt such rules, regulations, guidelines, subplans, procedures and the like for
carrying out this Plan as it may deem necessary, proper and in the best
interests of the Company.
Notwithstanding anything in this Section 4 to the contrary, in the event
the Committee ever includes a member who is not both a "disinterested person"
and an "outside director," as such terms are hereinafter defined, this Plan
shall be administered, as to Insiders and Covered Employees, by a Special Stock
Plan Committee (the "Special Committee") consisting of not less than two members
of the Board of Directors each of whom shall be (I) a "disinterested person"
within the meaning of applicable rules and regulations promulgated by the SEC
and (ii) an "outside director" as such term is defined at Section 162(m) of the
Code. The Special Committee shall be appointed, governed, indemnified and
authorized as is the Committee hereinabove described. However, the Special
Committee shall have absolute discretion as to all matters concerning Insiders.
The term "Committee," as used herein, shall refer to the Compensation Committee
or the Special Stock Plan Committee as the context requires.
5. ELIGIBILITY. Eligibility for the grant of Options under provisions of
-----------
this Plan shall be limited to employees of the Company in positions of
responsibility whose business decisions, in the judgment of the Committee, have
a significant effect upon the performance of the Company and to such other key
employees as the Committee may from time to time designate.
Recommendations for the grant of Options under this Plan shall be made by
management to the Committee. The Committee has the full and exclusive power to
determine which of such eligible employees shall receive Options; provided,
however, that, subject to the limitations of this Plan, the Committee may
delegate to management the authority to determine (a) which of those Company
employees who are not Insiders are eligible for grants or awards of Options
hereunder, and (b) the number of such Options such employees are to be granted
or awarded.
6. OPTION GRANTS.
-------------
(a) The Committee shall determine the number of shares of Common Stock
to be included in each Option granted under this Plan, the type of grant or
grants each individual will receive, and the terms and conditions of each
grant to be set forth in the Stock Option Agreement. No grants for
fractional shares may be made.
-3-
<PAGE>
(b) In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Committee
shall be authorized to issue or assume stock options, whether or not in a
transaction to which Section 424(a) of the Code applies, by means of
substitution of a new Option for previously issued options or an assumption
of previously issued options.
(c) If any Option granted hereunder should expire or terminate for any
reason without having been exercised in full, the unpurchased shares shall
again become available for the granting of Options.
7. EXERCISE PRICE AND DELIVERY OF SHARES.
-------------------------------------
(a) The price at which shares of Common Stock may be purchased under
an Option shall be that price determined by the Committee at the time of
grant, but in any case such price shall not be less than the fair market
value of a share of Common Stock. No fractional shares shall be issued as a
result of the exercise of an Option. The payment of the exercise price for
all shares purchased shall be (w) by cash or check in full on the date of
exercise (such cash or check may be delivered on behalf of an optionee by a
stock broker designated by the Company to whom the optionee has submitted
an irrevocable notice of election, on forms approved by the Company, to
sell shares of Common Stock deliverable upon exercise of an Option), (x)
through the delivery of shares of Common Stock held by the Optionee for at
least six months and having a Fair Market Value equal to the full amount of
the exercise price, (y) by the withholding by the Company from the shares
of Common Stock issuable upon any exercise of the option that number of
shares having a Fair Market Value equal to such exercise price pursuant to
a written election delivered to the Committee at least six months prior to
the date of exercise, or (z) by a combination of such methods. The
Committee shall determine acceptable methods for tendering Common Stock and
may impose such limitations and prohibitions on the use of Common Stock to
exercise an Option as it deems appropriate.
(b) Upon the exercise of an Option, the Optionee will be required to
pay to the Company for remittance to the appropriate taxing authorities an
amount necessary to satisfy the employee's portion of federal, state and
local taxes, if any, incurred by reason of the exercise of an Option. In
lieu of delivering cash to satisfy such withholding obligation, the
Optionee may elect to have shares of Common Stock withheld from the shares
deliverable upon such exercise; provided, however, that an Insider who
desires to have shares of Common Stock withheld from the shares deliverable
upon such exercise to satisfy such withholding obligation must make such
election by notice in writing delivered to the Board of Directors either
(I) at least six months prior to the date the amount of the tax to be
withheld is determined (the "Tax Date") or (ii) prior to the Tax Date and
in any ten business day period beginning on the third business day
following the release of
-4-
<PAGE>
InterCoast's quarterly or annual summary statement of sales and earnings.
The number of shares so withheld shall have an aggregate Fair Market Value
on the date of exercise sufficient to satisfy the applicable tax
withholding requirements.
(c) Upon any exercise of an Option, the Optionee shall certify on a
form acceptable to the Committee that he or she is in compliance with the
terms and conditions of this Plan.
8. OPTION PERIOD AND EXERCISABILITY; ACCELERATION OF VESTING. Each
---------------------------------------------------------
Option granted under this Plan shall be exercisable for a period of 10 years
from the date of grant. Except as provided in Section 10 below, each Option
shall become exercisable in whole or in installments as set forth in the Stock
Option Agreement. Where Options are exercisable in installments, the right to
purchase any shares shall be cumulative, so that when the right to purchase any
shares has matured, such shares may be purchased thereafter until the expiration
of the Option. The Committee shall have the power to accelerate the
exercisability of installments for any Option granted under this Plan. Subject
to the immediately preceding sentence, when and if a "Triggering Event" occurs
with respect to InterCoast, all Options granted under this Plan which have not
been exercised, forfeited or canceled shall become immediately exercisable
without any action on the part of the Committee or the Board of Directors. A
Triggering Event shall be deemed to have occurred upon the acquisition by any
individual, corporation, firm or other entity, including the successors,
affiliates and associates thereof (within the meanings ascribed to "affiliates"
and "associates" in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act ), other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or any Subsidiary of the Company, or any
entity holding shares of Common Stock for or pursuant to the terms of any such
plan, of the beneficial ownership (for purposes of Section 13(d) of the Exchange
Act and Rule 13d-3 thereunder), directly or indirectly, of 25% or more of the
shares of Common Stock then outstanding without the consent or approval of the
Board of Directors.
9. AMENDMENT, MODIFICATION, SUSPENSION OR DISCONTINUANCE OF THIS PLAN.
------------------------------------------------------------------
Except as provided in this Section 9, the Board of Directors may amend, modify,
suspend or discontinue this Plan for the purpose of meeting any changes in legal
requirements or for any other purpose permitted by law. Except for any
adjustments pursuant to Section 12 below, the Board of Directors may not (a)
increase the maximum number of shares that may be purchased pursuant to the
exercise of Options, except with the approval of the stockholders of InterCoast
or (b) withdraw the administration of this Plan from the Committee.
10. TERMINATION OF EMPLOYMENT. If the employment of an Optionee with the
-------------------------
Company shall be terminated, the following rules shall apply:
-5-
<PAGE>
(a) In the event of termination of an Optionee's employment with the
Company "for cause" (as hereinafter defined), any Option granted to such
Optionee shall expire forthwith. An Optionee's employment with the Company
shall be deemed to be "for cause" if such employment is terminated by
reason of such Optionee's willful misconduct or intentional and continual
neglect of duties (other than any such failure resulting from an Optionee's
incapacity due to physical or mental illness) which, in the business
judgment of the Committee, has adversely affected the Company or is likely
to have an adverse effect on the Company or is intended to improperly
personally enrich the Optionee at the expense of the Company or by reason
of such Optionee's theft or conviction of a felony or any crime involving
dishonesty or moral turpitude.
(b) In the event of an Optionee's death either during employment with
the Company or following termination of employment due to retirement or
disability, the Optionee's estate or beneficiaries shall have a period of
up to the later of three years after the Optionee's death or the expiration
date specified in the Stock Option Agreement within which to exercise the
Option; and any Option may be immediately exercised in full (i.e., all
unvested options shall become fully vested) by the Optionee's estate or
beneficiaries. In the event the Optionee's estate is closed with
exercisable Options then unexercised, the rights under this paragraph (b)
shall pass by will or the laws of descent and distribution.
(c) In the event of an Optionee's disability during employment with
the Company, the Optionee, or his or her guardian or legal representative
shall have a period of up to the later of three years after the Optionee is
determined to be disabled or the expiration date specified in the Stock
Option Agreement within which to exercise the Option; and any Option may be
immediately exercised in full (i.e., all unvested options shall become
fully vested) by the Optionee, his or her guardian or legal representative
estate or beneficiaries. For purposes of this Plan, an individual is
disabled if he or she is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 6 months.
(d) If the Optionee's employment terminates as a result of retirement
in accordance with the terms of a Company retirement plan, Options
exercisable at the time of such retirement may be exercised for a period of
up to three years from the date of retirement, but not beyond the date the
Option otherwise would have expired in accordance with the Stock Option
Agreement establishing the term of the original grant; and any Option may
be immediately exercised in full (i.e., all unvested options shall become
fully vested).
(e) In the event an Optionee terminates his employment with the
Company voluntarily or his employment with the Company is terminated other
than "for cause," Options exercisable at the time of such retirement (i.e.,
unvested Options shall be
-6-
<PAGE>
forfeited) may be exercised for a period of up to ninety days from the date
of such Optionee's termination of employment with the Company, but not
beyond the date the Option otherwise would have expired in accordance with
the Stock Option Agreement establishing the term of the original grant.
Notwithstanding anything to the contrary contained in this Section 10, at
termination of employment for any reason, the Committee may, in its sole
discretion, (I) authorize the continuation of Options granted prior to
termination, including without limitation Options granted less than one year
prior to such termination, as if the Optionee were still employed by the
Company, and (ii) permit the exercise of such Options during periods after such
termination of employment but not beyond the original expiration date of the
Option.
11. NONASSIGNABILITY.
----------------
(a) Except as set forth in paragraphs (b) of this Section 11 (I) no
Option or any other benefit under this Plan shall be transferable or
assignable otherwise than by will or the laws of descent and distribution,
and (ii) no Option shall be exercisable during the lifetime of the person
to whom it was granted except by such person or such person's guardian or
legal representative.
(b) An Optionee may assign his or her rights in Options to one or more
members of his or her immediate family (spouse, children and parents) or to
one or more trusts of which the only beneficiaries are the Optionee or
members of his or her immediate family and the Optionee's assignees shall
be entitled to exercise such Optionee's rights if, at the time of such
assignment, (I) such Optionee is not an Insider (provided, that this
restriction shall be eliminated if so permitted under the rules promulgated
by the SEC under Section 16 of the Exchange Act), and (ii) the Committee
approves in writing and in advance the assignment proposed by such
Optionee.
12. ADJUSTMENTS. In the event of a merger, consolidation, reorganization,
-----------
recapitalization, stock split or stock dividend or a combination or
reclassification of shares, the number of shares of Common Stock reserved under
this Plan, the number of shares covered by outstanding Options and the exercise
prices of outstanding Options shall be adjusted proportionately. In the event
of any other change affecting the Common Stock, such adjustments as may be
deemed equitable by the Board of Directors, in its sole discretion, shall be
made to give proper effect to such event. The Committee may make adjustments to
avoid fractional shares.
13. LIMITATIONS AS TO COVERED EMPLOYEES. Notwithstanding the provisions of
-----------------------------------
Sections 6 and 7 hereof, no covered employee may be granted options entitling
him or her to acquire more
-7-
<PAGE>
than 150,000 shares in any one calendar year and the exercise price per share
for all options granted to covered employees must equal or exceed the Fair
Market Value.
14. GOVERNMENT REGULATIONS. The Company's obligation to sell and deliver
----------------------
shares under an Option granted under this Plan is subject to the requirements of
any governmental authority with jurisdiction over the authorization, issuance or
sale of such shares.
15. NOTICE. Any written notice to InterCoast or the Company required or
------
permitted by any of the provisions of this Plan shall be addressed to the
Chairman of the Committee or to the Chief Executive Officer of InterCoast at the
principal offices of InterCoast and shall become effective only when it is
received by the office of such Chairman or Chief Executive Officer. Any written
notice to an Optionee required or permitted by any of the provisions of this
Plan shall be addressed to such Optionee at his or her address as reflected in
the records of the Company and shall become effective on the third day after
mailing to such Optionee.
16. COMPANY BENEFIT AND COMPENSATION PLANS. Nothing contained in this
--------------------------------------
Plan shall prevent any Optionee, prior to death, or any Optionee's dependents or
beneficiaries, after such Optionee's death, from receiving, in addition to any
Options provided for under this Plan, any salary, incentive or performance plan
awards, payments under a Company retirement plan or other benefits that may be
otherwise payable or distributable to such Optionee, or to such Optionee's
dependents or beneficiaries under any other plan or policy of the Company or
otherwise. To the extent permitted by law, grants of Options under this Plan may
be made in combination with, or as alternatives to, grants, awards or payments
under other Company plans.
17. REPRESENTATIONS AND WARRANTIES. No employee shall at any time have a
------------------------------
right (a) to be selected as a participant in this Plan, or (b) having been
selected as a participant for one grant, to be selected as a participant for any
other grant. No person shall have any authority to enter into any agreement
assuring such selection or making any warranty or representation with respect
thereto. An Optionee shall have no rights to or interest in any Option except
as set forth herein.
18. UNFUNDED PLAN. Insofar as it provides for grants of Options to
-------------
acquire shares of Common Stock in the future, this Plan shall be unfunded.
Although bookkeeping accounts may be established with respect to Optionees who
are entitled to Common Stock under this Plan, any such accounts shall be used
merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by Common Stock
purchasable under this Plan, and this Plan shall not be construed as providing
for such segregation. Neither the Company nor the Board of Directors nor the
Committee shall be deemed
-8-
<PAGE>
to be a trustee of any Common Stock purchasable under this Plan. Any liability
of the Company to an Optionee with respect to a grant under this Plan shall be
based solely upon any contractual obligations that may be created by this Plan
and the Stock Option Agreement; no such obligation of the Company shall be
deemed to be secured by any pledge or other encumbrance on any property of the
Company. Neither the Company nor the Board of Directors nor the Committee shall
be required to give any security or bond for the performance of any obligation
that may be created by this Plan.
19. GOVERNING LAW. This Plan and all determinations made and actions
-------------
taken pursuant to this Plan, to the extent not otherwise governed by the Code,
the Securities Act or the Exchange Act, shall be governed by the laws of the
State of Delaware (without regard to the conflicts of laws rules thereof) and
construed accordingly.
20. EFFECTIVE DATE AND TERMINATION. This Plan shall become effective on
------------------------------
the date the Initial Public Offering is consummated. Any Options granted by the
Committee prior to such approval shall be granted subject to such consummation
and, upon such consummation, shall be effective as of the date of grant. No
Options may be granted on or after the tenth anniversary of such date. This
Plan shall terminate on the earlier of the tenth anniversary of the date the
Initial Public Offering is consummated or the date the Board of Directors
declares it terminated and no Options may be awarded or granted hereunder after
this Plan has terminated.
The undersigned, being the duly elected Secretary of InterCoast Energy
Company, does hereby certify that the InterCoast Energy Company Long Term
Incentive Plan was duly approved by the Board of Directors of InterCoast Energy
Company on May 22, 1996 and by the stockholders of InterCoast Energy Company on
May 22, 1996.
------------------------------------
Secretary of
InterCoast Energy Company
-9-
<PAGE>
Optionee: ____________________________
Shares: ____________________________
Date: __________________, ________
NON-QUALIFIED STOCK OPTION
AGREEMENT
UNDER THE INTERCOAST ENERGY COMPANY
LONG TERM INCENTIVE PLAN
------------------------
THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is made and
entered into as of _________, 199__, by and between InterCoast Energy Company, a
Delaware corporation ("InterCoast"), and the below named individual
("Optionee").
R E C I T A L S
- - - - - - - -
A. Optionee is an officer or key employee of InterCoast or a subsidiary of
InterCoast (collectively, the "Company").
B. InterCoast desires to provide an additional inducement to Optionee to
remain in the employ of the Company and to provide a means for Optionee to
acquire a proprietary interest in InterCoast.
NOW, THEREFORE, in consideration of the presently existing employment
relationship between the Company and Optionee, and as an additional inducement
to Optionee to remain in the employ of the Company, and in order to provide a
means for Optionee to acquire a proprietary interest in InterCoast, it is agreed
between InterCoast and Optionee as follows:
1. Defined Terms. As used herein, the following terms shall have the
-------------
following meanings:
(a) "Plan" shall mean the InterCoast Energy Company Long Term
Incentive Plan, including any amendments thereto.
(b) "Optionee" shall mean _____________.
(c) "Option Shares" shall mean _____ shares of the Common Stock of the
Company, par value $0.01 per share.
<PAGE>
(d) "Expiration Date" shall mean __________, 200__.
(e) "Committee" shall have the meaning set forth in the Plan.
Terms used herein and not defined herein shall have the meanings ascribed to
them in the Plan.
2. Option Grant. The Company hereby grants to Optionee, subject to the
------------
terms hereof and the terms of the Plan, the right and option to purchase all or
any part of the Option Shares on or before the Expiration Date (the "Option");
provided, however, that the Option shall mature and become exercisable in three
cumulative installments of _____ shares, _____ shares and _____ shares on
_________, ____, ________, ____, and ________, ____, respectively. No exercise
as to a portion of the Option Shares shall preclude a later exercise or
exercises as to additional portions. The Option shall be exercisable only (a)
as provided in paragraph 3(b) hereof, (b) during such time as Optionee remains
in the employ of the Company, (c) in the event of disability (for purposes of
this Agreement, Optionee shall be considered disabled if he/she is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 6 months) or death during employment, or retirement in accordance
with the terms of a Company retirement plan, until the earlier of the Expiration
Date or three years after commencement of Optionee's disability, Optionee's
death or Optionee's retirement, respectively, or (d) in the event of Optionee's
voluntary termination of employment with the Company or termination other than
"for cause" (as such term is defined in the Plan), until the earlier of the
Expiration Date or ninety days after Optionee's termination of employment with
the Company.
3. Terms and Conditions of the Option. The Option shall be subject to the
----------------------------------
following terms and conditions:
(a) Exercise Price. The price to be paid for each of the Option Shares
--------------
with respect to which the Option is exercised, shall be $_____ (the
"Exercise Price").
(b) Exercise of Option. The Option shall be exercisable as specified
------------------
herein and in the Plan. Payment of the Exercise Price for the number of
shares as to which the Option is being exercised shall be (I) by cash or
check and in full on the date of exercise (such cash or check may be
delivered on behalf of an optionee by a stock broker designated by the
Company to whom the optionee has submitted an irrevocable notice of
election, on forms approved by the Company, to sell shares of Common Stock
deliverable upon exercise of an Option), (ii) through the delivery of
shares of Common Stock held by Optionee for at least six months and having
a Fair Market Value (as defined in the Plan) equal to the full amount of
the Exercise Price, (iii) by the withholding by the Company from the shares
of Common Stock issuable upon any exercise of the option that number of
shares
-2-
<PAGE>
having a Fair Market Value equal to such exercise price pursuant to a
written election delivered to the Committee at least six months prior to
the date of exercise, or (iv) by a combination of such methods. The Option
shall not be exercisable with respect to fractions of a share.
(c) Notice of Exercise. Each exercise of the Option shall be by
------------------
written notice to the Company. Each such notice shall state the number of
Option Shares with respect to which the Option is being exercised and shall
specify a date, not less than five nor more than ten days after the date of
such notice, as the date on which the shares will be delivered and payment
made therefor at the principal offices of the Company. If any law or
regulation requires the Company to take any action with respect to the
shares specified in such notice, then the date for delivery of such shares
against payment therefor shall be extended for the period necessary to take
such action. In the event of any failure to pay for the number of shares
specified in such notice on the date set forth therein, subject to such
date being extended as provided above, the Option shall terminate with
respect to such number of shares, but shall continue with respect to the
remaining shares covered by this Agreement and not yet acquired by exercise
of the Option or any portion thereof.
(d) Investment Representation. If shares of stock issued pursuant to
-------------------------
exercise of the Option have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), Optionee agrees to represent and
warrant in writing at the time of any exercise of the Option or any portion
thereof that the Option Shares are being purchased only for investment and
without any present intention to sell or distribute such shares, and
further agrees that shares so acquired may be appropriately legended and
will be sold or transferred only in accordance with the rules and
regulations of the Securities and Exchange Commission (the "SEC") or any
applicable law, regulation, or rule of any governmental agency.
(e) Taxes. Optionee shall pay all original issue or transfer taxes and
-----
all other fees and expenses incident to the issue, transfer, or delivery of
Option Shares.
(f) Nonassignability. The Option shall be exercisable during
----------------
Optionee's lifetime only by Optionee, and, except as specifically permitted
under the Plan, shall not be assigned, transferred, pledged, hypothecated,
sold or otherwise disposed of, in whole or in part, voluntarily or
involuntarily, any such assignment, transfer, pledge, hypothecation, sale
or other disposition being void and of no effect; provided, however, that
the Option shall be transferable by will or the laws of descent and
distribution.
(g) No Rights Until Issue. No right to vote or receive dividends or
---------------------
any other rights as a stockholder of the Company shall exist with respect
to the Option
-3-
<PAGE>
Shares, notwithstanding the exercise of the Option, until the issuance to
the Optionee of a stock certificate or certificates representing such
shares.
(h) Anti-dilution. In the event of a merger, consolidation,
-------------
reorganization, recapitalization, stock dividend, stock split or other
change in the corporate structure or capitalization of the Company, the
number of Option Shares and the exercise price shall be subject to
appropriate adjustments as described in the Plan.
The Option is also subject to, and, by accepting and executing this Agreement,
Optionee agrees to be bound by, all of the terms, provisions, limitations and
conditions of the Plan.
4. The Plan. Optionee acknowledges receipt of a copy of the Plan and
--------
represents that he/she is familiar with the terms and provisions thereof and
hereby accepts the Option subject to all such terms and provisions.
5. Withholding. Upon the exercise of an Option, the Optionee will be
-----------
required to pay to the Company for remittance to the appropriate taxing
authorities an amount necessary to satisfy the employee's portion of federal,
state and local taxes incurred by reason of the exercise of an Option. In lieu
of delivering cash to satisfy such withholding obligation, the Optionee may
elect to have shares of Common Stock withheld from the shares deliverable upon
such exercise; provided, however, that, if the Optionee is an Insider he or she
must make such election by notice in writing delivered to the Board of Directors
either (I) at least six months prior to the date the amount of the tax to be
withheld is determined (the "Tax Date") or (ii) prior to the Tax Date and in any
ten business day period beginning on the third business day following the
release of InterCoast's quarterly or annual summary statement of sales and
earnings. The number of shares so withheld shall have an aggregate Fair Market
Value, as such term is defined in the Plan, on the date of exercise sufficient
to satisfy the applicable tax withholding requirements.
6. Employment. Nothing in the Plan or in this Agreement shall confer upon
----------
Optionee any right to continued employment as an employee of the Company or
interfere in any way with the right of the Company to terminate Optionee's
employment at any time.
7. Transferability of Shares of Common Stock. In the event a registration
-----------------------------------------
statement with respect to the issuance of Option Shares to Optionee upon the
exercise of the Option or any portion thereof is not in effect at the time of
such issuance of Option Shares by the Company, at the time of the proposed
transfer of Option Shares, Optionee shall not offer, sell, hypothecate, transfer
or otherwise dispose of any of the Option Shares
-4-
<PAGE>
issued pursuant to the exercise of the Option or any portion thereof unless
either (a) a registration statement with respect to such Option Shares is then
in effect under the Securities Act, and any applicable state securities laws,
and such offer, sale, transfer or other disposition is accompanied by a
prospectus relating to such registration statement and meeting the requirements
of the Securities Act; or (b) counsel satisfactory to InterCoast renders an
opinion in writing, addressed to InterCoast and acceptable to InterCoast and its
counsel, to the effect that, in the opinion of such counsel, such proposed
offer, sale, transfer or other disposition of such Option Shares is exempt from
the provisions of Section 5 of the Securities Act and the applicable state
securities laws in view of the circumstances of such proposed offer, sale,
transfer or other disposition.
8. Binding Agreement. This Agreement shall be binding upon and shall
-----------------
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, trustees, successors and assigns.
EXECUTED as of the day and year first above written.
"InterCoast"
InterCoast Energy Company
By:____________________________________
Name:______________________________
Title:_____________________________
"Optionee"
_______________________________________
Name:__________________________________
-5-
<PAGE>
EXHIBIT 10.6
INTERCOAST ENERGY COMPANY
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN
1. PURPOSE. The purpose of the InterCoast Energy Company Non-Employee
-------
Director Restricted Stock Plan (the "Plan") is to attract and retain outstanding
individuals to serve as members of the Board of Directors of InterCoast Energy
Company (the "Company") and to furnish incentives to such persons by providing
such persons opportunities to acquire shares of common stock of the Company
("Common Stock") on terms as herein provided.
2. SHARES RESERVED UNDER THIS PLAN. There is hereby reserved for
-------------------------------
issuance under this Plan an aggregate of Fifty Thousand (50,000) shares of
Common Stock, which may be newly-issued or treasury shares. If there is a
forfeiture or cancellation of any shares of Common Stock awarded under this
Plan, all of such forfeited or canceled shares may again be used for new awards
of Common Stock under this Plan; provided, however, that in no event may the
number of shares of Common Stock issued under this Plan exceed the total number
of shares reserved for issuance hereunder.
3. ELIGIBILITY. Each member of the Board of Directors of the Company
-----------
(the "Board") who is not an employee of the Company or of an Affiliate (an
"Eligible Director" or "Participant") shall be eligible to participate under
this Plan; provided, however, any Eligible Director may decline any award of
Common Stock which would otherwise be granted hereunder. An "Affiliate" of any
Person shall mean any other Person: (a) which directly or indirectly controls,
or is controlled by, or is under common control with, such Person; (b) which
directly or indirectly beneficially owns or holds 10% or more of the Voting
Stock of such Person; or (c) 10% or more of the Voting Stock of which is
directly or indirectly beneficially owned or held by such Person. The term
"control" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract, or otherwise;
the term "Person" shall mean any natural person, corporation, firm, joint
venture, partnership, association, enterprise, trust or other entity or
organization, or any government or political subdivision or any agency,
department or instrumentality thereof; and the term "Voting Stock" of any Person
shall mean shares (however designated) of such Person having ordinary voting
power for the election of a majority of the directors (or other governing body)
of such Person, other than shares having such power only by reason of the
happening of a contingency.
4. COMMON STOCK AWARDS. Participants under this Plan shall be awarded
-------------------
shares of Common Stock as follows:
(a) "Restricted Stock" shall mean shares of Common Stock which are
----------------
subject to a "Restriction Period" as such term is defined at Section 9,
during which such Stock is subject to a restriction of some kind including
one that creates a substantial risk of forfeiture.
(b) "Restricted Stock Award" shall mean an award of Restricted Stock
----------------------
under this Plan.
(c) Initial Awards. On the date each Eligible Director is first
--------------
elected or appointed to the Board, each such Eligible Director shall
receive a Restricted Stock Award (an "Initial Award") of 1,000 shares of
Common Stock.
<PAGE>
(d) Annual Awards. On the day of each annual stockholders' meeting of
-------------
the Company, each Eligible Director who will continue to serve as a
director of the Company after such meeting shall receive a Restricted Stock
Award (an "Annual Award") consisting of 800 shares of Common Stock.
5. DELIVERY OF CERTIFICATES. During the Restriction Period, a
-------------------------
certificate or certificates representing a Restricted Stock Award may be
registered in the holder's name and may bear a legend, in addition to any legend
which may be required pursuant to Section 6, indicating that the ownership of
the shares of Common Stock represented by such certificate is subject to the
restrictions, terms and conditions of this Plan. All such certificates shall be
deposited with the Company, together with stock powers or other instruments of
assignment (including power of attorney), each endorsed in blank with a
guarantee of signature if deemed necessary or appropriate, which would permit
transfer to the Company of all or a portion of the shares of Common Stock
subject to the Restricted Stock Award in the event such award is forfeited in
whole or in part. All forfeited shares of Common Stock shall become authorized
but unissued shares. Upon termination of any applicable Restriction Period and
subject to the Company's right to require payment of any taxes in accordance
with Section 13(b), a certificate or certificates evidencing ownership of the
requisite number of shares of Common Stock shall be delivered to the holder of
such award.
6. OTHER PROVISIONS; SECURITIES REGISTRATION. An award of shares of
-----------------------------------------
Common Stock under this Plan may be subject to such other provisions as counsel
to the Company deems appropriate, including, without limitation, provisions
imposing restrictions on resale or other disposition of such shares and such
provisions as may be appropriate to comply with federal or state securities laws
and stock exchange requirements. The Company shall not be required to issue or
deliver any certificate for Common Stock awarded under this Plan prior to the
admission of such shares to listing on any stock exchange on which Common Stock
at that time may be listed. If, at any time during the period after an award of
shares under this Plan and the issuance of the certificate(s) for such shares,
the Company shall be advised by its counsel that the shares deliverable upon
vesting are required to be registered under the Securities Act of 1933, as
amended (the "Securities Act"), or any state securities law, or that delivery of
such shares must be accompanied or preceded by a prospectus meeting the
requirements of the Securities Act, the Company will use its best efforts to
effect such registration or provide such prospectus not later than a reasonable
time following an award of shares under this Plan, but delivery of a certificate
for such shares by the Company may be deferred until such registration is
effected or such prospectus is available.
All certificates for Common Stock delivered under the terms of this Plan
shall be subject to such stop-transfer orders and other restrictions as counsel
to the Company may deem advisable under federal or state securities laws, rules
and regulations thereunder, and the rules of any stock
-2-
<PAGE>
exchange on which Common Stock may be listed. The Company may cause a legend or
legends to be placed on any such certificates to make appropriate reference to
such restrictions or any other restrictions or limitations that may be
applicable to such shares.
7. EFFECTIVE DATE AND TERM OF PLAN. This Plan shall become effective
-------------------------------
upon, and only in the event of, consummation of the "Initial Public Offering."
For purposes of this Plan, the term "Initial Public Offering" shall mean that
offering and sale of shares of Common Stock to the public pursuant to a
registration statement to be filed with the SEC in accordance with the
Securities Act expected to be consummated on or before September 1, 1996 and
after which such shares are registered under Section 12(b) or (g) of the
Exchange Act and listed for trading on a national stock exchange or approved for
trading on Nasdaq. No shares of Common Stock shall be awarded under this Plan
more than ten (10) years after the date of its approval by the stockholders of
the Company.
8. AMENDMENT OF THE PLAN. The Board may amend this Plan from time to
---------------------
time or terminate this Plan at any time, but no such action shall reduce the
number of shares of Common Stock awarded to any Eligible Director or adversely
change the vesting provisions thereof without the Eligible Director's consent.
However, notwithstanding the foregoing, no amendment may (I) materially increase
the benefits accruing to Eligible Directors; (ii) materially increase the total
number of shares which may be issued under this Plan; or (iii) materially modify
the requirements as to eligibility for participation in this Plan, and this Plan
may not be amended more frequently than once every six months, other than to
comport with changes in the Internal Revenue Code of 1986, as amended (the
"Code"), or the rules thereunder, and no amendment shall be adopted which would
result in any Eligible Director losing his status as a "disinterested"
administrator under Securities and Exchange Commission Rule 16b-3 ("Rule 16b-3")
with respect to any employee benefit plan of the Company or result in this Plan
losing its status as a protected plan under Rule 16b-3.
9. RESTRICTION PERIODS. All of the shares of Common Stock issued
pursuant to the Restricted Stock Awards hereunder may not be sold, transferred,
assigned, pledged, hypothecated or otherwise encumbered or disposed of, from the
time an Eligible Director becomes a member of the Board of Directors of the
Company until the earliest to occur of the following:
(a) the Eligible Director's death or Disability while serving as a member
of the Board;
(b) failure of the Eligible Director to be reelected to the Board after
being duly nominated;
(c) removal from the Board or failure to be duly nominated for reelection
to the Board, in either event, following a Change in Control of the
Company;
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<PAGE>
(d) retirement from the Board; and
(e) removal from the Board other than for Cause.
For purposes of this Section 9, the term "Disability" shall mean the
inability of an Eligible Director to perform substantially such person's duties
and responsibilities for a continuous period of at least six months, as
determined solely by the Board of Directors; and the term "Cause" shall mean any
act of dishonesty, commission of a felony, significant activities harmful to the
reputation of the Company, refusal to perform or substantial disregard of duties
properly assigned or significant violation of any statutory or common law duty
of loyalty to the Company.
Additionally "Change of Control" shall be deemed to have occurred upon the
acquisition by any individual, corporation, firm or other entity, including the
successors, affiliates and associates thereof (within the meanings ascribed to
"affiliates" and "associates" in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act), other than the Company, any Subsidiary of the Company,
and employee benefit plan of the Company or any Subsidiary of the Company, or
any entity holding shares of Common Stock for or pursuant to the terms of any
such plan, of the beneficial ownership (for purposes of Section 13(d) of the
Exchange Act and Rule 13d-3 thereunder), directly or indirectly, of 25% or more
of the shares of Common Stock then outstanding without the consent or approval
of the Board of Directors.
10. GOVERNMENT REGULATIONS. The Company's obligation to deliver shares
----------------------
under of Common Stock awarded under this Plan is subject to the requirements of
any governmental authority with jurisdiction over the authorization, issuance or
sale of such shares.
11. NOTICE. Any written notice to the Company shall be addressed to the
------
President of the Company at the principal offices of the Company and shall
become effective only when it is received by the office of such President. Any
written notice to a Eligible Director shall be addressed to such Eligible
Director at his address as reflected in the records of the Company and shall
become effective only when it is received by such Eligible Director.
12. UNFUNDED PLAN. Insofar as it provides for the vesting of awards of
-------------
shares of Common Stock in the future, this Plan shall be unfunded. Although
bookkeeping accounts may be established with respect to Eligible Directors who
are entitled to Common Stock under this Plan, any such accounts shall be used
merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by Common Stock the
entitlement to which may vest in an Eligible Director under this Plan, and this
Plan shall not be construed as providing for such segregation. Neither the
Company nor the Board shall be deemed to be a trustee of any Common Stock which
has been awarded or the entitlement to which may vest in an Eligible Director
under this Plan. Any liability of the Company to a Eligible Director
-4-
<PAGE>
with respect to an award under this Plan shall be based solely upon any
contractual obligations that may be created by this Plan; no such obligation of
the Company shall be deemed to be secured by any pledge or other encumbrance on
any property of the Company. Neither the Company nor the Board shall be
required to give any security or bond for the performance of any obligation that
may be created by this Plan.
13. GENERAL PROVISIONS.
------------------
(a) Governing Law. The validity, interpretation, construction and
-------------
effect of this Plan and any rules and regulations relating to this Plan, to
the extent not otherwise governed by the Code, the Securities Act or the
Exchange Act, shall be governed by the laws of the State of Delaware
(without regard to the conflicts of law rules thereof).
(b) Tax Withholding. The Company shall have the right to require,
---------------
prior to the issuance or delivery of any shares of Common Stock or the
payment of any cash pursuant to an award made hereunder, payment by the
holder of such award of any Federal, state, local or other taxes which may
be required to be withheld or paid in connection with such award.
(c) Severability. If any provision of this Plan is or becomes or is
------------
deemed invalid, illegal or unenforceable in any jurisdiction, or would
disqualify this Plan or any option under any law deemed applicable by the
Company, such provision shall be construed or deemed amended to conform to
applicable laws or if it cannot be construed or deemed amended without, in
the determination of the Company, materially altering the intent of this
Plan, it shall be deleted and the remainder of this Plan shall remain in
full force and effect; provided, however, that, unless otherwise determined
by the Company, the provisions shall not be construed or deemed amended or
deleted with respect to any Eligible Director whose rights and obligations
under this Plan are not subject to the law of such jurisdiction or the law
deemed applicable by the Company.
The undersigned, being the duly elected Secretary of InterCoast Energy
Company, does hereby certify that (I) the InterCoast Energy Company Non-Employee
Director Restricted Stock Plan was duly approved and adopted by the Board of
Directors of InterCoast Energy Company on May 22, 1996, and by the stockholders
of InterCoast Energy Company on May 22, 1996.
----------------------------------------
Secretary of
InterCoast Energy Company
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<PAGE>
EXHIBIT 10.7
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement (this "Agreement"), dated as of
April 12, 1996, is by and between Medallion Production Company, a Delaware
corporation ("Medallion"), and InterCoast Global Management, Inc., a Delaware
corporation ("InterCoast").
In consideration of the promises hereinafter set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, InterCoast and Medallion agree as follows:
1. Purchase and Sale. Subject to the terms and conditions herein set
-----------------
forth, upon the Closing (as hereinafter defined) Medallion shall sell to
InterCoast and InterCoast shall purchase from Medallion the Subject Properties
(as hereinafter defined).
2. Consideration. At the Closing InterCoast agrees to (i) pay to
-------------
Medallion in cash or cash equivalent the sum of $5,615,000, and (ii) execute and
deliver to Medallion a promissory note in the form attached hereto as Exhibit A
---------
in the original principal amount of $2,315,000. As further consideration
hereunder, Medallion shall except and reserve unto itself a production payment
(the "Production Payment") payable out of production from the Subject Properties
pursuant to the terms of the Assignment and Agreement (the "Assignment and
Agreement") in the form attached hereto as Exhibit B.
---------
3. Effective Date of Sale. The effective date for the purchase and sale
----------------------
hereunder shall be April 12, 1996, at 7:00 a.m., Texas time (the "Effective
Date"). All operating and other costs, expenses and charges attributable to the
Subject Properties and incurred prior to the Effective Date shall be the
responsibility and obligation of Medallion and Medallion shall be entitled to
all of the proceeds from the sale of production attributable to the Subject
Properties accrued prior to the Effective Date. All operating and other costs,
expenses and charges attributable to the Subject Properties and incurred at or
after the Effective Date shall be the responsibility and obligation of
InterCoast and, subject to the terms of the Assignment and Agreement, InterCoast
shall be entitled to all of the proceeds from the sale of production
attributable to the Subject Properties accrued at or after the Effective Date.
Ad valorem taxes, prepaid utility charges and prepaid rentals and other prepaid
expenses relating to the Subject Properties shall be prorated to the Effective
Date. At the Closing the parties hereto shall account to and reimburse or pay
each other for their respective shares of such costs, expenses, charges and
proceeds to the extent the same may reasonably be estimated. It is recognized
that the exact amounts of all of these sums may not be available to the parties
at the Closing, in which event a determination of such reimbursements, payments
and other accounting adjustments required by this Agreement shall be made as
soon as possible and in any event within 120 days after the Closing, and at that
time such sums as may be found due by such determination shall be paid by the
party owing the same to the other party.
<PAGE>
4. Closing. The closing (the "Closing") of the transactions provided for
-------
in this Agreement shall take place at 11:00 a.m. at the offices of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., 1900 Pennzoil Place - South Tower, 711 Louisiana
Street, Houston, Texas, unless a different date, time or place shall be agreed
upon in writing in advance by the parties.
5. Subject Properties. "Subject Properties" means all of Medallion's
------------------
right, title and interest in and to the leases described on Exhibit C (the
---------
"Leases") insofar and only insofar as the Leases cover oil and gas capable of
being produced from the Canyon Sand formation under the lands covered by the
Leases, and insofar and only insofar as said oil and gas can be produced from
the wells described on Exhibit C (the "Wells"), including such of Medallion's
---------
leasehold or operating rights as may be required to operate the Wells and to
produce and market such oil and gas, together with all of Medallion's right,
title and interest in and to (i) agreements insofar as the same relate to or are
appurtenant to such limited leasehold or operating rights and (ii) all personal
property and equipment relating to the Wells up to and including the separator
(or where there is no separator, up to and including the metering equipment) and
other such surface equipment and flowlines appurtenant thereto (but specifically
excluding any equipment downstream of the separator, or where there is no
separator, downstream of the metering equipment). There is specifically
excluded and reserved from the Subject Properties (i) all of the other right,
title and interest of Medallion in and to the Leases and in and to oil and gas
under or allocated to the Leases to the extent the same is produced and
developed from other formations in the same Well or from other or the same
formation(s) in other existing or future wellbores and (ii) the concurrent right
to utilize the personal property, equipment and flowlines relating to the Wells
to the extent necessary for Medallion to operate the portion of the Leases which
it has retained hereunder.
6. Title Matters. Medallion shall transfer title to the Subject
-------------
Properties to InterCoast at Closing pursuant to the terms of the Assignment and
Agreement.
7. Review of Documents. Subsequent to the execution of this Agreement by
-------------------
both parties, InterCoast and its representatives shall be entitled to examine
and copy Medallion's records with respect to the Subject Properties, including
but not limited to all lease files, gas contracts, operating agreements, deeds
and documents of title, all other property records, all geological, geophysical
and other records, and all other contracts, agreements and documents relating to
the Subject Properties.
8. Covenants of Medallion. Medallion hereby covenants that:
----------------------
A. So long as Medallion shall remain as manager of the Subject
Properties or otherwise controls the marketing of production from the Subject
Properties, all non-liquid production from the Wells will be sold to persons who
are not related to InterCoast (within the meaning of Section 29(d)(7) of the
Internal Revenue Code of 1986, as amended (the "Code")).
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<PAGE>
B. So long as Medallion shall remain as manager of the Subject
Properties or otherwise controls the marketing of production from the Subject
Properties, no non-liquid production from the Wells will be sold under any
contract for sale at a price that is either unlawful or determined with regard
to Section 107 of the Natural Gas Policy Act of 1978, as amended (the "NGPA"),
or Subtitle B of Title I of the NGPA, within the meaning of Section 29(e)(1) of
the Code.
9. Subrogation of Rights. The parties acknowledge that the Subject
---------------------
Properties were acquired by Medallion pursuant to the Purchase and Sale
Agreement (the "Enron Agreement") dated March 30, 1996, between Enron Oil & Gas
Company, Enron Oil & Gas Marketing, Inc. and Medallion, as amended. Pursuant to
the Assignment and Agreement to be delivered hereunder, InterCoast shall be
entitled to full substitution and subrogation as to the covenants, warranties,
agreements and indemnities heretofore given or made in respect of all or any
part of the interests in the Subject Properties being assigned, including,
without limitation, all such covenants, warranties, agreements and indemnities
made by the sellers under the Enron Agreement and any assignment delivered
pursuant thereto.
10. Preferential Rights. The parties acknowledge that certain of the
-------------------
Subject Properties are subject to preferential rights to purchase. In the event
any holder of such rights exercises its rights to purchase a portion of the
Subject Properties, the following shall occur: (i) InterCoast shall execute
appropriate assignments quit-claiming its interest in the affected Subject
Properties to the party exercising such preferential rights to purchase, and
(ii) the amount of cash consideration and the principal amount of the promissory
note delivered pursuant to paragraph 2 hereof shall be reduced by the cash
consideration paid by the exercising party and the principal amount of the
promissory note delivered by the exercising party. The parties agree to execute
and exchange such documents, and refund such monies, as are necessary to
effectuate the foregoing.
11. Fees and Expenses. InterCoast shall pay all sales and transfer taxes
-----------------
and recording fees. No commission or brokerage fee will be paid by either party
in connection with this Agreement, and each party represents and warrants to the
other that it has not incurred any such obligations.
12. Repurchase. Medallion shall have the right to repurchase the Subject
----------
Properties pursuant to the provisions of the Assignment and Agreement.
13. Further Assurances. It is intended herein for InterCoast to acquire
------------------
all of Medallion's interest in the Subject Properties, subject to the Production
Payment. At Closing and thereafter as may be required, Medallion and InterCoast
shall timely execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, such instruments (including corrective instruments)
and take such other action as reasonably may be necessary or advisable to
evidence and effectuate the transfer of titles hereunder, and to carry out their
respective obligations under this Agreement and under any instrument delivered
pursuant thereto.
-3-
<PAGE>
14. Investment Representation. InterCoast represents and warrants that
-------------------------
(i) InterCoast is acquiring the Subject Properties solely for its own account,
for investment purposes only and not with a view to, or for resale in connection
with, any distribution thereof; (ii) InterCoast is aware and acknowledges being
informed that the Subject Properties have not been registered under any
applicable federal or state securities laws by reason of exemption thereunder
and must be held indefinitely unless they are subsequently registered under said
laws or an exemption from such registration is available, and they are disposed
of pursuant to such exemption; (iii) InterCoast is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended; (iv) InterCoast understands that the oil and gas business is highly
speculative and Medallion makes no representations to InterCoast as to the
success or financial gain which may result from InterCoast's acquisition of the
Subject Properties; (v) InterCoast, either alone or with InterCoast's advisors,
has sufficient knowledge and experience in business, financial matters to
evaluate the merits and risks of an investment in the Subject Properties; (vi)
InterCoast's financial situation enables it to bear the economic risks of the
purchase of the Subject Properties for an indefinite period of time, which risks
may include the loss by InterCoast of its entire investment in the Subject
Properties; and (vii) InterCoast has satisfied itself as to the qualification of
the transactions contemplated by this Agreement to generate tax credits pursuant
to Section 29 of the Code which accrue to the benefit of InterCoast and
InterCoast's ability to utilize such tax credits.
15. Notices. All notices, statements, payments and communications between
-------
the parties hereto shall be deemed to have been sufficiently given and delivered
only when actually received by the party to whom directed or when delivered to
the following address:
If to Medallion:
Medallion Production Company
Attention: W. E. Warnock, Jr.
7130 South Lewis Avenue, Suite 700
Tulsa, Oklahoma 74136
If to InterCoast:
InterCoast Global Management, Inc.
Attention: President
666 Grand Avenue, 26th Floor
Des Moines, Iowa 50309
Any party or the successors or assigns of the interest or rights of any party
hereunder may change its address or designate a new or different address or
addresses for the purposes hereof by similar notice given or directed to all
parties interested hereunder at the same time.
16. Amendments. This Agreement may not be amended nor any rights
----------
hereunder be waived except by an instrument in writing signed by the party to be
charged with such amendment or waiver.
-4-
<PAGE>
17. Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
18. Governing Law. This Agreement and the transactions contemplated
-------------
hereby shall be construed in accordance with, and governed by, the laws of the
State of Texas.
19. Texas Deceptive Trade Practices Act Waiver. InterCoast represents and
------------------------------------------
warrants to Medallion that InterCoast: (a) is acquiring the Subject Properties
for commercial or business use, (b) has assets of $25,000,000 or more or is
owned or controlled by a corporation or entity with assets of $25,000,000 or
more, and (c) has knowledge and experience in financial and business matters
that enable it to evaluate the merits and risks of the transactions contemplated
by this Agreement and is not in a significantly disparate bargaining position
with respect to Medallion. MOREOVER, INTERCOAST HEREBY UNCONDITIONALLY AND
IRREVOCABLY WAIVES ANY AND ALL RIGHTS OR REMEDIES THAT IT MAY HAVE UNDER THE
DECEPTIVE TRADE PRACTICES -- CONSUMER PROTECTION ACT OF THE STATE OF TEXAS,
BUSINESS AND COMMERCE CODE SECTIONS 17.41 THROUGH SECTION 17.63 (OTHER THAN
SECTION 17.555).
EXECUTED as of the date first above written.
MEDALLION PRODUCTION COMPANY
By: \s\ Brian L. Cantrell
----------------------
Name: Brian L. Cantrell
------------------
Title: Vice President - Finance
-------------------------
INTERCOAST GLOBAL MANAGEMENT, INC.
By: \s\ Donald C. Heppermann
-------------------------
Name: Donald C. Heppermann
---------------------
Title: Chairman of the Board
----------------------
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<PAGE>
EXHIBIT A
TO PURCHASE AND SALE AGREEMENT
PROMISSORY NOTE
$2,315,000 Tulsa, Oklahoma
April 12, 1996
FOR VALUE RECEIVED, the undersigned, INTERCOAST GLOBAL MANAGEMENT, INC., a
Delaware corporation, promises to pay to the order of MEDALLION PRODUCTION
COMPANY, a Delaware corporation, at Tulsa, Oklahoma, or at such other place as
the legal holder hereof may designate in writing, the principal sum of Two
Million Three Hundred Fifteen Thousand Dollars ($2,315,000) in legal U.S.
tender, with interest thereon from the date hereof at the Applicable Rate (as
hereinafter defined) and in monthly installments as hereinafter provided:
(1) Interest in the amount of $9,418.56 (representing interest from
the date hereof through April 30, 1996) shall be due and payable as of the
date hereof.
(2) Commencing June 1, 1996, and on the first day of each calendar
month thereafter through and including May 1, 2000 (the "Full Amortization
Date"), the unpaid principal balance of this Note, plus accrued interest
thereon, shall be due and payable in 48 consecutive monthly installments.
Beginning with the June 1, 1996 installment and continuing to and including
the installment due on the first Change Date (as hereinafter defined), the
monthly installments shall be in an amount which would be sufficient to
repay in full the original principal balance hereof, together with interest
at the Applicable Rate, in 48 substantially equal monthly payments (i.e.,
the payments shall be set based on a 48-month amortization). If the rate
of interest is adjusted on any Change Date, the amount of the monthly
installments of principal and interest will change, effective with the
first monthly installment due after the Change Date. Changes in the
monthly installments will be made such that the monthly installments will
always be sufficient to repay the unpaid balance as of the applicable
Change Date in full on the Full Amortization Date, at the new rate of
interest, in substantially equal installments. Any amount due hereunder
remaining unpaid as of the Full Amortized Date shall be due and payable on
the Full Amortization Date.
The "Applicable Rate," as herein used, shall be a variable rate of
interest, and shall initially be equal to the WSJ Prime Rate (as hereinafter
defined) published on the original date of this Note. The Applicable Rate shall
be adjusted on each Change Date to the WSJ Prime Rate published on such Change
Date. In the event a Change Date occurs on a day that the WSJ (as hereinafter
defined) is not published, the Applicable Rate shall be adjusted to the WSJ
Prime
-1-
<PAGE>
Rate published in the most recent previously published edition of the WSJ. The
Applicable Rate in effect at any given time shall remain in effect without
change until the next Change Date.
The "Change Dates," as herein used, shall be the first day of August, 1996,
and the first day of each November, February, May and August thereafter during
the term hereof.
The "WSJ Prime Rate," as herein used, means that annual rate of interest
from time to time published in the daily issues of The Wall Street Journal (the
"WSJ") as the Prime Rate under the column presently headed "Money Rates" as that
base rate of interest for corporate loans currently being charged by certain of
the largest commercial banks in the United States of America. If the WSJ should
cease to publish an annual rate of interest as the Prime Rate, the WSJ Prime
Rate for purposes of this Note shall be that variable annual rate of interest
readily ascertainable from reported or published sources established by others
independent of the holder hereof which the holder hereof shall in good faith
determine to be the principal equivalent of that rate of interest formerly
published in the WSJ as the Prime Rate.
Each of the payments referred to above shall be applied first to the
payment of interest then accrued and due on the unpaid principal balance
evidenced by this Note and the remainder thereof shall be applied to the
reduction of the principal balance.
The undersigned may voluntarily prepay all or a portion of the principal
indebtedness hereunder, at any time, without premium or penalty.
If any payment shall become due upon a Saturday or Sunday or other day on
which a majority of commercial banks in Des Moines, Iowa, are closed by reason
of a holiday, such payment shall be due upon the next ensuing banking day.
All sums not paid when due hereunder shall bear interest from the due date
until paid at the WSJ Prime Rate plus six percent (6%) per annum.
If all or any portion of the indebtedness hereby evidenced is not paid when
due, and such failure to pay continues for a period in excess of ten days
following notice by the holder to the undersigned of such failure to pay, or in
the event of the dissolution, insolvency, bankruptcy or receivership of the
undersigned, the holder may, without further notice or demand, declare this
indebtedness to be immediately due and payable.
The undersigned agrees that if, and as often as, this Note is placed in the
hands of an attorney for collection or to defend or enforce any of the holder's
rights hereunder or under any instruments securing payment of this Note, the
undersigned will pay to the holder its reasonable attorney's fees and all court
costs and other expenses incurred in connection therewith.
The makers, endorsers, sureties, guarantors and all other persons who may
become liable for all or any part of this obligation severally waive presentment
for payment, protest and notice of nonpayment. Said parties consent to any
extension of time (whether one or more) of payment hereof, release of all or any
part of the security for the payment hereof and the release of any
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<PAGE>
party liable for payment of this obligation. Any such extension of time or
release may be made at any time and from time to time without notice to any such
party and without discharging said party's liability hereunder.
This Note is to be construed according to the laws of the State of Iowa.
INTERCOAST GLOBAL MANAGEMENT, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
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<PAGE>
EXHIBIT B
TO PURCHASE AND SALE AGREEMENT
ASSIGNMENT AND AGREEMENT
THIS ASSIGNMENT AND AGREEMENT (this "Assignment and Agreement") is executed
on this 12th day of April, 1996, and consists of Part I, being an Assignment of
the Subject Properties from Medallion Production Company, a Delaware corporation
(hereinafter called "Assignor"), to InterCoast Global Management, Inc., a
Delaware corporation (hereinafter called "Assignee"); Part II, being a retention
of a Production Payment by Assignor; and Part III, which sets out certain
agreements between Assignor and Assignee.
For purposes of all Parts of this Assignment and Agreement, except as
otherwise expressly provided or the context otherwise requires, the terms
defined below have the meanings herein assigned to them and the capitalized
terms defined in the opening paragraph of this Assignment and Agreement and
subsequent paragraphs by inclusion in quotation marks and parenthesis have the
meanings so ascribed to them:
"Costs" shall mean, on a cash accounting basis, the sum of:
-----
(a) The following costs actually paid by or on behalf of Assignee, its
successors and assigns, during any month insofar as they are attributable
to the Subject Properties:
(i) all costs and expenses (subject to the limits on capital
costs set forth in subparagraph (iii) immediately below) paid by or on
behalf of Assignee pursuant to applicable agreements covering the
Subject Properties or otherwise for and in connection with the
ownership, operating and maintenance of the Subject Properties
(including, without limitation, any compensation payable under any
management or operating agreement and any costs incurred in connection
with the defense of any claims arising out of the operation of the
Subject Properties) and the lifting, handling, gathering, producing,
treating, storing, marketing, and transporting of production from the
Subject Properties, and the disposal of produced water therefrom; and
(ii) all federal, state and local taxes (except mortgage,
franchise and income taxes), whether existing on the Effective Date or
enacted in the future, paid on account of the Subject Properties,
including without limitation production, occupation, excise,
severance, ad valorem or other production related taxes, and any other
taxes (except taxes on income or franchise taxes) imposed on natural
gas reserves, attributable to the Subject Properties or the ownership
or sale of production therefrom; and
-1-
<PAGE>
(iii) any capital costs reasonably necessary to maintain the
Subject Properties as presently operated; provided, however, that
capital costs incurred for the purpose of developing or enhancing the
Subject Properties shall not be included in this definition of Costs
and shall not be a permitted deduction from the Production Payment;
and
(b) Excess Costs for the preceding month (including the Excess Costs
carried forward from any preceding month subsequent to the Effective Date).
"Effective Date" shall mean April 12, 1996, at 7:00 a.m., Texas time.
--------------
"Excess Costs" for each month shall mean the excess, if any, of Costs over
------------
Revenue.
"Excess Revenue" for each month shall mean the excess, if any, of Revenue
--------------
over Costs to the extent such amount exceeds the amount of Production Proceeds
for such month.
"Monthly Production Payment Amount" shall mean the amount payable each
---------------------------------
month under the Production Payment reserved by Assignor under this Assignment
and Agreement, with the amount to be payable each month to be equal to the Net
Proceeds for the immediately preceding month.
"Net Proceeds" shall mean for any month the lesser of (i) the excess, if
------------
any, of Revenue over Costs for such month, or (ii) the amount of Production
Proceeds for such month.
"Production Payment" shall mean the production payment payable with respect
------------------
to the Subject Properties excepted and reserved by Assignor in Part II of this
Assignment and Agreement.
"Purchase Agreement" shall mean that certain Purchase and Sale Agreement
------------------
dated as of April 12, 1996, by and between Assignor and Assignee.
"Required Volumes" shall mean that volume of gas produced from the Wells
----------------
equal to 24,013 MMcf (which amount is 79.01% of the estimated proved developed
reserves attributable to the Subject Properties as of the original date of this
Assignment and Agreement).
"Revenue" shall mean, on a cash accounting basis, (i) the revenue
-------
attributable to the sale of production from the Subject Properties actually
received during any month by or on behalf of Assignee, its successors or
assigns, net of any royalty, overriding royalty, production payment or other
burdens on production which are borne by the Subject Properties and which were
created before the Effective Date ("Production Proceeds"), (ii) any other
proceeds attributable to the Subject Properties actually received during any
month by or on behalf of Assignee, its successors or assigns, net of any
royalty, overriding royalty, production payment or other burdens on production
which are borne by the Subject Properties and which were created before the
Effective Date, and (iii) Excess Revenue for the preceding month (including the
Excess Revenue carried forward from any preceding month subsequent to the
Effective Date).
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<PAGE>
"Subject Properties" shall mean all of Assignor's right, title and interest
------------------
(immediately prior to the Assignment in Part I hereof) in and to the leases
described on Exhibit A (the "Leases") insofar and only insofar as the Leases
---------
cover oil and gas capable of being produced from the Canyon Sand formation under
the lands covered by the Leases, and insofar and only insofar as said oil and
gas can be produced from the wells described on Exhibit A (the "Wells"),
---------
including such of Assignor's leasehold or operating rights as may be required to
operate the Wells and to produce and market such oil and gas, together with all
of Assignor's right, title and interest in and to (i) agreements insofar as the
same relate to or are appurtenant to such limited leasehold or operating rights
and (ii) all personal property and equipment relating to the Wells up to and
including the separator (or where there is no separator, up to and including the
metering equipment) and other such surface equipment and flowlines appurtenant
thereto (but specifically excluding any equipment downstream of the separator,
or where there is no separator, downstream of the metering equipment). There is
specifically excluded and reserved from the Subject Properties (i) all of the
other right, title and interest of Assignor in and to the Leases and in and to
the oil and gas under or allocated to the Leases to the extent the same is
produced and developed from other formations in the same Well or from other or
the same formation(s) in other existing or future wellbores, and (ii) the
concurrent right to utilize the personal property, equipment and flowlines
relating to the Wells to the extent necessary for Assignor to operate the
portion of the Leases which it has retained hereunder.
"Termination Date" shall mean the day on which the volume of gas produced
----------------
from the Subject Properties subsequent to the Effective Date equals or exceeds
the Required Volumes.
PART I
ASSIGNMENT OF SUBJECT PROPERTIES
--------------------------------
1. Assignment. For Ten Dollars ($10.00) and other good and valuable
----------
consideration, the receipt and sufficiency of which are hereby acknowledged,
Assignor hereby transfers, grants, conveys and assigns to Assignee, its
successors and assigns, effective as of the Effective Date, the Subject
Properties, subject to the exception and reservation of the Production Payment.
2. Retained Production Payment. Assignor specifically excepts and
---------------------------
reserves from this Assignment and Agreement, and reserves and retains unto
itself, its successors and assigns, the Production Payment.
3. Further Assurances. Assignor and Assignee agree to execute and
------------------
deliver such other and further instruments and to do and perform such other and
further acts as may be necessary or desirable to carry out more effectively the
intents and purposes of this Assignment and Agreement.
4. Substitution and Subrogation. This Assignment and Agreement is made
----------------------------
with full substitution and subrogation of Assignee, its successors and assigns
in and to all covenants, warranties, agreements and indemnities heretofore given
or made in respect of all or any of the Subject Properties, and Assignor hereby
assigns and conveys to Assignee all such covenants, warranties, agreements and
indemnities and all of Assignor's rights thereunder, insofar as the
-3-
<PAGE>
same applies or relates to the interests in the Subject Properties being
assigned, including, without limitation, all such covenants, warranties,
agreements and indemnities made by the sellers pursuant to (i) the Purchase and
Sale Agreement dated March 30, 1996, between Enron Oil & Gas Company, Enron Oil
& Gas Marketing Inc. and Assignor, as amended (the "Enron Agreement"), and (ii)
the Assignment and Bill of Sale dated April 12, 1996, from Enron Oil & Gas
Company to Assignor which is recorded in Book _____ at Page _____ of the records
of the County Clerk of Sutton County, Texas (the "Enron Assignment").
5. Warranties. This Assignment and Agreement is made subject to the
----------
exceptions, reservations, covenants, and conditions hereinafter set forth:
(a) As used herein, the term "Defensible Title" shall have the meaning
given such term in Exhibit B attached hereto and made a part hereof.
---------
Assignor hereby warrants and agrees forever to defend Defensible Title to
each of the Subject Properties against any and all persons claiming or
attempting to claim the whole or any part thereof, by, through or under
Assignor, but not otherwise, except for claims under any provision of an
operating or similar agreement prohibiting assignment or requiring consent.
(b) This Assignment and Agreement is expressly subject to the Enron
Assignment, and Assignee hereby assumes the obligations of the assignee
thereunder to the extent applicable to the Subject Properties and to the
extent required pursuant to the Enron Assignment.
(c) Except as expressly provided herein or in the Purchase Agreement,
this Assignment and Agreement IS MADE AND ACCEPTED WITHOUT COVENANTS,
REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, RELATING TO
THE CONDITION OR MERCHANTABILITY OF THE SUBJECT PROPERTIES, THE FITNESS OF
THE SUBJECT PROPERTIES FOR A PARTICULAR PURPOSE OR PURPOSES, OR TITLE TO
THE SUBJECT PROPERTIES. EXCEPT AS EXPRESSLY PROVIDED HEREIN OR IN THE
PURCHASE AGREEMENT OR IN THE ENRON AGREEMENT, ASSIGNEE HAS INSPECTED THE
SUBJECT PROPERTIES AND ACCEPTS THE SAME "AS IS, WHERE IS AND WITH ALL
FAULTS." Without limiting the generality of the foregoing, any
representations, warranties or covenants implied by law by virtue of the
use in this Assignment and Agreement of the terms "grant", "bargain",
"sell", "convey" and "assign" (including, without limitation, any
representation, warranty or covenant under Section 5.023 of the Texas
Property Code), are hereby expressly waived, disclaimed and negated.
6. Successors and Assigns. This Assignment and Agreement shall bind and
----------------------
inure to the benefit of Assignor and Assignee and their respective successors
and assigns.
7. Purchase Agreement. This Assignment and Agreement is specifically
------------------
made subject to the terms and provisions of the Purchase Agreement.
-4-
<PAGE>
TO HAVE AND TO HOLD the Subject Properties unto Assignee, its successors
and assigns forever.
PART II
RESERVATION OF PRODUCTION PAYMENT
---------------------------------
Assignor hereby excepts from the Assignment in Part I hereof and reserves
unto Assignor, its successor and assigns, the Production Payment hereinafter
described and set forth. The Production Payment shall be a nonoperating
interest retained in a sale transaction as described in Section 636 of the
Internal Revenue Code of 1986, as amended (the "Code"). The Production Payment
shall be calculated and payable as follows:
1. Amount of the Production Payment. Commencing with the month
--------------------------------
immediately following the first month subsequent to the Effective Date in which
Net Proceeds are received from the sale of production from the Subject
Properties, Assignee shall, on or before the fifteenth (15th) day of each month,
pay or cause to be paid to Assignor the Monthly Production Payment Amount for
the immediately preceding month.
2. Term of the Production Payment. The Production Payment shall be fully
------------------------------
discharged and shall terminate on the Termination Date.
3. Non-Liability of Assignee. Assignor shall look solely to Net Proceeds
-------------------------
for satisfaction and discharge of the Production Payment, and Assignee shall not
be personally liable for the payment and discharge thereof.
4. Assignment by Assignee. Assignee shall have the right to assign,
----------------------
sell, transfer, convey, mortgage or pledge the Subject Properties or any rights
under this Assignment and Agreement, or any part thereof, subject to the
Production Payment and the terms and provisions of this Assignment and
Agreement. However, no such action will affect the method of computing Net
Proceeds.
5. Assignment by Assignor. Assignor shall have the right to assign,
----------------------
sell, transfer, convey, mortgage or pledge the Production Payment, in whole or
in part, at any time. However, no such action will affect the method of
computing Net Proceeds.
6. Assignment of Production. To secure the obligations of Assignee
------------------------
pursuant to the Production Payment, Assignee does hereby assign, transfer and
convey to Assignor, its successors and assigns, as of the Effective Date, all of
the production from the Subject Properties and all revenues and proceeds
attributable thereto until the occurrence of the Termination Date.
PART III
ADDITIONAL AGREEMENTS OF ASSIGNOR AND ASSIGNEE
----------------------------------------------
1. Designation of Assignor as Manager. Assignee hereby designates
----------------------------------
Assignor as Manager of the Subject Properties pursuant to the terms and
provisions of the Management
-5-
<PAGE>
Agreement attached hereto as Exhibit C, and Assignor agrees to act as Manager of
---------
the Subject Properties in accordance with the terms of the Management Agreement.
2. Option to Purchase. Assignor shall have the right and option (the
------------------
"Option") to purchase all or any portion of Assignee's interest in the Subject
Properties according to the following terms and conditions:
(a) The period during which Assignor shall be entitled to exercise the
Option shall commence on the Effective Date, and shall end on the date 120
days after the Termination Date. The Option may be exercised one or more
times for all or any portion of Assignee's interest in the Subject
Properties during said option period.
(b) Assignor shall notify Assignee of its election to exercise the
Option by giving written notice to Assignee (the "Option Notice"). The
Option Notice shall specify the portion of Assignee's interest in the
Subject Properties covered by such exercise of the Option.
(c) The effective date of a purchase of all or any portion of
Assignee's interest in the Subject Properties pursuant to the Option (the
"Option Effective Date") shall be the first day of the month following the
date Assignee receives the Option Notice.
(d) The purchase price (the "Option Price") for Assignee's interest in
the Subject Properties, or any portion thereof, shall be the appraised
current fair market value of Assignee's interest in the Subject Properties
in question as of the Option Effective Date. Unless Assignor and Assignee
agree otherwise, the appraised current fair market value of Assignee's
interest in the Subject Properties in question shall be the then present
value as of the Option Effective Date of the future net revenue estimated
to be received therefrom (including the value of any tax credits under
Section 29 of the Code), determined in accordance with generally accepted
engineering principles in effect at the time, by Netherland, Sewell &
Associates, Inc. or the successor thereof or some other nationally
recognized petroleum engineering firm agreed upon by Assignor and Assignee.
The price of natural gas used in the forecast shall be based on an average
gas price for the most recent 12-month period, as quoted in the then most
recent monthly publication of Inside FERC's Gas Market Report for the
appropriate index (or a mutually agreeable substitute index if such index
is no longer published) escalated at 3% annually, less an unescalated
average gathering and transportation cost from wellhead to the mainline for
the most recent 12-month period, multiplied by a BTU factor appropriate to
the affected properties; and the costs used in the forecast shall be the
average of the monthly costs attributable to the Subject Properties in
question during the most recent 12-month period preceding the Option
Effective Date escalated at 3% annually. The discount rate to be applied
shall be (i) the WSJ Prime Rate (as hereinafter defined) plus 8% per annum
in the case of the production stream, and (ii) the WSJ Prime Rate plus 4%
per annum in the case of tax credits receivable pursuant to Section 29 of
the Code.
-6-
<PAGE>
(e) The closing of Assignor's purchase of Assignee's interest in the
Subject Properties pursuant to the Option shall occur at Assignor's office
within 30 days of the determination of the Option Price as hereinabove set
forth, but shall be effective as of the Option Effective Date.
(f) Upon any exercise of the Option by Assignor prior to the
Termination Date, the Required Volumes shall be reduced by the amount equal
to the difference between (i) the amount of the Required Volumes
attributable as of the original date of this Assignment and Agreement to
the portion of the Subject Properties to be purchased pursuant to such
exercise of the Option, and (ii) the amount of production actually produced
from such portion of the Subject Properties during the period from the
Effective Date until the Option Effective Date; provided that the Required
Volumes shall not be reduced by an amount more than the amount of the
Required Volumes originally attributable to such portion of the Subject
Properties.
(g) The "WSJ Prime Rate," as herein used, means that annual rate of
interest from time to time published in the daily issues of The Wall Street
Journal (the "WSJ") as the Prime Rate under the column presently headed
"Money Rates" as that base rate of interest for corporate loans currently
being charged by certain of the largest commercial banks in the United
States of America. Each change in the WSJ Prime Rate after the date hereof
shall be effective as of the date first published in the WSJ and if the WSJ
should cease to publish an annual rate of interest as the Prime Rate, the
WSJ Prime Rate for purposes hereof shall be that variable annual interest
readily ascertainable from reported or published sources established by
others independent of Assignor which Assignor shall in good faith determine
to be the practical equivalent of that rate of interest formerly published
in the WSJ as the Prime Rate.
3. Omission of Certain Exhibits. For ease of recording, there may be
----------------------------
omitted from this Assignment and Agreement Exhibit C hereto at such time as this
---------
Assignment and Agreement is filed of record.
4. Successors and Assigns. This Assignment and Agreement and each
----------------------
provision hereof shall be binding upon and shall inure to the benefit of the
parties, their respective successors in title, and assigns. All of the
covenants and agreements herein contained shall be deemed to be covenants
running with the land and the Leases. All references to a party shall include
its respective successors and assigns.
5. Counterpart Execution. This Assignment and Agreement may be executed
---------------------
in multiple counterparts, each of which for all purposes shall be deemed to be
an original.
6. Notices. All notices, statements, payments and communications between
-------
the parties hereto shall be in writing and shall be deemed to have been
sufficiently given and delivered only when actually received by the party to
whom directed or when delivered to the following address:
-7-
<PAGE>
If to Assignor:
Medallion Production Company
Attention: W. E. Warnock, Jr.
7130 South Lewis Avenue, Suite 700
Tulsa, Oklahoma 74136
If to Assignee:
InterCoast Global Management, Inc.
Attention: President
666 Grand Avenue, 26th Floor
Des Moines, Iowa 50309
Any party or the successors or assigns of the interest or rights of any party
hereunder may change its address or designate a new or different address or
addresses for the purposes hereof by similar notice given or directed to all
parties interested hereunder at the same time.
7. Governing Law. This Assignment and Agreement and the transactions
-------------
contemplated hereby shall be construed in accordance with, and governed by, the
laws of the State of Texas.
MEDALLION PRODUCTION COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
INTERCOAST GLOBAL MANAGEMENT, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
-8-
<PAGE>
STATE OF __________ )
)
COUNTY OF __________)
This instrument was acknowledged before me on the _____ day of April, 1996,
by __________________________ as _________________ of Medallion Production
Company, a Delaware corporation, on behalf of said corporation.
_____________________________
Notary Public in and for the
State of __________
My Commission Expires:
_____________________________
STATE OF __________ )
)
COUNTY OF __________)
This instrument was acknowledged before me on the _____ day of April, 1996,
by __________________________ as _________________ of InterCoast Global
Management, Inc., a Delaware corporation, on behalf of said corporation.
____________________________
Notary Public in and for the
State of __________
My Commission Expires:
_____________________________
-9-
<PAGE>
EXHIBIT B
TO ASSIGNMENT AND AGREEMENT
As used in the Assignment and Agreement to which this Exhibit B is
---------
attached, the following terms have the meanings set forth below:
"Defensible Title" shall mean with respect to a well listed on Exhibit
-------
A, such record title, as will entitle Assignee to receive a percentage of
-
the hydrocarbons produced and saved from such well (subject to any depth
restrictions noted in Exhibit A other than depth restrictions that would
---------
have the effect of excluding intervals that are open for production as of
the Effective Date), after deducting all applicable Production Burdens (as
hereinafter defined), that is not less than the Net Revenue Interest (as
hereinafter defined) shown for such well on Exhibit A throughout the
---------
productive life of such well, and will obligate Assignee to bear and pay a
portion of the costs and expenses of operating the well that is no greater
than the Working Interest (as hereinafter defined) shown for such well on
Exhibit A throughout the productive life of such well and is free and clear
---------
of Material Title Deficiencies (as hereinafter defined).
"Material Title Deficiency" means a material deficiency in one or more
of the following respects: (i) Assignor's title is subject to an
outstanding mortgage, deed of trust, lien, encumbrance, contractual burden
(other than Production Burdens that do not have the effect of reducing
Assignor's Net Revenue Interest below that reflected on Exhibit A), adverse
---------
claim or defect which substantially and adversely affects the value or
operation of the well in question; (ii) Assignor's rights and interests are
subject to being reduced by virtue of the exercise by a third party of a
reversionary, back-in or other similar right not reflected in Exhibit A; or
---------
(iii) Assignor is in default under some material provision of a lease,
farmout or other agreement or right of way, easement, permit or license
affecting the well in question.
"Net Revenue Interest" means in respect of any lease, well or unit,
the interest (expressed as a percentage) in and to oil and gas produced
from or allocated to such lease, well or unit after deducting all
applicable Production Burdens.
"Production Burdens" means all royalty interests, overriding royalty
interests, production payments, net profits interests or other similar
interests that constitute a burden on, are measured by or are payable out
of the production of hydrocarbons or the proceeds realized from the sale or
other disposition thereof.
"Working Interest" means, in respect of any lease, well or unit, the
interest (expressed as a percentage) in such lease, well or unit before
giving effect to any applicable Production Burdens, and the percentage of
all costs and expenses required to be borne that are associated with the
exploration, development and operation of such lease, well or unit.
<PAGE>
EXHIBIT C
TO ASSIGNMENT AND AGREEMENT
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT ("Agreement") is made and entered into as of the
12th day of April, 1996, by and between InterCoast Global Management, Inc.
("InterCoast") and Medallion Production Company ("Medallion").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, InterCoast holds certain oil and gas interests situated in Sutton
County, Texas, under the terms of an Assignment and Agreement of even date
herewith between InterCoast and Medallion (the "Assignment and Agreement"); and
WHEREAS, InterCoast desires to engage Medallion to manage the oil and gas
interests owned by it; and
WHEREAS, Medallion desires to manage such oil and gas interests of
InterCoast; and
WHEREAS, terms not otherwise defined herein shall have the meanings
assigned to those terms in the Assignment and Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The Subject Wells. InterCoast represents and acknowledges that it
-----------------
holds certain oil and gas leasehold interests in the group of wells (the
"Subject Wells") set forth on Exhibit A hereto.
---------
2. Appointment of Manager. Medallion is hereby employed and designated as
----------------------
the manager of the Subject Wells on behalf of InterCoast, and, in such capacity,
shall be the general manager of and shall conduct, direct and have full control
of all matters pertaining to the Subject Wells as permitted and required by this
Agreement, subject to the rights of InterCoast as owner. Medallion shall be the
sole manager of the Subject Wells, and the enumeration of the particular or
specific powers in this Agreement shall not be considered as in any way limiting
or abridging the general power or discretion intended to be conferred on or
reserved to the manager to authorize it to do any and all things proper,
necessary or expedient, in its discretion, to carry out the purposes of this
Agreement. Medallion shall be the operator of record of the Subject Wells for
Texas Railroad Commission purposes to the extent practicable.
3. Operating Agreements. The parties recognize that certain of the
--------------------
Subject Wells are subject to existing operating agreements (the "Existing
Operating Agreements") which govern
-1-
<PAGE>
the rights and obligations of the various working interest owners in the Subject
Wells. With respect to the Subject Wells which are subject to Existing
Operating Agreements, Medallion will manage the operation of said wells on
behalf of InterCoast pursuant to the terms of the Existing Operating Agreements.
With respect to the Subject Wells which are not subject to Existing Operating
Agreements, Medallion will operate such wells pursuant to the terms of the
operating agreement attached hereto as Exhibit B (the "Attached Operating
---------
Agreement"; collectively, with the Existing Operating Agreements, the "JOAs").
The Attached Operating Agreement shall terminate with respect to a Subject Well
when Medallion ceases to manage the operations of said Subject Well. In the
event of any conflict between the terms of the JOAs and this Agreement, the
terms of this Agreement will control.
4. Duties of Manager. Medallion shall devote sufficient time to the
-----------------
duties and responsibilities required for the prudent management of the Subject
Wells; and will at all times faithfully, industriously, and to the best of its
ability, experience and talents, perform all such duties and responsibilities in
a good and workmanlike manner. Management duties shall include, without
limitation, the following services:
(a) Performing accounting and billing functions; and receiving,
distributing and reporting income on a monthly basis.
(b) Supervising the field superintendent who provides the first line
of supervision for all field personnel required in the operation and
production of the Subject Wells, and otherwise performing for InterCoast
the duties and obligations of InterCoast under the JOAs.
(c) Preparing and/or responding to AFE's relating to the Subject Wells
(subject to paragraph 4(d) below), and preparing, reviewing and responding
to correspondence relating to the Subject Wells.
(d) Approving expenditures relating to Subject Wells, for the interest
of InterCoast, up to a maximum limit of $50,000 for any single expenditure.
Medallion agrees that it will not approve or incur expenditures in amounts
in excess of the aforesaid amount without the prior written approval of
InterCoast; provided, in case of explosion, fire, flood, blowout or other
sudden emergency, Medallion may take such steps and incur such expenses as
in its opinion are required to deal with the emergency and to safeguard
life and property, and shall report the emergency to InterCoast as promptly
as possible.
(e) Overseeing and supervising on behalf of InterCoast the overall
operation of the Subject Wells.
(f) Medallion shall submit to InterCoast as promptly as is practicable
after the end of each calendar month a statement setting out the costs and
expenses incurred during such month for the Subject Wells.
-2-
<PAGE>
Medallion's management duties shall not include any duty to market production
from the Subject Wells. InterCoast shall have the right, pursuant to the JOAs,
to take such production in kind. In the event Medallion or one of its
affiliates undertakes to market such production, InterCoast shall pay an
appropriate marketing fee in connection therewith.
5. Management of the Subject Wells; Payment of Costs.
-------------------------------------------------
(a) So long as Medallion shall remain manager of the Subject Wells,
Medallion shall:
(i) Cause the Subject Wells to be maintained and operated for the
production of hydrocarbons in a good and workmanlike manner, as would
a prudent operator (and without regard to the existence of the
Production Payment), all in accordance with generally accepted
standards and all applicable federal, state and local laws, rules and
regulations.
(ii) Cause the Subject Wells to be developed, operated and
maintained in all material respects in compliance with all applicable
laws, rules and regulations and in compliance with the agreements
governing the same.
(b) So long as the Production Payment shall remain in force and
effect:
(i) Medallion shall pay on behalf of InterCoast, or cause to be
paid on behalf of InterCoast, promptly as and when due and payable,
all rentals and royalties payable with respect to the production of
hydrocarbons from the Subject Wells and all Costs incurred in or
arising from the operation or development of the Subject Wells or the
production, treating, gathering, marketing or transporting of
hydrocarbons from the Subject Wells.
(ii) If Excess Costs should exist with respect to any month,
Medallion shall not be obligated to advance such Excess Costs, and
InterCoast shall, upon notice from Medallion, remit to Medallion the
funds necessary to pay the Excess Costs within a time frame to avoid
any defaults or delinquencies. If Medallion elects in its discretion
to advance any Excess Costs, InterCoast agrees to reimburse Medallion
for such Excess Costs on or before the fifteenth (15th) day of the
month following the month in which such Excess Costs were incurred.
(iii) Medallion shall maintain true and correct books and
records sufficient to determine the amounts payable under the terms of
the Production Payment. Such books and records shall be open for
inspection by InterCoast upon reasonable notice at Medallion's office
during normal business hours. Within thirty (30) days following June
30 and December 31 of each year during the term of the Production
Payment, Medallion shall deliver to InterCoast a statement showing in
reasonable detail for the immediately preceding six (6) month time
period (a) the computation of Net Proceeds; (b) the volumes of gas
-3-
<PAGE>
produced and sold from the Subject Properties; and (c) the outstanding
volumes of gas reserves to be produced under the Production Payment as
of the end of such six (6) month time period.
6. Compensation. For providing the management services under this
------------
Agreement, Medallion shall be entitled to compensation for overhead costs as
provided for under the JOAs applicable to the Subject Wells.
7. Exculpation. Neither Medallion nor any parent, subsidiary, affiliate,
-----------
officer or employee of any of them shall be liable to InterCoast for any losses
sustained or liabilities incurred as a result of any act or omission of
Medallion or any agent or employee of it except as may result from bad faith,
gross negligence, willful misconduct or material breach of this Agreement by
Medallion.
8. Accounting and Disbursements. Medallion will maintain general
----------------------------
accounting records relating to operation of the Subject Wells and the accounting
for the Production Payment in accordance with its terms. Medallion shall
collect funds generated by the Subject Wells directly from the purchasers of
production and shall timely pay and discharge all costs and expenses incurred in
the operation of the Subject Wells pursuant to this Agreement. All records
maintained by Medallion pursuant to the provisions of this Paragraph 8 shall be
made available for inspection and copying by InterCoast, upon request by
InterCoast, at Medallion's offices during normal business hours.
9. Term. The term of this Agreement shall be concurrent with the term of
----
the Production Payment. Notwithstanding the foregoing, this Agreement may be
earlier terminated by InterCoast upon delivery to Medallion of prior written
notice to Medallion if Medallion should fail to perform or observe any material
covenant, agreement or obligation under this Agreement or under the Assignment
and Agreement and such failure shall continue unremedied for twenty (20) days
after delivery to Medallion by InterCoast of written notice thereof specifying
such failure in detail, unless within such twenty (20) days Medallion has begun
to cure such noncompliance in a manner reasonably satisfactory to InterCoast and
Medallion continues to diligently pursue such curative actions until such
failure is remedied to the reasonable satisfaction of InterCoast. In addition
to and notwithstanding the foregoing, this Agreement may be terminated at any
time by InterCoast for any reason upon no less than 30 days' notice to
Medallion. In any event this Agreement shall automatically terminate upon the
Termination Date of the Production Payment, as provided for in the Assignment
and Agreement.
10. No Partnership. This Agreement is not intended to create, and shall
--------------
not be construed to create, a relationship of partnership, mining partnership,
joint venture or an association for profit between the parties hereto.
11. Force Majeure. If any party is rendered unable, wholly or in part, by
-------------
force majeure to carry out its obligations under this Agreement, other than the
obligation to make money payments, that party shall give to the other party
prompt written notice of the force majeure with reasonably full particulars
concerning it; thereupon, the obligations of the party
-4-
<PAGE>
giving the notice, so far as they are affected by the force majeure, shall be
suspended during the continuance of the force majeure. The affected party shall
use all reasonable diligence to remove the force majeure situation as quickly as
practicable. The term "force majeure" shall mean act of God, strike, lockout or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood, explosion, governmental action,
governmental delay, restraint or inaction, unavailability of equipment, and any
other cause, whether of kinds specifically enumerated above or otherwise, which
is not reasonably within the control of the party claiming suspension. Nothing
herein shall require the settlement of labor difficulties by any party contrary
to its wishes.
12. Independent Contractor. In all things hereunder, Medallion shall be
----------------------
an independent contractor not subject to the control or direction of InterCoast
except as specifically provided by the terms of this Agreement.
13. Power of Attorney. InterCoast hereby designates and appoints
-----------------
Medallion as its attorney-in-fact for the limited purpose of executing on behalf
of InterCoast the following instruments and documents and all instruments and
documents related thereto: (i) division orders, transfer orders and other
instruments necessary to cause purchasers of production to pay revenues directly
to Medallion as contemplated hereby and by the Assignment and Agreement; (ii)
gas purchase agreements, transportation agreements and amendments thereto; (iii)
pooling, unitization and communitization agreements of whatever kind and nature
affecting the Subject Properties; (iv) amendments to existing leases relating to
the Subject Properties; (v) filings required by regulatory agencies relating to
operations in connection with the Subject Properties, including without
limitation all filings required by the Railroad Commission of the State of Texas
and the Federal Energy Regulatory Commission; (vi) elections under operating
agreements; and (vii) all other matters relating to the operation and management
of the Subject Properties; provided, however, that Medallion shall not be
authorized pursuant to said power-of-attorney to sell or otherwise transfer
title to the Subject Properties, except that Medallion shall be authorized to
execute releases of leases. This power-of-attorney is made with full power of
substitution, is a power coupled with an interest, and is irrevocable, except
that this power-of-attorney shall terminate upon termination of this Agreement.
InterCoast shall, upon Medallion's request, execute and acknowledge a separate
instrument evidencing the provisions of this Paragraph 13.
14. Assignment and Binding Effect. This Agreement shall be binding upon
-----------------------------
the parties hereto, their successors and assigns, except that this Agreement
shall not be assigned by either party without the consent of the other party.
15. Notices. Notices authorized or required hereunder shall be given by
-------
governmental mail, telegram or other telegraphic means, postage or charges
prepaid, or confirmed telecopy, addressed to the party to whom the notice is
given at its address set out in the Assignment and Agreement. All notices are
deemed given when received. Each party may change its address by giving written
notice to the other.
16. Governing Law. This Agreement and the transactions contemplated
-------------
hereby shall be construed in accordance with, and governed by, the laws of the
State of Texas.
-5-
<PAGE>
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall be in force when one or more counterparts have been signed by each of the
parties.
INTERCOAST GLOBAL MANAGEMENT, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
MEDALLION PRODUCTION COMPANY
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-6-
<PAGE>
The following schedules have been omitted, and the Registrant agrees to
furnish supplementally a copy of any such omitted schedule to the Securities and
Exchange Commission upon its request:
Exhibit to Purchase and Sale Agreement
C Oil and Gas Leases and Wells
Exhibit to Exhibit B to Purchase and Sale Agreement
A Oil and Gas Leases and Wells
Exhibits to Exhibit C to Purchase and Sale Agreement
A Wells
B Form of Operating Agreement
<PAGE>
EXHIBIT 10.12
INTERCOAST ENERGY COMPANY
PERFORMANCE INCENTIVE PLAN
1996
<PAGE>
INTERCOAST ENERGY COMPANY
PERFORMANCE INCENTIVE PLAN
- --------------------------------------------------------------------------------
Plan Purposes: Focus the efforts of key employees primarily on
- -------------- performance criteria that can be quantitatively
measured and that meet InterCoast Energy Company's
expectations.
Recognize differences in the performance of
individual participants.
Plan Year: The fiscal year (January through December).
- ----------
Participants: Those individuals recommended by the President,
- ------------- InterCoast Energy Company and approved by the
Compensation Committee.
Compensation Those individuals appointed by the InterCoast Board
- ------------ of Directors to comprise the Compensation Committee.
Committee: The Committee will be responsible for Plan
- ---------- administration.
2
<PAGE>
Award Opportunities: Participating positions will be grouped by incentive
- -------------------- award categories.
Each incentive category will have a target award
level assigned to it.
. The target award will be paid if a stated
performance goal(s) is achieved.
. Minimum and maximum performance/award levels will
be built around the target performance/award
levels.
A mega-maximum award opportunity applicable only to
the President & CEO Continential Power Exchange and
the SVP Energy Marketing will be established for each
performance criteria. The mega-maximum award
opportunity will be to encourage an ever increasing
performance effort while assuring a minimum
performance level for all criteria. Percentage
amounts earned between the maximum and mega-maximum
will be reduced by the target percentage award for
any performance criteria that does not meet target.
In no event, however, shall the mega-maximum award be
less than zero.
The incentive categories, with their respective award
opportunities, are set forth below:
Incentive Award Opportunity
--------- -----------------
Category (as % of Salary)
-------- ----------------
Minimum Target Maximum
------- ------ -------
A 20 40 80
B1 10 20 40
B2 10 20 40
C 5 10 20
Category A shall initially include the following
position:
. President & CEO, Continential Power Exchange
. Senior Vice President Energy Marketing
3
<PAGE>
Award Opportunities: Category B1 shall initially include the following
- -------------------- positions:
. Senior Vice President & COO, Continental Power
Exchange
. Vice President & General Manager, InterCoast Power
Marketing
Category B2 shall initially include the following
positions:
. Vice President, Finance
. General Counsel & Corporate Secretary
. General Manager, Human Resources
. Executive Director of Marketing, Continental Power
Exchange
Category C shall initially include the following
positions:
. Manager, Accounting
. Manager, Treasury
. Vice President, Marketing & Business Development
4
<PAGE>
Performance/Award Each Participant's award opportunity will be
- ----------------- segmented into two components as illustrated below.
Components:
- -----------
Weighting of Award
Opportunity/Performance Factors
-------------------------------
Incentive Financial Non-Financial
Category Goals Goals
--------- --------- -------------
A, B1 50% 50%
B2, C 40% 60%
One component's performance will not directly affect
the portion of the award opportunity earnable from
another one, except as noted below in the "Threshold
Corporate Performance" requirement.
A Participant's final award amount will be determined
as the sum of the awards earned based on the
performance of their pertinent award components.
Threshold Corporate If a threshold level of performance established for
- ------------------- the Financial Goals is not achieved, no part of the
Performance: incentive opportunity otherwise earned through the
- ------------ Non-Financial Goals component will be paid. Threshold
performance shall be set at 80% of budget.
5
<PAGE>
Performance Criteria: Normally, up to five performance criteria will be
- --------------------- established for the Non-Financial objectives.
Target, minimum, and maximum performance levels will
be established for each of the performance criteria.
These performance levels will coincide with the
target, minimum, and maximum award levels referred to
previously. These performance levels, together with
the weighting of each of the performance criteria,
will be established prior to each Plan Year, approved
by the Compensation Committee, and will be set forth
in an Appendix that will be attached to these Plan
specifications.
Interpolated performance/reward levels will be
established on a straight-line basis between each of
the above performance/reward levels. If actual
performance falls below the minimum level set forth
for the particular performance criterion, the portion
of the award related to that performance criterion
will be forfeited in its entirety.
Performance/Reward A Participant's final award will be calculated as the
- ------------------ sum of the amounts earned from each of the
Levels: performance/reward opportunities, each independent
- ------- from the others. However, in no event will any award
be payable unless the Financial Goal threshold is
met.
The Effect of In comparing actual performance against the
- ------------- performance goals, the CEO, InterCoast Energy
Extraordinary Items: Company, with the approval of the Compensation
- -------------------- Committee, may exclude from such comparison any
extraordinary gains, losses, charges, or credits
which appear on the Company's books and records as it
deems appropriate. An extraordinary item may include,
without limiting the generality of the foregoing, an
item in the Company's financial statements reflecting
an accounting rule, tax law, or major legislative
change not taken into consideration in the
establishment of the performance goals. In addition,
the impact of a material dislocation in the U.S.
economy or a substantive change in InterCoast Energy
Company's business plans also may be deemed to be
such an extraordinary item.
6
<PAGE>
Termination of If the Participant's employment is terminated during
- -------------- a plan year for reason of death, disability, or
Employment: normal or early retirement, a pro-rata award will be
- ----------- calculated (at year-end). The award will be
calculated by multiplying the award that would have
been earned if the Participant had remained employed
throughout the Plan Year by a proration factor.
If a Participant's employment is terminated during a
plan year for any other reason, an incentive award
normally will not be paid. However, the CEO,
InterCoast Energy Company with the approval of the
Compensation Committee, may exercise discretion in
this matter.
Form and Timing of All awards will be paid in cash and will be subject
- ------------------ to applicable withholdings.
Payments:
- --------- Payment of the full value of the final award will
follow the release of audited results after the end
of the Plan Year in which it is earned, but no later
than April 1.
Modification or This Plan may be amended, suspended, or terminated
- --------------- only in writing at any time for any reason by the
Termination of the CEO, InterCoast Energy Company, without the consent
- ------------------ of the Participants or any other person claiming a
Plan: right under the Plan.
- -----
Plan is Not an This Plan does not constitute an employment contract
- -------------- or right of continued employment. The Company
Employment reserves the right to dismiss a Participant at any
- ---------- time, with or without cause, free from any claim or
Contract: liability other than as provided under this Plan.
- ---------
7
<PAGE>
Other Miscellaneous The administration of this Plan is strictly at the
- ------------------- discretion of the Company and the CEO, InterCoast
Items: Energy Company.
- ------
With respect to this Plan, this document and
attachments covers all incentive award terms. There
are no other written or oral provisions and any and
all representations, warranties, covenants and
agreements with respect to the Plan are merged
herein.
No Participant shall have any claim or right to be
granted an award.
8
<PAGE>
EXHIBIT 10.13
PERFORMANCE INCENTIVE PLAN
SPECIFICATIONS
Medallion Production Company
April 1992
Hewitt Associates
<PAGE>
MEDALLION PRODUCTION COMPANY
PERFORMANCE INCENTIVE PLAN SPECIFICATIONS
- --------------------------------------------------------------------------------
Plan Purposes: . Focus the efforts of all key employees primarily
- -------------- on performance criteria that can be quantitatively
measured and that meet the Company's (and
InterCoast's) expectations.
. Encourage teamwork and cooperation in the
achievement of the Company's goals.
. Recognize differences in the performance of
Individual participants.
Plan Year: The fiscal year (January through December).
- ----------
Participants: Those individuals recommended by the President of
- ------------- InterCoast Energy Company and approved by the
Compensation Committee.
Compensation Those individuals appointed by the InterCoast Board
- ------------ of Directors to comprise the Compensation Committee.
Committee: The Committee will be responsible for plan
- ---------- administration.
Award . Participating positions will be grouped by
- ----- incentive award categories.
Opportunities:
- -------------- . Each incentive category will have a target award
level assigned to it.
-1-
<PAGE>
Award -- The target award will be paid if a stated
- ----- performance goal(s) is achieved.
Opportunities:
- -------------- -- Minimum and maximum performance/
(continued) award levels will be built around the
target performance/award levels.
. The incentive categories, with their respective
award opportunities, are set forth below:
Award Opportunity
(as % of Salary)
Incentive ------------------------------
Category Minimum Target Maximum
--------- ------- ------ -------
A 15.0% 30.0% 60.0%
B 10.0% 20.0% 40.0%
Category A will initially contain the President
and Executive Vice President positions.
Category B shall initially include the following
positions:
-- Vice President-Finance
-- Vice President-Land
-- Director-Acquisitions and Programs
-- President, MGM Gas Marketing
-2-
<PAGE>
Performance/ . Each participant's award opportunity will be
- ------------ segmented into two components as illustrated
Award below.
- -----
Components:
- -----------
Weighting of Award
Opportunity/Performance Factors
-------------------------------
Individual
Medallion Participant
Goals Goals/Evaluation
-------------------------------
75% 25%
. One component's performance will not directly
affect the portion of the award opportunity
earnable from another one, except as noted below
in the "Threshold Corporate Performance"
requirement.
. The Medallion component shall consist of a
financial criterion (operating income) and
nonfinancial objectives. The financial criterion
will comprise 50% of the Medallion Goals
component.
. A participant's final award amount will be
determined as the sum of the awards earned based
on the performance of his pertinent award
components.
Threshold If a threshold level of performance established for
- --------- the financial criterion (operating income) of the
Corporate Company-wide component is not achieved, no part of
- --------- the incentive opportunity otherwise earned
Performance:
- ------------
-3-
<PAGE>
Threshold through other Company-wide objectives or under the
- --------- Individual Goals/Evaluation component will be paid.
Corporate Threshold performance shall be a level that is set
- --------- moderately below the minimum established for
Performance: Corporate financial performance (i.e., the minimum
- ------------ will be established as 85% of the target performance
(continued) goal, and the threshold will be set at 65% of
target).
Performance . Normally, up to five performance criteria will be
- ----------- established for the nonfinancial objectives.
Criteria: Examples of such criteria are:
- ---------
-- Reserves added
-- Number of new drilling prospects
-- Success ratio on prospects
-- Acquisition of outside participants for
drilling programs
. Target, minimum, and maximum performance levels
will be established for each of the performance
criteria. These performance levels will coincide
-----------
with the target, minimum, and maximum award levels
-----
referred to previously. These performance levels,
together with the weighting of each of the
performance criteria, will be established prior to
each plan year, approved by the Compensation
Committee, and will be set forth in an Appendix
that will be attached to these plan
specifications.
-4-
<PAGE>
Performance Interpolated performance/reward levels will be
- ----------- established on a straight-line basis between each
Criteria: of the above performance/reward levels. If actual
- --------- performance falls below the minimum level set
(continued) forth for the particular performance criterion,
the portion of the award related to that
performance criterion will be forfeited in its
entirety.
. Individual performance will be evaluated based on
an overall assessment of the participant's
personal contributions during the particular plan
year.
This assessment will take into account the
individual's personal goals, and his/her
contribution to the organization's team
environment and cooperative effort.
. Responsibility for determining the earned amount
of the Individual Goals/ Evaluation portion of a
participant's award opportunity will be assigned
as follows:
Participant Rater Reviewer
------------- -------------- ---------------
President President InterCoast
(Medallion) (InterCoast) Compensation
Committee
All Others President President
(Medallion) (InterCoast)
-5-
<PAGE>
Performance The joint determination of the rater and reviewer
- ----------- will assign an earn-out percentage of between 0%
Criteria: and 200% of the Individual Goals/Evaluation
- --------- portion of the participant's award opportunity.
(continued)
Performance/ A participant's final award will be calculated as the
- ------------ sum of the amounts earned from each of the
Reward Levels: performance/reward opportunities, each independent
- -------------- from the others. However, in no event will any award
---
be payable unless Medallion's operating income
threshold is met. The table below illustrates the
performance/reward relationship for an Incentive
Category B participant, assuming two Medallion
performance criteria weighted equally and an overall
evaluation of Individual performance.
<TABLE>
<CAPTION>
Individual
Medallion Goals (75%) (25%)
--------------------------------------- --------------
Perf./ Operat. Award Award Goals/
Reward Income Oppty. Oppty. Eval. Award
Levels (000) (50%) Reserves Added (50%) Perf. Oppty.
------ ------ ------ -------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Maximum $1,800 15.0% xxx 15.0% yyy 10.0%
Target $1,000 7.5% xx 7.5% yy 5.0%
Minimum $850 3.75% x 3.75% y 2.5%
Threshold $650 0 ----- ABOVE AWARDS AVAILABLE -----
Below less than $650 ----- NO AWARDS AVAILABLE -----
Threshold
</TABLE>
-6-
<PAGE>
Performance/ For example, if the actual operating income
- ------------ performance were $850,000 (i.e., the minimum) and
Reward Levels: actual 1992 reserves added were at maximum and the
- -------------- Individual Goals/ Evaluation was yy (i.e., target),
(continued) the participant's award (as a percent of salary)
would be:
Final Operating Reserves Individual
Award = Income + Added + Evaluation
----- --------- -------- ----------
23.75% = 3.75% + 15.0% + 5.0%
Note that if actual operating income were $650,000,
the participant would not earn an award tied to this
financial criterion but would be eligible for the
portion of the award tied to the "reserves added"
criterion and the portion related to the Individual
Goals/Evaluation (i.e., 20% = 0% + 15% + 5%).
However, if Company operating income were below
$650,000, no award would be payable from either the
Company-wide or the Individual component.
The Effect of Note that, in comparing actual performance against
- ------------- the performance goals, the President (InterCoast),
Extraordinary with the approval of the Compensation Committee, may
- ------------- exclude from such comparison any extraordinary gains,
Items: losses, charges, or credits which appear on the
- ------ Company's books and records as it deems appropriate.
An extraordinary item may
-7-
<PAGE>
The Effect of include, without limitating the generality of the
- ------------- foregoing, an item in the Company's financial
Extraordinary statements reflecting an accounting rule, tax law,
- ------------- or major legislative change not taken into
Items: consideration in the establishment of the performance
- ------ goals. In addition, the impact of a material dislo-
(continued) cation in the U.S. economy or a substantive change in
Medallion's business plans also may be deemed to be
such an extraordinary item.
Termination . If the participant's employment is terminated
- ----------- during a plan year for reason of death,
of Employment: disability, or normal or early retirement, a
- -------------- tentative award will be calculated (at year-end)
as if the participant had remained employed as of
the end of the plan year. The final award will be
calculated by multiplying the tentative award by a
proration factor. The proration factor will be
equal to the number of full weeks of employment
divided by fifty-two.
. If a participant's employment is terminated during
a plan year for any other reason, an incentive
award normally will not be paid. However, the
President, with the approval of the Compensation
Committee, may exercise discretion in this matter.
-8-
<PAGE>
Form and Timing . All awards will be paid in cash and will be
- --------------- subject to applicable withholdings.
of Payments:
- ------------ . Payment of the full value of the final award will
follow the release of audited results after the
end of the plan year in which it is earned, but no
later than April 1.
-9-
<PAGE>
Medallion Production Company
Performance Incentive Plan
April 1992
Addendum - January 1994
Issues:
- -------
. Going beyond the maximum award opportunity for a performance criteria
and receiving no incremental incentive award is inconsistent with the
desire to encourage ever increasing performance effort.
. However, an uncapped incentive award may cause an imbalance in effort
whereby undue focus is placed on one performance criteria at the
expense of other criteria.
Purpose:
- --------
Encourage increasing performance effort after the maximum award
opportunity for a performance criteria is attained while assuring a
minimum performance level for all criteria.
Mega-Maximum
- ------------
Award Opportunity:
- ------------------
A mega-maximum award opportunity will be established for each
performance criteria.
. The mega-maximum award opportunity will be established as three times
the increment between the target and maximum award opportunities.
. Mega-maximum awards will be reduced by the target percentage award
for any performance criteria that does not meet minimum. Examples of
the mega-maximum award opportunity are:
<TABLE>
<CAPTION>
Performance Goal
1. Operating Income $(000) Award %
---------------- ---------------- ----------
<S> <C> <C>
Mega-Maximum 22,000 45.00
Maximum 12,000 22.50
Target 7,000 11.25
Minimum 5,000 5.63
2. Exploratory Drilling
--------------------
Mega-Maximum 5,000 11.27
Maximum 3,000 5.63
Target 2,000 2.81
Minimum 1,000 1.41
</TABLE>
<PAGE>
-2-
Actual Results
--------------
<TABLE>
<CAPTION>
Normal Mega-Maximum
$(000) Award % Actual %
-------- ------- -------------
<S> <C> <C> <C>
Operating Income 15,000 22.50 6.75/1/
Exploratory Drilling 500 - 0 - (2.81)
----- ------
Total 22.50 3.94
</TABLE>
- --------------------
/1/ $3,000/$10,000 x 22.5%
<PAGE>
Medallion Production Company
Performance Incentive Plan
April 1992
Addendum - March 1994
Issue
- -----
It is the desire to have all Medallion employees focus their efforts on
attainment of the Company's goals and objectives and to compensate employees
according to actual results achieved.
Incentive Categories
- --------------------
In this regard, the Medallion Performance Incentive Plan is amended to establish
incentive categories to include employees not presently included in the plan.
With this amendment the incentive categories and participants for the 1994 plan
year are as follows:
<TABLE>
<CAPTION>
=======================================================
Award Opportunity
=======================================================
Incentive
Category Minimum Target Maximum
=======================================================
<S> <C> <C> <C>
1 15.0% 30.0% 60.0%
2 10.0% 20.0% 40.0%
3* 5.0% 10.0% 20.0%
4* 2.0% 4.0% 8.0%
-------------------------------------------------------
</TABLE>
* Categories 3 and 4 are not be eligible for the
---
"Mega-Maximum" awards. Category 4 is based totally
on corporate performance whereas Categories 1, 2 and
3 are based 75% on corporate performance and 25%
individual performance.
=======================================================
Participants
- ------------
The participants, by category, for the 1994 plan year are hereby established as
follows:
<PAGE>
-2-
<TABLE>
<CAPTION>
============================================================================================
Category Individual Position
============================================================================================
<S> <C> <C>
1 Bill Warnock, Jr. President
--------------------------------------------------------------------------------------------
2 Brian Cantrell Vice President - Finance
--------------------------------------------------------------------------------------------
Dave Chandler Director, Acquisitions
--------------------------------------------------------------------------------------------
Gene Daley Sr. Vice President - Exploration
--------------------------------------------------------------------------------------------
Chris Girouard Vice President - Land
--------------------------------------------------------------------------------------------
Dave Harber V.P. - Engineering & Acquisitions
--------------------------------------------------------------------------------------------
Cam Stiernberg Sr. V.P. - Operations
--------------------------------------------------------------------------------------------
Dan Williams President, InterCoast Gas Services
--------------------------------------------------------------------------------------------
3 Chris Treml Landman
--------------------------------------------------------------------------------------------
Ed Rothenay Production Foreman
--------------------------------------------------------------------------------------------
4 All other Madallion Various
employees employed as
of 1/1/94
--------------------------------------------------------------------------------------------
</TABLE>
APPROVED:
/s/ Stanley J. Bright 3-14-94
- -------------------------- ------------------------
Stanley J. Bright Date
/s/ Lance E. Cooper 3-14-94
- ------------------------- -------------------------
Lance E. Cooper Date
/s/ Howard R. Poe 3-16-94
- ------------------------- --------------------------
Howard R. Poe Date
<PAGE>
Exhibit 21.1
INTERCOAST ENERGY COMPANY
List of Subsidiaries
--------------------
Name State of Incorporation
- ---- ----------------------
InterCoast Oil and Gas Company Delaware
Medallion California Properties Company Texas
Continental Power Exchange, Inc. Delaware
InterCoast Gas Services Company Delaware
InterCoast Gas Services Company Oklahoma
GED Services, Inc. Delaware
InterCoast Trade & Resources Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our
reports included in this Form S-1 of InterCoast Energy Company and to all
references to our Firm included in this Form S-1 Registration Statement.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
May 24, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As Petroleum Engineers, we hereby consent to the inclusion of the
information in this Registration Statement on Form S-1 with respect to (i) the
oil and gas reserves of InterCoast Energy Company (the "Company"), the future
net revenues from such reserves, and the present value thereof for the years
ending December 31, 1994 and December 31, 1995, and (ii) the oil and gas
reserves of certain properties acquired by the Company from Enron Oil & Gas
Company and Enron Oil & Gas Marketing, Inc. as described in this Registration
Statement, the future net revenues from such reserves and the present value
thereof as of December 31, 1995, which information has been included in this
Registration Statement in reliance upon the report of this firm and upon the
authority of this firm as experts in petroleum engineering. We hereby further
consent to all references to our firm included in this Registration Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Clarence M. Netherland
---------------------------------
Clarence M. Netherland
Chairman
Dallas, Texas
May 23, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF WILLIAM E. WARNOCK, JR.
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), I hereby consent to the references to my name appearing
in this Registration Statement on Form S-1 and in the accompanying Prospectus
forming a part thereof relating to the registration under the Securities Act of
shares of common stock of InterCoast Energy Company to be issued in connection
with the proposed initial public offering of said shares of common stock.
/s/ William E. Warnock, Jr.
---------------------------
WILLIAM E. WARNOCK, JR.
May 23, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF RUSSELL E. CHRISTIANSEN
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), I hereby consent to the references to my name appearing
in this Registration Statement on Form S-1 and in the accompanying Prospectus
forming a part thereof relating to the registration under the Securities Act of
shares of common stock of InterCoast Energy Company to be issued in connection
with the proposed initial public offering of said shares of common stock.
/s/ Russell E. Christiansen
---------------------------
RUSSELL E. CHRISTIANSEN
May 23, 1996
<PAGE>
EXHIBIT 23.6
CONSENT OF STANLEY J. BRIGHT
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), I hereby consent to the references to my name appearing
in this Registration Statement on Form S-1 and in the accompanying Prospectus
forming a part thereof relating to the registration under the Securities Act of
shares of common stock of InterCoast Energy Company to be issued in connection
with the proposed initial public offering of said shares of common stock.
/s/ Stanley J. Bright
---------------------
STANLEY J. BRIGHT
May 23, 1996
<PAGE>
EXHIBIT 23.7
CONSENT OF JOHN A. RASMUSSEN, JR.
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), I hereby consent to the references to my name appearing
in this Registration Statement on Form S-1 and in the accompanying Prospectus
forming a part thereof relating to the registration under the Securities Act of
shares of common stock of InterCoast Energy Company to be issued in connection
with the proposed initial public offering of said shares of common stock.
/s/ John A. Rasmussen, Jr.
---------------------------
JOHN A. RASMUSSEN, JR.
May 23, 1996
<PAGE>
EXHIBIT 23.8
CONSENT OF GEORGE G. DALY
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), I hereby consent to the references to my name appearing
in this Registration Statement on Form S-1 and in the accompanying Prospectus
forming a part thereof relating to the registration under the Securities Act of
shares of common stock of InterCoast Energy Company to be issued in connection
with the proposed initial public offering of said shares of common stock.
/s/ George G. Daly
------------------
GEORGE G. DALY
May 23, 1996
<PAGE>
EXHIBIT 23.9
CONSENT OF ROBERT C. THOMAS
In accordance with the requirements of Rule 438 promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), I hereby consent to the references to my name appearing
in this Registration Statement on Form S-1 and in the accompanying Prospectus
forming a part thereof relating to the registration under the Securities Act of
shares of common stock of InterCoast Energy Company to be issued in connection
with the proposed initial public offering of said shares of common stock.
\s\ Robert C. Thomas
--------------------
ROBERT C. THOMAS
May 23, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 8,303 1,879
<SECURITIES> 0 0
<RECEIVABLES> 23,016 25,656
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,959 28,928
<PP&E> 236,302 247,978
<DEPRECIATION> 67,204 70,922
<TOTAL-ASSETS> 202,057 205,984
<CURRENT-LIABILITIES> 21,448 27,167
<BONDS> 0 0
0 0
0 0
<COMMON> 79 79
<OTHER-SE> 103,217 105,813
<TOTAL-LIABILITY-AND-EQUITY> 202,057 205,984
<SALES> 72,596 52,921
<TOTAL-REVENUES> 72,596 52,921
<CGS> 23,543 36,372
<TOTAL-COSTS> 60,536 46,690
<OTHER-EXPENSES> 6,598 2,106
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,462 4,125
<INCOME-TAX> 1,926 1,529
<INCOME-CONTINUING> 3,536 2,596
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,536 2,596
<EPS-PRIMARY> 0.45 0.33
<EPS-DILUTED> 0.45 0.33
</TABLE>
